NOTE: Every week I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. Here is this week’s.
The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor.
Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonald’s and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through paper money and deficit driving hyper inflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long term value as difficult to assess.
However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? …. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.
David Einhorn gave a tremendous speech last Monday at The Value Investing Congress and I recommend reading it in full. In it, Einhorn essentially broke ranks with a fundamental premise of value investing, which draws so much of its appeal from the figure of Warren Buffett, that macro economics doesn’t matter. Most value investors have stuck to the old dogmas but the financial crisis taught Einhorn that any serious investor needs to do macroeconomics. Macro is a big part of what I do and I can’t imagine trying to invest without considering the overall economy given how big of a role that plays in the earnings of individual companies.
Forget about the events of the past 12 months…. the punters are back punting as aggressively as ever. Highly leveraged short term trades are back in vogue as players … jostle to load up on everything from REITs and commercial property, commodities, emerging markets and regular stocks and bonds.
Any sense of control is being chucked out the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months. Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?
– E-mail from a senior, recently retired banker quoted in “Rally Fuelled By Cheap Money Brings A Sense Of Foreboding”, Gillian Tett, The Financial Times, October 22
Many argue that the current rally reflects economic fundamentals. The economy is on the mend from a nasty recession and that is reflected in improved economic reports and earnings results.
On the other hand, many question the nature of the spectacular move over the last seven months. Is it really based on fundamentals or something else? Is it driven by improvement in the real economy or unprecedented government bailouts, stimulus and money creation?
More from Gillian Tett:
No doubt many brokers would like to attribute this to fundamentals…..
Yet, if you talk at length to traders – or senior bankers – it seems that few truly believe that fundamentals alone explain this pattern. Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home…
The Wall Street Journal’s E.S. Browning noted an interesting feature of the rally in an article on the front page of today’s “Money & Investing” section: both gold and stocks are in rally mode when they usually trade inversely to each other
(“Odd Couple: Stocks, Gold Share Same Ride Higher”
, E.S. Browning, The Wall Street Journal
, October 26, C1).
Stocks generally go higher when economic prospects appear to be good or improving. Gold generally trades in line with inflation expectations. One interpretation: stocks and gold are reflecting massive inflation, not an economic recovery.
It is for this reason that 18% of our overall portfolios are in gold and gold stocks. Thankfully, that substantial gold position has cushioned the losses from our short positions. Gold continues to be my #1 highest, long term investment conviction. All roads point towards inflation and no other economic trend currently in play has the same force or logic.
DJ Total: +15.77%
Top Gun: -4.71%
YTD Returns (Through 9/30)*
DJ Total: +20.08%
Top Gun: +6.21%
* Chart Attached [NOTE: Blog readers e-mail me for chart]
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