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  • Disconnect: 2nd quarter 2020 best in 20 years for stocks as economy collapses
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  • Jeremy Grantham: “Own zero stocks… less than zero is not a bad idea”


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

No Football? No Problem! Sports Betting Meets Day Trading
July 8, 2020

All the money in the world can be thrown at an economy that is stuck. You may draw a few more sports bettors into the Wall Street Arena, but the games end when the music stops, we may not have a scarcity of money, but I think when the music stops, there’s always been scarcity of chairs in that particular game.
  – David McAlvany

Kevin: It’s funny, Dave, you can get online and you can find betting lines on just about anything. I mean, it could be politics, it could be on the way a sitcom is gonna end. But strangely enough, the betting world is really, really getting into the stock market at this point.

David: Well, they’ve lost one of their favorite places to bet, which is on sports, and we have in America an obsession with sports. We love baseball. We love basketball. We love football. Whether it’s the Super Bowl or the Stanley Cup or the World Series, there are live audiences, and there are massive numbers of fans that watch from the comfort of their own homes.

Kevin: Except for now, we don’t have the sports, other than, you know, my son has shown us that on some of these channels, they’re doing video games that look like the sport. It’s just not quite the same thing.

David: Right, and I’ve had a number of people say, hey, are you going to compete in the virtual race such and such this weekend and I’m like…

Kevin: (laughs) A virtual race?

David: …I don’t know that I want to sit in my basement and try to duke it out with somebody in Boulder.

Kevin: Well how much money is involved in the sports betting industry?

David: It’s a global audience, and those enthusiasts drive a hundred billion dollar a year sports betting industry. And these sports bettors are obviously more than a little bored in the age of COVID.

Kevin: But they always find a place to go. They always find a place to go.

David: Yeah, Dave Portnoy—he’s a popular figure in the sports betting universe—he’s taken his energy to day trading in stocks and has made headlines for ridiculing Warren Buffett and other hedge fund managers, as he would describe as sort of old, washed up failures. And of course, that’s by comparison to his investment prowess, right? So imagine, if you can, someone even more irreverent than Jim Cramer, maybe even with a little bit more ego, if you can imagine such a thing, touting penny stocks and sort of looking at bankruptcy stories, not necessarily a turnaround story but actually going all in on companies like Hertz post-bankruptcy. His famous quote from last month was: “Stocks only go up, this is the easiest game I’ve ever been a part of.”

Kevin: Well, thanks to the Fed, I mean stocks really only do go up until they go down, until somebody has to sell.

David: I think that phrase, that quote, captures, it reflects the understanding that today’s day traders have of market dynamics.

Kevin: Do you remember the old days when you used to have a trading platform and you actually paid a little bit of a commission every time you did a trade? At this point, you’ve got services like Robinhood, you know, granted, hopefully you never have to sell a stock, but you can certainly buy for free.

David: Yeah, and you might wonder, what is the business model that allows for, whether it’s a Charles Schwab or Robinhood or anyone else, to either reduce their commissions or fees for a trade to dollars, pennies, or even free. And it’s because they’re selling their order flow to high frequency traders. The structure of the market has changed, such that a TD Ameritrade will make several hundred million dollars a quarter by selling the order flow to a Citadel or a NITE. Or, you know, one of these high frequency traders. And, of course, the high frequency traders are making hundreds of millions of dollars with the order flow themselves.

Kevin: Do you remember what Paul Verany told us? “If you get something for free online, you’re the product.”

David: Exactly and that’s really what Robinhood most recently has come up with: a platform where the client is the product. And you know, we’ve mentioned Robinhood in the past, and I think it’s sort of because of their notably ill-timed outages, and they’re not able to process sell trades the same way they are processing buy trades. It is kind of interesting. They seem to melt down when they’re processing things in a down market.

Kevin: (laughs) Sorry, sir, Wally World is closed.

David: But if the market is going up, they have no problem taking your money or your order and selling it on. So thirteen million users, half of whom have never invested before, never invested before. Robinhood is not alone in this, you’ve got TD Ameritrade transaction volumes, which are up four times from last year in the same period. You’ve got millions of new accounts that were opened at Schwab and TD Ameritrade and Interactive Brokers, and to some degree, these are your bored stay-at-homers and they’re inspired to play with the house’s money.

Kevin: Well, that is money that’s been showing up in bank accounts. I was talking to some clients yesterday who, both the husband and the wife are unemployed right now. Between unemployment and the things that they’re getting from COVID, and they’re obviously not socialists, but they’re like, you know what, Kevin? We’ve saved $27,000 in the last three months based on the fact that we’re unemployed and we’re getting a whole lot of money from the government.

David: Isn’t that interesting? Well, yeah, many are in receipt of their first round of the CARES Act stimulus checks. And it’s interesting that betting, again, this is the equivalent of March Madness. If you go back to what you’ve typically seen, whether it’s in an office scene or amongst friends…of course, it was canceled this year, but everybody knows who their brackets are and who’s going to win and you’ve put 20 bucks down.

Kevin: Hey, Hertz has is going out of business, let’s buy!

David: Yeah, and so last week we mentioned the surge of bank deposits, and this was a CNBC piece. $865 billion in a single month, that is April, from the CARES Act, those are the stimulus checks. Year to date, I think $2 trillion coming into the banking system and you’ve got that money also trickling in on Wall Street. Of course Trump would love another round of direct fiscal stimulus, and he wants it ASAP. And this is not a slight on Trump. Every politician’s dream is to shower voters with gifts in the run-up to an election. I mean, this is as Banana Republic and as third world as it gets, honestly. When you actually can pull it off, where you’re giving money out just before you go to vote I mean, you can’t make this stuff up, you could be in Colombia. And yet we’re not, we’re in America.

Kevin: You know, the stock market has represented hope in the future generally. But in this particular case, the more no hope there is in the economy…I mean, look at the economy, it’s a mess. But the more no hope there is, the more stock market is taking out new highs. I mean, the NASDAQ!

David: We have a series of contrasts, don’t we. You get the NASDAQ taking out the all-time highs, and speculation in stocks is soaring, even as we noted last week, you’ve got the IMF reducing its global economic forecast down to negative 4.9% this year.

Kevin: That’s the no hope.

David: Yeah and it’s negative for next year too. As and you might have guessed it’s not economic activity that’s inspiring millions of small-time speculators. Prior to the massive monetary stimulus from the Fed, you had 2000 account holders at Robinhood, on that platform who held Hertz stock. 90 days later, after the bankruptcy filing, the number of accounts speculating on a company in bankruptcy, that is Hertz, you get 170,000 accounts. From 2000 to 170,000 accounts who now think it makes sense to speculate on a bankrupt stock.

Kevin: And there’s your sports betting line right there.

David: Exactly. The common themes among Portnoy’s picks or the current speculative rise in stock investing, if you’re talking about the newbies, it’s companies with massive debt, it’s very little in revenue, it’s having a reasonably large short position, which again you look at these short positions they’ve had to cover, and as the shorts have had to cover those positions, all of a sudden, those stocks take on a life of their own. Shares are being covered and that turns from short covering panic, again on the short side, to a manic sort of FOMO behavior on the long side.

Kevin: Well, and you often talk about keeping your powder dry so that you can get better pricing. And, of course, after a crash, sometimes you get better pricing and then you get these, maybe we’ll call it a really rabid dead cat bounce, but it’s a dead cat bounce nonetheless. You know, Q2 of 2020 has got to go down in the records is one of the best.

David: Yeah, meanwhile you’ve got Gary Shilling saying we’ve got a second leg down. It’ll look a lot like the 1930s all over again, and there is a sobriety, but there’s only sobriety in certain quarters. It’s very difficult to get people thinking in any other terms that are, you know, just super excited and super positive with Q2 results. The second quarter of 2020 was the best quarter in more than 20 years. That is for the equity market indexes. In terms of in terms of stock performance, the S&P 500 returns 20.5%, leaving it only down for the year about 4%. So it’s still in negative territory, but that’s not the case with NASDAQ.

Kevin: But how about the FANG stocks? You pointed out the FANGs are really the ones that lead the way.

David: Oh, yeah, Yeah. And if you wanted to pare back the NASDAQ to the NASDAQ 100 again, you get more of a concentrated boost from the big names, large capitalization names that are getting a lot of attention. NASDAQ 100 returned 30.3% for the quarter. Apple was at 43%. Amazon up 41%. Microsoft up 29.4%. And Tesla, if you can get a drum roll, was up 106% for the quarter.

Kevin: So we have to add a T to the FANG stocks at this point ‘cause Tesla’s probably the leader.

David: T for trillion, T for are we tripping? I mean, what do we do? What’s the T for?

Kevin: Yeah, actually, I think the T is for the panic turned, so the turn is to mania at this point.

David: Well, that’s right. So you get Tesla reaching over 1400 this week. So let’s call it 290% off of its March lows. Up 290%, which is a short covering nightmare of epic proportions. And you might say, “Oh, no, no, no. You don’t understand this story.” Okay, I get it. So if I don’t understand this story, you don’t understand basic math. Panic has turned, and that is short covering panic, has turned to manic and the imagination of the average Joe investor is filling in a rather large gap.

Kevin: Well, let me ask you another question, ‘cause I drive a Toyota, my wife drives a type of Toyota and you know, that’s an actual company that sells actual cars. I mean, I don’t know how many millions of cars they’ve sold, but how does Tesla compared to just somebody who’s actually doing business?

David: Well, Tesla is an actual company, and they sell actual cars. They just don’t sell as many. So, I mean, we’ve talked about VW in the past and Toyota today, great car company. And you know, one of the things that’s notable about Toyota in terms of their management style is they’ve managed themselves very conservatively, and they have kept capital in the company so that they have not had major booms and busts impact their employees in a real significant way. They want to make it through multiple cycles, and this is something that was, you just don’t see in terms of a corporate boardroom prioritizing employees. Oftentimes today it is shareholders, shareholders, shareholders, shareholders to the extent that you actually are sort of gutting out the positive aspects of a company for the short-term quarter to quarter returns that a shareholder may expect. And Toyota has done a magnificent job of managing through not quarters or years, but decades with stability for their employees. And it’s made for a great company and a great product. They have a market cap of $174 billion. A pretty decent market cap. Tesla today is $260 billion, now 49% larger by market cap. Tesla verses Toyota, Tesla 49% larger, yet Toyota runs a company with 10 million cars produced and sold annually. 10 million.

Kevin: And how many does Tesla?

David: Half a million, 500,000 units is what Tesla is hoping to produce this year. If all goes perfectly this year, so give them the benefit of the doubt. 500,000 versus 10 million. It’s a 20 times difference in production.

Kevin: Yet their market cap is 49% larger than Toyota.

David: Correct, I mean, depending on how you want to count it. If you’re counting it versus the 174 it’s 49%. If you’re counting it verses the 260 it’s about 1/3 larger. So as we said, this is a short covering nightmare, and it’s a short covering nightmare for the record books. You’ve got investors who are now believing that stocks only move one direction, and that’s a fresh energy in the market. It’s frenetic, it’s irreverent. And frankly, it’s unaware.

Kevin: Let’s say that is true. Okay, so I’m ready to bet. I’m ready to bet. How far does Tesla go from here?

David: I mean, this is again, what are the limits of your imagination? Because back in March, everyone was assuming okay, the company’s over, and it’s trading at $360 a share. Now it’s over $1400. It’s not a coincidence, Kevin, that you’ve got Tesla bulls, and these are that really bullish bulls, calling for $7000 as a base case, terms of a share price or aggressive pricing at $15,000 a share.

Kevin: So a tenfold possible move from here is what they’re saying.

David: JP Morgan bumped their estimate to $1500. Deutsche Bank is at $1000. The average analyst is actually still calling for $536 dollars a share, which is 62% lower than current numbers. So you’ve got the Tesla bulls calling for larger numbers. You’ve got the stock market bulls looking for an S&P 500 trading to $4000. Again, this is not a coincidence, not a coincidence that at the same time you’ve got William Dudley, retired from the Federal Reserve Bank of New York, now forecasting the Fed’s balance sheet to, as he said with CNBC this week, conceivably exceed $10 trillion by year end.

Kevin: Do you remember what Doug Noland told us a couple of years ago?

David: He was the first analyst I saw projecting a $10 trillion balance sheet. I think that was three years ago.

Kevin: That was unheard of back then.

David: Yeah, we’re at seven today. We’ve ramped up from the upper threes to seven already and again, now you’ve got Bill Dudley from the Federal Reserve Bank of New York, retired from the Federal Reserve Bank of New York, and now the Fed has the imagination for it, and I think a part of the reason is the markets are also giving permission for them to get it done.

Kevin: One of the things that you watch Dave and you talk about often is the insurance that’s built into the market. They’re called credit default swaps, and you can watch to see just how nervous people are by what those credit default swaps are doing.

David: Yes, so what’s the price to insure? And if there’s a high price to insure, you know there’s really concern in the market. If there’s no one buying insurance, the price of insurance goes down. So we have another week, if you’re talking about the Fed balance sheet…let me finish on something there first. You’ve got the Fed balance sheet. There’s another week, this is the third in a row, where currency swap lines have diminished—and this is a key point. This is a key point on risk taking because you’ve got your emerging market players who are at this point glowing, they are happy. The ease of access in the credit markets has them taking risk again. And so it’s not a surprise as the emerging markets are coming back to life and there’s new speculative energy in the emerging markets, credit default swaps the prices to insure against default in the emerging markets, shrinking over the last 90 days, shrinking pretty amazingly. And it’s no surprise there that the need for emergency swap lines with the Fed, they’re diminishing as well, and so the Fed balance sheet is shrinking. It’s still north of seven trillion. It’s still north of seven trillion, but preview of coming attractions, what do we have between now and the end of the year? We have not seen the last of Fed balance sheet expansion for 2020 and Bill Dudley’s likely right that, yeah…and again, all he’s doing is getting on board with the same appraisal that’s been in place for 36 months from Doug Noland, 10 trillion. That’s where we’re going.

Kevin: But if you’re overseas you’re benefiting from this right now. This euphoria is really helping the overseas markets.

David: Oh, yeah. So if you’re looking at credit default swaps on the emerging markets, it would imply that the markets on the horizon and see no hiccups, no hiccups. In fact, they’re priced where they were, they’re actually priced a little bit better than they were just before February 19th. And if you recall, we had stock market at all time high February 18th and 19th. That was the high before boom. Then things started moving lower and moving lower fast. And all of that to say we think about efficient markets, and we think about prices telling us what we need to know. And yet CDS prices getting to the lows of February in the emerging markets, we’re just back to where we were.

Kevin: I remember that Weekly Commentary you were talking about how credit default swaps are at a low. That’s a signal for something going terribly wrong. And guess what? Look at the last few months. We have such short memories. How much was erased since February when the markets crashed?

David: Well, and this again, when you look a 27 day correction and think that it’s all done, you have to think about the lessons learned in the midst of a market correction, and if nothing has been learned, we’re not done. That’s just not the way the markets work.

Kevin: How soon we forget.

David: Right, so there was $30 trillion in global equity values that disappeared in this 27 day period. This is why we repeat history. This is why we so often repeat history because we don’t learn from it. I mean, we’re back to it. I love quoting from Rudyard Kipling’s book The Gods of the Copybook Headings, “The burnt bandaged finger wobbles back to the flame.” This is the small-time investor saying it’s different this time, and part of the reason it’s different is because nobody’s ever sent them $1200 to spend. They haven’t had the “house’s money” to speculate with as a form of entertainment, better than Vegas, is on your laptop or desktop, or yes, even your smartphone.

Kevin: So let’s look at this just for a second, because you’re right. There are a lot of people who say this time is different. It’s, you know, it always repeats, but let’s look at the guy who’s been here for a long, long time: Warren Buffett. Contrast what he’s doing right now with the Robinhooder’s, the people who are going, hey Hertz is out of business. Let’s go buy!

David: Yeah, well, I mean, if they’re piling into Hertz and Carnival Cruise Lines, Buffett is, as of this week buying energy infrastructure again, Dominion is selling off part of its natural gas transmission lines. I his like style. These are the type of assets that makes sense to us on the wealth management side. What we do is we want real things that pay you while you wait. So note that Buffett is not chasing a momentum story. Natural gas is off 20% year to date. You might think, well, it’s not doing anything for me lately. His timeframe is different. His expectations are different. He’s playing a completely different game because guess what? He’s not on a platform that gamifies buys and sells, he is an actual investor looking for an actual asset that’s going to give him an actual rate of return year after year after year. Isn’t that different than a one-time flip of the switch let’s see what we get if we can buy Hertz today, sell Carnival tomorrow. It’s insanity what is happening on the Robinhood platform.

Kevin: Yeah, but it’s all happening on just a micro-scale as far as timing. I loved what we talked about last night, Dave. You know, my wife and I streamed Hamilton the other night and watched, and it is interesting to see that. And I started thinking about information speed at the time because one of the songs in Hamilton, Jefferson comes back after the revolution. He says, “Hey, what’d I miss?” Because he was in Europe and I was thinking at that time, how would you be an investor? Let’s say that you were investing in something in America and you lived in Europe. Okay, well, you would be investing with letters on boats that might take I don’t know what it is: 4, 5, 6, 7 weeks. And just to get a message back and forth, you know, we talk about these messages back and forth to Mars if we go there, you know, that’s eight or nine minutes. We’re talking actually much longer on boats. How can a guy invest and keep up with the high-speed computer trading, and is there a way to invest with the mindset like you were talking about with Toyota or Buffett? I almost wonder if Buffett couldn’t do most of his business by letter, by boat because of the way he looks at the markets.

David: Well, that’s right. And I think what we’ve seen in the evolution of the financial markets is this idea that it will always be better if we can just move a little faster. So, for instance, the Rothschilds, they filled an information gap by having a better and faster bird and said they were able to…

Kevin: That’s right, carrier pigeons.

David: Carrier pigeons gave them an informational advantage, and they were able to deceive the London Stock Exchange into thinking one particular outcome. This is again sort of the war between Britain and the French, and they confused the market, took advantage of pricing and then came back in. It was it was a brilliant set up.

Kevin: Well, now add the telegraph okay in the 1840s and then add radio after that and television. Now we’ve got high speed Internet. In fact, you can actually squeeze out a little bit of a profit, Dave. There’s a book by Lewis, who talks about guys who built on office just a little closer and with a little faster fiber optic connection line to just squeeze out those fractions of a fraction of a fraction of a penny.

David: Right, and I think this is again, this is a contrast because a few great purchases on occasion, this is Buffett again, contrasted with trading too frequently. And in many respects, what Buffett is doing is he’s letting cost basis do the heavy lifting for performance and long term compounding of assets, which I mean it requires not following the crowd. It requires slowing down, practicing a bit of patience. And, you know, I think we’re all subject to this, Kevin. We all judge success on on the basis of a timeframe. And so timeframes, frankly, they’re always arbitrary. I think of some of my friends who, you know, in their first few years of marriage, were wildly successful in their marriage, well they’re divorced today. So how would you judge things according to a longer timeframe, right? Or timeframes, again this is arbitrary, but you look at being successful today. Your portfolio is up 5%. What is a day? “Does a day a trend make?” is what Wall Street will often ask. No, a day does not a trend make.

Kevin: Well, okay, so boat and letter, let’s talk again. Let’s say that you didn’t get news but every 6 to 8 weeks, okay, you could actually do very, very well if you understood the long-term Dow-to-gold ratio.

David: Yeah and I think this is again where you’re right or you’re wrong based on a time frame. And rarely do we have enough of a timeframe in mind. Or we want to come to hard conclusions and judgments based on our timeframe and expectations. And frankly, the market doesn’t give a rip what we think or what our timeframe is. So I might say, well, it’s not moving fast enough. Does that mean that it’s the wrong side of the trade? Oh, yes, because it hasn’t proven itself yet. Look, it makes me think of the Dow gold ratio. It doesn’t take a few months or quarters. It takes years to decades to work through. And most people cannot tolerate that timeframe. They don’t have the patience for it. I’m up against it. I’m 60 years old and I want to retire in five years or, again, you take and you judge what should be the timeframe and the performance metric to get you to your financial goals. And I just don’t think the market cares. If you can back away, I think there’s an opportunity. In a world where there’s less and less of an information gap because of the speed at which data flows, I would guess this is where there is a huge information gap to fill because it’s not in the nanosecond trade, but it’s in trades that require more time than the market cares for. You have to slow down. You have to slow down to improve. You have to slow down to speed up.

Kevin: There’s an analogy that you gave me last night. You went swimming in the lake the other day and the surface was just real turbulent. It would have been something that most people would have turned away from and said not not today. But you got out there and you realized it was just the surface that was turbulent. It was completely smooth underneath.You had a really nice two mile swim.

David: It was one of my best swims ever. And it was complete white caps. The wind was crazy. And, you know, nobody was out on paddle boards because they were just getting thrashed. And, you know, if you’ve ever been scuba diving, you realize that whatever is happening on the surface is almost irrelevant, because once you get under the surface, there is, and the vast majority of what exists there is calm. Right, so you can either react to what’s on the surface, or you can exist with the greater reality, which is total peace. And I recognize that if I could maintain peace and calm, even my interaction with the whitecaps was going to be fine. And it was absolutely one of those slow down to speed up moments. I wasn’t trying to break the land speed or water speed records, but the more relaxed I was, the easier it went in spite of the difficulties that I was working through. And maybe that analogy breaks down, but I think when you’re looking at a longer timeframe, nobody cares anymore, and I think that’s where some of your biggest opportunities are as an investor. Everyone’s thinking about the nanosecond. Get rich quick, I want immediate gratification trade, and what they overlook is something that takes years or decades to play out. But again, like Buffett, do you think he’s buying Dominion natural gas transmission assets for trade? Is he going to flip this tomorrow? Is he hoping to make 300% on the next rebound? Or is this something that will compound at a 20-40% rate of return over a longer period of time. Maybe it’s an internal rate of return, I don’t know what his bogey is on it. Maybe it’s an internal rate of return of 16% a year. How is he going to compound that $9 billion purchase over the next 50 years?

Kevin: This is one of the beautiful things about being involved with, you know, just the McAlvany business for the last 33 years. I can remember, see this commentary actually is an outgrowth of something that I wished for for years. We would on Tuesdays, have meetings and talk about these things as a group, and we’d remember, and we look forward and Don, your dad, would talk. And then when you came in, the same thing and I thought, gosh, I wish we had a recording of this, I wish we were flies on the wall so that we could remember and see, let’s step back from the chart because there’s peer pressure for what’s going on in a moment to moment basis. Okay, these guys we’ve been talking about who are, you know, the betting lines buying Hertz, Carnival. You know, they can have that. But if we step away from the chart Dave, what we know is when you have this double barreled stimulus, when you have this huge fiscal spending and the printing of money to the degree that we’ve never seen before, that is a wall of money you’ve talked about like being behind a dam. It always turns into the devaluation of a currency when the big V shows up. Velocity. We don’t have velocity right now, we just have a whole lot of money sitting in banks.

David: Velocity is something that does tend to increase when you get more and more fiscal stimulus, contrasted with monetary because of monetary can get stuck in the financial system and create asset price inflation without escaping, without getting into circulation.

Kevin: Well, and speaking of swimming, I mean, the banks are swimming in money at this point.

David: They are, and so I think it is important to look at the double contribution of asset purchases. So you’ve got the monetary purchases being made. You’ve got the Treasury fiscal spending, which I think creates a very dangerous illusion. CNBC, when they were talking last week about the $165 billion in money that hit bank accounts in the month of April, the Treasury has another unspent balance of $1.5 trillion in their books.

Kevin: There’s some spending money.

David: Yeah, so it’s not as if we’re done with the fiscal spending initiatives. The Fed is still buying $80 billion in Treasuries a month, $40 billion in mortgage backed securities monthly, $1.4 trillion on an annual run rate. It’s it’s a huge number. But think bigger. Think about the monetary infusion and the fiscal spending on a bigger stage: globally. Bank of Japan has promised a spending program which is equal to 40% of Japanese GDP. It is massive. Bank of England just topped off their bond buying scheme to $920 billion from $790 billion, and frankly, it just seems paltry. It seems paltry when you don’t cross the trillion-dollar threshold. I mean, what are we talking about here?

Kevin: Look at the European Union.

David: ECB (European Central Bank) comes in at $1.5 trillion in their bond buying promises and the ECB balance sheet, it topped six trillion euros for a new record, and it’s kind of a spurt to the record. $600 billion at an 11% top off, that balance sheet, the ECB balance sheet is now equal to 52% of the eurozone GDP. These are numbers that are mind boggling. You have to ask then, what is in a price for either a stock or a bond? On the one hand, today, it’s nothing. It’s supposed to convey information. It’s supposed to convey information about value and risk in the quality of assets and the implied future earnings of a particular entity. The implied value of a bankrupt company, that’s what we’re beginning to talk about, or an overextended trend being forced higher by a wall of fiat money, created from nothing to sustain an illusion of prosperity. That’s what you have in prices today.

Kevin: Yeah, but look at what the mastodons of investing or doing…the John Paulsons. You know, Warren Buffett has not stepped away. Warren Buffett’s going in and buying real things that have nothing to do with momentum. But John Paulson, he doesn’t want to be in the hedge fund business at this point.

David: Well, I guess you could say that Buffett has stepped away to the degree that he’d rather sit on a mountain of cash than chase a trend. He’s only going to put money to work in pockets…

Kevin: If it is real.

David: Where he can find value. So there are still pockets of value if you’re engaged, right? So okay, so Paulson, he made his money a decade ago, shorting the mortgage backed securities market. He’s walking with what Bloomberg I think registers as about $4.4 billion net worth. Already handed his money back, the money he was managing to hedge fund clients and is converting to a family office. So he’s leaving the hedge fund business. And the contrast is with that and skyrocketing interest by small time speculators. But that’s amazing. Jeremy Grantham runs GMO. I’ve talked about Grantham before because he was one of the guys who was early in 1999 saying, yeah, things are overpriced. We’re moving to cash. He lost about half of his assets under management because clients said, you’re not chasing the trend, you’re under performing the market benchmark, you idiot. And so they moved away from him back fully into the market just before they got their walloping 60% to 80% decline. Was he right? Yes. Was he early? Yes. Is it okay to be early? Again, what is success? When you when you judge things according to a timeframe, my question is what is your timeframe?

Kevin: Okay, but he has been asked a question recently. How much should a person have in equities at this point?

David: Yeah, CNBC Interview, what level of exposure should investors have to U.S. equities? Was the question for Grantham. By the way, he got bearish in ‘99, he got bearish in ‘07 and his answer to that question is, “I think a good number is zero.” And his quote went on to say, “and less than zero might not be a bad idea if you can stand it.”

Kevin: Less than zero sounds to me like shorting the market.

David: Thats right.

Kevin: Okay, so one of the things that you also watch, you know, we talked about credit default swaps to see just how nervous people are. That’s insurance against the market crashing. The other thing you can do is you can just say, hey, what’s the percentage of bulls versus bears? Boy, the bulls outnumber the bears all of a sudden, don’t they?

David: Yeah. On Wednesdays we have an outside analyst that joins us for our portfolio manager meetings and he is a technical analyst. Works with a major Wall Street firm and brings a tremendous amount of insight from a technical perspective. And it’s nice to have that as an overlay, blending in sort of the macro fundamentals and the bottom up fundamentals as well. One of the things we look at weekly is the investors intelligence polls, which show today a gap of nearly 40 points. That is, more bulls than bears by nearly 40 points and that point difference, again we discuss it as a weekly sort of sentiment indicator, is in the danger zone. It’s in the danger zone. Any time you get to 40 or above…I mean, this is like the red line for a vehicle. You can get there, you just don’t want to stay there very long or you are going to blow rods, seals, or something. And I mean, this is contrast. A professional class of investor like Grantham that sees an opportunity to now either be at zero or short the market and then you’ve got, by contrast, the bag holding every man, coming into the market at valuation levels, only seen one other time in market history. We can all choose to ignore the economic recession if we prefer to focus our attention on the enormous bubble, the central banks are delivering to us.

Kevin: Or we can look at the economy, Dave, and look at unemployment numbers and they’re always understated.

David: And then look, it looks good. It looks great on paper. But again, you have to ignore and treat as some sort of, you know, irrelevant fact that we still have 11.1% unemployment, 18% if you’re counting the U6 number instead of the U3. Are we out of the woods? Are we looking over the valley as some would say? Well, that apparently, is what most investors are doing. Only no, I don’t think most investors are looking over the valley. They’re ignoring the facts, and they’re going with what feels really good, which is get rich quick.

Kevin: We’ve talked about printing money, but there’s also the other technique, which is lowering interest rates. Central banks still seem to use that as a tool.

David: Well to accommodate the markets, to speed growth and try to create the world that we have today, you’ve got Fred Hickey that counts the global rate cuts by central banks at close to 150 rate cuts, just shy of it, and also from Hickey leaning on the Bank of America research, we’ve mentioned this number before. Central bank balance sheet expansion, collective global central bank balance sheet expansion year to date, $5 trillion. $5 trillion! Again, we talk about a wall of money, total global fiscal stimulus, again, this is Bank of America research, tallies to $18 trillion. I repeat, $18 trillion in fiscal stimulus. This is the liquidity wall, which on the front end seems like an economic positive, seems like a miracle, a recovery drug. And it reports, if you’re looking at statistics, as an improvement. But consider more than the initial benefits, consider that the global economy, we’re still held back by COVID-19. The global economy is not merely driven by liquidity, right? It’s still driven by people who are subject to fears, which no amount of stimulus can counteract. I don’t want to increase those fears. I’d love to see them dissipate and for us to get back on more of an even keel. But you had one of the central bank Feds in a Reuters article on July 1st was interviewing San Francisco Federal Reserve Bank President, Mary Daly. She basically says, best case scenario, we’ve got 4 to 5 years for us to work out of the COVID crisis. That’s a best-case scenario. It may take longer. So that there’s the economic story. And then there is the abundance of money story and how that gets channeled into the greed factor. What do you get when there is an abundance of money, but not an abundance of economic activity?

Kevin: You know what it leads to Dave? It leads to food people can’t afford. I mean, when we talk about inflation, that sounds like, oh, we’re just talking economics. No, when we talk inflation, we talk starvation. Okay, that’s what we see with when you’ve got this wall of money. At some point, it’s going to cost more to buy the things that we need.

David: Well, so again, this is a day for contrast. Contrast between professional hedge fund managers leaving the business, small time investors entering…it tells you something. It tells you something about the possibility of analysis and macro judgment calls being meaningful in this environment. And so you’ve got the throwing up of hands and walking away, and that is different, that’s a different reaction than throwing up sort of the Cramer pom poms as if this is the halftime show and we’re getting ready for the best plays yet.

Kevin: Okay, but let’s not look just at the contrasts that don’t make any sense. Let’s look at the contrast between stock prices and safe havens. Safe havens are speaking to us quietly, but they’re speaking.

David: Incredibly significant. If you’re looking at Q2 numbers, think about this. As stocks have recovered dramatically off the lows of March, for the entirety of the second quarter, the 10-year Treasury hardly budged. It was actually down one basis point to 66 basis points. The German Bund rose two basis points. It’s only negative 46 basis points now. Japanese yields rose one basis point to .02. In other words, the bond universe, this is really critical. The bond universe suggests that not everyone buys into the health of the stock market move. So granted, the central banks are buyers too. They’re buying bonds and so that helps in terms of the pricing of Treasuries across the board. Bunds, JGBs, Treasuries in here in the U. S. But the lack of movement at all even as stock’s melt-up is still telling.

Kevin: Well, look at gold. Look at gold.

David: Yeah, don’t forget gold. For the quarter, an impressive $204 rise, 13%. $1781 is where it finished for the quarter. It is pushing 20% for the year to date performance numbers and again reflecting the contrasts. Stocks post the best quarter since the fourth quarter of 1998. Bonds don’t buy it. Bonds don’t buy it. That’s Treasury bond buyers. Bund buyers don’t buy it. JGB buyers don’t buy it.

Kevin: And gold buyers.

David: Gold buyers don’t buy that risk is something that is entirely warranted today. If you’re going to take risk, you should be hedging your bets. So notice that the VIX has hardly budged. We’re still in the upper twenties to low thirties on the VIX, suggesting that there are still a number of people who want to hedge their bets. Even as stock prices move higher, the VIX has remained stubbornly high. You would want to see that get into the single digits again for there to be, you know, sort of complacency. So it’s actually a very interesting dynamic watching a stock market melt-up while the bond market says, yeah, not a chance. This is not going to be a pretty picture. Just give it a little bit of time. You see the same thing with gold buyers. Gold buyers see an $18 trillion wall of global fiscal stimulus and know full well that fiscal stimulus has far more direct consumer inflationary impact than monetary policy does because it typically does move directly through the banking system into the economy fairly quickly, whereas monitored policy can get stuck in the financial asset world. And again, the rich, if they receive it, don’t have to spend it. And that’s where again the difference between the hoi polloi getting a $1200 check and getting it spent, that does go towards an increase in velocity. And gold is at highs not seen since the European debt crisis of 2012. And that’s not because it’s trading as a risk on asset.

Kevin: No, people are not buying it to make money. They actually have a legitimate concern that top down management is not going to work in the long run.

David: Right, so you blend that stimulus, the double barrel stimulus programs, with COVID-19 and a world where uncertainty abounds and guess what you end up with. You’ve got the stag, as in stagnant, and the flation as in inflation and these are not far-fetched variables to put together.

Kevin: No, and that actually goes back to food that can’t be affordable. Okay, and that’s where it gets dangerous. We try to stay away from price prediction in the show, Dave, and I try not to put you on the spot on this, but gold is getting near that high that we saw back in 2011. You were, what, 7% away or what have you. What are you thinking, I mean, obviously you don’t buy gold necessarily just as a speculation to make money. It’s more of a hedge, but what’s your thought at this price level?

David: Well, you know, it’s interesting cause I mentioned that we do some technical analysis as a part of our wealth management group, and it’s been troubling that we’ve had a series of non-confirmations with gold. It’s still in a long-term bull market. There’s no question about that from a technical perspective, but the daily and weekly charts would suggest that you’ve got a couple of non-confirmations, which we could see a correction at any time. However, you get above 1800, say for three days, four days and you’re likely to run to that old highs 1920, 1930. I think we are at that point now. We may be crossing the Golden Rubicon as we speak.

Kevin: And I was thinking of something, Dave…guys go and do things on the Fourth of July and sometimes they’ll go four-wheeling in this area, and sometimes one of these four-wheel drive vehicles will get stuck. If you were measuring the health of the vehicle or the speed of the vehicle and all you had was the rpms, you would have no idea that that truck may be stuck and I think about it, the truck itself is the economy, and it could be stuck in a ravine. But, you know, you walk up, let’s say you walk around a corner and you don’t know that the guy is stuck and you hear “Wzoooo,” you might be thinking he’s going 80 miles an hour down the road, but instead he’s sitting there, stuck, the rpm’s are racing, and I’m thinking the financial markets. This bubble is a little bit like the rpm’s in a stuck truck.

David: Exactly, but we don’t have the gears engaged. We do not have the gears engaged. So, you know, we are to believe that all is well, and V is the shape of this recovery. Again, we come back to contrast. Financial markets are easy to excite. There’s economic activity, which, on the other hand, is a lot harder to gin up. And all the money in the world can be thrown at an economy that’s stuck. And you may draw a few more sports bettors into the Wall Street Arena, but the games end when the music stops, we may not have a scarcity of money, but I think when the music stops, there’s always been a scarcity of chairs in that particular game.

Kevin: Let’s go back to what Doug Noland talked about for the second quarter because Doug Noland is always somebody worth reading and quoting and, you know, he’s got some thoughts on this amazingly different second quarter from first.

David: You know, it’s interesting. Doug and I talked the other day, and we both feel like what we do here on Tthe Commentary and what he’s done with Credit Bubble Bulletin going back to the late ‘90s and early 2000s is to provide a record of one of the most critical periods in financial history and to just chronicle that, and to have some place that play by play had some thoughts and details, data details, permanently logged. And that’s what he did, has done for decades. That’s what we’ve done now for 13 years on The Commentary here. And so he reflected on the second quarter in this week’s Credit Bubble Bulletin, saying the second quarter was momentous, momentous for reasons beyond huge securities market gains. Speculators and investors do now believe central banks will exercise complete control over asset prices for the foreseeable future. There is no longer any shred of doubt. Highly synchronized global market bubbles are the ultimate too big to fail. Moral hazard has reached its pinnacle. And after unleashing several trillion at home and trillions more overseas, central bankers will find it impossible to wean highly speculative and inflated markets off of aggressive monetary stimulus.

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fed buying virtually everything