The Music Has Stopped, It's Just Too Hard To Hear Over The Crowd
Markets hit an all-time high last week as "cautious optimism" seemed to be the validation preached by all. The idea is that as long as some investors are still bearish, negative, cautious, worried, that means the market is too, and there's still some buyers left to push the market even higher. This is poor reasoning, and concerning, as there's always small groups permanently bullish or bearish, and commentary itself is mostly worthless in my opinion. So what do the hard numbers, facts, and data tell us? Well that trade world-wide is going in the trash, currencies are being devalued in last ditch efforts to save over-indebted countries, and the Central Banks have little left in the playbook to try and remedy the situation. Bulls, however see this as a reason to buy, as Central Banks lowering rates and buying bonds is bullish for stocks. It was from 2009 to the Present, so why not anymore? Well we're not in 2009, and nothings the same.
On a brief side-note before we get into the details, I wanted to let everyone know that I have worked hard over the past year to finally make my hedge fund official. I paid lawyers, signed papers, created companies, and partnerships, and it's all done. So from now on all results are audited and official, and Storm Port Capital can begin taking investments from outside capital, friends, family. There are minimums and fine print, but nothing that serious. If you're interested and want to invest, please feel free to call or email to set-up an initial call to go through the process or just answer any questions you might have. There are two active funds, one actively traded long/short fund, with a primary goal of maximum returns, and a deep value fundamental fund, long only, modeled after Seth Klarman, Warren Buffett, and Dr. Burry, with a goal of downside protection and long-term appreciation.
June and July were great months for Storm Port, we returned 5.19% and 10.87% respectively, these results are final and audited. I am cautiously optimistic that we can keep this positive momentum going, and will continue to do so with hard work and perseverance. Now onto the markets!
The markets reasons for rising are up for debate, however the most prevalent currently are the always positively spinned close-but-not-quite China-US trade deal that is always 'almost' complete, positive earnings trends, stock buybacks (another letter on that later), unemployment, and the Central Banks combined efforts globally to protect the world from all risk.
Some causes for concern arise as we meddle through the data. Below is a chart of GDP growth for the USA following a recession. You will notice that this expansion, starting in 2009, is now the longest lasting of all time. Take that with a grain of salt as markets have existed for thousands of years and the USA is relatively young in that regard. Second, you will notice that our expansion is the weakest on record as well. Not something you want to see as the USA hits another slow growth period with record debt at all levels (national, local, consumer, corporate).
I do not want to spend too much time on China as that might risk me going on and on. I'll begin by saying I believe they have an enormous debt issue, and will likely go into extreme if not hyper-inflation as they attempt to print their way out. The cracks are starting to show, and the signs you see prior to this type of event (civil unrest, falling economic indicators, extreme money laundering) are ever more prevalent. The reason I bring it up, is that as I invest, I keep a constant eye on the financial bombs that could sink years of returns by killing the markets, and China's debt is absolutely one of those bombs.
As we begin managing our value fund I have been hesitant to add aggressively to positions I'm not 100% certain are either near a long-term bottom, or balance sheet secure with very little downside. This is for several reasons: value has under-performed as a result of investors chasing momentum to recognize expected higher returns as a result of growth, expected returns from M&A seem to be less exciting to corporations and PE funds when compared to share-buybacks and dividends, and the Fed is forcing everyone into a bond trade as a side-effect of their policies. Stan Druckenmiller, arguably the greatest hedge fund manager of all, has now levered up and invested heavily in bonds. Why? Because the Fed said they are going to start easing, so as they lower rates, todays bonds with a yield will go up in value. He's betting on a sure thing in his mind, and he's probably right.
I'll end with two charts. One explains the Federal Reserves recent moves. The chart shows the US Dollars performance against other currencies. As you'll see, the "Race to Debase" is in full swing and the worlds Central Banks are fighting each other over who will benefit from a weaker currency.
The second chart shows the value of US citizens net-worth to disposable income. Which should frighten everyone.
Thank You,
Dean Grimes
Storm Port Capital
