There’s a Bull Market in Pessimism: Can the 2020s be a Golden Age instead?
Being Bearish Doesn’t Make You Smart
George Soros was the G.O.A.T (Greatest of All Time) but his protege, Stanley Druckenmiller, wasn’t bad either. He delivered spectacular returns throughout the 1980s and 1990s (+30% annually for a long time!). He always seemed to be early on emerging themes and crucially acted upon them in size. When things went wrong, he “panicked early” as Jim Simons used to advise. Indeed, part of his investment success boiled down to cutting positions when markets turned, like his mentor, Soros, always did.
The issue with Druckenmiller now is he’s old. And that’s a problem with a lot of the financial titans from yesteryear who are still alive. Pessimism builds with age. There seems to be a certain satisfaction that comes from claiming a crisis is around the corner at the coda of your life. Druckenmiller has even admitted he has a tendency to be too negative.
The press is making a big deal about his comment that the 2020s will be a lost decade for equity markets. For the author, it was only a matter of time before one of the old titans of finance came out and said it. There have already been so many disparaging comments about the future of Europe.
Doom sells but the merchants of doom aren’t always former financial titans to be fair. They come in all shapes and sizes. Perhaps the most insidious amongst them are the economists. They seem so erudite and well read. But when you back test what they’ve recommended over the last 20–30 years, you often find they have been very wrong.
Jeffrey Sachs is a case in point. He hasn’t been this busy spreading his doom gospel since the Greek debt crisis of 2010, which, incidentally, he was wrong about. His book “The End of Poverty,” is celebrated at upper middle class dinner parties from Chiswick to Point Piper but as a world economic analyst, he is not distinguished. He was also involved in the catastrophe that was 1990s Russia but that’s a topic for another day.
Historians aren’t much better either. The charismatic Niall Ferguson has found every opportunity he could to get in front of the cameras and claim today is worse than the 1970s. He sounds so persuasive with that learned Scottish accent, like a Russel Napier, but we forget how wrong he was about the 2010s. In 2013, he went head-to-head with Paul Krugman claiming the 2010s would be a period of rapid inflation. The media praised Ferguson and disparaged Krugman. It turned out Paul Krugman was right. Hasn’t he been right about a lot of things?
The most disappointing commentary comes from the former titans of finance such as the heads of Brevan Howard, GMO and Druckenmiller, of course. Instead of counting their gold at Lake Como, they love finding time to preach their “end-of-the-world” narratives. They sound convincing until you realize their assets under management have collapsed over the last 10 years due to poor performance. Their best years are a long way behind them. Berkshire Hathaway would have gone the way of GE without Charlie Munger forcing Buffet into his Apple position. Even with Apple, Berkshire has underperformed the S+P. People forget that.
History Rhymes — Mark Twain
The author has a sense of Deja-vu. It’s the same people saying the same things as in 2010. And bizarrely, the media is happy to give them all the airtime they want.
The press seems to celebrate only those who did well in 2008; it spends little time on people like George Soros and David Tepper, who crushed it for years from 2009. For the author, that seems strange.
Getting it right once every 8–10 years isn’t the best long-term strategy for wealth building. Being focused on growth and playing for the recovery has been the strategy that has made fund managers filthy rich. Wasn’t Julian Robertson, a man focused on growth, the best example of that? How much did people really make being short in 2008 versus buying Walmart in 1981, Microsoft in 1992 and AutoZone in 1999? Growth investors are always the best investors, no?
The trouble seems to be a constructive analysis of markets is less newsworthy than one tinged with biblical doom. Michael Burry gets a movie, despite putting gates on his investors and never repeating the same success again, but groups like Tiger and Baillie Gifford get heavily criticized for being long the wrong stocks after years of dominance.
Working out when to buy takes just as much insight and deduction as knowing when to sell. It also involves thinking through all the various policy levers to prevent a melt-down. And it might also require a real-life earthiness, which was definitely needed in the dark days of 2008. While all the financial brainiacs enjoyed extrapolating how bad things were going to get, most “normal” people got up and went to work. The world kept turning. And that made all the difference.
The Ghost of Japan
One of Druckemiller’s big trades in the 1990s was being short Japan and being long the US. It was a profitable trade for him, and he stuck with it when it went against him at various points. He didn’t cut. It would seem his comment this week was influenced by his experience with Japan, which did indeed experience 20 years of flattish equity markets. But the author would argue Japan was in a very different situation to what the US is in today.
As explained in Richard Koo’s brilliant book “Balance Sheet Recession: Japan’s Struggle with Unchartered Economics and its Global Implications,” the balance sheets of corporates in Japan were a mess after the Bubble burst. This meant corporates wouldn’t invest and without wanting to fire half the working population, the government borrowed and invested. If they had not, Japan would have gone into a depression. The fact that Japan de-bubbled without massive layoffs was an amazing success story, especially as some asset prices collapsed 90%.
To achieve what they did, the Bank of Japan and the Ministry of Finance knew they needed the bond market to hum along. They didn’t care less about the equity market. If that meant a few equity fund managers at Fidelity cursed them, so be it.
The US is in a very different place. Banks are financially solid, and the balance sheets of corporates and individuals are quite robust, almost at levels that they were in 1981–1982, when the equity markets began to recover. And then there’s the recent publication of the Financial Accounts of the United States.
Does the national debt matter?
The latest “Financial Accounts of the United States” published by The Federal Reserve at the end of last week challenges the popular narrative of an “over-indebted US economy”.
It is fair that the outstanding stock of US nonfinancial debt hit another high in 2Q of 2022 but that ignores the significant shift away from private to public sector debt. The structure of US debt is now the mirror image of its pre-GFC structure following the shift away from relatively high-risk household debt towards lower-risk government debt.
Households and corporates have no-where near as much debt as they did at the end of Q1 2008. The household debt ratio has gone from 99% of GDP to almost a post-GFC low of 75%. That often gets lost in the bearish noise.
Even if you are a not a fan of modern monetary theory (MMT), that’s pretty significant. But if you are like George Soros is, then it’s a big positive that debt is now mostly government debt. For the MMT believers, government debt represents financial wealth for the private sector. As a currency issuer, the US government cannot become insolvent in its own currency since it can always make payments as they come due in its own currency.
As MMT is a controversial topic, it might make sense to park that argument and focus on other facts. Druckenmiller’s comment negates the chance of inflation falling despite all the evidence it’s about to. Did you see the secondhand car auction results in New York last week? What will happen to interest rates if inflation does drop along with growth? Do we head towards zero again?
And it does not take into account how successful the US has become. Even in 1989, did Japan have as many truly world class companies as the US does right now? Isn’t the US winning every battle when it comes to commerce? Name a truly global Chinese company. Name a European one that dominates outside of some luxury brands and ASML. There is something that works in the US. Jim Chanos is right that there is a LOT of excess in Silicon Valley but there are also incredible success stories too. Isn’t the iPhone becoming a global utility?
Time to Embrace Keynes?
The author remembers sitting on the trading desk and being bombarded with negativity in early 2009. Everyone seemed to want markets to go down. They wanted the economy to collapse. The smart clients, on the other hand, talked about levers that could be pulled. Some had even worked out that it was a matter of time before the Chinese would pump and the US government would drop more and more money on to the economy from “helicopters.”
The economy was slowing down just before Covid. It might slow down more if the Fed acts too aggressively. We need to start worrying about the growth and jobs more than inflation. If both parents in a household that earns USD$50,000 a year combined (50% of America?) lose their job, the 50-basis point increase in the price of milk is academic. They have other issues to contend with like healthcare. Isn’t it time therefore time to think through what levers the US administration has right now at its disposal to make sure we don’t lose the impressive nominal GDP growth we have seen?
Eisenhower embraced Keynesian policies in the late 1950s and he was a Republican. And 1958–1966 was still one of the greatest periods of economic growth the US had ever seen. Isn’t it possible to imagine 2020s might not be so bad if we start thinking about education and infrastructure spend as an investment again? For all his faults, didn’t Biden talk like that in his first few weeks of office?
The reality is the US bond market will handle many more bouts of public spending. We never think about what a sovereign fund for the US would look like. Its wealth is unfathomable. The US is not Weimar. And it’s not Rome. The US is infinitely more powerful. And its bond market is its greatest strength.
Yardeni Research pointed out recently that foreign buying of US debt is going through the roof. Ask yourself this: if you have USD$1 trillion to park, what do you do with it? Invest in bitcoin? Invest in the Chinese Yuan? Don’t make me laugh.
There’s a lot to worry about. But we might look back on this period as a period of over-worrying, as a JP Morgan fund manager argued this week. Didn’t someone say, “nothing can be done without hope and optimism?” We need more constructive discussions on the media. And we need new blood with new ideas. It’s time for a lot of old timers to fade out. Thing can, and often do, get better.