We All Pay When Big Investors Lose NIRP-Incited Gambles

Hedge fund managers got together last week for a billionaires’ Woodstock — the Ira Sohn Investment Conference. And boy, for a bunch of rich dudes, they sure were cranky and downbeat.

The two managers whom I respect the most, Duquesne Capital chief Stanley Druckenmiller and Jeff Gundlach of DoubleLine Capital, decried the perils of negative interest-rate policies, or NIRPs, that have spread like a plague across the industrialized world.

They complained that myopic monetary and fiscal policies were fostering a debt bubble that will ultimately end badly because investors can’t help but gorge themselves on all of that cheap money.

The theory, proven time and again, is that: Inevitably hedge fund managers will overexpose themselves because they are incentivized to do so. And when they are all crowded in the same trades and no buyers remain, they will panic and try to sell.

And their feverish selling will create losses, not just for them but for the real economy and for all of us private investors. The diminished wealth effect will result in lower consumption and growth will collapse. Factories, malls and real estate will close or tumble, so they say.

If it comes to pass, the fault will all lie largely at the feet of those who made access to all of the cheap money possible. Yes, it always comes down to central banks as the villains.

Some Woodstock. I prefer the original. Peace out.

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ROOT FOR UTES

Utility stocks have been the surprise darlings of the past six months, up 17% since December.  And yet they can’t get any love from the pundits. All the smart people say that the strength of the utilities is a sign of the apocalypse — that investors’ ardor for low-growth-but-safe industries shows that the market is too risk-averse to go anywhere.

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Yet this conventional wisdom may not be true at all. Jason Goepfert, of Sundial Capital, ran the numbers and found that a big divergence between utilities (new high) vs. cyclicals, like transports, (flat to down) has actually led to good broad-market returns in the long run.

Goepfert went back to 1931 to look for days when the DJ Utility Average closed near a three-year high while the DJ Transportation Average was at least 10% below its own three-year high.

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In the shorter-term, the Dow had mixed performance, with some weakness a couple of weeks later. It was negative more often than positive with a negative median return. Yet in the time frames longer than two weeks, the Dow’s returns ranged between good and excellent, Goepfert reports. A month later there were 18 positive returns out of 23 occurrences. Six months later, there were only 3 negatives and the Dow’s average return was more than double a random return.

This divergence actually triggered in March, Goepfert notes, so the current signal wouldn’t be included since one is already active. Regardless, this has not been a useful signal to get out of stocks, he argues, adding: "Like we see so often with common market perceptions, proponents like to drag out one or two historical examples, like 2007 in this case, when in fact there were many more times when the signal failed. We are not considering the rally in utilities to be a negative for stocks. It may actually be a positive factor."

So there you have it. Go utes! This data set, like others I have shown lately, is bullish over the next three to twelve months. Kind of surprising, but you have to go where the evidence leads.

Best wishes,

Jon Markman