Should You Be a Contrarian?; Twitter Update*

Should You Be a Contrarian?

What does it mean to be a contrarian?

The Oxford dictionary defines a contrarian as “a person who opposes or rejects popular opinion, especially in stock exchange dealing.” What is the consensus of stock and bond market direction – today’s “popular opinion”? What would it therefore mean today to be a market contrarian?

Economists’ forecasts of economic doom seem pervasive …, except for wire house analysts who almost always homogeneously permanently predict bull markets in stocks (Goldman Sachs, for example, expects that 2020 will be another year of double-digit gains for the S&P 500, and Deutsche Bank, Credit Suisse and JP Morgan see the stock market continuing to rally) … and sometimes in bonds as well (Barclays and Morgan Stanley see a risk of global recession and are cautious about stock market prices, but are optimistic about bond prices). Interest rates are declining worldwide – $17 trillion of global debt carries a negative interest rate and, significantly, buyers of those debt instruments now pay for the privilege of getting their money back. They fear that deflation will spiral out of control and take their hard-earned savings away. With U.S. Federal debt exceeding $22 trillion and trillion-dollar deficits ominously stretching to and beyond the horizon, their fears may be justified. Alas, the dreaded month of October is fast approaching and stoking investors’ fears – October 19, 1987 saw the stock market’s greatest-ever decline and October 29, 1929 marked the beginning of the Great Depression. A trigger for those fears, we are told, is America’s inverted yield curve … an almost-guaranteed signal of impending recession (see “Is This Time the Same” in the August 21st TLR). On top of that, corporate earnings growth has hit a wall, manufacturing barometers are dropping, unemployment data has disappointed, the tariff wars are raging, and money has been draining out of the stock market. Many investors therefore are reluctant to commit additional capital to stocks (for example, institutional investors’ cash reserves currently stand at ~25{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of investable assets and Tiger 21, a coalition of 750 investors with assets in excess of $75 billion, has reported an average cash position of 12{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} by its wealthy members). Even normally bullish investment banks and investment gurus have been warning about the potential for a stock market meltdown correction and caution that the stock market is “priced to perfection.” Alan Greenspan, Larry Summers, Ray Dalio, David Rosenberg, Paul Jones, Gary Shilling, etc., etc., etc., all have issued warnings. And recent economic data have been dark weak. A Bloomberg headline over the weekend was “Gloom deepens for the global economy” and a Barron’s contributor warned that “ÔÇÿIncredible Volatility’ Could Hit the Currency Market.”

21st Century concerns center on what might be called the Four Horsemen of the Markets: deflation – evidenced by the proliferation of negative interest rate debt instruments; recession – evidenced by the inversion in Treasury yields; the waning influence of Central Bankers –recent quantitative easings and lowerings of interest rates have not had their intended stimulative effect; and economic, social and political disruptions – Brexit, the U.S.-China cold war and Middle East tensions, to name only a few. TLR has written about deflation (see “Whither Inflation” in the March 13th TLR and “Deflation?” in the June 19th TLR), recession (see “A Recession?” in the March 18th TLR, “The Coming Recession” in the July 17th TLR and “A Weaker US Dollar?” in the August 26th TLR), the waning influence of Central Bankers (see “The Fabulous Federal Reserve” in the April 19th TLR, “Managing The Economic Cycle (Part 1)” in the May 8th TLR and “Managing The Economic Cycle (Part 2)” in the May 10th TLR), and the threat of economic, social and political disruptions (see, for example, “1937” in the March 11th TLR, “Change is Coming; A Perpetual Bull March” in the March 3rd TLR, “Deglobalization = Volatility” in the June 5th TLR and “There’s Something Happening Here” in the July 26th TLR) … and, after chewing on the potential realities behind these commentaries, it’s understandable why many investors now may be running scared.

What are the realities? Where should Americans be putting their money in these “interesting” times?

Relying on online financial advisory programs is a common approach many investors take. Those programs counsel investing for the long-term and ignoring the market’s ups and downs – which is all that passive computerized allocation programs can do. Those programs advocate an age-based stock/bond allocation of 100{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} stocks/0{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} bonds for a 20-year-old, 45{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}/55{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} for a 75-year-old, and a graduated stock/bond balance at ages in between. At all age levels, they advise maintaining between 5 and 20{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in cash/cash equivalents … just in case. If a more conservative online “survival program” were used, it would recommend an age-based stock/bond allocation of 80{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}/20{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} for 20-year-olds and 40{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}/60{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} for 75-year-olds and recommend a 20-30{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} cash or cash equivalent position. And an aggressive, bull-market program might show 100{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}/0{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} for investors aged 45 and younger with their elders holding 70{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}/90+{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of their assets in stocks and a nominal allocation to bonds and cash.

With many economists warning of doom risks over the next year or so, a committed contrarian would be tempted to go “all-in” on stocks. Corporate buy-backs have created an unprecedentedly low level of equity supply, especially in selected industries, meaning that enhanced demand, even at relatively low levels, could have a disproportionately large, positive impact on stock prices …, especially given the size of investors’ substantial uncommitted cash reserves. One (of several) of the possible drivers of stock market demand is a resolution of the tariff wars: “Resolution of President Trump’s trade wars would be a major [stimulative] step … and the timing of a deal may depend on his reelection campaign’s estimate of greatest electoral benefit” (Forbes, September 7th). Strong bull markets climb a wall of worry …, and there’s plenty to worry about today. The scarcity of investment alternatives to equities enhances the potential for outsize returns. With real estate weak, the Dollar strong, commodities in oversupply, and a weak global economy, the best investments in the world could well be U.S. stocks.

Insofar as timing is concerned, October is NOT a month to fear. It has been a positive performance month for the past 70 years. The fact that September has been the worst performance month (followed by May and February) means that the next few weeks bear watching … and a properly-timed contrarian-bet on the continuation of the bull market may be worth a bit of a wait.

What about bonds? They look terribly unattractive, paying the lowest interest rates in history …, and for that reason, bonds – and especially Treasury bonds – also may be a sound contrarian bet.

Bonds have been on a tear since 1981, a period of over 35 years in which the return on U.S. Treasury bonds has exceeded that of the S&P 500 Index by almost five times. Government bonds haven’t appeared attractive to most investors because of their low (and constantly falling) interest rate …, but investing in bonds is not about their yield. As long as interest rates are declining – as they have been since the 1980s –, bond prices have been going up. And they’ve been going up consistently as interest rates have continued to drop in the U.S., Japan and Europe. If interest rates continue their downward spiral – with over $17 trillion now in negative territory –, bond prices will continue to go up (and up).

Does that mean that Treasury bonds should be contrarians’ #1 pick?


The question is how long the bond market bull can run. The answer to that question depends on whether the trade war with China continues to escalate – if so, yields are likely to fall – and/or a recession is imminent – if so, yields are likely to fall – and/or whether Central Bank countermeasures against deflation are finally successful – if so (which seems unlikely), yields are likely to rise.

Perhaps the best contrarian bet of 2019 therefore would be an age-appropriate balance of selected equities and Treasury bonds. It’s entirely possible that both could go up …, and very unlikely that both will go down – unless, that is, the doomsayers are correct and the global system indeed falls apart.

Twitter Update

“The Twitter Market” commentary in the September 3rd TLR speculated that “the most significant market mover of 2019 has been Twitter … and its master has been President Trump.”

To TLR’s surprise, JP Morgan recently came out with an index (named the “Volfefe Index” after the nonsensical word “covfefe” that Trump tweeted early in his Presidency) to measure the impact of Trump’s tweets on financial markets. The Index measures how the President’s tweets are influencing volatility in U.S. interest rates. JPM concluded that the Volfefe Index accounts for a “measurable fraction” of moves in implied volatility, and the impact of those tweets is particularly apparent at the shorter end of the yield curve, with two- and five-year rates more impacted than 10-year securities. Trump’s pertinent tweets have created volatility spiking, and led JPM to “find strong evidence that tweets have increasingly moved the U.S. rates markets.” Analysts can only guess at the effects those tweets have had on stock prices and stock market volatility, although it’s clear that they indeed had an effect. The Huffington Post has written that JPM’s “findings are a dramatic indication of Trump’s impact on the market. They also underscore why previous presidents generally avoided actions like attacking the Federal Reserve: in part to avoid triggering market volatility.”

Finally (from a good friend)

The richest man in the world, Jeff Bezos, at work in his executive office 25 years ago, in 1994:

*┬® Copyright 2019 by William Natbony. All rights reserved.

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