I have always thought -- and I have always been taught -- that recessions, diseases, riots, the destruction of property, chaos, etc. will be deleterious, materially, to equity valuations.
I’ve been wrong of late for this seemingly illogical thought.
Instead, in 2020, we’ve seen that recession, disease, riots, destruction of property and chaos are beneficial to equity valuations as long as the monetary authorities do indeed throw all caution to the winds and remain massively expansionary.
As I have said in countless speeches, television appearances and radio interviews since then, we must always understand that the Fed’s “margin account” is, by definition, almost infinite. At the very least, it is larger than any of ours.
Here we are four-plus months into the COVID-19 shutdown/circumstance/pandemic and the harsh reality is that bringing our entire economy to a halt as quickly and as “violently” as we have is not something we can reverse as easily, as quickly and as violently.
The hard truth is that machines and machinery rust; workers go stale and forget their skills; trade lines are broken and are difficult to repair.
Some things will survive and may even prosper in the future including Amazon, Zoom, Nvidia, et al, but others will be nearly impossible to start again.
Restaurants, hotels, local stores, barber and beauty shops, auto repair stations (the list can and will go on) have closed their doors, hopefully temporarily, but in many instances, the closures are already permanent.
Yes, economies can be rebuilt, but the harms done to address the virus are harms nonetheless.
Hope does spring eternal in the minds of many investors. Hope, however, is at best a very difficult investment partner.
The signs of ill-advised, naive, young speculators rushing into the markets are everywhere. They remind me of Joseph Kennedy’s decision to exit the stock market in early ’29 when he began receiving stock tips from the young man who shined his shoes.
As Kennedy reportedly said, “When the shoeshine boys have tips, the stock market is too popular for its own good.”
When American Airlines announced several weeks ago that its flights are more than 60 percent full, naive speculators rushed to own the company’s shares, forgetting that American was flying only a bit more than one third as many flights as it had been flying only a very few months earlier.
This is borderline investment madness.
Nonetheless, stocks have until very, very recently, rallied, and rallied sharply, as the Fed has rushed to the rescue of the market and the economy. It is, indeed, the Fed’s duty to be the adult-in-the-room when things go wildly awry.
The Fed, along with the other leading central banks such as the Bank of England; the ECB; the Bank of Japan; the Bank of Canada; and others, has been manifestly expansionary.
To this end, we see new “experts” such as Barstool Sports founder Dave Portnoy, gain national exposure for his advocacy of rank, almost amateurish, speculation.
Thousands, perhaps many thousands, of naive, mostly very young and wholly inexperienced “investors” follow his every word and his every recommendation as he engages in day trading.
For the past several weeks he has been right. The market had rallied -- but we are again reminded of Joseph Kennedy’s admonition.
We are also reminded of John Maynard Keynes’ admonition that the market can remain illogical far longer than we can remain solvent.
Finally, we are reminded of Thomas Tusser’s admonition that “A fool and his money are soon parted.”
The “boat” is crowded and we fear it is likely to be o’er-swamped -- sooner rather than later.
Portnoy and his legion are having their proverbial day in the sun. But eventually, that sun shall set, or eventually, darker clouds will eclipse that sun.
You can count upon that as a fact.
Soon the music these “investors” are dancing to will either stop or turn atonal; soon he and they will find out that investing is very, very hard work.
So what are we to do? More importantly, what am I doing with my own account?
I’m long of gold and I am short of the equities markets.
Finally, I’m long of bond funds and various bond-like ETFs that pay dividends monthly.
Time shall tell if I’m right.
For now, I am.
I wish you good luck and good trading.
Dennis Gartman is the University of Akron Endowment Committee Chair and former publisher of the Gartman Letter.