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A Permabear Strikes Back

September 8, 2021

At the end of July, I wrote an article, “Jeremy Grantham Knows Nothing,” providing an update on the high-profile bear whose crash call I’ve followed all year.

His initial forecast was for the stock market to collapse in spring. When that failed to materialize he changed the schedule to this fall, warning that the trigger “could be a virus problem, it could be an inflation problem, or it could be the most important category of all, which is everything else that is unexpected.”

To make fun of his rescheduling, I revisited his forecast and pointed out the folly of forecasting in general, and the superiority of my Signal System, which requires no forecasting. Of his above “forecast,” I wrote:

“In other words, Grantham doesn’t know what or when. He has a general idea that the market has been going up and will one day go down, but did you need a big kahuna to tell you that?”

He also said, “Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier.”

Following which, I wrote: “Full stop. That knowing when the bust will come is everything. If it can’t be known, then the seeing of a bubble was merely conjecture and ultimately irrelevant. Does anybody mind a bubble that doesn’t go bust? In Years Two and Three of such a bubble, would anybody be happy to have gone to the sidelines in Year One because Grantham had no trouble seeing the bubble? Of course not.”

This installment is not about Grantham but about the resurfacing of an old nemesis of mine, RJM Consulting, in response to my Grantham article. The head of this firm, who once worked at a major credit rating agency, has predicted the spectacular implosion of my Signal plans for the past seven years. He went ballistic when I upped the ante from my “over committed” 3Sig plan to my leveraged 6Sig plan then—Katy bar the door—my 3x leveraged 9Sig plan. It would be the death of me, he promised.

About my Grantham piece, he wrote:

_____________

“Does anybody mind a bubble that doesn’t go bust?” Well, yes.

This is the foundation of MMT: for so long as the Fed has air in its lungs, that bubble will keep growing.
The problem is timing, as it ever was. Dollar losing its reserve currency status, increased wealth inequality that reaches a destabilization point, climate change finally reaching the halls of the rating agencies forcing a drastic reset.

The market has been in “postponement” mode for a long time. Making hay while the sun shines is sensible, but that “1/3 of the time” it’s in retreat often happens at a speed for which your reallocation methods will not be sufficiently timely.

Do you not think that a 20% or 30% mark down of the 65-year-old subscriber’s portfolio is a risk worth avoiding? Buying again after the “correction” may do very little for the retiree who is depending on that portfolio’s value, should it be collateralizing some borrowing (that may become a heavier burden as a result).

And that’s only assuming a correction. Looking at the debt levels across the globe, and the negative real rates of interest, suggests a deflation (and an asset reset) of much greater magnitude, at least as a possible risk.

Even without leverage, the market is (to my mind), primarily a casino.

RJM

_____________

I normally let this kind of thing blow over, having seen it dozens of times with always the same arguments that somehow never matter, i.e. the Fed will run out of ammunition, there’s too much debt, the dollar will lose its reserve currency status, and so on. All permabears cite the same repeating set of ten or so worries, none of which have altered the market’s long-term upward march.

But somehow they never mentioned a pandemic.

This time, I couldn’t hold back. The following was my reply to RJM Consulting:

_____________

Ah, RJM. Still stuck on the sidelines, I see. That might be impressive if you had gone there at recent price peaks, but you and I both know you’ve spent most of the past 13 years there. Subprime was your PTSD.

All right. I’ll respond to you the way I always do when you send me a reprise of the doubt you voiced today. I will do it not for your benefit, because I believe you to be permanently lost to headlines and invalidated pundits, but for the benefit of other investors who visit my site to find a better, more profitable and less stressful approach to stock-market profits.

Here goes:

How do you know the market is in postponement mode? Permabears have said so for years, while investors committed to a system of price reaction have profited greatly.

The Fed was supposedly out of ammunition after dot com and again after subprime, yet here we are, much higher in price with a Fed looking and sounding confident. Who’s to say they don’t have five or ten more rounds of stimulus in them?

The dollar is nowhere close to losing its reserve currency status–another decades-old permabear canard. The SDR basket of currencies never caught on, and nobody can name a single sovereign currency ready to take over. There is no alternative to the dollar, therefore the dollar will not lose its status in the near term.

National debt and global debt–other permabear favorites that have not mattered yet in the 35+ years we’ve heard they would create a catastrophe.

You are told these things matter, and you believe they should matter, but so far they have not mattered. “But just you wait,” you might think, and have written to me in so many words. Fine, except that investors have awaited accurate permabear forecasts for decades. An investing lifetime comprises only about three decades, so thanks to permabear warnings, some investors have missed out on a lifetime of stock profit.

As for a retiree’s use of my system, they enter a reduced allocation as they approach and then enter retirement. A bear market would cause a drawdown in their stock allocation, but deep into retirement their base allocation to stocks is only 20%. They would have plenty of buying power to pounce on the low prices and benefit from the ensuing recovery–and a system that guides them to do so, which is more useful than pundits advising them to hide because of, oh, I don’t know: the market being in postponement, the Fed being out of bullets, the dollar losing its reserve currency status, and national debt, perhaps?

From the above, you might conclude that I’m bullish, but this is wrong.

I don’t see the market in the traditional bull/bear terms, and think that the framework does a disservice to investors. The stock market merely fluctuates, and my system is indifferent as to where we are in the fluctuation. It reacts to all price movement, both up and down, and is currently prepared to take advantage of a price decline. We’ve hoped that the likes of Grantham could get it right one of these months, but the months, quarters, and years go by. We make money; permabears don’t.

How many times over the years have you written something like your latest comment to me? Why do you not notice that my system keeps working while the pundits who speak to you are usually wrong? I know you hope to tell me you told me so one of these years, but even then it won’t mean anything because my system will be busy buying whatever coincidental price decline you believe vindicates your lifelong skepticism.

Jason

_____________

Strident, yes, but it felt good.

Posted in Stock Market Forecasts | 1 Response

Jeremy Grantham Knows Nothing

July 28, 2021

I have followed Jeremy Grantham this year since Note 3 sent January 17, not because he’s more accurate than other z-vals but because he’s an industry darling, one of the big kahunas everybody loves to quote because he’s considered a really smart guy.

But smarts don’t count in zero-validity environments. Experience doesn’t accrue to a higher level of efficacy as it does in positive-validity environments, where something learned last year can improve performance this year. Examples of positive-validity environments include heart surgery, carpentry, and aeronautics. There’s a reason older surgeons, carpenters, and pilots are usually better than younger ones. By contrast, in the coin toss landscapes of stock-market and political forecasting, experience matters not.

Nonetheless, Grantham, who is a co-founder of Boston-based asset management firm Grantham, Mayo & van Otterloo (GMO), has earned a permanent seat on the smart-guy list, which implies that his view carries more weight than others, and too many investors have taken this to heart. When Grantham growls a warning, I hear from readers more than I would like.

To offset this misplaced reverence for what is ultimately another coin tosser, I am following Grantham’s latest zero-validity forecast, his January warning. It was already wrong in calling for a spring crash. He has since updated the forecast date and now calls for an autumn crash.

Last week, Reuters called Grantham “a certified bubble-ologist, fascinated by how and why bubbles emerge.” The news service referred to Grantham’s January warning, but rather than noting that it was already wrong it wrote: “Six months later, the stock market is starting to show some cracks.”

In an interview published Tuesday, headlined “Bubbles, bubbles everywhere: Jeremy Grantham on the bust ahead,” Grantham told Reuters:

“Looking at most measures, the market is more expensive than in 2000, which was more expensive than anything that preceded it. My favorite metric is price-to-sales: What you find is that even the cheapest parts of the market are way more expensive than in 2000.”

He doubled down on changing the date of his crash forecast from spring to autumn:

“A bust might take a few more months, and, in fact, I hope it does, because it will give us the opportunity to warn more people. The probabilities are that this will go into the fall: The stimulus, the economic recovery, and vaccinations have all allowed this thing to go on a few months longer than I would have initially guessed.”

Points for honesty, I suppose, but only in fessing up to whiffing the first date. On the more important issue of forecasting helping nobody at all, he remains an active noisemaker. Note that calling him out on this is not akin to saying he’s not smart, dismissing his credentials, or even questioning his logic. It is merely a reminder that nobody, no matter how venerated or how old, can forecast the stock market.

He hints at this: “Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier.”

Full stop. That knowing when the bust will come is everything. If it can’t be known, then the seeing of a bubble was merely conjecture and ultimately irrelevant. Does anybody mind a bubble that doesn’t go bust? In Years Two and Three of such a bubble, would anybody be happy to have gone to the sidelines in Year One because Grantham had no trouble seeing the bubble? Of course not. His above statement is a rephrasing of the following well-known aphorisms:

  • He forecasted nine of the last three crashes.
  • He’s never wrong, just early.

In other words, such imprecise musings are useless to allocators of capital. He went on to tie such a general comment to our current era:

“You see it when the markets are on the front pages instead of the financial pages, when the news is full of stories of people getting cheated, when new coins are being created every month.”

Well, that could be scary except that he said basically the same thing in January. Since then, the markets have not been on the front pages, Finra cracked down on Robinhood, and Bitcoin fell 46% from its April high. I’m not sure that Robinhood is what Grantham had in mind when referring to “people getting cheated,” but its being brought to bear by regulators indicates a system under scrutiny for fairness.

When it comes to identifying in advance what might prick the bubble, Grantham is at a loss. Or, rather, he reaches into the same grab-bag of warnings that are so evergreen as to be meaningless, along the lines of saying next year could be tough because bad things occasionally happen. True, but that’s not a usable forecast. Here’s Grantham’s version:

“What pricks the bubble could be a virus problem, it could be an inflation problem, or it could be the most important category of all, which is everything else that is unexpected. One of 20 different things that you haven’t even thought of will come out of the woodwork, and you had no idea it was even there.”

In other words, Grantham doesn’t know what or when. He has a general idea that the market has been going up and will one day go down, but did you need a big kahuna to tell you that?

The market presents a historical profile that obviates the need to guess. It exhibits rising action two-thirds of the time, falling one-third, and the best thing to do in the falling third is buy so that you benefit more in the subsequent repeat of the rising two-thirds. That’s the whole story. It’s forever complicated by narration and prognostication, but that’s the whole story. Nobody can time any of it. Luckily, the history of our plans shows timing to be unnecessary. Proper reaction is all you need.

While Grantham and others have been guessing when and where the market will go next, our plans have been preparing. In aggregate, they’ve used price strength to build buying power. Despite a generous holding of bonds, they’ve kept ahead of the S&P 500 this year. When lower prices finally present themselves, as they do one-third of the time, we’ll buy them.

You know the saying that hindsight is 20/20? That’s why we use it. The only metrics that guide us are price changes already on the books. We never dabble in future-guessing, and maybe Grantham should consider doing the investing public a similar courtesy. If he knows he doesn’t know when the bust will come, why does he keep pretending he does know?

Posted in Stock Market Forecasts | Tagged | Comments closed

TQQQ is Unlikely to Hit Zero in One Session

June 24, 2021

The following is from the comments section of last Sunday’s Kelly Letter.

Q. Subscriber Kenneth asked:

What happens if the QQQ loses 34% in a day? Does TQQQ go below zero?

A. I answered:

It would bottom somewhere just above zero, effectively eliminating the investor’s position.

However, this is unlikely to happen. From “Research Behind 6Sig and 9Sig” in the User Guide:

“…the maximum historical one-day gain of the Nasdaq 100 was 18.8% on January 3, 2001, and the maximum one-day loss was 17.8% on Black Monday, October 19, 1987. The average daily deviation was 1.14%.”

On top of that, the market now maintains circuit breakers to prevent a plunge to nowhere. From Vanguard’s post on the subject:

“Circuit-breaker points represent the thresholds at which trading is halted market-wide for single-day declines in the S&P 500 Index. Circuit breakers halt trading on the nation’s stock markets during dramatic drops and are set at 7%, 13%, and 20% of the closing price for the previous day. The circuit breakers are calculated daily.”

Thus, while it is theoretically possible for TQQQ to hit zero in a trading session, it is unlikely. We can say the same thing about almost anything in the stock market. For example, it is theoretically possible for GOOG to fall to zero in a session, but unlikely.

Posted in 9Sig, TQQQ | Comments closed

My Weimar Reference

June 17, 2021

My reference to Weimar in last Sunday’s Kelly Letter confused a number of readers. Allow me to clear it up. I wrote:

“…a contingent of economists staking careers on inflation warnings willfully ignored, and ignore, assurances from the Federal Reserve and other central banks that it is transitory. It makes perfect sense why early data show higher prices as shutdown bottlenecks reopen and base comparisons exaggerate leaps back into action. I suspect that many showboats intoning about inflation know that the current round of reports represents a fake variety of it, but just could not resist this rare chance to shout ‘Weimar!’ in a crowded theater.”

The Weimar Republic was Germany from 1918 to 1933. Among other things, it’s known for one of the worst bouts of hyperinflation the world has seen. Therefore, people who fret about inflation frequently mention Weimar—even when observing run-of-the-mill inflation or, dare I say, transitory inflation. That was my reference.

In the same way that Godwin’s Law of Nazi Analogies holds that the longer an online discussion goes, the higher its probability of invoking a comparison involving Nazis or Adolf Hitler; Kelly’s Law of Weimar Hyperbole holds that any media obsession with inflation will produce Weimar warnings.

The two laws are connected, given that Weimar preceded the Third Reich. It was the Weimar Republic’s president, Paul von Hindenburg, who appointed Hitler Chancellor of Germany in 1933. From this relationship, the invocation of Weimar enables detractors to affix either or both of two easy labels to leadership they dislike: it is fascist and/or it is inflationary.

When Donald Trump was elected president, pundits invoked Weimar to say America had come under fascist rule. For example, Roger Cohen wrote a New York Times opinion piece in December 2015, “Trump’s Weimar America,” from which:

“Welcome to an angry nation stung by two lost wars, its politics veering to the extremes, its mood vengeful, beset by decades of stagnant real wages for most people, tempted by a strongman who would keep all Muslims out and vows to restore American greatness. … The United States is not paying reparations, as Weimar Germany was after World War I. Hyperinflation does not loom. But the Europeanization of American politics is unmistakable.”

The White House went from Trump to Joe Biden, and fascism fear mongers handed the Weimar baton to hyperinflation hyperventilators. Representative of the new group is Joseph Sternberg, who wrote in a Wall Street Journal opinion piece last February, “What Inflation Debates Miss: Inflation,” from which:

“A consequence of chaotic financial markets [in the Weimar Republic] was a new boom in speculation. The economic miseries of the era were not uniformly distributed, and the divergence between new classes of haves and have-nots stoked political and personal resentments alongside rampant corruption. Does any of this sound familiar?

“In other ways too, faint but eerie echoes of the Weimar era are starting to sound. A curious phenomenon of that time was the emergence of Notgeld, or emergency money, printed by local governments or larger corporations to facilitate commerce amid the collapse of national money. Is Bitcoin the Notgeld of our day?”

No, it is not, partly because it emerged not recently but back in 2009. That’s one slow-moving emergency.

Weimar is a permanent part of the political and economic lexicon, so it’s good to understand what pundits mean when they use it.

It’s also good to know that they’ve been wrong about it applying to the United States ever since the disappearance of the actual Weimar Republic.

Posted in Inflation | Comments closed

CLM Is No Panacea

June 2, 2021

I wrote in last Sunday’s Kelly Letter about a closed-end fund called Cornerstone Strategic Value (CLM $11.50 -2% YTD). It’s one of many securities I’m auditioning to play a part in an Income Sig strategy for retirement.

Please remember that this is a research phase.

None of the funds I’ve referenced is a recommendation. I don’t know yet whether I will reach a level of confidence high enough to release an Income Sig plan at all, much less what specific funds would power it, nor what rules would guide it. The result of this research could be nothing more than a regularly updated table of income assets to accompany a slimmed-down Sig System portfolio for retirement. Please don’t jump the gun and load up on funds I mention during this research phase.

About CLM, I wrote last Sunday:

“If a retiree had put that $1M into CLM at its closing price of $8.02 on 3/30/20, the date our Q1 2020 orders filled, they would have purchased 124,688 shares.

“Those shares would have kicked off a $23,105 monthly income last year and a $19,975 one this year, as the untouched holding grew in value to $1,417,703 today.”

You may wonder, “What in the world could CLM own to kick off that kind of monthly income while also growing capital 40% in a year?”

It does, indeed, look like a free lunch—and you know what they say about those.

The answer: nothing. There is no portfolio good enough to deliver CLM’s results of the past year. The secret to its high yield is that it pays from proceeds of new rights offerings. From Investopedia:

“A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings. These are considered to be a type of option since it gives a company’s stockholders the right, but not the obligation, to purchase additional shares in the company.

“In a rights offering, the subscription price at which each share may be purchased is generally discounted relative to the current market price. Rights are often transferable, allowing the holder to sell them in the open market.”

Such a discounted rights purchase can work out well for the investor. It can also turn into high yield being nothing more than taking money from you, then paying it back and calling it income. Rest assured that I’m aware of this risk with CLM and other closed-end funds engaged in the practice.

CEFs that engage in new rights offerings are not necessarily out of the question for income seekers, nor ineligible for an Income Sig plan, but buying and holding them is generally inadvisable because their price decays over time, as shown below for CLM:

CLM Trailing Price Change
– – – – – – – – – – – – – – –
1-Yr +14.0%
3-Yr -22.8%
5-Yr -29.9%

Now, observe its trailing total returns for the same time frames, which reveal the benefit of its high distributions:

CLM Trailing Total Returns
– – – – – – – – – – – – – – –
1-Yr +34.5%
3-Yr +12.2%
5-Yr +15.3%

Better, but not as good as the general market, represented below by SPY:

SPY Trailing Total Returns
– – – – – – – – – – – – – – –
1-Yr +39.6%
3-Yr +17.4%
5-Yr +17.0%

It’s possible that an investor would value income so highly that they would be willing to watch the value of their CLM position shrink over time while they collected its big monthly distributions. However, this is not suitable to an evergreen Income Sig system.

Another possibility for using CLM-like big payers is swapping them in and out based on a metric or suite of metrics, such as discount to net asset value, yield, and/or price change. Reacting to the latter is the Sig System’s specialty, but it could also react to something else. A CEF study by Matisse Capital found that discounts to NAV correlate with high subsequent total returns, which encourages work in that area.

However, what I have come up with so far is overly complicated for negligible benefit. The investing world is filled with unnecessary complexity. I refuse to compound it.

This drawing board is a long one.

Conclusion: CLM is no panacea.

Posted in Income Sig, Retirement | Tagged | Comments closed
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