Tano Capital Commentary: September 2009
Goldilocks and the Three Bears...
We attribute our rather lengthy silence not to lethargy or sloth, but to the bald fact that we could not find anything in the markets which piqued our interest enough to force us into committing pen to paper until now. We have learned the hard way, that when we have nothing interesting to say, it is better then to say nothing, as opposed to polluting our readers inboxes with pointless drivel. So be it.
We sense the conventional groupthink that is coursing its way through the markets now runs something like this: Global governments have managed to avoid a 1930’s style crash by opening up the dam and allowing a flood of newly created money to keep our economy afloat. This new wave of liquidity is keeping bond yields low and by contrast making stocks look very attractive at post- crash valuations. This has brought buyers back into the markets, which has created an almost self fulfilling prophecy that the worst is behind us and it’s time to get off the couch and get long again. As stocks rise, more and more sidelined players are getting back in as they must keep up with their benchmarks or lose their assets under management to more aggressive players.
The other major evidence of groupthink we see concerns the valuation of the US Dollar. Never in our thirty year plus investing history have we seen such a one- sided raft of opinion about an asset. The pundits calling for $3000 per ounce or higher gold are falling over each other one after another on CNBC and Bloomberg and in Barron’s. “The dollar is dead” they all shout from the rooftops. We beg to disagree. We certainly would agree with the basic fundamental argument that the dollar and paper currency in general are in for a rough ride over the longer term, and that eventually there will emerge a new world order with a new global payments system. Our focus at the nonce is on the timing of all that. We are no Friedman or Keynes by any stretch of the imagination, so we will leave the new structure musings to those who are much more qualified to do so than ourselves. What we do know for sure is that whenever we have seen such certainty and unanimity of opinion in the past about an asset, it almost always proves out to be wrong, at least in the short term.
“What does Goldilocks and the Three Bears have to do with all this?”, you might well ask. Goldilocks in the fable comes upon a deserted house in the woods, enters and finds after scrounging a meal, three beds. It turns out they belong to Papa Bear, Mamma Bear and Baby Bear. She tries Pappa Bear’s and Momma Bear’s and settles on Baby Bear’s for her nap. We, as investors, have had our turn in Pappa Bear’s bed last year, and it did not fit us very comfortably. The markets now feel to us like we have climbed into Mamma Bear’s bed. We are very discomfited by the complacency we see all around us, and we are tossing and turning in our new bed. Starting a little over a year ago, in a matter of a few months, the S&P went from over 1400 to under 700, in a sickening downward spiraling rollercoaster ride. The real economy went off a cliff into a free-fall, and everything just stopped dead in its tracks. Yet, nine months after the fact, you would be hard pressed to see or feel anything different just driving around town and going to the shopping malls. Stores and restaurants seem busy as ever, and the mood of normalcy seems to have taken root again. The pundits are all rabidly calling for higher prices and for $3,000 dollar an ounce gold.
Certainly the economy is showing some signs of revival globally, we readily concede that. What we don’t concede is that things have returned to “business as usual” so quickly. How soon people forget the plummeting S&P, and the calls for the onset of the “Great Depression” redux. We wincingly recall being riveted to our chair last year, watching our Bloomberg terminal, as stocks melted down day after day and month after month. As we watched with horror the global credit system and the economy shut down, we began to muse on what the likely end game would be for such a sudden, drastic and sharp demise in equities. We studied in depth what happened in 1929 (for those interested in reading our conclusions please visit our website to see our whitepaper: The Crash of 2008 vs 1929) and compared and contrasted that period to what was happening now in real time. We concluded that there would likely be what we termed a “sucker” rally in equities, much similar to that which occurred in the first several months of 1930, followed shortly thereafter by further weakness in equities.
As to the current “strength” of the economic recovery, we believe the following dynamic is at work: during and after the crash of 2008, people and companies just froze up. Everyone just stopped all spending, and sat down to wait and see what was going to happen. All discretionary, and all non-discretionary, spending was brought to a dead stop. Non-discretionary spending, by definition, has to be spent. It can be delayed for a period of time, but it cannot be postponed forever. Now, with the economy looking a little better, all that non-discretionary spending that was temporarily postponed is occurring all at once. This is boosting all the leading economic indicators and allowing the pundits to paint rosy pictures of the recovery. We believe that the current mild upsurge in economic activity and leading indicators is most likely due to the one time release of a bubble of pent- up non-discretionary spending as opposed to representing a sustainable longer-term expansion in spending. We think once the pent-up spending is done, the economy will stabilize at a much more anemic run- rate than anyone thinks now. The bad debt bubble in the Western economies has barely been pierced, and it needs to deflate materially before any real return to economic normalcy can be contemplated. We are thus now shorting stocks and shorting precious metals. It almost makes us sick to our stomach to admit that to you. The only thing going in our favor is that when we look back in time, almost all our really good trades made us sick to our stomachs at the time we put them on. We are also the first to admit that timing markets is no picnic, and that going counter to the current trend is fraught with risk. Time, as always, will be our judge, jury and...
With all best regards,
Sep 1, 2009