The Poster Child : Part 1
Is Crypto the poster child of the bubble?
Bonds, Drugs and Rock n’ Roll
Of all the masters-of-the-universe type financial celebrities, Jeff Gundlach sparks an interest. This is especially true when compared to the inert mass of platitudes and frozen takes that is say Stephen Schwartzman, CEO of Blackstone.
There are not many people who end up managing $140bn because they failed to make it in Rock n’ Roll. That’s Gundlach on the left in the 1980s.
He gave up his hot licks with his transition from Rock n’ Roll to move to the Bond desk. Now he comes forward with hot takes on yields, rates, and the macro state of world economies. No other guru (in part because he runs a mutual fund and not a hedge fund) gives more insight into what they are thinking than his firm Double Line Capital does.
The data dumps from Double Line Capital, while lacking in appearance (cringe at Comic Sans like feeling), are always insightful and the wonderful Sherman Show podcast featuring one of his PM’s, Jeffrey Sherman, is a must listen. It does lack in sound quality and it would be great if Sherman was less hamstrung by compliance.
What makes Gundlach so interesting is not just his unconventional background. He prefers to hire people who are new to the ecosystem. Those that don’t know anything and train them. He deliberately tries to ignore “news” and other people’s thoughts on investing with a few exceptions. It’s not like he has his head in the sand to other’s opinions. His insights are always impressive, particularly the ones that revolve around relative value. (Lately, he’s become a part of the “cranky Californians” who complain about teachers unions this, taxes that, whatever.)
Here is a more modern picture of Gundlach that still gives a kind of just left a Hot Topic vibe.
As with all investment guru types he is a frequent story-teller. His theories around bear markets are quite interesting, and he successfully called the bottom in 2009, as did Jeremy Grantham. He also proclaimed we were in a Bitcoin mania in 2017, that lead to a decline in stocks and a bear market. Whoops.
But, that doesn’t mean the thinking was unsound. Too often in listening to prominent investors, people will focus on whether they were right about x or y event and ignore the thinking that went in to it. This is called results based analysis.
Take John Paulson who made the most money shorting the subprime market. A relatively boring merger arbitrage fund manager, Paulson went out on a limb (that wasn’t even his own idea) raised some money, made a gazillion dollars, and hasn’t been able to replicate the returns ever since. Not for a lack of trying out ideas, but this time the ideas came from him. Neither did Paul Tudor Jones (PTJ) after 87.
The only guy who rocked 50-100% returns for almost a decade was Justin Arnold. He was involved almost exclusively in natural gas, and in a time where natural gas had wild price swings. Whereas, it has been dormant since he quit in 2012. In fact the day he quit was the lowest day natural gas printed for the next 9 years. PTJ though, has a replicable philosophy that either he or the market has trouble replicating, but you can apply successfully—trend following.
According to Gunldach, in runaway bull markets (some say bubble) like the one we are in now in US equities, the “poster child” for the bull market is the one to crash the last. There are several poster children. Entire backs of milk cartons: SPACs, Billionaire Space Races, and (as some have suggested) Crypto. The important point Gundlach makes is that the poster child for the excess is the last thing to go.
He thinks that sell offs are not the result of excessive risk taking but rather as misrepresentations of assets as being safe. The easiest example of this is the housing and securitized debt markets that comprised the Great Recession.
It works a little like this: a financial product is introduced to the market. That product is given a safety rating. If that safety rating is incorrect, then those who bought the product thinking it was safe creates the selling conditions for the bear market, or something more consequential than the casual bear market, which, it is worth noting, none who entered the workforce since 2009 have experienced. So that’s 11 years worth of population who know nothing but up, and to buy the dips.
From the Desk of Boomer
I’m here to provide a traditional trader’s perspective on this (it’s not new, but it feels new) asset class, Crypto. I was a mega bull through much of the 2010s, shrugging off the European debt crises and fading the “bubble of books about bubbles.” This paid off. But I certainly think we have now gone too far.
Perhaps borrowing from crypto’s catchy, “HODL”, the private wealth management crowd has come up with this snazzy acronym to keep you invested; TINA. There Is No Alternative. Makes sense at some level. Bonds have—at least for now—negative real rates, inflation (we are really more stagflation but whatever) has made that a thing, so “there is no alternative to owning stocks.”
As Jeremy Grantham has pointed out (this is a must watch), this is an absurd idea. Pointing to one (record level) over-valued asset class (bonds) and another over valued (pushing historically high relative levels) asset class (real estate), and saying you should buy this other asset class (us equities that have exceeded record levels by a lot) that is overvalued because the others are more overvalued is whatever the reverse of a relative value trade is. Or it’s a confused relative value trade on steroids. It has resulted in inflows to US equities that if they continue at this pace through years end, will exceed all the previous 20 years of inflows combined. That will not end well.
To be continued… Look out for Part 2 tomorrow.