Pig2019

For those staring off into space just now, 2018 was “The Year of the Dog” in the Chinese Zodiac; a fitting designation if you had your capital anywhere but under your mattress.

And with 2019 ordained as “The Year of the Pig” expectations are, as you might imagine, not running very high at the moment.

Let Me Tell You a Story…

Our stars aside, years ago the breaking of the British Pound went something like this:

In 1992, George Soros and Stan Druckenmiller (George is the only one who got all the press for it) bet heavily against the British pound. Of course, this was back in the very early days of taking huge bets on something in hope of toppling the dominos, so to speak.

Anyway, George kept driving Stan to increase the position, who would then grudgingly continue to step further and further out on the ledge over time.

When Stan worried that the position had gotten too big, George would reply sternly that, “It takes courage to be a pig.”

And so it went with larger and larger positions until on Black Wednesday, 16 September 1992, those pigs came home to roost. Soros unwound his positions, paying back his original borrowings and ending with a profit of around £1 billion.

He also bought as much as £350 million of British shares at the same time, gambling that equities often rise after a currency devalues.

The Point?

I suspect 2019’s Year of the Pig will go down as one of those periods where courage will win out. 

Much like the naysayers of the flat years of 2015 and 1994-95, the grand fear of a recession was clear; but in the end it was a failed effort to make that fear into a reality.

And sure, we can feel the tremors now, with the noise of all the so-called experts huffing and puffing away at this little piggy. Equally, it took courage to stand tall during those previous times just as it will again now against the current squalls blown in by analysts and the media.

The waterfall-like December decline led to the identical behaviour we saw in late 2008 and early 2009, as people fled stocks towards the assumption of safety in treasuries.

Quantitative Easing (QE) was then a required act from the US Federal Reserve to merely meet the demand for cold hard cash; as no one wanted anything else as it dried up all around us.

In fact, just weeks ago equity mutual fund outflows, and even ETF's, witnessed levels last seen around those 2008-2009 lows as investors rushed to “reduce risk.”

And for what?

Well, they did it primarily for the sake of fear, folks, plain and simple. It felt bad because people all around us made it sound bad, and it felt smart to move in that direction until “the future becomes more clear.”

And when exactly does the future become clearer?

That age-old, magical, self-ordained crystal ball that everyone assumes will one day appear on their desktop as a barometer that says it’s safe to go outside never ever materialises.

It’s just an arbitrary point in the future when folks “feel better.”

Translation: “I like my investments to cost more.”

The 2008-09 financial crisis was our generation's once-in-a-lifetime, perspective-altering event.  It was our version of the Great Depression causing people to change everything they perceived - for the rest of their lives.

Logically, it’s easy to diagnose:  The financial crisis made investors risk- and volatility-phobic. 

Every red ink day since then has been a “this is it, we’re going back into the abyss” moment.

The continuing emotional battle is over-powering. And the higher the markets go the worse the altitude sickness becomes.

Think I am exaggerating?

Wait until a normal day's trading range on the Dow Jones is 2,000 to 4,000 points. It's coming. And so is the nausea.

When markets begin to fall, as they did in early 2016 - and just last quarter again - investors will keep rushing for the equity exits, flooding into bonds, cash and bunkers.

Last quarter made us forget that the first six weeks of 2016 were the worst start to a year in the history of the S&P.  That was back when the Dow Jones was 15,500.

And now another record-headline-setting event: The 2018 December results were the worst in 87 years! 

Imagine that for a minute...

And now this: That “dire” 2016 period launched a 60% move for the next two years.

Nearly Identical Fears

Though it’s almost three years apart the fears in the 2016 panic and the fears of the late 2018 panic were nearly identical. 

See if this sounds familiar:

  • Fears that the Federal Reserve would overtighten on rates
  • Fears that collapsing oil prices signalled a global economy that was rolling over into a recession, and
  • Fears that grim economic news out of China presaged a potentially dire, debt-driven downturn that would prove contagious.

I think it’s highly likely that the current, well-advertised and over-hyped global macro worries will prove as ephemeral as 2016's and 1995's.

For investors, the panic selling from the September high of 2940 to the current 2530 level, coupled with the rise in bond prices over the same period, has stocks now priced at under 15x 2019's estimated earnings, compared to about 37x the annualized, hold-to-maturity return on 10-year treasuries.

Corporate earnings and dividends should grow about 5% or so long-term, and today's 10-year coupons will not grow by even a single basis point.

Many may not recall in the fog of worry that back in 2008 Mr. Buffett took out that full page WSJ ad to state "he was buying US stocks" and urged others to do so too.

The key to remember is that he did not buy at the lows. He was months early and prices got much, much uglier. 

Later he was asked how he knew it was time to buy. It’s reported that he said he didn't know the time to buy, but he knew when prices were attractive.

We also have no idea when it's time to buy.

But in this new year of the pig, you should be bold, patient and courageous.  

The future is far brighter than the crowd believes or expects.

Mike_williams
Author
Mike Williams
Founder and Managing Partner of Genesis Asset Management, New York