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Brian’s Blog October 2016

BRIAN’S BLOG

October 2016

Jeffrey Gundlach of DoubleLine Capital said recently:

“Sell everything: the house, the kids, stocks, bonds, commodities
– everything looks overvalued.”

Jeffrey Gundlach, to be honest, hasn’t always been right. He predicted muni bonds to be a bad investment and their value to lose more than 20%. That was in 2011 and so far that hasn’t turned out as predicted, but in his defense, the markets have not been working in a predictable fashion either.

Jeffrey Gundlach is famous for TCW’s, Total Run Bond Fund and its 10 year finish in the top 2% of all bond funds. Which elevated him to oracle status and he has been orating ever since. He is often heard on CNBC, Bloomberg, and others. So could he be right this time? Is it time to “sell everything” and hide in the hills?

One way to get some insight on this is to look into what the “smart money” is doing vs what the “dumb money is doing. Smart money refers to those investors that more often than not get things (the trends right). They don’t always make tones of money but they usually are contrarian at the right times. These are the commercial investors, the guys whose companies depend on them being right. This might be airline investment advisor who buys fuel options at the right times, or another who hedges oil or sells their commodities while betting on future gains 12 months out.

The dumb money are those that continue into a trend until it ends and then try to get out, usually to late or hang on expecting things to turn around until the bottom. Once, at the bottom they often become so disillusioned that they bail only to see things begin to rise again. That’s me. We follow the heard right into the slaughterhouse.

According to one investment newsletter I receive it looks like Mr. Gundlach may be on to something. Apparently the smart money is at or close to record levels in shorting commodities, lumber, oil, stocks, and long bonds.

Even gold and silver are expected to fall according to smart money. They even short the USD, my favorite hedge for the last two years! And of course the Yen. Let’s look at what this may mean before we get all caught up and put the kids and dog in the garage sale.

So smart money is short commodities. If this is true and raw materials like iron, aluminum, copper etc. are about to fall some more, this would also mean that China will not be getting its mojo back anytime soon, US will continue to muddle along as is or fall into that overdue recession that has been eluding the cycle geeks. Shorts on lumber mean housing starts may be ready to turn down, and low expectations for oil would then just be a natural call. As economies would begin to stall even more than at the anemic pace we are seeing from the developed countries around the world. If we are to trust “smart money” then we must sell our gold and silver, the go to buy for gold bugs when crisis hits. I’m not surprised by this as gold and silver shot up just before the 2008 mortgage crisis but fell when stocks fell and the major crisis peaked. They have stayed down ever since until recently, as they have spiked up close to $1400.00 USD, Deja vu all over again?

The smart money is also close to record levels in short positions in the stock market. This is one market that has gained from central banker’s monetary policy in a big way. If bubbles always burst as some analysts contend, then this is one big bubble looking for a needle in the fiscal hay stack.

Japan has been rumored to be contemplating helicopter money, direct bond purchasing to provide monies for infrastructure, (they already have the best infrastructure in the world), or checks sent directly to the people as tax rebates or some other schemes. Shorting the Yen has been a favorite of some contrarians for many years but it has rarely paid off, a lot of money has been lost on this bet but it looks like a sure thing? Maybe, some day.

If all this comes to pass as smart money at the moment seems to be indicating then the USD could take a hit but my personal opinion on this is that the USD will continue to be in a better position than my home currency, it being commodities and export dependent in the eyes of the world.

So let’s summarize what has to happen-just for fun;

  1. The USD falls with the Yen as both counties fall into recession or stagnate further at a minimum
  2. China continues to slow putting deflationary pressures on commodities
  3. Japan’s helicopter money does not impress investors
  4. Oil continues to fall due to slowing world economies along with all commodities
  5. Housing starts falling, dragging economies and lumber prices with them
  6. The monetary policies of reserve banks becomes ineffective, the stock bubble bursts and gold and silver follow.

Hmmmm!  A lot has to happen for the smart money to win this one. There are things called Black Swans, one time or very seldom cataclysmic events, there are also unknown unknowns, the effects that something unknown produces that we couldn’t even conceive of, like mortgage derivatives in 2008. There is also the truism that the markets can stay irrational a lot longer that the average investor can stay solvent. You might not want to sell the kids right now but I’d have them dressed nice and if the dog isn’t behaving…well?

It’s impossible to tell how all of this will play out but through it all we have to put food on the table. At IR we are continually working to find you the best deals and give you the best service we can. We have recently launched our new ecommerce website loaded with prices so you can compare (if you want) but we are confident that what we offer goes beyond just price, it is people. People like Jenna, Pieter, CJ, Vanessa, Byron and Robbie, who know you, who you can trust to give you great service and advice or just bounce an idea off of. Our new website is a convenience for you, not a replacement for personal service, we still want you to call or come in and see us. We hope you like the new site and that you will give us your comments, likes or dislikes because it is for your benefit that we have spent countless hours putting it together.

So have a look, go to www.irss.ca and remember “For the Unknown there is NDT, for NDT there is IR”!

Cheers

Brian Sargent

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