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The 2024 book entitled: “How to Listen When Markets Speak…” by McDonald and Robinson is worth purchasing and a fascinating and frightening view of how one might want to change their investments from growth stocks to value stocks. As a minor point of confusion, the book reads a bit like the first and likely primary author was joined later by a second author. The authors seem to feel that the non-volatility of the markets is in part due to more individuals investing in index funds. The authors predict more inflation and a need to invest less in mindless index funds and more money in hard assets, like gold and copper and companies that mine such minerals.
In the forward to this book, Ferguson writes: “McDonald [with Robinson] prophesies “a new era of persistent inflation, an escalation in global conflict, a multipolar world teaming up against the United States, the horror of a weakening dollar, a series of sovereign debt crises, and a thundering of capital out of financial assets into hard assets,” not to mention “catastrophic shortages of natural resources.”… The message of his new book is… that the global economy is going through a paradigm shift… fiscal policy… has driven the U.S. federal debt to a height relative to GDP that is unprecedented since World War II… The great migration of capital, moving from growth stocks into value stocks, has only just begun… Inflation is not returning to 2 percent or lower… invest in precious metals, not to mention copper, lithium, cobalt, graphite, and uranium, all of which will be in short supply relative to the ambitious demands of the “energy transition.”… I became a regular reader of The Bear Traps Report. It’s why I recommend [this] book. And it’s why, as soon as I’d finished it, the first thing I did was take a long, hard look at my own portfolio. I predict most readers will do the same.”
The authors write: “the government now owes $ 33 trillion in debt after years of spending wildly beyond its means, the Fed has bought more than $ 8.5 trillion in bonds, and financial assets have cycled through bubble after bubble… In the coming decade, we’ll witness a new era of persistent inflation… Stocks, bonds, real estate, commodities, and other assets are riddled with imbalances, leaving millions of 401( k) s and IRAs at risk… Tens of trillions of dollars have been shoveled into passive investing vehicles like exchange-traded funds (ETFs), with little consideration as to how that might distort valuations and buying behavior… My goal is not to scare you but to prepare you—to light a path through and around the coming upheaval… I founded The Bear Traps Report… to help hedge funds, family offices, asset managers, and investors navigate an increasingly risky world and build crisis-proof portfolios… this book will… trace the origins of our current economic order, replaying the events, decisions, and economic conditions that created a thirty-year bull market…[then] outline new rules of investing in a radically reshaped economic landscape, including strategies for resisting reactionary narratives and detecting bearish and bullish trends a beat ahead of the crowds… Why countries like Russia, China, and Saudi Arabia are taking steps to transition away from using the U.S. dollar as a reserve currency, further hurting our country’s ability to finance its tremendous debts, wreaking havoc on financial markets, and potentially forcing us to slash Social Security, Medicare, and military spending—and how investors can capitalize on the coming era of a weak dollar.”
The authors write: “How passive investing and the vehicles intended to democratize finance have fueled bubbles and ideological skew by large market participants, and how America’s 401( k) and retirement plans have been hijacked by fourteen stocks… Why the classic 60 percent stock/ 40 percent bond portfolio—revered as the foundational guidepost for many investors—is dead, and why the forward thinking should embrace a more commodity-and cash-heavy approach to portfolio construction… We’re about to witness a historic multitrillion-dollar migration of capital—one that ushers in a new class of winners and losers. If you have skin in the market, this story is happening to you… Historians William Strauss and Neil Howe famously argued that modern history moves in cycles, with four distinct phases, or “turnings.” Each typically lasts fifteen to twenty-five years, meaning the whole cycle neatly coincides with the average life span of a human being.”
The authors write: “The End of an Era… The Soviet Union was in free fall by late 1991… But what does the fall of the Soviet Union in the 1990s have to do with your portfolio in the 2020s? Everything!... The surging supply of everything from raw materials (sourced from Russia) to finished goods and cheap labor (sourced from Asia, and especially China) stamped out inflation in Europe and the United States until 2021… This disinflation was one of the most important contributors to the epic bull market in risk assets… If you’d put $ 1,000 in the S& P on the day World War II ended, you would have had… by the end of 2021… $ 343,000. In other words, those three decades of disinflation enabled a radically new approach to portfolio construction… The World We Once Knew Is Gone… America forged a real bond with Saudi Arabia in the 1980s… the Saudis agreed to continue trading their oil in dollars. This was known as the petrodollar agreement… the West’s control over oil markets not only reduced inflation, lowering the cost of production for many goods and keeping transportation affordable, but also… acted as a safety catch on global peace, stabilizing commerce, controlling autocrats… “In a multipolar world, it’s next to impossible to stabilize global markets, especially inflation,” Baker explained… When China became an official member of the World Trade Organization (WTO) in 2001, multinational businesses—determined to offshore their manufacturing to a place without any potential red tape… over the next seventeen years, America would lose 3.7 million manufacturing jobs—and would be left $ 1 trillion in debt—to China… In an inflationary regime, hard assets and value stocks outperform. In a deflationary regime, financial assets and growth stocks outperform… this book lays out… exactly how investors must be positioned for the coming storm…”
The authors write: “Chapter 2: America Crosses the Rubicon… In this chapter, we’ll revisit the first colossal asset bubbles of the modern era and the role that governments played in inflating them, and in responding when these bubbles finally burst, leaving the economy in shambles… The Fed’s choices will be very different during the next market crash. It can either do nothing, letting it all go to hell, or rescue the markets with another multitrillion-dollar bailout… We now know that this policy, commonly known as quantitative easing (QE), primarily inflates financial assets such as stocks and bonds, while also exacerbating income inequality by keeping asset prices like houses and commodities artificially high… Each country pegged its currency to the U.S. dollar, the global reserve currency… The Birth of Bailout Nation… Meriwether presided over a hedge fund that was the talk of the town… Meriwether’s hedge fund was the legendary LTCM… Its staggering success was built on… leverage. It’s a highly addictive drug … An army of copycat traders all over the place was squeezing it out of its best trades… In 1997, LTCM… started investing vast sums of money in emerging-market debt and foreign currencies… But LTCM itself didn’t know the value of the holdings… There is a valuable lesson here. Success often breeds complacency around risk management… LTCM was… on the edge of bankruptcy… The Fed had concluded that LTCM was too big and could not be allowed to fail… The bailout of LTCM by the Fed sent a clear message to every financial institution… : If you get too big, if you become an out-of-control pile of debt that puts the entire financial system in jeopardy, we won’t let you go down. Uncle Sam will bail you out and support the financial markets no matter what. This act changed the course of financial history...”
The authors write: “Chapter 3: The Dazzling Obamas— and the Dying of the Light… What had caused the demise of the American manufacturing economy?
… When [China] joined the WTO in 2001, there were 17.5 million American manufacturing jobs. By 2007, 3.5 million of those jobs had been axed, and by 2009, only 12.8 million people were still employed in manufacturing. That’s 5 million workers displaced… By May 2009, the U.S. government had bought 72.5 percent of General Motors in a debt-for-equity exchange. That kept 5,700 Canadians out of the soup kitchens that winter. The total rescue cost was about $ 51 billion, plus another $ 17.2 billion to the company’s mortgage bank, GMAC Finance, which had been hammered by the housing crash…”
The authors write: “Chapter 4: The New Washington Consensus… if central banks continually suppress volatility, preventing market corrections by deploying lifelines at the first signs of trouble, the market professionals will figure out one thing real fast… “I think 90 percent of the buyers out there are totally oblivious to the risks. Other forces are at play. Passive funds and quant funds are a monster now… close to 70 percent of daily stock market trades… The Bear Traps Report index of twenty-one Lehman systemic risk indicators is pretty damn good at spotting major risk-off events in advance… Too many equity investors will look at a stock… and not understand that it may be only a small slice of the total picture… No matter the party, this kind of stimulus can be a real boon for investors… All told, 44 percent of all U.S. dollars ever created were turned out in 2020 and 2021. On top of Trump’s $ 7.5 trillion, Biden tacked on another $ 5 trillion to the national debt during his tenure. Together, these two increased the debt by 50 percent in seven years… you’ve got a recipe for one thing above all: rising prices for the long haul. Buckle up!”
The authors write: “Chapter 5: Fossil Fuels Paving the Way to the Green Meadow… Tampering with markets is a dangerous game. They are delicate systems with endless subtleties, great living organisms with millions of finely balanced components, each one interacting with the others, each part like a white-gold cog made by a master watchmaker. Healthy markets are resilient machines, self-healing, with their own innate brand of shock absorbers… With the global population on an upward trajectory, planet Earth will have an unstoppable demand for energy in the coming years… My respect for nature and the natural world is part of my soul, but I’m also an economist who understands what it takes to feed, clothe, transport, and provide living quarters for about 8 billion people… And it cannot be done with wind farms, solar panels, and hydroelectric power. Not even close… knocking out oil with green energy right now is a mathematical impossibility… INVESTORS BEWARE: More Causes of Sticky Inflation… Through Social Security alone, the federal government sent an extra $ 207 billion to retirees to offset the decline in purchasing power in 2022 and 2023. COLA capital oozes through the economy, buying food and clothing off the shelves, and keeps inflation sticky… Heading into the next recession, the United States will be running at least 5 to 7 percent annual budget deficits, with social welfare spending already 20 percent higher than the twenty-year average… For copper, 40 percent of the future demand growth is expected to come from electrical applications in green technologies, such as electric vehicles (EVs), wind turbines, and solar panels… Copper is a key material component of transmission… Lithium is another vital mineral for the green transition… You can get a president who doesn’t like fossil fuels, or you can get a president who… loves them. But… : Fossil fuels aren’t going anywhere. If anything, we’re gonna need more and more as the world demands stable electric grids in every corner of the globe.”
The authors write: “Chapter 6: The Dark Side of Passive Investing… Market crashes are caused by forced selling. Period… Forced selling is more like an elevator with snapped cables, hurtling straight down at two hundred miles per hour… It’s also how Black Friday happened in 1929… The usual suspects were behind that forced selling: Margin. Leverage… Today, computer-driven trading poses a similar threat to 401( k) s and IRAs. Over the past decade, passive investors have come to dominate Wall Street and are now projected to have $ 36.6 trillion of assets… the twenty largest stocks in the S& P 500 are responsible for more than 40 percent of the average daily value traded in the index… the bulk of the volume is in the big stocks, such as Apple, Microsoft, Amazon, Google, Meta (Facebook), Nvidia, and especially Tesla… Passive investors now control at least 50 percent of all the fund assets in America. This is up from just 25 percent in 2012… We think that $ 10 trillion will move out of stocks and into bonds and hard assets (commodities) over the next decade… When there’s inflation, or the risk of it, the Fed couldn’t dream of bailing out a market crash. That would… send inflation roaring to 20 percent, which would impose an unbearable burden on the American people… David Einhorn… His book Fooling Some of the People All of the Time is an investing classic and one of our all-time favorites… “There’s nothing wrong with passive investing per se,” he continued, “but when you have $ 4 to $ 5 trillion come in over a decade, the BlackRocks and the Vanguards of the world end up with much bigger seats at the table. The sun has largely set on the activist fund manager…”
The authors write: “Chapter 7: The Psychology of Bubbles and the Mania of Crypto… what Freud couldn’t have known [that his work] would one day explain the giant real estate bubble in Japan in the 1980s. It would shed light on the frenzy behind the dot-com bubble of 2000. And in 2022, it would tell us why a secretive digital currency born out of blockchain technology would create an asset bubble exceeding $ 2 trillion—the largest hot-air bubble there has ever been… There’s an adage on Wall Street that is really more of a cliché at this point: “The market can stay irrational longer than you can stay solvent.”… A human being is a creature of two natures: a rational ego, which tends to dominate conscious thought, and a prerational or even irrational so-called id lurking beneath, which controls the subconscious mind… The annals of economic history are littered with asset price bubbles. Some of the most famous are the Dutch tulip bubble of the seventeenth century, the South Sea Company bubble in 1720… The formation of asset price bubbles doesn’t just rely on the irrationality of the subconscious mind; it also depends on the available capital for that mind to direct… When governments use a fire hose to douse financial meltdowns with artificially cheap capital and easy money, it intensifies the extent to which people’s irrational nature can affect and interfere with market economics… Over the past thirty years, when governments have tried to use policy to address disinflation, they have… generally ended up fostering inflation… Reasoning is cast aside, and the merest indications of logic replace full-blown, properly thought-out investment decisions… In the words of the great Robert Shiller, “We are irrationally exuberant beings.” It’s human nature to be optimistic, as beautifully explored in Tali Sharot’s 2011 book, The Optimism Bias … We are currently in a Fourth Turning… [and] This generation will be handed a bill for $ 33 trillion in national debt and almost $ 200 trillion in unfunded entitlements, once the baby boomers are gone… In the long run, the only way out of this mess is a wholesale debasement of the dollar.”
The authors write: “Chapter 8: The Decline of the U.S. Dollar… eighteenth-century Scottish historian Alexander Fraser Tytler says, “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to generous fiscal policy, which is always followed by a dictatorship.”… Tytler is said to have been the originator of a theory about the life cycles of nations and empires… And amid his invasion of Crimea in 2014, Putin shook hands with China on a gigantic thirty-year gas deal worth $ 400 billion known as the Power of Siberia. It connected the gas fields of central Russia via a pipeline, with the capacity to move 61 billion cubic meters a year, to Shanghai and Beijing… Putin was preparing, ultimately, to disconnect Europe from Russian gas, and was hedging against the strong possibility of Western sanctions… America’s finances have entered a precarious chapter through years of reckless overspending and opposing bad actors on the world stage… Biden faces $ 11 trillion of debt maturing between 2023 and 2025, and he’s in a high-interest-rate environment that is doomed to continue for several more years. That… debt must be refinanced at rates near 5 percent… [Presidents] will have to address the post-COVID hangover, the energy crunch, and any crises yet to materialize amid high inflation and high rates. The annual interest payments will be at least $ 1 trillion higher than they were under Obama. That is a big problem… the rosy days of America raising easy money might well be over. [And] the countries that the United States could always rely on to buy its debt—countries like China, Saudi Arabia, Brazil, and India—are all collaborating these days to develop a competing global payment system so that they are no longer dependent on the dollar… INVESTORS BEWARE: When Will Social Security Be Exhausted?... The future is not growth; it’s value. And it’s not just precious metals. It’s not just oil and gas. There will also be a big stampede for cold, hard assets, which brings us to the final chapter in this tale of global finance and investing.”
The authors write: “Chapter 9: Cold, Hard Assets— the Portfolio for the Next Decade.. The [Congo]… is home to more mineral resources than almost anywhere else on earth… Cobalt has the ideal configuration that facilitates the stability of the battery at high-energy densities… But a… humanitarian crisis is taking place... Thousands of local workers, including more than forty thousand children, in addition to women and the elderly, work in these makeshift mines, often for more than twelve hours per day… Although the global mining companies are making a killing, very few in the [Congo] are getting rich off the cobalt trade. The money is ripped out of their land and sold on the global market to the technology giants and makers of electric cars… In the overarching cycles of markets, cycles that last a decade or more, there is a pendulum that swings between growth and value. Timing that pendulum is the key to long-term wealth, and on January 1, 2022, it completed its fourteen-year journey and was at the pinnacle of its arc, in the furthest reaches of the growth phase… never trade or invest out of boredom or a desire to find something to do… The great market pendulum is swinging once more into the value sector and into cold, hard assets… Will your family’s wealth play a role in this and walk into that neglected meadow of value stocks, commodities, and hard assets, or will it fade away with the last decade’s portfolio? The choice is yours.”
G. C. Carter (Amazon Reviewer)
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Source
https://www.amazon.ca/Listen-When-Markets-Speak-Opportunities/dp/0593727495?
One of his biggest positions. Huge backlog, growing addressable market. Divested one segment, so now a pure play in technology and valuation should increase. Experienced management and strong board. Starting to attract institutional interest. Significant, hidden value through its massive amounts of data. Insider buying, very telling.