A history lesson in money management from a great American bear
If you want fun and excitement, says this U.S. analyst, go to Las Vegas. If you want to do well in today’s markets, preserve capital.
Whenever we’re wondering just how bad things could get
in the markets, we know we don’t have long to wait for the most pessimistic
possible answer. Once a month, we hear from Hawaii, whose sun-swept beaches
are home to one of the great American bears.
Mr. Irwin T. Yamamoto hasn’t had anything good to say
about the markets or the economy for over a year. And you can’t really
say he’s been wrong. The one thing he is happy about is the performance
of his portfolio — it’s kicking the stuffing out of stock markets
around the world.
Writing in The Yamamoto Report, the editor gives us
the lowdown on his portfolio vs. the world. He defends himself against
the notion that he is always bearish. And he gives us a history lesson
in just how the current financial crisis would have been handled by a
Fed chairman who knew his stuff.
A boring portfolio
Dull, dull, dull. That’s Mr. Yamamoto’s portfolio.
90 per cent of it is in bank money market accounts, i.e., cash. The other
10 per cent is in the Rydex Ursa Fund (RYURX), which runs inverse
to the S&P 500, i.e., shorts it.
But this “boring” portfolio, he says, has “easily
outperformed the various market averages — domestically and internationally.”
His portfolio is solidly in the black. The market indexes are in the red.
Here are the index figures for the first quarter of 2008.
The Dow Jones is down 7.55 per cent, the S&P 500 even farther at 9.92
per cent. The Nasdaq’s down double digits at 14.7 per cent.
Internationally, the figures are even more ghastly. China
is off 32 per cent, India down 20 per cent. Japan, France and Germany
have all lost 16 per cent off their indexes.
“Our first investment objective has always been to preserve
capital,” he states. “The next goal — achieve profits.
If you seek fun and excitement, travel to Las Vegas.”
No reckless touting
Mr. Yamamoto then re-states the obvious. “To say the
least, we are bearish.” But it hasn’t always been this way.
His long-term subscribers, he informs us, have seen him 100 per cent invested
in stocks. “And we’ll do it again in the future.”
But don’t expect him to recommend equities only to keep
clients and attract new customers. He believes “the practice of recklessly
touting high-risk investments to attain more business is unfortunately
an all-too-common practice. We detest it.”
In other words, buy stocks when they’re profitable.
For 30-year-old money managers
Mr. Yamamoto informs us that when he was quoted on MarketWatch
last year, he launched the rhetorical question: “Where have you gone
Paul Volcker?” Mr. Volcker was chairman of the U.S. Federal Reserve
Board at a time of economic upheaval. Questioning the “wild monetary
policy “ of the current chairman, Mr. Ben Bernanke, the editor points
to Mr. Volcker as an example of how things ought to be done.
“To all the 30-year-old money managers out there who
don’t have a clue who Paul Volcker is,” says Mr. Yamamoto, “here’s
a short lesson in history just for you.”
He sets the scene. In the 1970s inflation skyrocketed to
13.5 per cent — 15 per cent on a monthly basis, which remains the
highest level on record (some will remember the endless lineups at the
gas pumps that ushered in this new era).
Faced with this unprecedented situation, Mr. Volcker took
the hard road. He decided to cut back the money supply. The prime rate
soared to — get this — 21.5 per cent. That was a record, too.
The results were ugly. A long and painful recession brought
in the highest levels of unemployment since the Great Depression. Mr.
Volcker was not a popular figure.
It took four years, but finally the worm turned. In 1983,
inflation had fallen to 3.2 per cent. Mr. Volcker was now hailed as a
“genius.” Among those who have led the Fed, his reputation stands
high.
So what does Mr. Volcker think of the current chairman and
his works?
“It’s no fun raising interest
rates”
Mr. Volcker offers neither blunt criticisms of today’s
policy, nor a ringing endorsement. The former chairman told the New
York Times: “Too many bubbles have been going on for too long…
The Fed is not really in control of the situation… I think Bernanke
is in a very difficult position.”
He added, “It’s no fun raising interest rates.”
This is Mr. Yamamoto’s cue to read between the lines and reckon that
Mr. Volcker would have had the fortitude to take that difficult decision
where Mr. Bernanke will not. We’ll never know. Now 80, Mr. Volcker
is not likely to ask for another turn on the hot seat.
In the meantime, the editor is in no doubt that Mr. Bernanke
is flooding the financial system, and ruining the dollar in the process.
He may be winning the battle — ending the credit crunch — but
he is losing the war.
A double-dip recession
“A double-dip recession is a real possibility,”
says Mr. Yamamoto. We’re in the first phase now. The second will
come when interest rates are finally raised. A long bear market will follow.
“In no shape or form has the stock market factored in
a prolonged recession,” he says. The recent stock market rally priced
in the end of the credit crunch. It also anticipated an economic recovery.
“There is no room for any kind of disappointment. Absolutely no space
for error. None.”
But disappointment there will be, the editor says. He sites
just one chilling statistic. American household debt, which stood at $6.4
trillion in 1999, is now $13.8 trillion — a 116 per cent increase.
And don’t compare today’s problems to those of 2000-2001, he
adds. Then, the downturn came from a decline in business capital spending.
Today we have had the bursting of two bubbles — property and credit.
“It’s night and day — worlds apart,”
concludes Mr. Yamamoto. “Visualize the environment six months from
now. Do you really think the situation will be much different from today?”
The bear has spoken. Have a nice weekend.
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