Week 35 of the Quarantine
SAN MARTIN, ARGENTINA – Earlier this week, news of the relief column – an almost miraculous vaccine from Pfizer – prompted a $1.5 trillion celebration on Wall Street.
So excited and positive was Pfizer’s CEO, Albert Bourla, that he sold many of his own shares! So today, the fellow is $5.6 million richer.
Hotels, restaurants, travel companies – all are anticipating a return to “normal.” And we can all enjoy a future free from the worry about that dastardly virus.
Shot in the Arm
But wait… We look out over the ramparts of our COVID redoubt, where we have been besieged for the last nine months. Where is the relief column?
That cloud of dust on the horizon – is it really the deus ex shot-in-the-arm we’ve been waiting for? Or is it just a mirage?
The testing technique is simple. Just give a lot of people the drug. And give an equal number a placebo. Then wait to see who gets sick.
So far, out of more than 43,000 in the test groups – spread around the world – only 94 have gotten sick during the three-month test. And, at least how we read it, no more than eight of them were taking the drug (the others were in the placebo group).
Hmmm… Eight people. Did we read that right? Is that enough to justify a trillion-dollar Wall Street rally? Is it statistically valid? Is humanity really saved?
And if so few people are getting sick anyway, is it worth taking the vaccine at all? So far, the side effects of the vaccine have been moderate… But who knows what the long-term damage might be?
In any case, the elixir must be kept cold – at more than 100 degrees below zero. According to one report, there’s only one company in the world that can keep things that cold and distribute them widely – a Chinese company… naturally.
Problem Solved
But there’s no need to worry about a vaccine. Team Biden has its own panacea – house arrest and fake money. Here’s CNBC:
Biden COVID advisor says U.S. lockdown of 4 to 6 weeks could control pandemic and revive economy
Dr. Michael Osterholm, a coronavirus advisor to President-elect Joe Biden, said a nationwide lockdown would help bring the virus under control in the U.S.
He said the government could borrow enough money to pay for a package that would cover lost income for individuals and governments during a shutdown.”
“We could really watch ourselves cruising into the vaccine availability in the first and second quarter of next year while bringing back the economy long before that,” he said.
So, there you have it. Problem solved!
Blissful Ignorance
Our advice is to take precautions… just in case.
Last week, we started to tell you about our “Trade of the Decade.” It is not an “investment.” It is a gamble… a speculation… a bet on long-term trends.
And it depends on two of the most reliable phenomena in the world of money – ignorance and oscillation.
As for ignorance, it hardly needs an introduction. We live with it. It is universal. It is ubiquitous and permanent, everywhere and always.
The biggest mistake an investor can make is to think he knows what’s coming down the pike. Then, he makes an “investment” based on an illusion, knowledge that doesn’t exist.
This causes him to buy things that are overpriced (he knows they are going up) and to stick with his positions long after he should have unloaded them (well… they ought to go up!).
The feds spend millions of dollars employing thousands of Ph.D. economists, statisticians, mathematicians, and analysts. Yet, not a single one of them can tell you what the price of oil will be tomorrow.
The future is a closed book. We are ignorant of it… and can only discover it one page at a time.
The shrewd investor admits that he doesn’t know what lies ahead… and rests his money decisions on the hard, unyielding rock of ignorance.
Sure Thing
With this in mind, locking your money into a 10-year trade would appear to be spectacularly unwise.
And maybe it is. A 10-year time horizon compounds the negative consequences of being wrong over an entire decade.
On the other hand, it is designed to capture big moves, not small ones. And big moves, like grape vines, take time to mature.
Looking at an economy close up – like glancing at a plant – you can’t tell what is going on. It takes a full season to express itself; but then, plain as day, there is the fruit.
Betting on inflation (after the new, fake dollar was introduced in 1971) was a cinch.
Betting against inflation (after Paul Volcker stopped it in its tracks in 1980) was another sure winner.
In the 1990s, the stock market soared. And who couldn’t see that coming?
As early as 1987, then-Federal Reserve chair Alan Greenspan made it clear that the Fed was backstopping the stock market.
The economy was booming. And the miracle drug of the time, the internet, promised a whole new era of growth and prosperity.
Out of Whack
And now, we come to the 21st century.
In 1999, to the great annoyance of many of our dear readers, we warned that the dot-com bubble was going to pop. Then, in early 2000, we issued our Trade of the Decade – Dump stocks, buy gold.
The trade was based on an ignorance of the future… but a knowledge of the past. Over time, markets oscillate from high to low, from blind optimism to stone-faced, wide-eyed gloom and doom.
In the entire history of the Dow, not once had stocks been so expensive, in terms of gold. Usually, it took about 10 ounces of gold to buy the 30 leading industrial Dow stocks. But by 1999, it had risen to over 40.
And while stocks were now trading at 11 times more than they did in 1980, gold was trading at almost three times less (the price had fallen from close to $700 to only $250).
Things were clearly out of whack. Neither gold nor the stock market were going away.
And while the two had drifted farther and farther apart over the previous years, that they might come back into whack (oscillation) over the next 10 years was a bet too good to pass up.
It turned out to be about the best bet you could have made. Stocks went into an almost immediate decline in 2000. Gold headed up.
By the end of the 10-year period, gold was the number one performer.
The gold side of the “trade” alone approximately quadrupled our money, while the stock side was almost exactly where it was 10 years before.
Next Step
But then, the decade was over. We had to do something else. But what?
The pendulum had swung.
By this time, gold appeared to be fully priced. At the time, there was no reason to think it would register another spectacular move to the upside. (As it turned out, it continued rising for another couple of years.)
And stocks? This was just the beginning of the Fed’s big bailout for Wall Street. It was not the time to short the stock market.
We looked around. What had been going down for so long that it almost had to go up? And if it went up, what was on the other side of the see-saw? What would go down?
Japanese Bet
We had been following Japan for many years. Back in the late 1980s, we had predicted that the Japanese miracle economy would fail.
We were right. The bubble burst in 1989.
Then, the Japanese stock market fell down… and didn’t get back up.
But after 20 years, we figured it was time for a revival. Japanese companies were still going strong; it was a reasonable bet that their prices would move up sometime over the following 10 years.
On the other side of this trade, the obvious choice was Japanese bonds. The country had an exploding national debt… an aging population… and anticipated health and pension liabilities that would frighten an actuary.
Still, Japan’s bonds remained remarkably expensive, with the lowest yields in the world. That, too, we figured, was likely to change.
What happened? Well, not much.
Japanese stocks rallied over 150% from 2010 until the end of last year. Japanese bonds, the other side of the trade, actually rose 34%…
So we were right to be long Japanese stocks. But we missed the mark betting against Japanese bonds.
But we should mention one thing…
Japanese bonds would have fallen if the Bank of Japan hadn’t taken on phony money policies… They printed about $4 trillion from 2010 to 2019.
“Don’t fight the Fed,” say the old-timers. We battled the Japanese Fed for 10 years… and it won!
No Sweat Returns
But if you had begun the 21st century with $100,000… and done nothing but make the two trades we recommended… you would now have $612,786…
We are perfectly happy with that return, by the way. It was achieved with very low risk and almost no sweat.
And it beats the returns on the Dow and the S&P 500, hands down…
From 2000 to 2019, $100,000 invested in the Dow would have turned into $251,000 (including dividends). And the same amount in the S&P 500 would have turned into $222,000.
New Decade
But now, we are arriving at another decade.
We have a new president… a COVID-plagued economy… a $27 trillion government debt… and another $54 trillion in business and household debt.
What’s out of whack now? What’s the miracle that will fail?
More tomorrow…
Regards,
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Bill
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