Last year we had hedge fund owner Ray Dalio stating that if you don’t own gold you don’t know history.
Now another investor with an excellent track record is warning that stock markets are looking overvalued and explains his reasons why he owns a very large “pig sized” position in gold…
By Justin Spittler
Stan Druckenmiller has some advice for you: “Get out of the stock market.”
Druckenmiller is one of the world’s greatest traders. From 1986 to 2010, his hedge fund earned average annual returns of 30%. Even more incredible, he never had one down year.
Druckenmiller stopped managing outside money in 2010. Today, he runs a family fund with about $1 billion in assets.
• Like us, Druckenmiller is bearish on U.S. stocks…
During the third quarter of 2015, he cut his holdings in U.S. stocks by 41%. He then issued this warning in November:
I’m working under the assumption that we may have started a primary bear market in July…
I can see myself getting really bearish. I can’t see myself getting really bullish.
The S&P 500 has since fallen 3%. It’s now down 4% from its all-time high.
According to the mainstream definition, a bull market ends when an index falls 20%. By that measure, U.S. stocks are still “technically” in a bull market…but they may not be for much longer.
• Last week, Druckenmiller said the “bull market is exhausting itself”…
He delivered the message at an investor’s conference in New York City. He gave plenty of reasons for why he’s so bearish.
For one, Druckenmiller thinks stocks are expensive.
According to the CAPE ratio (a popular metric that gives a long-term view of the market), companies in the S&P 500 are 55% more expensive than their historic average.
Druckenmiller thinks it’s ridiculous stocks are this expensive. If anything, they should be cheap:
If the stock market is the future, we should be selling at a discount right now, not a premium.
• Druckenmiller is also worried about weak corporate earnings…
Regular readers know Corporate America is in an “earnings drought.”
Earnings for companies in the S&P 500 have fallen three straight quarters. They’re on track to decline for a fourth consecutive quarter. That hasn’t happened since the 2008-2009 financial crisis.
Yet, stocks are still near record highs. Druckenmiller called the disconnect between corporate profits and stock prices “unprecedented in market history.”
• Druckenmiller is concerned about excessive borrowing too…
U.S. corporations have issued more than $9.9 trillion in debt since 2008. Last year, corporations issued a record $1.5 trillion in debt.
Borrowing money isn’t necessarily a bad thing. If companies invest the borrowed money in their businesses to buy new machinery or develop new products, it can be a good thing. But that’s not what companies are using debt for these days.
Companies are borrowing money to pay for acquisitions and share buybacks. A buyback is when a company buys back its own stock from shareholders. It reduces a company’s share count, which increases earnings per share. In other words, buybacks often make earnings look stronger “on paper” without improving the actual business.
Last year, U.S. corporations spent $2 trillion on buybacks and acquisitions. That’s about $200 billion more than they spent on research and development and capital expenditures, which includes new machinery and equipment.
Druckenmiller said this “unproductive corporate behavior” is starting to take its toll. Operating cash flow for U.S. companies has shrunk over the past year while net debt increased.
• The stock market is starting to crack…
Dispatch readers know stocks have taken investors for a ride over the past 12 months.
Just look at this chart of the S&P 500…
Foreign stocks have been just as volatile. The MSCI World Index (excl. U.S.) rallied 9% from January 2015 to April 2015. It’s since fallen 16%.
Druckenmiller thinks the global stock market is nearing a crossroads.
[V]olatility in global equity markets over the past year, which often precedes a major trend change, suggests that their risk/reward is negative without substantially lower prices and/or structural reform. Don’t hold your breath for the latter.
When asked what to do about all this, Druckenmiller said the same thing he’s been saying for months:
The conference wants a specific recommendation from me. I guess ‘Get out of the stock market’ isn’t clear enough.
• Druckenmiller bought about $300 million worth of gold last year…
That stake now represents about one-third of his fund’s money.
We normally encourage investors to put 10% to 15% of their money in gold. But Druckenmiller isn’t your average investor. When he finds a trade he likes, he doesn’t tiptoe into it. He places huge bets. It’s why he calls himself a “pig.”
The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered.
I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere.
• Druckenmiller is buying gold for the same reasons we’re buying it…
Gold is real money. Here’s Druckenmiller:
Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation.
Gold has preserved wealth for centuries because it has a unique set of attributes: It’s durable, transportable, easily divisible, has intrinsic value, and is consistent across the world.
Unlike paper currencies, governments cannot create more gold on a whim. And that’s more important than ever…
• The Federal Reserve has launched all sorts of crazy schemes since the 2008 financial crisis…
It’s created $3.5 trillion from nothing and pumped it into the financial system. It’s held its key interest rate near zero for eight years.
These radical, unproven policies were supposed to “stimulate” the economy. But the U.S. economy is hardly growing. In many ways, the average American is worse off. The real median household income is more than $2,500 lower today than it was in 2008.
The Fed’s easy money did fuel a historic rally in stocks. The S&P 500 surged 215% from March 2009 to May 2015…but even that high is starting to fade. As noted, the S&P 500 is down 4% over the past year.
• Druckenmiller says the Fed’s “radical monetary experiment” has gone too far…
Yahoo! Finance reported last week:
“I have argued that the myopic policymakers have no end game,” Druckenmiller said. “They stumble from one short-term fiscal or monetary stimulus to the next despite overwhelming evidence that they only produce a sugar high and grow unproductive debt that impedes long-term growth.”
The Fed might not have an end game, but Druckenmiller says the “markets do.”
Moreover, the continued decline of global growth despite unprecedented stimulus the past decade suggest we have borrowed so much from our future and for so long that the chickens are now coming home to roost.
• E.B. Tucker, editor of The Casey Report, also thinks the bull market in U.S. stocks is over…
He titled the September issue of The Casey Report “R.I.P. 2009-2015 Bull Market.”
Like Druckenmiller, he’s been telling investors to sell stocks. He’s also urged his readers to own gold.
This advice has paid off. Gold is up 20% this year. Last week, the price of gold topped $1,300, a key psychological level, for the first time since January 2015. He also recommended two gold stocks this year. One is up 30% since April. The other is up 34% since March.
E.B.’s also shorting (betting against) some of America’s most vulnerable companies. One of his shorts, a bet against a major airliner, is up 11% since February.
You can invest alongside E.B. by signing up for The Casey Report. You’ll have 120 days to decide if the service is right for you. Click here for details.
We have also prepared a short video presentation that explains other ways to “crisis proof” your wealth. It’s a must-watch for anyone worried about the tiring stock market, slowing economy, or fragile global financial system. Click here to watch this free video.
Chart of the Day
World debt has gone vertical…
Today’s chart compares total world debt with world economic output. Up until about 20 years ago, debt and the economy grew at about the same rate. In the mid-90s, world debt overtook the global economy. It’s been soaring ever since.
Over the past decade, each dollar of debt has added just $0.35 to the global economy. Needless to say, that’s a big problem.
There’s no way the global economy will ever close this gap. But that won’t stop governments from trying to pay their debts by printing more money. This will only destroy the value of paper currencies. Meanwhile, the price of gold, which is real money that cannot be created from thin air, will soar.