Wesley Chapel, FL

Warren Buffet is still probably the best investor alive and perhaps the best who ever lived. He is 93 years old now, and has uttered countless quotable phrases, the most famous of which is probably to “be fearful when others are greedy and be greedy when others are fearful.”

So, what if I told you that after closing positions in some pretty big and well-known companies like United Parcel Service (UPS), Proctor & Gamble (PG), Johnson & Johnson (JNJ), and General Motors (GM), Mr. Buffet is sitting on more cash than ever before… and as they say, “ever” is a long time.

It seems like he is building his war chest, just as he has done countless times before when he thought we were headed for a recession and therefore, a substantial decline in the markets.

As I have written before, the only way to have cash to “invest when there is blood in the streets,” is to raise cash by selling securities before panic sets in. The more cash you have when the blood starts running in the streets the easier it is to confidently risk that cash in new investments when everyone else thinks you are crazy for investing. If you are doing it right, those same people will be calling you crazy for raising the cash, too.

To be clear, this isn’t supposed to be easy to do. Going against the herd is against our natural instincts. Further, it requires tremendous patience and as far as I know, throughout history patience has never been a common character trait for human beings and it doesn’t come naturally now either… perhaps especially now with the myriad ways we can secure instant gratification.

Notice that Buffett began raising cash in 2002 and it wasn’t until 2008 that he put a large portion of it to work. How many people can remain committed for nearly six years while pretty much everyone else is telling them how wrong they are and that they are missing out on easy money, only to ultimately be proven right? Obviously not many.

More recently, in 2021 the cash hoard peaked in November, the same month as the Nasdaq. The S&P 500 peaked one month later and ultimately dropped by 25% in subsequent months and neither index has put in a new high since.

So, what can we learn from the 93-year-old greatest investor of all time? A great deal. Far too much to dig into in this monthly commentary. But thankfully, we can read (for free) every single one of Warren’s annual letters to the shareholders of Berkshire Hathaway going back to 1977 if we click here.

Love him, hate him, or never heard of him, Bill Ackman, the billionaire investor who runs Pershing Square Capital Management once told a friend who after college called him for some advice on how to get started investing:

“Read everything Warren Buffet has ever written, and you can stop there. That’s all you need to know.”

That sounds about right to me.

What does Buffet see that the rest of us don’t?

Probably nothing. It’s all about discipline.

“Discipline is choosing between what you want now, and what you want most.”
-Abraham Lincoln

He sees the same data as the rest of us. Data that I have consistently written about in this commentary for the past two years, or so. The big difference between him and the rest of the world is that he doesn’t just ignore the data and hope it all works out while chasing FOMO stocks.

One big red flag that is hard to ignore is how poorly the average stock in the market is doing vs. how well the mega-cap technology stocks are doing. It’s hard to ignore because anyone with a diversified portfolio of stocks can sort of just “feel” it, without even trying to quantify it.

That said, I will try to quantify it for you with a chart that is pretty easy to understand and makes it pretty obvious where we are. And rather than just cherry pick the “Magnificent 7” I will use the entire Nasdaq 100 index and compare that to the Russell 2000. To be crystal clear, the Nasdaq consists of 100 mostly large technology stocks while the Russell includes 2,000 small stocks which are more evenly distributed across 11 sectors.

The last time we had a major bubble in tech stocks was during the dotcom era. Back then if you compared the price of the Nasdaq 100 with the Russell 2000 you got a ratio of 8.1. Meaning the 100 stocks in the Nasdaq were 8 times more valuable than the 2000 in the Russell. It was the largest technology bubble of all time which of course led to a crash in the Nasdaq that lasted a few years and brought the index down by around 80%! It was the largest bubble… until now.

Fast forward to today and make the same comparison and you will find that the same Nasdaq 100 to Russell 2000 ratio has hit 8.5! And this time around the Nasdaq is even more concentrated in just a few names!

What could possibly go wrong?

Another major reason for caution, which again, I pointed out in this commentary all the way back in February, and then again in May, is that the money supply as measured by M2 is contracting for the first time since (according to Goldman Sachs) the great depression. The Federal Reserve Bank of St. Louis data doesn’t go back quite that far but we have enough history to clearly see how much of an outlier of a situation this is. It is a wild card at best.

Less money in circulation means lower inflation – which is great. But lower inflation means lower prices and less revenue and profits for companies and therefore the major stock indexes. Firing the money printer back up to save the stock market will only serve to reaccelerate inflation which remains far too high by pretty much any historical standard. If I had told you three years ago that inflation was 4% or even 3% and that you’d be happy about it because it was that “low,” you’d have probably fell out of your chair laughing at me.

Even today, people say things like, 3% is only 1% higher than the 2% target. But they are failing to understand that on a relative basis, 3% is actually 50% higher than the 2% target!

So, the Fed still has work to do. And here we are with the Fed meeting this week the market expects them to hold rates steady at a range of 5.25% to 5.50%, and that is probably what they will do, for better or worse. The market and economists are now confident that the Fed is done hiking rates, and their next move will be to cut rates in early to mid-2024.

My question is, “why would they cut rates if the market is doing well?”

Usually when the Fed cuts rates it is to stimulate a recessionary economy and save an already crashing stock market – not just for the heck of it.

Time will tell. Maybe it really is different this time – but I am not counting on it.

Another major factor in staying cautious is the astoundingly high level of our national debt which recently rocketed above $33 trillion! As a percentage of GDP, it is just off all-time highs at 120%. There is zero chance that we will ever pay this money back in today’s dollars. The only way to repay these debts is by printing money to do it, which devalues all the existing dollars in circulation and is the direct cause of inflation. This is partly why foreign governments increasingly don’t want to own our debt (see 4th image below).

Here is a kicker… back when the total was only $32 trillion, which was like 5 minutes ago… legendary investor Stanley Druckenmiller said:

"This is what really annoys me, how no one talks about it... Do you know that the $32 trillion assumes the federal government will never make another Social Security or Medicare payment? Only government accounting could think that the government is never going to make another payment, not one. If you actually accounted for those (big) government programs, credible estimates put the value of that debt at $200 trillion.”

More recently, Druckenmiller, in an interview on CNBC said:

“It seems bonds are adjusting to a post-QE world but for some reason equities haven’t. If you had told me that rates were gonna be where they are now on Jan 1 and earnings would be flat and the S&P 500 would be up 12-13%, that’s not part of my process.”

I am with Stan on both comments.

This year has been a difficult one for investors, including myself. Most stocks are reflecting economic reality, but a few, very large stocks are driving index performance. None of it makes much sense.

Our core strategies are not immune from this situation. Many of our positions reflect economic reality and accordingly are not up very much on a year-to-date basis. But year-to-date isn’t really a time frame that makes much sense to evaluate. We are focused on full market cycle performance – from one peak or bottom to the next.

One thing that does make some sense is that with higher interest rates available in short-term US Treasury Bills, “blue chip” dividend paying stocks are having a hard time attracting capital. If you have to decide (and you do) between owning Coca-Cola with a 3.25% dividend, or Kraft-Heinz with a 4.75% dividend, vs. a US Treasury Bill that matures in 3 months that pays interest at over 5%, which are you going to choose? Our clients and market participants in general are increasingly choosing the T-bill.

Large growth stocks in the tech sector that don’t pay any meaningful dividend don’t have this problem of competition with T-bills. Nobody buys Nvidia for its 0.039% dividend in the first place. They are buying it for potential growth 40 years out – which is a whole different level of insanity – but the point is that NVDA isn’t in competition for capital with T-bills the same way that Coca-Cola is.

Even though the market expects the Fed to start cutting rates in 2024, I believe that higher interest rates are here to stay. If the Fed does cut rates, it is probably because we have formally entered a recession and the market is falling. I continue to expect a recession to arrive in the first half of 2024.

But I would have said (and did say) the same thing as we headed into 2023 – and the recession never materialized, mostly because the government borrowed crazy amounts of money it will never be able to pay back at interest rates it can never hope to afford. And they can keep doing it for as long as people keep accepting US Dollars in exchange for goods and services.

If a recession arrives as I expect, the best way to protect capital is by holding a lot of cash which today means T-bills. For that purpose, we offer a US Treasury Strategy that invests in T-bills that mature monthly for the next 12 months.

Once the recession is in progress and stocks have dropped significantly to reflect it, I expect the Fed to announce that they will cut interest rates and maybe even initiate another round of Quantitative Easing (QE) to stimulate the economy. From there, the best thing to own won’t be short-term treasuries, but rather, capital efficient stocks that don’t require much ongoing capital expenditures to maintain revenue growth. We have two strategies that focus on owning those types of stocks for the long run: the Elevate Capital Strategy and the Elevate Capital Low-Volatility Strategy.

What if I am wrong?

Well, I will be. I just don’t know how, or when, or to what extent… so, for investors who don’t want to take their chances with actively managing their investments to reflect fundamental economics, or patiently await the next “blood in the streets” moment, we offer the Elevate Momentum Strategy and the Elevate Passive Capital Strategy.

The momentum strategy excludes fundamental analysis and uses monthly technical buy and sell signals to open and close positions in markets all over the world. The passive strategy is designed to maintain ultra-low-cost broad exposure to stocks and bonds in alignment with each investors risk tolerance and Modern Portfolio Theory.

Of course, I don’t think I will be wrong, but as another legendary investor said:

“I guess when someone’s wrong, they never… they never know how.”
-Michael Burry, The Big Short

It might be worth noting that Mr. Burry ended up being right. Bigly.

Buffett is sitting on record cash. It’s not sexy, it’s not fun or exciting… in fact, it is downright boring. Buffet loves boring. Perhaps we should too.

Scroll down a bit for some slides and charts that I found insightful this month!

Until next time, I thank God for each of you, and I thank each of you for reading this commentary.

Clients, I encourage you to click here to access your personalized performance portal to see how your portfolio performed vs. the markets last month.

Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors

More people are searching for “give car back” on Google than ever before… this is on top of last months Google Trends chart on the term “cant pay credit card.”

You just have to watch it. It’s worth your six minutes.

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This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.