Wesley Chapel, FL
“All roads lead to inflation… I’m long gold. I’m long Bitcoin. Commodities are all underpriced. I’m long Nasdaq. I have zero bonds. If I had cash, it’d be very short term.”
“Financial crises percolate for years but they blow up in weeks.”
- Paul Tudor Jones speaking in an interview with CNBC on October 22nd.
We now know which road (the Trump one) we are taking to inflation.
Paul Tudor Jones is a legendary investor. I’ve quoted him many times before. He recently spent about thirty minutes on CNBC discussing topics that I have covered regularly in this commentary. I won’t rehash them all, but I encourage you to watch the interview. You can find the first nine minutes here and another five minutes here. The full interview is behind a paywall for now, but you’ll get the gist from these two clips, and if you are a regular, long-time reader, the ideas will sound, and the charts will look very familiar.
Seriously though, click those links above and invest the time to watch or just listen to those clips. They are important.
The interviewer mentions another legendary investor, Stanley Druckenmiller. These guys are a couple of my favorite investors, and I have learned a ton from reading and following each. I used to have favorite hockey players; now, I have favorite investors, economists, apologists, and theologians. If you knew me at age 15, you would never have predicted it!
At any rate, when these guys speak, I stop and listen.
In an interview with Bloomberg on October 16th, Druckenmiller said that the markets were indicating to him with a high degree of certainty that Trump would win. This is what the CNBC interviewer was referencing in his question to Paul Tudor Jones. As it turns out, the market and Mr. Druckenmiller were correct about the outcome of the election. Druckenmiller also went on to say about the Fed and inflation:
“I’m a market animal. Frankly, we’ve found over the years that markets are better predictors than professors, and when I look at the landscape, equities at a record high, gold at a record high, GDP above trend, credit tight, bank earnings and forecasts look good, we don’t see any restriction whatsoever, crypto going crazy, you name it. So, all of a sudden, the crowd (the Fed) that said they want to see the whites of inflation’s eyes, and they (the Fed) want to be data dependent as opposed to forward looking, are now cutting 50 basis points, not a quarter which is what they started with [in the last hiking cycle] and inflation isn’t even to target yet. And this is all on the theory that monetary policy is restrictive.”
So, given that the market and his interpretations were correct about who would win the presidential election – what are the chances that the market and his interpretations are going to be proven correct about inflation? I’d argue that the chances are pretty high.
Unfortunately, the Druckenmiller interview was overly focused on the upcoming election and not enough on investing. But you can watch it here, or in the nearby video player.
With the election now over, October seems like ancient history, but below is a quick look at how the indexes we’ve been tracking this year performed during the month and year-to-date. Click the images to enlarge them.
Two days after the election, the Fed concluded its November meeting and decided to cut interest rates by another 0.25%. That moved the low end of their “policy rate” from 4.75% to 4.50%. This is the second consecutive meeting in which the Fed has cut the rate. The last time they met, they actually cut it by 0.50%. Remember, the policy rate, or the Fed Funds rate, is the rate that banks charge each other for overnight loans. So, while you might think that “interest rates” have fallen since the Fed began its most recent campaign to reduce interest rates, you’d be wrong.
As I pointed out last month, immediately after the Fed’s first rate cut since 2020, both 2-year and 10-year US Treasury interest rates began to rise. At the time of my last commentary, they had both risen by 10%.
As of this morning, before inflation data was released (which I will get to in a moment), they had both added another 10% rise, with each now 20% higher than before the Fed started cutting rates. Mortgage rates are also up from 6.09% to 6.79%, or about 11% higher.
Economic interest rates are set by supply and demand – not the Fed. Go back and watch that first Paul Tudor Jones interview clip at the 5:50 mark.
Who would agree to lend money to this government for 10 years, let alone 30 years, at these rates? Not me.
The rates are going to have to go much higher to attract buyers regardless of how low the Fed sets its policy rate. This is exactly why Jones and Druckenmiller are both not only avoiding bonds but shorting (betting against) them.
Meanwhile, the Consumer Price Index (CPI), which measures inflation (poorly), was just released for the month of October. And wouldn’t you know it? Inflation is not only still above the Fed’s 2% target but is also showing signs of reacceleration. The October inflation report showed that prices rose 2.6% from a year before, which is more than the 2.4% rise reported in September. The so-called Core CPI, which excludes food and energy, held steady from last month at 3.3%.
All this while another legendary investor, Warren Buffett keeps selling stocks and raising cash. This includes having sold around half of his largest position, Apple, this year. When Berkshire Hathaway reported earnings on November 4th, we learned that their cash pile reached a record $325 billion.
This is clear evidence that the world's best investor is not interested in putting money to work at today’s sky-high valuations – even for Apple. I estimate that Apple is probably worth around $200/share, but today, it trades at $225/share and recently traded as high as $237. It’s not as wildly overvalued as many other stocks, but it certainly isn’t cheap.
Does this mean we should sell all of our Apple? Nope.
First of all, Warren hasn’t even sold all of his, and it remains his largest position. Further, we have our stops in place to get us out when the market inevitably turns south.
What should we learn from Buffett? I think the takeaway is that we should be patient, long-term investors when it comes to putting money to work. It is getting harder and harder to find wonderful companies trading at fair prices. So, even if the market races higher for a while, whether due to election euphoria or some other reason, patience will likely be rewarded, as it has been in Buffett’s extensive experience.
For people who do have cash to put to work, we have rolled out a new strategy called the Elevate Permanent Portfolio Strategy. This represents our twist on a proven approach that has stood the test of time since its inception in 1982. It even became the basis for the All-Weather Portfolio strategy at the largest hedge fund in the world, Bridgewater.
Without getting into too many details, the original portfolio was broken into four equal parts: 25% stocks, 25% bonds, 25% gold and 25% cash.
So, we are not doing that, exactly. We have modified the stock, bond, and gold portions to reflect the current market environment, including what I wrote earlier in this commentary about bonds (we don’t want to own those!) and inflation.
The Elevate Permanent Portfolio Strategy is meant to be a long-term conservative way to stay invested through all market cycles. It can be used as a diversifying allocation alongside our core Elevate Capital Strategy.
Another strategy we have recently developed at the request of more than one client is a dividend strategy. We call it the Elevate Dividend Focus Strategy, and we use all the same rules-based risk management principles that we use in our core strategies. So, position sizing and trailing stop losses (adjusted for dividends, of course) will protect our capital while we invest in companies (and a couple of funds) that pay high but safe dividends and ideally have a long history of raising those dividends year after year.
I am excited to see what happens with the Department of Government Efficiency (DOGE) under the leadership of Elon Musk and Vivek Ramaswamy. I probably could have voted for Vivek to be president. He strikes me as genuine, and I don’t think anyone can argue that he is highly intelligent. Elon is more of a wild card, given all the other things he has going on. But if they achieve even half of what I think is possible, we could cut a lot of unnecessary costs for our country – and not a moment too soon. Most politicians are not willing to spend the political capital necessary to gut all these wasteful projects. But maybe 🙄 this time, it’s different. These aren’t your traditional politicians. If you haven’t read Walter Isaacson’s biography of Elon Musk, I encourage you to check it out. Even if you are not a Musk “fanboy,” as I am not, I think you will find the parts about his cost-cutting at Tesla, SpaceX, and Twitter to be very impressive. You’ll at least see why he is an ideal candidate to lead the charge on government cost-cutting.
At the same time, I will not be the least bit surprised if the whole game plan falls apart quickly, as it seemed to during the last Trump administration, with a revolving door of names in leadership positions of all sorts.
As Mike Tyson said, “Everybody has a plan until they get punched in the face.”
I suspect you might begin to see and hear the term “stagflation” if you haven’t already. So, before I wrap up for today, I will give a brief overview.
The term stagflation was first coined in the 1960s by British politician Iain Macleod. Today, it is most commonly associated with the American economy of the 1970s when, due to an oil crisis, many developed economies (not just the USA) experienced an extended period of slow economic growth (measured by GDP), high unemployment, and persistent rising inflation.
The term stagflation is a combination of the words stagnant and inflation—more accurately, stagnant economic growth and persistently high inflation.
When combined, these factors create a very challenging economic environment, which is nearly impossible to address with traditional policies like raising or lowering interest rates.
During stagflationary periods, growth stocks tend to suffer as companies experience higher input costs and reduced consumer spending. Investors also prefer more defensive investment strategies, shifting money out of stocks with higher potential growth and lower current profits.
The bond market also tends to suffer as higher inflation usually leads to higher interest rates, which correspond to falling bond prices. On the other hand, if central bankers can keep rates low in an effort to stimulate economic growth, bonds can perform well, for a time. Bond market volatility should be expected to rise during the stagflationary period.
In short, nobody wants stagflation. But both I and a growing chorus of highly respected investors, businesspeople, and economists, including the CEO of JP Morgan Chase, Jamie Dimon, are sounding the alarm. Dimon said at a recent conference:
“I would say the worst outcome is stagflation — recession, higher inflation… And by the way, I wouldn’t take it off the table.”
All roads lead to inflation. People almost always think of gold as a good hedge against inflation, and history has proven that it is. I think Bitcoin will prove to be a good hedge going forward, perhaps even better than gold. Capital-efficient stocks are still probably the best way to fight inflation. We own plenty of those! And we’ll keep on holding them until either a) our exit rules get us out or b) the story changes.
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
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