Imperial Arbitrage

By David Stockman  |  January 9, 2020

Great empires are not maintained by timidity.

– Tacitus, Histories (c. 100 – 110)

Well, would you look at that: easy money, Forever War, and all-time highs for the stock market…

The S&P 500 Index, the Dow Jones Industrial Average, and the Nasdaq Composite are, once again, redefining “Peak Trump.”

Michael Coolbaugh is back with his first market commentary of 2020. There’s a lot to soak up here.

But put pins in a couple things: Michael is helping us build The Stockman Letter model portfolio in a way that’ll allow us to participate in some upside while we prepare for the inevitable crash.

Also, Michael is about to launch his own higher-frequency trading service. He’ll employ the same quantitative-plus-qualitative approach he’s using to shape recommendations for TSL.

It is all a matter – as Michael notes – of timing…

Do Fade Away

By Michael Coolbaugh

I’m going to out on a limb here and assume you’ve heard of Warren Buffett. And, chances are, you’re also familiar with his famous quote, “Be fearful when others are greedy and greedy when others are fearful.”

This sentiment speaks to Buffett’s mentality as a value, or “contrarian,” investor. When most people hear this quote, they immediately think about the stock market.

As it goes, “When the stock market is high and overvalued, you want to be selling. And when the stock market is low and undervalued, you want to be buying.”

But this contrarian mindset can apply to any asset class in the world. It doesn’t matter what you’re looking at – the S&P 500 Index, Japan’s Nikkei, JPMorgan, Caterpillar, U.S. Treasuries, the British pound, crude oil, and/or gold.

And, while being a contrarian sounds easy, when it comes to investing, EVERYTHING comes down to timing.

The truth of the matter is, timing is so important because of the behavioral flaws all of us as humans have deep inside our brains. It’s nothing to be ashamed of; we all have them, and we all allow emotions to influence our decisions.

What we can do is establish a handful of basic rules and processes to help keep those emotions in check. One of my major rules is that I almost never trade opposite of the long-term trend.

Let’s look at General Electric (NYSE: GE) for a moment. Between January 2017 and December 2018, GE was your typical “deep value” stock. But for those who bought at $20, it sure felt painful as it continued to tumble to a low of $6.66 per share.

It reminds me of a popular adage across Wall Street: “How does something fall 90%? First it falls 80%, then it falls another 50% from there.” In other words, just because something has gone down a lot, doesn’t mean it will stop going down.

But I’m not here to talk about the stock market, or General Electric. I’m here to talk about gold.

I’ve talked at great length about the very attractive long-term prospects for gold. But, remember, timing is everything!

The opening chapters of Ray Dalio’s book Principles shed some light into a few of this legendary investor’s investment philosophies. One that really stood out to me was his conclusion that “war and politics are generally to be faded.”

So, naturally, as we’ve been bombarded with flashing headlines of a potential war with Iran, gold and oil have had quite the rally over the past few days.

Most of the talking heads on Bubblevision claim that gold is rallying because of geopolitical tensions.

Well, I’m sorta sorry to say it: If you were buying gold after the rockets began to fly, you’re probably regretting that decision by now.

You see how gold’s consolidation perfectly coincided with a stabilization in real yields, marked by the green boxes?

So, why then did I sell all my gold and gold-mining stocks on the day it was announced that the U.S. had killed Iranian Major General, Qasem Soleimani?

Because real yields, which is the primary driver for gold, didn’t move. This means that the last spike was purely due to speculators betting on World War III.

And, as Ray Dalio astutely noted in his book, “War and politics are generally to be faded.”

The fact that nearly everyone, including Bubblevision’s own Jim Cramer, was touting bullish gold prospects, made it easier for me to decide it might be time to be fearful when everyone else was greedy.

In other words, the party was already over!

Just like those friends who came running into the party 10 minutes after the ball dropped, all they got to see was a crowd who drank too much champagne stumble into their Uber rides.

You see, my bullish view on gold has nothing to do with the potential for World War III. Rather, my preference for the Midas metal is rooted in the belief that real interest rates will continue to decline, and the U.S. dollar will continue to depreciate over the long term.

If my long-term view is correct, there will undoubtedly be numerous opportunities in the future.

But, for now, a good dose of patience might be just what the doctor ordered to cure this hangover!

This Is Real…

This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market and we’d like to help you do that.

To common sense.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR