The latest economic data are not very encouraging. For instance, the Q1 Gross National Product in the U.S. data pointed to an economic decline of -0.7%. It was the second consecutive year in which the economic activity declined quarter-on-quarter. That has not happened since the credit crisis of 2008.
The American economy clearly has been impacted by the strengthening dollar. But we also believe that real growth is fading. Additionally, we know an interest rate hike will occur sooner or later, which will undoubtedly have economic repercussions. Considering those elements the peformance of the broad averages should not come as a surprise.
It seems that the American economy, as well as its monetary policy, are arriving at some sort of “end point.” What is the reason for continual stimulation of an economy, which after 5 years of extreme stimulus, is not growing?
This will be a tough challenge for financial markets in the years to come.
However, every problem contains an opportunity. Likewise, every crisis creates new heroes. John Paulson became famous because of his ‘Big Short’ in 2008. He traded the other side of those financial products which were so hot in the real estate market before the financial crisis hit (ABC’s, CDS, CDO’s, MBS, etc). John Paulson became a multi-billionaire.
Today, we see another rich investor who has turned his attention to the next ‘Big Short.’ His name is Paul Singer. Do not forget his name. He is calling his trade ‘the Bigger Short’!
Singer is telling his subscribers today the same thing we have been telling our subscribers for years. The monetary interventions of central banks are unprecedented…and have never been implemented on such a large scale. Therefore, even the monetary masters (i.e. central bankers) find it impossible to predict the effects.
Singer is convinced these policies will have dramatic effects on the bond market, sooner or later. Consequently, his “Bigger Short” is focused on government bonds … from all over the globe!
“Bond holders still believe it is safe to own 30-year German government bonds with a yield of 0,6%, or 20-year Japanese bonds with a 1% yield, or American 30-year Treasuries with a 2% rate. That is an unrealistic belief.”
Obviously, Paul Singer is correct. However, he does not want to be the first one to short bonds. Many have tried to short bonds but were hurt by the ongoing outrageous bond bull market. Still, Singer believes that the current bond market justifies a short trade from a risk/reward perspective.
Only time will tell whether Singer will become the “next Paulson.” We definitely support Singer’s vision in theory, but from a practical point of view we prefer to execute differently. The rationale behind OUR vision is that a collapse in the bond market will lead to a gigantic exodus of capital which will seek new investment opportunities.
Instead of shorting bonds we believe it is better to invest in the assets that will benefit from the capital that will come out of bonds. We believe an exodus from bonds will be inflationary, hence we are looking into inflation sensitive assets: commodities, precious metals, and some segments in stock markets.
We do not see a bust coming, similar to the collapses of 2000 and 2008. The exit of capital out of the bond markets will be a slow process which will take years. An appropriate analogy would be a tanker leaving port. It will initially move extremely slowly, but once it has picked up speed, there is no way to stop it!
We believe that commodities will benefit not only from the inflationary effect, but even more importantly, supplies are shrinking. The inexpensive minerals in the earth are being exhausted and are less available each year.
The cost to mine precious metals has gone up significantly