Where to Find Shelter in the Coming Bear Market - Barron's

“Don’t follow anyone who hasn’t been around for at least an entire cycle.” Photograph by Anne Nygard

The coming bear market will “do real and perhaps severe damage to portfolios everywhere.”

That dire warning comes from Dennis Gartman, editor of the Gartman Letter. He recently announced that he would bring his letter to an end on Dec. 31, after 30 years of publishing.

Individual investors may not have heard of the Gartman Letter, as it caters to an institutional clientele—who pay as much as $500 a month for the daily service. But he is widely followed on Wall Street. In a recent interview with Barron’s, Gartman reflected on how the world has changed during his career and the investment implications for the future.

His pessimism has nothing to do with a distaste for President Donald Trump, whom he voted for in the last election and is likely to do so again. Instead, it derives from what he perceives to be the absence of fear among market participants.

He describes the current environment as a “kids market,” relying on a phrase introduced in the 1960s by Adam Smith, the pen name of George Goodman, in his classic book The Money Game. Goodman used the phrase to refer to an investment environment in which the traders making the most money are those too young to remember the last bear market.

Gartman describes today’s “kids” as “young, brash, utterly naive, ill-educated, egregiously overconfident, neophyte-yet-fearless ‘investors.’” Market veterans such as himself are left to do little more than stand on the sidelines, “fearful yet envious” of the kids’ profits.

This isn’t the first kids market that Gartman has encountered in his career, of course. All have ended badly, and he’s confident the current one will too. When it does, the “all-too-easily-made profits [of today’s] kids” will evaporate.” Out of the ashes will emerge the latest crop of poorer, but older and wiser, investors.

Avoiding this boom-to-bust cycle requires following an advisor with the battle scars of having lived through a bear market. No amount of education can substitute for that experience, Gartman says. That’s why he doesn’t trust “a 26-year old who has just gotten his M.B.A. and has no experience.” His advice: “Don’t follow anyone who hasn’t been around for at least an entire cycle.”

Experience, of course, is one thing that Gartman’s long investment career has given him in spades. One lesson his experience has taught him is the value of focusing on all the major markets at once: not just stocks and bonds, but gold, oil, industrial and agricultural commodities, foreign currencies, and real estate.

He reached this insight upon realizing that the “people who traded foreign currencies weren’t talking to those who traded oil, who in turn didn’t talk to those who traded bonds or equities, and so forth.” No one, it seems, was “focusing on the interconnections between the various markets.”

“I am the liberal-arts major on Wall Street,” Gartman adds, in contrast to almost everyone else, who concentrate exclusively on their own areas of specialization.

This eclectic approach means that, unlike advisors who focus only on stocks, he feels no need to keep looking for bargains in the stock market when it becomes overvalued. There will always be an undervalued market out there.

Which begs the question: Which market is most undervalued now? Gartman says it’s commodities, especially agricultural commodities—which he says are “unbelievably inexpensive right now.” The two agricultural commodities that he currently is recommending in his newsletter are cotton and wheat.

He believes that his broad focus has given him a comparative advantage. He doesn’t have to be better at analyzing any one market than analysts who focus exclusively on one. Instead, he merely has to be decent at analyzing each of many different markets. He says that because so few investors or advisors focus on all the markets at once, he’s able to exploit obvious arbitrage opportunities that most everyone else overlooks.

Gartman fully acknowledges that the stock market may continue rising for a while longer before eventually succumbing to a bear market. But even if it does keep rising, its potential reward relative to its potential downside is far less attractive than it is for agricultural commodities. And it’s only by focusing on all these various assets simultaneously that this would be evident.

Futures contracts are Gartman’s preferred vehicles to exploit any price appreciation in cotton and wheat, though investors can also use exchange-traded notes (ETNs). Two they can consider are iPath Series B Bloomberg Cotton Subindex Total Return (ticker: BAL), with a 0.45% expense ratio, and Teucrium Wheat (WEAT), which charges 1.0%.

Another investment lesson Gartman has learned over the decades is that, to quote John Maynard Keynes, the market can stay irrational longer than you can stay liquid. He goes further than Keynes, however, drawing the following corollary: “The market will return to rationality the moment you have been rendered insolvent.”

One wonders if that corollary sheds any light on the significance of Gartman’s decision to discontinue his investment newsletter. Might it be that we’re about to enter into an extended period in which investment success requires a wide-angle focus on numerous asset classes, just as Gartman stops publishing?

Gartman himself poo-poos the idea. At 69 years old, he says that he’s getting tired of getting up each business day at 1 a.m. to write that day’s edition of his newsletter.

But it seems at least plausible that the most popular asset classes today have unappealing long-term expected returns. Depending on the valuation metric you use, for example, stocks are either overvalued or extremely overvalued right now.

For the S&P 500 index, for example, the cyclically-adjusted price/earnings ratio made famous by Yale University finance professor (and Nobel laureate) Robert Shiller currently is higher than 96% of monthly readings since 1881. Treasury bonds’ expected after-tax real return is negative, given that their yields are barely higher than what the futures markets are betting inflation will amount to in coming years. So any real hope of earning profits anywhere near as good as stocks’ and bonds’ historical returns might very well require looking to other asset classes entirely.

If so, Gartman’s letter is disappearing at just the time we might need it most.

Mark Hulbert is a regular contributor to Barron’s. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. (The Gartman Letter is not one of the letters that it tracks.) He can be reached at mark@hulbertratings.com.

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https://www.barrons.com/articles/where-to-find-shelter-in-the-coming-bear-market-51577790001?mod=RTA

2019-12-31 11:00:00Z
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