It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
– The Opening Paragraph from Charles Dickens’, A Tale of Two Cities
Bubbles, Bubbles Everywhere…
Without the ability to identify bubbles I’d pretty much be useless in this business. I live, breathe and eat macro news and trends. It is what I am inherently good at and I leverage that talent to the best of my ability. On the other hand put me in front of a financial model and I want to blow my brains out within 20 minutes. I am not exaggerating. I worked in equity research for five years. I learned a lot actually and I am very lucky to have had the experience but it was like taking a fish out of the water, tossing it in the air and telling it to fly. It just wasn’t natural. I have always said that people screw up when they don’t figure out what they are naturally good at and then stick to that, but rather attempt to be a jack of all trades. I make a living off of people that don’t get that. I love it when people engage in my world when they have no business doing so, but the best types, the types that make people like me salivate are those that are ignorant of the macro world but also suffer from the deadly (to them) combination of large bank accounts and equally large egos.
So I haven’t written about many “bubbles” since 2008. Back then I was at Bernstein and I was hardly capable of writing a word without saying commodities were a bubble ready to crater. I also hammered home the point of the “fert.coms,” which included POT and MOS. The main reason I haven’t written about similar bubbles is because I have been 100% focused on what is likely the biggest bubble in the history of mankind. The fiat U.S. dollar and all income streams related to it. Of course, the inverse to this monumental bubble are gold and silver and the commodities necessary to everyday life (food and energy) and as such I have been wildly bullish on those particular items. This is the most amazingly easy trade I have ever stumbled upon because it takes some serious macro thinking and a grasp of financial history to understand the precious metals markets. These are two things Wall Street is not very good at. Even better, Wall Street is full of ego maniacs with lots of money. So all a lot of these clowns do is look at the price charts of gold and silver and the childish thought “bubble” pops into their clouded heads. Of course it’s very tempting to just look at the charts and think this if you don’t understand what is really driving their ascent. The popping of the largest bubble in human history. The fiat, counterfeit, and immoral U.S. dollar standard.
The “High End” Bubble
Anyway, gold, silver and the dollar are not the focal point of this email (amazingly). The focal point of this email is what I believe to be the only other major bubble currently in place besides the dollar and that is this absurd view that the “high end” is some sort of great secular investment theme that will carry on forever due to rising incomes in the emerging markets and the bifurcation between haves and have-nots in the West. Like any other bubble, it begins with a real macro trend; a real and powerful story. Then at some point the thing gets stretched beyond its ability to continue and then finally you get to a point where investors confidently extrapolate the trend forever into the future just at the time the trend itself becomes unsustainable. With regard to “high end” I believe we are there now and I think this entire theme will implode on itself in the not too distant future and there are two main reasons why I think this.
First, we all know about the bifurcation in the haves and have-nots in the West. The funny thing is that when you hear Wall Street talking heads speak to this they act as if they just discovered electricity. Sorry guys, this has been going on for decades. The only thing that has happened is that the super, super rich (0.1% of the country) and their puppets in D.C. neglected to use their positions of power during the 2008 crisis to help their country and their fellow citizen get back on their feet and reform the system, but rather they decided to totally raid, abuse and pillage their fellow Americans in an act of unprecedented greed and recklessness. What the “analysts” fail to see is that these “elites” have played their hand way too far. The social crisis facing the country as a result of the most egregious plundering in modern American history will spell the end of the “high end” theme. Buying into this trend now is like getting long Marie Antoinette’s unsevered head in 1792.
Moreover, in the BRICS (China in particular) this bifurcation has also exploded in recent years and with inflation spiraling higher we have a cauldron for social unrest and revolution. The haves have already taken everything from the have-nots. When that happens you don’t buy high end retail stocks, you get long guillotines (to be clear I do not condone violence WHATSOEVER, I am merely calling the situation as I see it). Just read this article from Bloomberg this morning to get an idea of how close we are to a total social implosion. http://www.bloomberg.com/news/2011-07-21/consumers-in-u-s-relying-on-credit-as-inflation-erodes-incomes.html. Key quote from the article: “Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food, said Tavares, who’s based in Atlanta. That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem.” and… “The swings in purchases of fuel and food have been “dramatic,” Tavares said. The volume of gasoline purchases placed on credit cards jumped 39 percent last month from a year earlier, compared with a 21 percent increase in June 2010, he said. Food shopping increased 5 percent after falling 7 percent last year.” Serfs up!
The second reason I think this trend is set to be put to bed is that a lot of these companies are not really “high end” at all. I mean look at some of the winners benefitting from this theme. Take JWN (+23% ytd), RL (+27% ytd), COH (+20% ytd), TIF (+35% YTD), BRBY LN (+42% ytd), RMS FP (+50%) and AXP (+22% ytd). I cannot think of a worse basket of stocks to buy right now. The thing about these names is yes of course the super rich do shop there but that is not where the marginal dollar is coming from. The marginal dollar is coming from the emerging market consumer that THINKS they are rich and making false extrapolations about their real wealth and future earnings potential just as so many Americans did earlier this decade when they felt wealthy due to the housing bubble. Essentially the same trade in happening in China and elsewhere in the developing nations as we speak. Furthermore, believe you me when the SHTF the super rich aren’t going to run into Coach and Ralph Lauren and support sales. They will buy gold and real estate in a foreign country in anticipation of the guillotine (metaphorically speaking hopefully). Have a great weekend!
Peace and wisdom,
Mike
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