Some of The Wealthiest People In the World Are Sending Very Bearish Market Signals

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Some of The Wealthiest People In the World Are Sending Very Bearish Market Signals

Ray Dalio (Net Worth 15 Billion) – “There are now no safe places to invest.” On 23 July 2015”.

Carl Icahn (Net Worth 23 Billion)  – “I believe the Market is extremely overheated – Especially high yield bonds.  If more respected investors had warned about the market in 2007, we might have avoided the crisis in 2008.” On 19 June 2015

Warren Buffett (Net Worth 72 Billion) – his company has made $20.2 billion in profit over the last 4 quarters and his cash position during that period of time has increased by $14.8 billion.  This means he has retained 75% of his new earnings over the past year in cash.  In May 2015, Warren Buffett, Bill Gates, and Charlie Munger talked about their concern with the FED’s continual manipulation of low interest rates and the potential bubble in real estate prices.  The video can be found here.

So I think you get my point.  Lots of people think the market is getting a little scary and some are speaking with their actions.  So what’s the bubble?  Well, Carl Icahn and Ray Dalio think the junk bond market is the potential bubble.  The implications and how that might play out in stocks and other markets is unknown, but threatening.  Below my signature block, I’ve pasted a thorough analysis of Icahn’s concerns.  It was written by my friend Matt.  He was kind enough to send this analysis to me for the group’s reading pleasure.

Finally, here’s a really great article that demonstrates the extreme valuation metrics we are currently facing.  I highly recommend you take the time to read this article from Ph.D. John Hussman. Also I think it’s important to point out the unprecedented amount of margin debt that’s being used by wall street presently.  Feel free to check out this chart by Doug Short to see what I’m referring to.

If you are interested in tracking my conversation with Stig and other smart investors in the community, you can go to this point in our forum.  (P.s. We’ve fixed the technical issues we were previously having thanks to our good friend James Meirowsky!)

As we’ve said many times in the past, there’s no way of predicted the short term movements in the market.  With that said, we are getting to a point were major players with large capital are starting to buckle down their hatches.  I’ll leave you with Warren Buffett’s best investing advice: Rule #1: Don’t lose money.  Rule #2: refer back to rule #1.



Preston Pysh is the founder of The Pylon Holding Comopany. Preston’s videos on financial investing have been viewed by millions of people around the world. He has been featured on shows like the Colbert Report and the History Channel. He takes great pleasure in taking complex ideas and making them accessable. Preston is a graduate of West Point with a degree in Aerospace Engineering. He enjoys outdoor activities and spending time with his wonderful family. Preston is also an author of 3 books. Two about investing and one about leadership.

The Diary of a West Point Cadet

Warren Buffett’s 3 Favorite Books

Warren Buffett Accounting Book

P.s.s. Here’s the message from my friend Matt on the additional information about Billionaire Carl Icahn’s concern with the junk bond market:

“After hearing the bond market conversation and then the Icahn comments this morning, I think there is a bit more nuance I can share with you that you’ll be interested in. Just happy to give something back:

Icahn is concerned that high yield bonds are overvalued and overcrowded. Overvalued in that current prices underestimate rising default/credit risks, and overcrowded in that the investor base for high yield appears to be increasingly more “mom and pop,” or “unsophisticated.” See Icahn specifically talk about this on a recent Wall Street Week episode . You’ll notice in the interview that he is not hedging his stocks so much, but he does think by utilizing CDX (a high yield derivative) he has found a cheap and effective way to profit from a decline in the high yield asset class OR at least on a rise in volatility INSTEAD of hedging his stocks. Icahn is “talking his book,” and giving us some insight into where he sees a decline and how he intends to make money from it. He is never just making a public service announcement – and that’s a reason to love the guy. This also dovetails nicely into your listener question about shorting to hedge overvaluation risk and how a very smart investor is looking across asset classes to find his opportunities.

Regarding the concept of high yield being overcrowded, the broader issue is that the size of “the exits” for the bond market has theoretically shrunk significantly post financial crisis (liquidity risk). This is largely due to regulation from the Volker Rule and in particular which limits banks holding of debt to trade for their own profits (way oversimplified). The fear is that bonds already trade less frequently than stocks and often require a matchmaker of sorts (aka a trading desk who can help match buyers to sellers or hold by having a bigger Rolodex at their disposal than the individual seller). Regulation has driven those matchmakers away from the market as the rules about what they are allowed to hold in inventory have changed, which hasn’t mattered much as money has flowed in (plenty of people to sell to), but could matter a lot on the way out (if/when everyone is selling at once). River Park recently had an excellent discussion about the decline in dealer inventory and the liquidity risks given the current size of the bond markets with special attention to high yield that you can read here

Overcrowded with less liquidity then shifts the conversation to ETFs role in the debate. First, ETFs own a sampling of a broader index and not the entire, actual index. Second, they trade like stocks (far more often than the actual cash bonds trade – this is very different than equity ETFs!). Third, this means that the ETF can trade differently from their benchmark and more importantly their net asset values due to the limits of real time arbitrage in the space. The extreme bear argument goes that with more money in the ETF space owning sampled baskets of the benchmark than ever before, people may attempt to sell the ETF first, then there won’t be any arbitrageurs to close any gaps that may arise from aggressive selling between prices and NAVs, and finally the entire space may temporarily cease to function (think flash crash or 1987 for stocks) as a vacuum is created.  You can see Jeff Gundlach discuss this here along with the valuation risk part as well. Back to Icahn – buying insurance to profit from a collapse like this could be understandably very attractive (especially if it is sufficiently cheap).  Before you panic, Hotchkis & Wiley wrote a very good piece covering all of these issues with strong supporting data, and that can be found here

Connecting it all to why this matters to equity investors and why Icahn is using this instead of directly hedging his equities – if a negative scenario were to occur, we must ask if this could cause, or least would be associated with a recession – which typically coincides with a bear market in stocks. Stephen Schwarzman at Blackstone certainly thinks so. He pulls many of these ideas together for us in this WSJ Op-ed In short, a bond debacle would constrict funding to businesses and a positive credit cycle goes a long way to contribute to positive growth and bull markets. The broader unintended consequences of this type of regulation with a market event like Icahn or Gundlach project would have a real impact on all of our portfolios.

Last but not least, since some people do still need/want bonds (let’s not forget Intelligent Investor, Chapter 1), remember that bonds can dampen volatility and give you the dry powder you’ll need for buying stocks in a bear market (when used correctly). Kenneth Winston from Western Asset wrote one of my favorite pieces on rate-driven bond bear markets that you can see here for a data driven view of investing when rates rise. If you don’t chase yield, focus on quality and your maturity schedule, you can still accomplish a lot with bonds.”

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