Be Careful Out There

Michael Lewitt, author of The Credit Strategist, likes to get right to the point. Here’s the opening paragraph of this month’s TCS:

Commodity prices are plunging, the dollar is powering higher, the yield curve is flattening, ObamaCare is collapsing, global trade is plummeting and terrorism is spreading across the globe. The high yield credit markets are sending distress signals and 10-year swap spreads are negative. Energy companies are going out of business faster than you can say “frack” and trillions of dollars of European bonds are again trading at negative interest rates. The world is drowning in more than $200 trillion of debt that can never be repaid while European and Japanese central bankers promise to print more money and the Federal Reserve is being dragged kicking-and-screaming into raising interest rates by a paltry 25 basis points. Accurate pricing signals in the markets are distorted by overregulation, monetary policy overreach and group think. Hedge funds are hemorrhaging and investors, desperate to generate any kind of nominal return on their capital, continue to ignore the concept of risk-adjusted returns. Some market strategists believe this is a positive environment for risk assets; I am not among them.

Michael pays particular attention to the credit markets, and he doesn’t like what he sees. He points out that corporate debt is now much higher than it was on the eve of the financial crisis in 2007, driven by Fed-fueled leverage. This leverage problem is really hurting the energy industry but goes far beyond it, as Michael explains:

Companies in the United States have taken advantage of low interest rates to issue record levels of debt over the past few years to fund buybacks and M&A. This has driven the total amount of debt on balance sheets to more than double pre-crisis levels. However, cash flows have not kept pace, resulting in leverage metrics that are the highest in 10 years.

This month’s issue of The Credit Strategist is sobering, and I hereby forward it to you as this week’s Outside the Box – at the risk of putting you off your Thanksgiving dinner! Michael consistently has one of the most well-reasoned perspectives in the Wide Wide World of Finance, and if you’d like to consider subscribing to TCS, visit his website

Richard Russell, RIP

I was saddened this week to learn that my friend Richard Russell had passed away over the weekend. He was 91. Dick was an icon of the investment analyst industry. He launched his Dow Theory Letter in 1958 and had writen the letter continuously ever since. He became famous for his uncanny calls of the twists and turns in the market. Early in the last decade he moved onto the Internet and began to write a daily commentary, which had a wide and loyal following. The expanded space gave him the opportunity to share his life with us. And what a life he had.

A World War II combat bombardier, jazz enthusiast, raconteur; he could sit and tell stories of his old Brooklyn neighborhood for hours. He recently noted the passing of his last high school buddy, as one by one the old fighters from World War II are disappearing.

The Dow Theory Letter is the oldest investment service written continuously by one person. He mentored so many of us. I always enjoyed going to La Jolla and reaching out to Dick (and his wife Faye), and we would have an early dinner somewhere. Even in his mid-80s he felt compelled to get up early to study the markets so that he could write, which meant early to bed.)

I organized a tribute dinner for Dick about six years ago in San Diego. My original thought had been to get together as many of the investment writers who began in the ’80s and ’90s as possible and simply honor one of our own, before he passed on and it was too late. Somehow, the evening morphed into a rather fabulous and elaborate banquet for some 400 people from all over the world.

One of the more amazing aspects of the event was Richard sitting at the head table with all three of his wives and their four kids, and then working the room like the Godfather of the industry that he was. Everyone was laughing and having a great time. Along with all the personal tributes from the attendees, Mark Skousen presented him with a book calledFifty Years on Wall Street, which included tributes from his readers and many compatriots in the business.

Dick was a true believer in gold and diamonds, as well as dividend-paying stocks. The diamonds were part of his Jewish heritage – he often told me that you can put them in a small bag and take them anywhere.

During his response that evening, he talked about the country, the markets, and the future. Although the following aren’t exactly his words on that occasion, they are his words, and they do reflect what he said:

The end of capitalism will be due to the unbelievable amount of debt that is currently being created. This will create monster inflation that will destroy every currency. The only currency that cannot be destroyed is gold. When investors realize this, we’ll have the makings of the greatest bull market in gold ever seen.

He sadly didn’t live to see that great gold bull market that he so passionately believed in. Those of you who would like to read a note from his family can click here. You can read the tributes from the book we did at this link.

As I get ready to start baking cakes and otherwise preparing for the big gathering tomorrow, there are so many things I’m thankful for. One of them is you and the generous gift of your time and attention to my musings, which has given me a life far beyond what I could have imagined 15 or 20 years ago. Perhaps, like my writing hero Richard Russell, I will still be writing to you when I’m 90. And you will still be reading.

Have a great week and don’t forget, calories don’t count on Thanksgiving!

Your getting his chef hat on analyst,

John Mauldin, Editor
Outside the Box