On this week’s episode of the Stansberry Investor Hour, we’re doing something a little different.
Long time listeners may remember that on January 3, 2020 (Episode 135), Dan shared with everyone his Top 10 Big Surprises for 2020…
Well today we’ll take a look back and see how Dan did.
Why do this?
Dan wants to hold himself accountable. Too often, financial media will just make claims and predictions all day long and never review them down the road for any sort of accuracy.
At the Stansberry Investor Hour, we want to do things differently.
So Dan wants to be 100% transparent. He covers exactly what he said at the beginning of the year and how those discussions look with the benefit of hindsight… including the topics he was way off on… and the topics he called with incredible accuracy….
It’s an episode you won’t want to miss. Listen in on this week’s episode.
2:25 – Dan opens up with his top surprise of 2020… “I talked about how a crash of 30% or more – in 2020 – would surprise the heck out of everyone because the market was still going up in January…”
5:30 – Dan says the bond market would have been surprised by higher interest rates… “In 2020, we got lower rates, so this surprise did not really come true… As far as bonds go, this didn’t really materialize.”
7:32 – Dan’s next big surprise… “European bank stocks… when rates are negative, the banks don’t earn a big spread and they get crushed. The European banks haven’t really done very well, and I said, ‘well they’re cheap and they haven’t performed well,’ so the surprise would be if they outperformed everything…”
8:52 – Dan recaps what he said earlier in the year on gold, “Next I talked about gold… [With gold at] $1,550… certainly a move below about $1,250 an ounce would be a surprise or a move to a new all-time-high above $1,900…”
13:39 – Dan shares some big surprises in private equity this year… “COVID really sucked the air out of the bubble that was happening in private equity in the beginning of the year.”
15:54 – The next big surprise of 2020 was in junk bonds… “The surprise then would have been if junk bond spreads widened quickly… and what happened?”
19:30 – Dan’s next big surprise was in venture capital… “you’ll remember I said the venture capital bubble had already begun to deflate… I said, the bigger surprise would be a resurgence of interest and higher valuations than the peak…”
22:55 – Dan shares his thoughts on the Fed from earlier this year… “So the surprise would really be if the Fed has as much control as many people believe and can keep the stock market propped up as many people believe and can keep the economy humming, and the financial markets humming without interruption and low inflation as many people believe…”
27:41 – Dan’s last surprise centers around the growth vs value debate… “well if you look at them over the last ten years… growth has just destroyed value. Like you didn’t want to be in the value index at all…”
Hello and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I’m also the editor of Extreme Value published by Stansberry Research. Before we get into today’s episode, don’t forget Trish Regan is now part of the Stansberry family. Check out her podcast, American Consequences With Trish Regan. The link will be in the description of this episode.
Today we’ll take a look back at my 10 surprises for 2020 for Episode 135 on January 3, and I’ll take a look at each surprise and I’ll tell you what I said then, and I’ll tell you how it turned out. Why am I doing this? Well, that’s just the way we roll on this show.
What do they do on regular finance TV? They say something different every day and they never go back and revisit their predictions and their advice. Well, we’re not going to do that. This is another way that we distinguish ourselves from that whole thing that just doesn’t even work at all for me, and doesn’t work for you either, I know. That and more right now on the Stansberry Investor Hour.
All right, I’m just going to dive in here, and I do have a general comment to make about this. I listened to Episode 135. It was our first episode of 2020, and I was not crazy about it, I have to tell you. I’m going to do another one of these in the first episode of 2021. I’ll give you my top 10 surprises for 2021. And I’m going to make it a lot clearer. As I listened to the episode I was like well, wait a minute. I didn’t say surprise No. 1, surprise No. 2, so it was kind of hard to follow. And even when I got into it, it wasn’t easy to tell exactly what the surprise was that I was saying that you should prepare for. So I’ll try to make that clearer today and tell you how it came out. And certainly, when I do my 2021 surprises, I will make it crystal clear so that when we get to the end of 2021 it’ll be a lot more fun.
All right. Let’s dive in. The first surprise I talked about was in the stock market, and it was pretty nuanced, right? I talked about how a crash of 30% or more in 2020 would surprise the heck out of everyone, right? Because the market was still going up in January, and it made a new all-time high before the COVID crash on February 19. New all-time high. So into February it remained the condition that investors would be surprised by a 30%-or-more crash. And if I had just left it there, man. If I had just stopped there it would have been great. Because what did we get in March? Well, we got a 30% or more crash, 34% really fast.
So you know, it was good to talk about that particular surprise, but then I kind of went on and I talked about how some investors were kind of preparing for the opposite. Like they would have been surprised by the market going up because they took $156 billion net out of equity funds in 2019. So either those folks were all preparing for retirement, or they were getting scared because the market was just going up and up and up. So you know, they were preparing for the market to fall and they would have been surprised by the market soaring.
So in the end I concluded well, investors with real money on both sides of this were basically anticipating a wide range of outcomes, and what is a wide range of outcomes? We’ve talked about this many times. A wide range of outcomes means higher risk. And it’s so weird. Ever since I’ve been bearish in 2017, the market has made new highs and new lows. If you look at a chart of the S&P 500, it’s just a big wedge going out in time from mid-2017 to now. And 2020 is a microcosm of that, right? Because we got that big drawdown to the bottom on March 23, and then what happened? We got the most blistering recovery rally for the rest of the year. Huge, huge range of outcomes. So in the end, my nuanced view was actually really spot-on. The very thing that I said would surprise everyone, right? This wide range of outcomes to be realized, is exactly what happened. So I was right to sort of warn you that this thing might surprise you in this really strange, nuanced way.
So these aren’t predictions, right? We say prepare, don’t predict. I’m not a predictor. But the preparation. You know, if you were preparing for a range of outcomes in the stock market, you nailed it in 2020, and we nailed that first surprise I think.
So all right, we’re off to a blazing start. But then we come to surprise No. 2. And I listen to this thing over and over again, and I think what I was really talking about, I said that the market would be surprised, where I implied that the market would be surprised, that the bond market would be surprised by higher interest rates, which would be lower on the prices, right? Interest rates and bond prices, they move in opposite directions.
So what happened to 2020 was we got much lower interest rates, so the surprise did not really come true. And I don’t know. I don’t know if I have a lot to say about that. It’s a crazy situation. Interest rates, they just seem to go lower and lower and lower. We’ve been in this huge bond bull market since what, 1980? Yeah, or ’81 or something. And bonds are like the no-brainer thing. You just keep buying them and buying them. Even more than stocks it’s been this whole time.
So I’ll get to my surprise, with the first show in 2020, but you can take a wild guess what the surprise would be. If rates are even lower now. If we’re down to zero. And the amount – I talked about negative rates in January. Well, now we’re up to an all-time high of something like $18 trillion of negative yielding debt in the world. Most of it the sovereign debt of Japan and various European countries.
Is the U.S. going that way? I think maybe they are. You know, you can’t say these things for sure, but certainly with the Fed coming out recently and saying hey, we’re going to buy more security. We’re going to buy more debt securities. You know, more Treasury bonds, and probably more corporate debt, too. You know, that doesn’t tell me that we’re going to see higher rates. It doesn’t tell me we’re going to see the Feds trying to push rates up any time soon, but you never know. I have another surprise later on about the Fed, and we’ll talk about that then, but as far as you know, bonds go, the surprise never materialized.
And then I talked about surprise No. 3 was European bank stocks. Because if you talk about negative rates, you’re talking about the sovereign debt of a lot of European countries. So when rates are negative, the banks, they don’t earn a big spread, and they get crushed, and the European banks haven’t done very well, and I said well, they’re cheap and they haven’t performed well, so the surprise would be if they out-performed everything. And they really didn’t. They didn’t underperform. I mean, they crashed along with everything else.
If you use the European financial ETF ticker symbol EUFN. It was down – actually it fell about 50% for mid-peak, during the COVID crash, but it rose to date about 61-62% which is just slightly less than the S&P 500. So they underperformed to the downside and just very slightly underperformed to the upside. So you know, the outperformance did not materialize. However, if you bought these things, during the COVID crash, you did OK, but this is like – our first surprise we kind of nailed it, but No. 2 and 3, eh, not so much.
Next I talked about gold, and what did I say? I said gold was volatile. Everybody knows gold is volatile, right? And I said what would really surprise the market at that point with gold at like $1,550 at the beginning of the year when I was talking. At $1,550 I said well, certainly a move below about $1,250 an ounce would be a surprise, or a move to a new all-time high above $1,900 seemed like it might be a bit of a surprise at $1,550. And what happened? Well, during the COVID crash, gold crashed from not quite $1,700 to what was it? It was like $1,477 there at the bottom of the COVID crash. And then what happened? Well, we know what happened. It went on a tear and topped out above $2,000. Above a new all-time high.
So on the downside I was – my downside was lower. My surprise downside was lower. I still think the market was caught napping. I don’t think anybody expected that huge drawdown during the COVID crash. We all thought gold was going to be a safe haven, and it crashed along with everything else for various reasons. We talked about it. You know, they shut down the refineries. You couldn’t get good delivery bars from London over to the United States to fulfill the commodity contracts. You know, and it was a big COVID snafu.
So while my downside target of like $1,250 for a big market surprise was not hit, I don’t know. I still think that I was basically right to call out this surprise. I still think my surprise basically came true. Because we got a big drawdown. Not to $1,250. $1.470-ish... $1,477-ish. And then we got a new high above $,1900 which I said, but also surprise the market. And as we speak we’re pushing back – as I speak to you right at this minute, I’m looking at a chart with gold pushing back towards $1,900. So I don’t know. I didn’t nail this one as much as I did with stocks with surprise No. 1, but I think I did pretty well here to point out to you what can happen to gold, and it pretty much happened.
Then I talked about gold stocks, and I said the real surprise – and I used the GDX, right? The VanEck Vectors. You know, Gold Miners ETF. I said the GDX, the real surprise there would be like an extended bull run stretching out several years without any big drawdowns along the way because gold is volatile. Gold stocks are really volatile. You know, that’s like leveraged gold, right? So I said exactly like it would surprise me if gold stocks did not correct in 2020, and I said 15 to 20% down, right? A 15 to 20% correction in the GDX would be – that’s what I would expect. That’s the kind of correction that I would be looking for.
And well, guess what happened while the entire – while the price of gold was crashing. Yeah. The GDX was, too. I think it was down just about 40% from $31 late February to $19 in mid-March. And then it went on a rip-snorting tear, up to $44 in August, and now you know, as I speak to you, around $35. So I think I did pretty well here, too. Because I said it would surprise me if gold stocks didn’t correct in 2020, and they certainly did correct along with everything else. And yes, COVID sort of smashed everything, so we don’t get to know if I would have been right otherwise, but hey, what happened happened, and calling this surprise out to you was the right thing to do. I hope you were prepared for it, and I hope you took advantage of it, too. I don’t care what anybody says about bitcoin, I’m bullish on bitcoin, but I’m not selling my gold and I’m not selling my gold stocks either. I have gold stocks that I want to hold for quite a while, and I’m not selling them. I don’t know bitcoin replaces gold necessarily.
And it’s funny because I mentioned bitcoin. Bitcoin is nowhere in these surprises. Like nowhere. It wasn’t on my radar screen so I recommended it, somewhat before I recommended it in the April issue of Extreme Value. And boy, then it got on my radar screen in a big way, didn’t it?
All right, the next surprise I talked about was private equity. You might remember in the episode in January I said man, they’re cashed up. They’ve got $2.4 trillion. They’re ready to buy, right? They’re ready to go on a huge buying binge, I said, right? They were paying huge premium valuations for companies. They just – they were a typical cashed-up investor. It doesn’t matter that they’re sophisticated people. They’re just human beings. And they were cashed-up, paying high multiples. You know, ready to rock in 2020. And what happened? Well, by the end of the first half, private equity deals were down almost 60%. And as I talk to you today, they’re down still more than 30% year over year at the end of 2020. So COVID basically really took a – sucked a lot of the air out of those private equity bubbles that was happening at the beginning of the year.
So the big surprise there I said would be indeed if the private equity bubble kind of slowed down. If private equity buying slowed down, I said. And then the COVID sure made that happen in a big way.
This is not something that most of us needed to prepare for, but private equity does influence what happens in public equity markets. Especially when they get cashed up to the tune of more than $2 trillion because they lever up, you know. Two trillion dollars can become like five, six, eight, 10. Whatever. So that was part of the deflationary trend that we saw as a result of COVID.
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My next surprise was in junk bonds, right? Junk bond spreads were at 3.6% in January, which over time I told you that the range of junk bond spreads over Treasury bonds was roughly between – you know, if you take out the big peaks and the real sort of spike downward, it’s basically between 400 and 1,000 basis points. Between 4% and 10% over Treasuries. And it was lower than that in January, right? So junk bonds were really expensive. People were basically as in love with them as they were with any debt instrument. It was just part of the global bond bubble I said, right?
So the surprise then would have been if junk bond spreads widened quickly, and what happened? And you know, another way to say junk bond spreads widening quickly is to say junk bond prices falling quickly. And what happened? Well they got crushed along with everything else, and then we saw negative oil prices and there’s a lot of junk debt in the oil patch. So by March 23 at the end of the day when the stock market bottomed, that’s when the spreads spread their widest. And you can go to the Federal Reserve Economic DAta at the St. Louis Fed. It’s called FRED – fred.stlouisfed.org. And they have the Bank of America U.S. High Yield Index Option-
Adjusted spread, and that index was 10.87% on March 23. Right there at the bottom.
So this surprise materialized in a big fat, hairy way. I mean, we are talking from – what was it? Like in February 17, and we actually – yeah, just call it February 17 still right around 3.6%. And then boom. Out to 10.87% in a heartbeat. In less – well, I just about a month. A little over a month. Wow. Basically a huge crash. And just like with stocks, a huge V-shaped recovery. And today, where are we? We’re back at 3.6%. I mean, it’s like déjà vu all over again. It’s like 2020 never happened in the junk bond market. We’re right back where we were.
I mean, actually. I’m sorry. We’re not quite. It’s like 4%. So we’re 40 basis points shy, and I’m just eyeballing charts here, so you know. As long as I’m in the ballpark, I feel like I’m vindicated, and we are in the ballpark. If you looked at the chart, you’d be like wow. Huge crash, and we’re just about back down to where we were. I’m sure you’d agree. Go to FRED and take a look at the chart and you tell me.
So I’m calling a victory here because nobody was prepared for this, and it was right to prepare you and to tell you that the surprise would be a huge blowup in the junk bonds. Because junk bonds, they’re like in the capital structure businesses, they’re just one step above equity. So when equity markets crash, equity is the cushion that bond investors have, and when equity markets crash, that cushion compresses and shrinks, and the bond investors start to get nervous, and the most nervous ones are the ones at the bottom of you know, right above equity, so they’re the junk bond holders. And got nervous is like an understatement, right? They sold off hard.
Surprise No. 8 was venture capital. And you remember I said the venture-capital bubble had already begun to deflate, because last year we had the WeWork IPO. Never even happened. It blew up before it happened. And I said the bigger surprise would be a resurgence of interest and higher valuations than the peak. And I have to notice, you know, two recent IPOs, right? The IPO market is where venture capital meets the public equity market, right? So we had a couple of things. We had Airbnb and DoorDash IPOs, they were very well received. They both rose quickly.
Berna Barshay over at Empire Financial Research, an affiliate of Stansberry, wrote a really good little piece about this, and she just talked about how it kind of feels to her like 1999. She called her piece Echoes of 1999 in a Red-Hot IPO Market. And this was just a few days ago. This was like Monday, December 14. So not long ago at all. And I would have to say overall you know, we also had the SPAC market. The special purpose acquisition companies. We spoke with Enrique Abeyta on Episode 174 in October about this. And you know, Enrique is a really great bond investor. He was kind of defensive. He was like hey, stocks are a good thing. We’re finding a lot of good deals. There’s a lot of bad ones. And I was like oh well, SPACs are a bubble. Whatever. But DraftKings, the gambling company, they did really well, and they went public through a SPAC.
Nikola, the electric truck company, they were kind of a bubble. Most of the SPACs go public at $10 and I think Nikola soared and went up to $80 and then it’s back to like below $20 now. So it soared and crashed. So just two examples of how different the outcome can be. The outcomes are all over the map. Huge, wide range of outcomes in SPACs. So I feel vindicated that there’s a lot of risk. You know, when I was talking with Enrique, and overall I said the bigger surprise would be a resurgence of interest. Check. That surprise happened. There was a strong resurgence of interest. If you count the SPAC boom and these later in the year sort of IPOs, I think that constitutes a resurgence of interest in venture capital.
Higher valuations than the peak? No. Didn’t get that. So I’m kind of halfway on this one. I was right to point out that the surprise would be a resurge of interest, but the higher valuations never materialized.
Then we come to my friend Enrique Abeyta once again, and Enrique tweeted about this. He tweeted about it on December 15. And he said – this is the tweet I’m going to read to you, and this tells you how far out of touch Dan is with the Fed. So Enrique says, since 1997 if you remove S&P 500 returns, on the day of federal open market – Federal Reserve open market committee meetings, and the day before FOMC meetings, that’s a total of 394 days out of 6,000 total days. The S&P 500 would currently trade at the 1,750 level. OK? That’s the 1,750 level. And as I’m talking to you, it’s at the 3,700-ish level, right? And he says, never knew this. And he was asking you know, people on Twitter’s thoughts on why this is.
Well, I don’t really care why it is. I just care that I said the surprise would be if the Fed wasn’t in control, and I didn’t know about this data point. So it sure looks like the Fed has heavy-duty influence on the level of the S&P 500. If you remove the return from the day of the Fed meeting and the day before, and all that return would wipe out all the gain between 1,750 and 3,700.
So I appear to be all wet on this. And you know, up to this moment I will say it’s true. You know, all the people who know a lot more than me about this are saying well, the Fed did a great job and they put out the fire, and the stock market has rallied back and it’s making new all-time highs. And you know where I stand on that, right? I think we’re right back to an extremely risky stock market and the Fed interference overall, over time, will prove to be a bad thing. Because they’re just – it’s exactly like the fires, the big destructive forest fires, that we saw out west this year. And I was locked in my house for the better part of a week because we couldn’t go outside, because you couldn’t really breathe without hacking and coughing. Breathing outside was bad for you, and you had to keep the HVAC, you had to keep the air pumping throughout your house the whole time. You couldn’t turn it off for that reason.
So I feel like I had a little skin in that game, so I kind of keep abreast of it. And what the Forest Service does is they suppress the fires. They suppress like 98% of the forest fires, and the other 2% that they don’t suppress some of those they burn so wildly out of control because from suppressing all the fires, the fuel builds up on the forest floor and then when they can’t suppress and when you get a little bit of wind like we got this summer, woo. The ambers can blow a mile and start another fire. It just gets crazy. I mean, there are videos of fires just blowing across freeways. It’s insane. And people die. Their homes are destroyed. It’s a disaster. It’s horrible.
And I feel like it’s a perfect metaphor for what the Fed does, right? They put out these fires and they put them out, put them out, put them out, and they’re building up systemic risk, and one day I think we’re just going to get the mother of all meltdowns. And I don’t think we would have gotten it if the Fed would just kind of mind its own business, or if the Fed didn’t exist and we just didn’t have this function. I know a lot of people are listening are saying oh, you’re all wet. That’s stupid. It’s a good thing that they stepped in and saved us all. I don’t know. Seems to me like they’re just doing the same thing as the Forest Service. They’re building up the fuel for the next gigantic hyper-destructive conflagration. But the surprise. The surprise, you know, I’m all wet on the surprise. I freely admit that. To say that the surprise would be – if we all found out in 2020 that the Fed couldn’t do anything and that they weren’t in control, obviously that’s wrong.
Which brings us to surprise No. 10. And surprise, No. 10 is something I’ve been talking about for a couple of years, too, and I’ve been wrong on that, too. And it’s the growth versus value debate, right? If you look at the growth funds, the Russell 1000 growth versus the Russell 1000 value funds. I’ll just look at the indexes, but there are funds based on these things, too.
Well, if you look at them over the past 10 years, value has just like destroyed – I’m sorry. Growth has destroyed value. Like you didn’t want to be in the value index at all. You basically overall, between that phenomenon and the phenomenon of great value investors like David Einhorn and Seth Klarman and even Bill Ackman for a period of time there, they all experienced periods of loss and underperformance. And those two phenomenon, the big value investors underperforming plus the value indexes dramatically underperforming. I mean, value is like not very popular nowadays.
I suppose for good reason. I mean, we’re only human and people look backwards and they say well, the performance wasn’t there so I don’t want to do this. And I’ve been saying this – we’re near an inflection point and this is going to change. Well, if you take a year-to-date chart of the Russell 3000 value and Russell 3000 growth indexes, year-to-date like from January 1 to now, I mean, growth is actually up like 32 to 33%, and value is down like a little more than 1%. So huge differential.
We talked about this in our recent interview with Chris Davis. Huge differential. 33% differential. However, if you start – you know, if I take like a five-month chart, just going back five months to July, then guess what? Well, then they a lot more similar. But growth is still slightly ahead, right? So if I go back – just take a three-month chart. OK, well then value is starting to look a lot better, and value had a really nice run you know, just over the past couple of months.
Look, we’ve been here before. OK? We’ve been here before, and I’ve said this is it. This is the beginning of a new golden age of value, and I was wrong. And the trouble is you know, I can’t really say that and not be making a prediction. And what have I said about predictions? That you know, it’s a fool’s errand. So I will say this. I still think that the circumstances are right for this trend to reverse and for the value indexes to dramatically outperform the growth indexes over the next five to 10 years. And if you go back just a few months, so far we’re looking pretty good, right? So just, the last three months, the Russell 3000 value is up about 12% and Russell 3000 growth is up about 9%. And if that’s the differential over the next five to 10 years, that’s a huge 3% annualized, would be a huge difference and you’d be really, really happy to own the value index.
So you know, for this year, was I right? Was the surprise – you know, did we get surprised? Not really, right? Because year to date, if you go back to January 1 from when I started talking about the surprises, it’s been a year for growth. Same as it has been for the last 11 years. And only very recently, just like in the last two or three months here, does it look like we might be getting this inflection point again. But we’ve been there before, so I think to call it a golden age of value and not be all wet, I’m going to have to wait until this trend is in place for what, a year? Two years? Something like that. You know, it’s got to be pretty consistent for a couple of years for me to really not get egg on my face with this prediction I have.
It really is a prediction. I mean, I don’t want it to be, and it is based on just a common-sense view of history and the way trends reverse, and the fact that growth has just screamed for more than a decade. You know, it’s common sense. But if I’m really being honest, it is a prediction. I’m predicting that value is priced much more attractively relative to growth here in late 2020.
Overall, I don’t think I did too bad to point these things out to you, right? I mean, to point out the heightened risk in the stock market and the wider range of outcomes, let’s face it. You and I are focused on stocks more than anything else with this stuff. These other things are backdrops. The bond market is pretty much a backdrop to most of this, and European bank stocks and private equity and junk bonds and venture capital, and what the Fed is doing, that’s backdrop.
You and I are worried about the stock market more than anything else. And I have to say one more time, I nailed that one. I really did. Since we’re right back where we were. You know, what do you think my No. 1 surprise for 2021 is going to be? I mean, unless we get a huge drawdown between now and the next couple of weeks here, and my first show of January 7, I mean you can predict that my No. 1 surprise for 2021 is going to be the same as it was for 2020.
I’d like to think that you kind of reflect on all this and you see that we’re creating some value. I think we’re doing pretty well here, man. Write in. Write in to [email protected] and let me know how we’re doing, right? I always invite comments and questions, and politely worded criticisms. And I have to say, you’ve taken me up on that and you’ve been really, really thoughtful in your emails. The mailbag has become a really wonderful thing, and I hope it keeps up.
So write in to [email protected], and let me know what’s on your mind. Let me know what you think of these 10 surprises. So that’s another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. If you want to hear more from Stansberry Research, check out americanconsequences.com/podcast. And do me a favor. Subscribe to our show on iTunes, Google Play, or wherever you listen to podcasts, and while you’re there help us grow with a rate and a review. You can also follow us on Facebook and Instagram. Our handle is at investor hour. Also, follow us on Twitter where our handle is at Investor_Hour. If you have a guest you want me to interview, drop me a note at [email protected].
Till next week, I’m Dan Ferris. Thanks for listening.
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