Submitted by QTR's Fringe Finance
One of my favorite investors that I love reading and following, Harris Kupperman, has offered up his latest thoughts on the market this week. Attached is part of his Q1 2024 letter, reprinted with Harris’ permission.
Harris is the founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection.
Harris is one of my favorite follows and I find his opinions - especially on macro and commodities - to be extremely resourceful. I’m certain my readers will find the same. I was excited when he offered up his latest thoughts, published below (slightly edited for grammar, bold and bracket emphasis is QTR’s).
Please be sure to read both my and Harris’ disclaimers, located at the bottom of this post
Market Views
Ever since I began investing in stocks, over two decades ago, I have been of the view that fiscal deficits cannot simply be papered over with money printing. That is the road to ruin for all nations that have tried it. However, when the deficits are moderate, and economic growth is strong, the deficits matter less. As a result, we’ve been able to avoid a crisis, despite our nation’s level of absolute debt, and the debt-to-GDP being on an ascent. Since COVID, both metrics have expanded at a far more rapid pace. It’s the sort of thing you’d see in an Emerging Market economy, right before they would experience a crisis.
As the wealthiest nation on earth, with the world’s functional reserve currency, the rules are somewhat different here, but they only stay different for as long as we do not abuse our status. Increasingly, I believe that we’ve crossed a line, where our fiscal balances begin to look a lot more like those of an Emerging Market. As I see zero inkling of any spending restraint amongst those in Congress, nor the two leading candidates for President, I believe that our deficits will continue to expand. In such a scenario, the rules will eventually be reversed, and the Central Bank will be forced to worry about the health of the bond market—at the expense of the economy and the jobs market.
I believe we’re nearing a point where the bond market has an aneurism, as it refuses to Fund the Treasury’s spending levels [QTR: Exactly what I discussed with Jack Boroudjian days ago]. We’ve seen this play out in many Emerging Markets before. In such a scenario, the natural knee-jerk response is for the Central Bank to intervene in the yield curve, buying longer-dated bonds, usually with printed money. It buys time, but expands the money supply, leading to further distortions to the economy. I also call this “Project Zimbabwe.” In such a world, there may be a short-term decline in asset prices as the bond market seizes-up, followed by an explosion in inflation-linked asset prices as investors realize what’s underway. Alternatively, we may simply sleep-walk into “Project Zimbabwe” without ever having experienced that dip. The question for me, has always been how to avoid the short-term dip, while being prepared for the longer-term rip. I’ve increasingly been of the view that it’s better to suffer some pain, rather than miss it. Particularly, as precious metals, are already telling me that the timing of this is increasingly imminent.
For the past two years, this Fund has under-performed my expectations, as we’ve been heavily weighted towards inflationary assets, during a time when inflation rates were in decline. As the Central Bank is forced to pivot, I believe that our portfolio should finally perform more in line with my expectations, albeit with the potential for a nasty dip along the way. Everything in my views is simply a reflection of the coming bond market crisis that I believe to be almost inevitable. Should I be right about that, not much else will matter to capital markets, except the timing and the...(READ THIS FULL NOTE & HARRIS' TOP 5 CORE POSITIONS HERE).
Please read Harris’ full Disclaimer here.
QTR’s Disclaimer: I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have not been fact checked and are the opinions of their authors. They are either submitted to QTR, reprinted under a Creative Commons license or with the permission of the author. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.
