American Consequences - December 2019

This IsWhen the Next Recession Begins

But that doesn’t make their opinions accurate. It just creates more headlines. About 20 years ago, I was asked to speak at a high-yield debt conference in Las Vegas. One of the conference sponsors was a man named Mitch Julis, one of the two partners in the formidable Canyon Capital hedge fund. I didn’t know it when speaking with him at the time, but Mitch was on his way to becoming, if he wasn’t already, one of the most successful hedge-fund managers ever. I told Mitch that I was a bit uncomfortable speaking in front of a room full of credit experts as I considered myself to be “an equity guy.” Why would this audience want to hear fromme? Mitch explained that it was my accounting expertise that he and the audience were after. He stated how the importance of getting to the right corporate performance numbers was as important to credit holders as it was to stockholders. Then, this icon of investing was kind enough to provide me with some of the most important advice I’ve ever received in my career. “If you want to be a great equity investor, you’ve got to be a solid credit analyst.” He added something to the effect of, “Got that, kiddo?” That conversation changed my life. OF COURSE A RECESSION AND A BEAR MARKET ARE COMING... EVENTUALLY Over the past 10 years, one of the most

common conversations we have in meetings with our institutional clients is about the end of the bull market. However, just because the stock market is at all-time highs doesn’t mean it has to go down. It all depends on where we are in the earnings and credit cycles. In fact, over the last 150 years of recorded financial history, it is very difficult to find a bear market that isn’t preceded by a seizure in the credit markets. That goes for the savings and loan crisis, the Asia financial crisis, and the Great Recession... and throw in the Panic of 1907, the stock market crash that led to the Great Depression in 1929, the Roosevelt recession in 1938-39, and the 1970s recession if you still needed more examples. All the severe bear-market collapses that people fear most have been preceded by major breakdown in credit markets. Stock markets don’t fall because of high valuations. History has shown that those very high valuations can get even higher still. They fall because of collapsing credit... And right now, the most advanced credit and earnings signals all point to a stock market that is highly likely to continue climbing for another 12 months or more. We’ve been telling our institutional clients this since 2013. Over these past many years, we probably sound like a broken record. But while it isn’t as exciting as telling folks the sky is falling, the difference is that we’ve been right...

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December 2019

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