Legendary investor Jim Rogers sat down with Business Insider CEO Henry Blodget on this week’s episode of The Bottom Line. Rogers predicts a market crash in the next few years. One that he says will rival anything he has seen in his lifetime. Here is a direct video link.
A few ironies and observations stand out as we watch this clip.
First, is its sponsored by long-always behemoth Fidelity whose business model depends on people buying and holding their products in order to collect fees. As you watch the clip, consider how ‘the worst market collapse’ of our lifetimes will impact their customers and revenues, indeed their ability to sponsor sites like Business Insider in the future, if Rogers is correct about the coming mean reversion cycle.
Second, Henry Blodget (age 51) is the infamous former equity research analyst who was senior Internet analyst for CIBC Oppenheimer and the head of the global Internet research team at Merrill Lynch during the dot-com bubble. Due to violations of securities laws including knowingly recommending junk stocks to the public and a civil trial conviction after the 2000 -50%+ collapse, Blodget was permanently banned from involvement in the securities industry. He then became a host of finance show Yahoo’s Daily Ticker. I met him as a guest on that show in May 2009 in New York when I was then a very rare bull and he and most people were existentially gutted by the second -50%+ market collapse of 2007-2009. Out of these ashes, Henry co-founded and built the business news aggregator site Business Insider, which was then 88% sold in September 2015 for a reported $343 million.
Trained as a fundamental analyst, and having lived a boom, bust, boom, bust, boom career that has so far spanned two of the worst loss cycles in market history, Blodget has been understandably cautious and expressing concern as asset prices have rallied far beyond reason once more on QE-phoria the past 4 years. In this discussion the much older Jim Rogers (74), explains that following the present largest asset bubble ever in history, we should next expect the largest price collapse ever to follow. Makes sense, but anxiety provoking to those who still have no strategy to protect or profit from the coming reset.
Rogers is reportedly a billionaire, having run the Quantum Fund with George Soros from 1973-1980. People with savings have to put our funds somewhere, and Soros has more than most. He says he has bought emerging market stocks and bonds as a place to park some of his capital, although he does not define his allocation percentage. He explains that valuations there are much lower than other developed markets today, so he sees it as a relatively less risky bet than things like US stocks.
While there is no doubt that US stocks and corporate bonds are among the most obscenely valued today, the trouble is that when they enter their must deserved bear market, international capital flows and deleveraging will take emerging markets down for the ride as well. In a world of highly correlated central bank policies and markets, international diversification is a theory, but not reality.
As Harry Markowitz pointed out in his 1952 paper that fathered modern portfolio theory, the most defining feature of portfolio returns is our asset allocation decisions. Where risk assets are highly correlated and over-valued across global markets, holding different colors and packages of them does not add diversity benefit and will not meaningfully reduce capital risk and losses once bear markets begin. Only the rare, non-correlated asset classes that maintain liquidity–like cash, some currencies, and the least risky bonds and deposits–can do that. And yet, because these are least-yielding and least-fee-paying assets to ‘advisors’ in the short-run, few people are prepared to hold them while they wait for riskier assets to go back on sale. This is the Achilles’ heel of managers and investors every single cycle, and this one will be no different.
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