Friday, September 23, 2022

Carl Icahn on the Markets

From time to time, as a public service, I share the views of some of the savviest investors. I am not making recommendations, but I am saying that if you know very little about the market, as is my case, you do well to pay close attention to those who are older and wiser and richer.

Generally, the people I choose are cranky old guys. And today, the honor falls upon legendary investor Carl Icahn. If the stock market is generally nonplussed, if the Biden administration thinks we have nothing to worry about, and if Icahn and other cranky old guys are worried, you should continue to worry.

Icahn’s view of the markets-- “the worst is yet to come.” So you can wipe some of the optimism off your face.

Fortune magazine reports the bad news:

From JPMorgan Chase CEO Jamie Dimon to former Federal Reserve officials, the world’s top economic minds have pointed, practically in unison, to the storm of headwinds facing the global economy and expressed fears about the potential for a serious downturn.

In the U.S., consumers are grappling with near 40-year high inflation and rising interest rates, all while the world struggles to cope with the war in Ukraine, the European energy crisis, China’s COVID-zero policies, and more.

And even after a more than 21% drop in the S&P 500 this year, Wall Street’s best minds still think stocks have further to fall.

“The worst is yet to come,” Carl Icahn, who serves as the chairman of Icahn Enterprises and boasts a net worth of $23 billion, told MarketWatch at the Best New Ideas in Money Festival on Wednesday.

Why does Icahn think what he thinks? It has something to do with the Fed management of interest rates during the pandemic. For starters. Actually, if you have been following Lawrence Summers, he too has been especially harsh about Fed mismanagement:

The investor [Icahn] argues the Federal Reserve boosted asset prices to unsustainable levels amid the pandemic using near-zero interest rates and quantitative easing—a policy where central banks buy mortgage backed securities and government bonds in hopes of spurring lending and investment. 

“We printed up too much money, and just thought the party would never end,” he said, adding that with the Fed switching stances and raising rates to fight inflation, he now believes “the party’s over.”

The hangover from the Fed’s loose monetary policies, according to Icahn, is sky-high inflation, which rose 8.3% from a year ago in August.

“Inflation is a terrible thing. You can’t cure it,” Icahn said, noting that rising inflation was one of the key factors that brought down the Roman Empire.

OK, I am not going to explain how inflation brought down the Roman Empire-- though I am happy to hear some cogent historical analysis. One understands that inflation also brought down Weimar Germany, but that has become too much of a cliché.

In any event Icahn is not new to the pessimistic camp:

Wednesday’s warning for investors wasn’t the first from Icahn this year, either.

The billionaire warned back in September that a recession or “even worse” was likely on the way for the U.S. economy and compared today’s high inflation with that of the 1970s, arguing the Fed will struggle to control rising consumer prices.

True enough, if you are Carl Icahn you can find some stocks to buy here. But still, caution seems clearly to be the best approach to stocks. It’s not the time for heroics. And it’s not the time to incur unnecessary risks. After all, look who’s running the country.

1 comment:

Ares Olympus said...

The Fed raising interest rates is certainly an open experiment, from 0.25% in March to 3% now is something I wasn't sure I'd ever see again, but 40 year record inflation requires drastic actions, whether that inflation was caused by "printing too much money" or simple global demand for energy and good post pandemic.

Now 30 year fixed mortgages are over 6%, while bottomed 3% during the pandemic. This is nothing like the 18% mortgage rates in 1981. That is we've moved all the way back to 2003-2008 mortgage rates, which were considered very low.

Overall higher borrowing rates are GOOD because there's less borrowed money trying to compete with savings for assets, so stock, bonds and houses all ought to cool off, bad for retirees who need to sell now, but helps give some sanity to prices.

But with the cost of borrowing higher, and the Federal Government as the biggest borrower (nearing $31 trillion), it's debt payments will soon be twice as expensive. And with SS indexed with inflation means we can be 100% sure deficits CAN NOT go below $1 trillion/year, and will keep going up, as all economists have predicted for the last 30 years.

Maybe the only thing to save us is Republicans who are ready cut SS benefits, knowing no one who matters expects to live off SS income anyway. But even cutting entitlements isn't enough. No one knows how insolvent systems are fixed. They are just patched until they fail completely. All we have is the reassurance that the world is on the same implosive path, and the US so far seems able to be the worst of a doomed global financial system.

Avoid debt seems sensible as ever, and if you have money to invest, maybe stop competing for returns, and just invest for something you can believe in, on your mainstreet, not wallstreet.