Most people would agree that the current banking crisis is very complicated. But there’s one aspect of it that’s especially confusing: the very differing investment advice we are getting. Some experts are recommending that investors “buy gold,” while others urge them to “buy silver,” and still others say, “buy commodities,” “buy Bitcoin,” “buy the dip,” or “don’t buy anything at all.” How can anyone not be confused?
This is one more reason to carefully consider the insights of proven pros like Leon Cooperman, who have experience dealing with all kinds of markets. He was interviewed very recently by Bloomberg. Cooperman, in case you’re unfamiliar with the name, is a self-made billionaire and chairman of the investment advisory firm Omega Advisors. He said that the US is experiencing “a textbook financial crisis,” and investors should anticipate “sluggish” returns in the S&P 500 for a long time. Unfortunately, this is a message that Wall Street never wants to hear - and these days in particular.
Cooperman said that the recent market volatility, caused by the collapse of Silicon Valley Bank and the downgrade of the entire banking system by ratings service Moody’s, shook investors’ confidence.
And that was not all. Other recent developments also added to the already high level of angst in this sector. For example, despite a cash injection into First Republic in mid-March, its shares continued to fall sharply; now banks are hurriedly planning additional financing, according to The Wall Street Journal.
“First Republic Bank was downgraded for the second time by S&P Global into junk territory,” according to Yahoo Finance.
And shares of Credit Suisse, a major European bank, continued to drop. It plunged another 52% – and that was followed by news of a takeover by UBS.
Both institutions leave a trail of investors who, in combination, lost many billions of dollars, saw the loss of many thousands of jobs, and created many uncertainties about what impact these will have on markets and economies.
In A Tight Spot
Cooperman said he anticipated problems in the banking industry after the Fed jacked up interest rates dramatically over the last year to bring inflation under control. Yahoo Finance described this as “one of the most aggressive tightening actions in Fed history,” and one that brought “a sudden and shocking change to years of easy money policy and rocking the banking industry.”
“I think 4,800 on the S&P 500 will be a high that will stand for quite some time,” Cooperman said, referring to the high reached in January 2022. He added that he expects returns in the S&P to be very lackluster going forward. Even more worrisome was his warning that stocks could drop another 20% this year.
A Bear Club
Cooperman is not the only market guru who is pessimistic about the economy. Another is Nouriel Rubini, who was dubbed “Dr. Doom” after accurately predicting the 2008 financial crisis and the chaos it would bring. Now Roubini is warning that a similar crisis may be in the works.
The consensus opinion of economists is that the economy will experience a brief recession, followed by a collapse of price and wage inflation, and subsequently a bull market.
But Roubini disagrees with this view for several reasons. For one, he anticipates a spike in commodity prices. As evidence, he points to Goldman Sachs’ prediction of a 42% increase in commodity prices this year because of “a massive underinvestment, not just in energy but across the board. At the same time, demand is increasing. In addition, the labor market is tight, which could lead to still more upward pressure on wages and prices.
“In my opinion we are in a debt trap,” he said, “caused by all the private and public debt. This means we will live in a world of much higher inflation.” Roubini anticipates that both the Fed and the market will be surprised by how “sticky” a problem controlling inflation will be.
Now the Fed has two choices. The first is to continue tightening, which would cause a “really sharp” decline in stocks and other economic problems. Their second choice is to “wimp out,” in which case the market will rally temporarily but crash later when inflation surges.
Will History Repeats Itself?
Cooperman also believes the economy could slip into recession in the second half of the year, and that in recessions the market usually drops around 35% from its high.
So where does this leave investors? Going forward, “I believe the action will be in individual stocks, not the (popular) averages. I would advise people to get a good quality money manager who can go both ways – long and short. I don’t think the averages are going anywhere.”
Cooperman has 22% of his investments in energy, and in mid-March those were up slightly for the year. He said that he has a big position in Paramount Resources, a Canadian oil and gas producer. He believes the company may raise their dividend. In addition, Paramount is growing production by double digits and may announce a stock buyback. The family of Paramount’s CEO owns about half of the company, so they have a vested interest in the company’s success.
Cooperman also has a position in Lithium Motors, which has announced a stock buyback. However, not all of his investments are doing as well, particularly one bond position.
Another market guru who has commented about recent developments is Charles Nenner, a former Goldman analyst who has developed proprietary market timing algorithms to analyze stocks, bonds, commodities, and other assets. One thing that distinguishes him from other experts is his enviable record; another is that many of his forecasts take a very different view than the herd’s, yet, in the past, have materialized.
Nenner recently said that the prices of everything will go higher from here – except stocks, which he believes could drop as much as 40% later this year. And based on his analysis of the war cycle, he predicts “the war is going to pick up and it is not going to end well.” Nenner sees an “enormous upside potential” for gold.
The bottom line: Timing the market and picking stocks have never been easy, but are even more difficult in the current environment. When even the experts get nervous, you can be sure that things are really tough out there.
Sources: bloomberg.com; marketwatch.com; msn.com; yahoofinance.com; wsj.com; zerohedge.com