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“The Big Short” Is Only Half The Story

On Monday I finally got around to seeing “The Big Short.” I’m no film buff but I really enjoyed it and thought Christian Bale and Steve Carrell both gave amazing performances.

To me, the film did a great job of profiling a few of the guys who really nailed the mortgage crisis and fully understood its implications for the broader financial system way before anyone else even had a clue. I especially appreciated how the movie treated the abject loneliness of being a true contrarian. I’ve gone through it many times in my career. The film does about as good a job as I can imagine of putting you in their shoes as they are ostracized, ridiculed and eventually even victimized to some degree by their peers, clients, the media and the big banks before finally being vindicated.

There is one major component, however, that is glaringly absent from the movie and that is the role of the Fed in laying the groundwork for the crisis in the first place. For a more holistic view, I highly recommend my friend, Jim Bruce’s documentary, “Money For Nothing.”

Ultimately, I believe both films are “must watch” for anyone who truly wants to understand what really went wrong back in 2008 and why. More than that, they can help us understand just how history rhymes, knowledge which may prevent us from making these same, critical mistakes again and again, both as investors and as a society.

Get your copy of “Money For Nothing” at and follow Jim on Twitter. He may even have a few t-shirts left (pictured above).

record player for dad

Greatest Hits 2015

Here are a few of the most popular TFR blog posts from the past year:

This Is Now The Worst Possible Environment For Stock Market Investors

How To Trade Like Stan Druckenmiller, George Soros And Jim Rogers

The Single Greatest Mistake Investors Make

How The Baby Boomers Blew Up The Stock Market

The Most Crowded Trade On Wall Street: Denial

Thanks for reading. I wish you a very happy and prosperous 2016!


Why You Should Be Worried About The Junk Bond Rout

There is an ongoing debate about the current state of the junk bond market and what it means for equities and, more broadly, the economy. Spreads on the junkiest of junk bonds have recently moved to their widest levels of this expansion.


The NY Times aptly reflects the consensus view that there has really been no, “rout,” in the market for junk bonds and that they don’t signal anything more serious for other markets or the economy, as they don’t represent a, “systemic risk.” In an article carrying the headline, “the junk bond rout that was’t,” the paper reports:

…in conversations this week with a wide range of investors, Wall Street executives, and economists, no one told me they thought that the Third Avenue fund’s liquidation was likely to set off another crisis. And while bubbles may yet emerge, by their very nature they’re likely to be found somewhere entirely unexpected — not a closely watched, highly liquid market like the $1.3 trillion United States junk bond market.

Bloomberg, though, has an entirely different take, claiming, “The rout in junk bonds is intensifying and there’s blood in the water.” While junk bonds may not represent a systemic risk as credit derivatives did during the financial crisis, they can be one of the more effective leading economic indicators. The Bloomberg article quotes a recently published research paper which posits:

One reason for looking at junk bonds is that the firms that issue junk bonds are closer on the risk continuum to a large mass of firms that are too small and too weak to issue bonds at all, and that rely on banks or the informal capital market for funds. A second reason for looking at junk bonds is that they may be a more sensitive indicator, perhaps a more sensitive leading indicator, of economic conditions than higher-grade bonds.

The paper finds that junk bonds are, in fact, a very good indicator for forecasting economic peaks if not troughs, effectively warning ahead of eight of the last ten peaks in the business cycle. And this just exemplifies how critical the credit cycle is to the economy. Junk bonds are simply the most sensitive segment of the credit market to changing financial conditions. In other words, these bonds react more dramatically to major changes in the credit cycle. Jeff Snider may have recently phrased it best:

Confirming the message in junk spreads, GMO put out a piece a few months ago suggesting that peaks in the credit cycle have regularly occurred five to six years ahead of peaks in the maturity wall. We are currently at precisely that point in time right now.

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I would argue, then, that both the maturity wall and the action in high-yield spreads this year suggest the credit cycle has probably already peaked. Considering just how important credit has become to both the economy and the stock market (in terms of debt-funded buybacks and acquisitions), this is a big deal.

The consensus is that there has been no, “rout,” and any weakness in the market for junk bonds is, “contained.” The evidence, however, suggests junk spreads are an effective leading indicator for both the economy and the stock market. In fact, junk bonds have never performed as poorly as they have in 2015 outside of a recession. To say it means nothing today is to say, “this time is different.”

It may very well be different this time. However, as Bloomberg reports:

In the three months before August 1929, the high-yield spread spiked by 47 basis points, and in the three months before May 1937, it shot up 85 basis points.  In the past six weeks of 2015, it has spiked by about 120 basis points.

Nobody is really talking about it but, with the Fed tightening this week amid rising corporate bond spreads, Ray Dalio’s 1937 analog continues to rhyme. And if the next year or two play out anything at all like 1937 investors will once again wish they had paid attention to message in the junk market.


Mr. Market To Carl Icahn: “Danger Ahead”? LOL!

Early this week, Carl Icahn put out a video to express his concerns regarding risk assets called, “Danger Ahead.” The video, directed by my friend Jim Bruce (writer/director of “Money For Nothing“), is very well done. I encourage you to go watch it at

In it, he discusses what he believes to be ‘fallacious earnings,’ driven by faulty accounting, a merger boom and buyback bonanza. And for these inflated earnings, he claims investors are now paying ‘bubbly valuations,’ in both stocks and high-yield bonds at a time when liquidity has been falling dramatically. He ultimately blames the Fed’s zero interest rate policy for exacerbating all of these issues.

I’m glad to see someone of Icahn’s reputation willing to stand up and tell it like it is. But what I’m most impressed with, though, is Carl’s clear desire to try to help the little guy – which seems to be the whole purpose of the thing. He recently tweeted:

Today he warns:

I’ve seem this before a number of times. I been around a long time and I saw it ’69, ’74, ’79, ’87 and then 2000 wasn’t pretty. A time is coming that might make some of those times look pretty good… The public, they got screwed in ’08. They’re gonna get screwed again. I think it was Santayana that said, “those who do not learn from history are doomed to repeat it,” and I am afraid we’re going down that road.

What I find most astounding, is the popular reaction to the video:

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Here you have one of the greatest investors of all time going out of his way to produce a short video intended to help the little guy and the response is dismissal and ridicule. And I haven’t read one article that actually addresses the substance of the Icahn video. They all resort to logical fallacies that support preexisting biases. Could there be a better contrarian signal that Carl is actually onto something AND that the markets haven’t fully priced it in yet?


Contrarianism In The Age Of Social Media And More On #TheMustFollowPodcast

I recently sat down with @ChicagoSean over at StockTwits to discuss the beard, of course, along with my general investment philosophy and feeling for the markets right now. We had a blast – maybe too much fun! Hopefully you’ll find the discussion valuable food for thought in feeding your own investment portfolio: