Monday, February 13, 2023

The Chance of Another Great Depression... And Gearing Up for the 'Reshoring' Trade

By Herb Greenberg (View Archive)

I built a career quoting people who said the world was about to end, except... so far it hasn't.

But thanks to many of those same people, my readers got a heads up on plenty of upheavals before they happened.

Among them was the financial crisis. Thanks to some good sources, I was raising red flags about subprime lenders well before they blew up.

I was once even on CNBC arguing with my old pal Larry Kudlow about the risks in so-called "Alt-A" mortgages, which are between prime and subprime mortgages and were considered the safest of the unsafe mortgages going into the financial crisis. As he often did, Larry rolled his eyes at me and chuckled.

I guess I had the last chuckle though, because the blowup of Alt-A mortgages helped turn the mortgage meltdown into the full-scale financial crisis it became.

Times are different, but this market and this economy are both filled with enough fodder to feed the 'crash is coming' crowd...

So when I saw that Neuberger Berman portfolio manager Steve Eisman was going to be on Bloomberg's Odd Lots podcast – which is hosted by Joe Weisenthal and Tracy Alloway – I tuned in.

Steve is perhaps best known as the inspiration for a key character in the 2015 movie The Big Short, where he was played by Steve Carrell. It's the story about how he and his team were among those who were betting that the mortgage industry was like a house of cards.

I first got to know Steve during my journalism days, when he was flagging fraudulent activity among for-profit education companies... some of which wound up going out of business.

But as much as he's often called a short seller because of some very big, short-biased calls, like most hedge fund managers he is both long and short.

And that's what I've always liked about him... He's really smart, in a blunt, cynically skeptical sort of way.

Given Steve's history with the financial crisis, it wasn't surprising to hear Joe ask something along the lines of whether investors are too focused on a repeat of the 2008 financial crisis as they try to assess today's markets.

The surprise was Steve's answer (emphasis added)...

Oh, I think 2000 and 2008 for some investors is like PTSD. Look, financials are complicated. There aren't a lot of people on planet earth who really understand how much the financial structure of the United States and Europe has really changed. So they see the markets go down and they say to themselves, "Oh my God, something bad is going to happen."

Now something bad could happen, you know, we could have a recession, but my feeling is we'll have an old-fashioned run-of-the-mill recession. We're not going to have some enormous meltdown crisis where the system is completely at risk, which is what happened in 2008.

The significance of Steve's comments, assuming he's right, is that right now there's a strong and loud chorus that insists we're headed for a 'black swan' event...

One that will cause the end of the financial system as we know it today.

Spencer Jakab of the Wall Street Journal recently wrote about a letter hedge fund manager Mark Spitznagel had sent to his investors, suggesting that it's only a matter of time before we see a Great Depression-style wipeout.

It's a prediction, as Jakab writes, that "investors who follow him have heard many times over more than a decade." But in this recent letter, Spitznagel calls it "objectively the greatest tinderbox-timebomb in financial history – greater than in the late 1920s, and likely with similar market consequences."

And maybe it will be... But while reading it, I harkened back to a speech I heard in the mid-1970s by the late economist Pierre Rinfret, who served as an economic advisor to several presidents. It was in Boca Raton, Florida, at the Boca Raton Hotel & Club, where Rinfret was the keynoter at some convention that I was covering as a young reporter for the Boca Raton News.

My ears naturally perked up when Rinfret said that the economy was so bad that "there is a 50-50 chance that we will see a depression worse than the Great Depression of the 1920s."

Well, I had my story, and it was a good headline. And who knows, maybe one day his prediction will come true.

I'll go out on a limb and say that there's a 50-50 chance he'll yet be proven right... or wrong.

Moving on, as an investment theme, reshoring will never generate the excitement of, say, artificial intelligence ('AI')...

In other words, fewer headlines, less hype, and less speculation... But as a result, also a better filter for higher-quality ideas.

And as it turns out, I'm not the only one thinking about it.

During the Odd Lots podcast episode, Joe asked Steve...

So let's say we are at this paradigm shift and we don't know what it's going to be, we don't know what it's going to look like, but something that's not speculative tech will be the new leadership, presumably for a while. As an investor, do you feel like you can wait and sort of see what it is and let the market decide? Or do you feel like an impulse to try to anticipate today what that thing is going to be?

As Steve responded...

I think you anticipate a little bit, you know, so for example, I think one of the themes for the next several years is what I would call the reshoring of the industrial world back into the United States.

So, you know, for the last, call it 30 years, companies have essentially sent their supply lines outside the United States because labor in the United States is expensive and labor in China and Vietnam is cheap.

And that worked for a very long time and it was very deflationary, and COVID proved one thing, yes, that [the] supply chain is less expensive, but it's also very brittle.

And because of what happened during COVID, companies are bringing back the supply chain, at least partially, back to the United States.

So, you know, stocks that haven't done anything in 20 years, let's say, might start to do well like BHP (BHP), iron ore, etc. That's one theme that I think will last a long time.

So do I. If you have any favorite reshoring ideas you would like to share, I'd love to hear them – send me an e-mail by clicking here. I look forward to hearing from you.


Herb Greenberg
February 13, 2023