One of the most interesting figures in ancient Greek mythology is the Trojan woman Cassandra. According to legend, she had been granted the gift of prophecy by the Greek god Apollo. But when she later displeased the god, he cursed her to never be believed in spite of her prophetic gift. This twisted curse later figured prominently in one of the best known tales of ancient Greek mythology – the destruction of the walled city of Troy.
In ancient accounts of the fall of Troy, Cassandra is one of the few people to recognize the danger that the besieging Greeks pose. In fact, she attempts to intervene several times on behalf of the Trojan people to avert the disaster, only to be thwarted in every instance. The Trojans ridiculed Cassandra, believing her prophecies to be insane. The naive Trojans are eventually tricked into accepting the gift of the Trojan horse. The Greek soldiers hiding inside the hollow horse spill out at night to pillage and burn the doomed city while Cassandra is forced to helplessly sit by and watch.
I feel, in many ways, that I am a modern-day parallel to the Cassandra of ancient Greek myth. I have watched in horror over the past 20 years as a relatively stable, prosperous U.S. economy has been gradually deformed and hollowed-out by serial bubbles blown by the malicious Federal Reserve. And yet I have been powerless to do anything about it. I am a present-day financial Cassandra.
My life as a financial Cassandra started back in late 1999. The first internet bubble was in full swing at the time. I was a freshly-minted college graduate who had just landed his first job at a Boston-based mutual fund company. I was learning everything I could about the financial markets, but a couple things puzzled me endlessly.
First, I couldn’t understand why everyone was in love with “new economy” technology stocks. They seemed hopelessly overvalued to me. But the investors buying them – including my company’s fund managers – could see a future of endless growth that was invisible to me.
Instead, I salivated at the prospect of buying the old-fashioned tobacco company Philip Morris which sported a shockingly-high dividend yield of 10% at the time. Ironically, I had no money to invest myself and couldn’t convince anyone else of the value of the company. Being a financial Cassandra has rarely been so frustrating.
In retrospect, Philip Morris has been a phenomenally good investment since 2000. If you bought Philip Morris back then and held to today without selling, you would have received massive dividends over the years. In addition, you would also be the proud owner of shares in four valuable Philip Morris successor companies: Altria Group, Philip Morris International, Kraft Foods Inc. and Mondelez.
The next memorable period during my career as a financial Cassandra occurred in the spring of 2007. I could foresee that a financial crisis of some form was going to hit the economy, although I didn’t know exactly when. Everyone else thought I was crazy. My co-workers were talking about a permanent economic expansion driven by the ever upward spiraling housing and stock markets. Predictably, I could convince no one of my views. My co-workers and I eventually agreed to amicably disagree on investment strategy.
So I went searching for the most secure future cash flows I could find – U.S. Treasury bonds. However, I also wanted the longest duration Treasury securities I could get as well. This would enhance my profits if my forecast of an economic crash came to pass. After much research, I eventually opted for zero-coupon, 30-year U.S. treasury strips. Zero coupon bonds make no periodic interest payments, but instead issue one large final payment at maturity.
Buying long-dated U.S. treasury strips was so unorthodox at the time that the bond broker I spoke to when I placed the trade actually tried to talk me out of it. I politely declined his free “advice”. The global financial crisis unfolded about a year later. I closed my U.S. treasury strip position for an 80% gain in only 18 months. Being a financial Cassandra can be very profitable, if you can be patient and ignore the ridicule that comes with it.
And now, in 2017, I am staring at the third major bubble period of my life as a financial Cassandra. This bubble is absolutely huge and the accompanying stock market insanity is breathtaking. We are clearly headed for another economic disaster.
As an example of the absurdity of current stock valuations, media streaming company Netflix currently trades at more than 200 times earnings. This is even though the technology darling has nearly saturated the domestic U.S. market, greatly diminishing its prospects for future growth. In addition, the company’s profitability will always be constrained by content owners who will seek to arbitrage away any excessive revenue Netflix derives from an increasing subscriber base or rising subscription prices.
Another bubble stock, Tesla, looks like a raging Ponzi scheme with a staggering $61 billion market capitalization, which is larger than either Ford’s or General Motors’. Its CEO, Elon Musk, could have reined in the company’s expansion when it was still a niche, luxury electric car manufacturer. Tesla would have been a much smaller company under those circumstances, but it also would have had a reasonable shot at being profitable.
Instead, Musk chose to let it turn into a cancerous monster, growing without any limit using cheap capital market financing. Unfortunately, the company is far too large and unwieldy to salvage now, particularly after its ill-advised Solar City acquisition. Absent an unlikely buyout, it is only a matter of time until a financial crisis closes the capital markets and forces Tesla into bankruptcy.
Not all investments are doomed in the next financial bust, though. Tangible asset like precious metals, investment grade antiques and fine art have been largely overlooked during our latest bout of bubble insanity. These enticing investments have track records hundreds of years long proving they are sound investments. And it takes far less money to get started buying art and antiques than you might think.
Of course, I can convince very few people of these opinions. Such is the curse of a financial Cassandra. But I implore you; please learn from my past. Paper assets are grossly overvalued right now while fine art and antiques are perhaps the world’s most under-owned asset class.
