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  • Martin Sosnoff

Inflation Always Worrisome, Yet Deflation Makes Me Crazy

I’m a Great Depression baby (1931.) But, with a good peg from third base, baseball was my game. I never went hungry while we lived off baked potatoes topped with sour cream and all the day-old bread you can cram down. The public school system in the Bronx during the thirties was exceptional. Mayor La Guardia created and funded elite high schools like the Bronx High School of Science and Music and Art, which I attended as a woodwind player. Later, CCNY was a good fit.


So, I spent the first 21 years of my life in Harlem and then shipped out to the Korean war zone. ROTC appealed to me at school because I needed the shoes and overcoat they issued to cadets plus the $29 a month stipend. The arctic climate in North Korea was forbidding, because we had no arctic clothing or thermal boots. My country had failed me. A good lesson to learn early on.


Frugality was knitted into my bones. I remember when my father would turn the ignition key off on his jalopy when he was coasting downhill. Gasoline was 21 cents a gallon, early forties. I own today Occidental Petroleum shares, but not as much as Warren Buffett. Also, I inventory Enterprise Products Partners, an MLP with an 8% yield. Nobody seems to care, as yet. I own 2-year Treasuries as well, yielding 5%. Nobody cares. Who can explain such a steep negative yield curve in 2- year vs 10-year Treasuries, never wider over 30 years? What the Street doesn’t understand, it never comments on. The bet is inflation rests in the cards.


You learn about banks when living in a tar paper shack that overlooked the Hudson River in Croton-on-Hudson. Pop wasn’t credit worthy for a mortgage so he made his own home improvements, including plumbing and roof covering. Later he replaced the 2 x 4 uprights for 4 x 8 posts. Decades later pop sold out at around $4,000 and took back a mortgage from the buyer. Banks still totally disinterested.


Same the early sixties when JP Morgan turned me down for a mortgage. They claimed my manor house on the Hudson was a one-of-a-kind property, too iffy to finance. Then I turned to my old buddy, Sandy Bernstein, who then controlled a rival NYC bank. It took Sandy five minutes to make his decision, and he asked me to write up the papers, myself, which I did.


Jaime Dimon is considered a best in class operator of his major institution, Morgan Guaranty Trust. But, laurels go to the gutsy operators who use leverage: George Soros, Peter May, and Carl Icahn, who later on earmarked billions in personal profits to major projects in medical sciences, education, and theater construction for the public's utilization and enjoyment. What has Janie Dimon done that’s comparable excepting speech making?


If you believe, as I do, that an unfolding scenario of deflation is as easily construed as an inflationary cycle, there’s plenty to learn from our economic history. First, you don’t want to carry much income producing real estate like shopping centers and office buildings. They’re losing tenants that can’t be replaced for a going rate of return. Natural resource plays you can take off the table, too. They’ve gotten too richly priced.


I’m disinterested in industrial earnings power because I fear GDP momentum turns south.The stock market still pricey, selling at what I perceive as 20 times forward 12 months earnings power. On stagnant earnings the market can be crushed down to 15 times earnings. Most growth stocks do shed their multipliers and likewise lose any premium valuation as shown here.


Disbelief in Growth Surfaces

Note here how prime growth stocks shed their huge premiums to the market. It didn’t take very long. Many later sold at market discounts, inclusive of Microsoft and Apple. Fundamentally, growth, stocks, traced a downward slope with the exception of Intel. Remember, the Internet bubble in 19 99–2000 when the market traded at 20 times earnings, not much more than today.


Going back to the gut wrenching recession of 1973–’74, earnings then collapsed for Polaroid, Xerox, Avon and Eastman Kodak. They never recovered. Such tarnish lasted and lasted.


In 1962 during the Cuban missile crisis, the market sold down to book value and 10 times earnings. I was a buyer. After all, I had very little to lose. Recently arrived on the Street, just pocket change to my name. But, I quickly learned to leverage myself for all the money brokers would bear at 10% margin. They’d mark you to market daily. Put up more or else.


Markets never carry a risk premium for terrorism, even for wars. I noted in 1962 during the Cuban missle face-off, our airports stayed open. You could hop a jet to Toronto and rest comfortably there. When your sideburns turn gray, your mind is not so flexible.


Investors with a sense of history know that the rate of return on equities can be negative for a 10-year span. The historic return comes in at 6.1% when the inflation adjusted return on 10-year Treasury is 3.7%. Today, 10-year Treasuries yield nearly 4%, not competitive for inflation even if you penciled in 2%.


Net, net, financial markets rest too pricey. We need to see progressive good numbers recharging the averages.



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