Wall Street legend Carl Icahn just posted a warning to America…
During the 1980s, Icahn built a reputation as a feared “corporate raider.” He buys huge stakes in “broken” companies…takes a seat on the board…and tries to turn the companies around. He’s an “activist investor,” and it’s made him one of the thirty richest people on the planet.
Now, Icahn says it’s America that’s broken. On Monday night, he released a 15-minute video called “Danger Ahead.” In the video, he talks about huge problems facing the U.S. economy.
Low interest rates are one of Icahn’s biggest worries. He calls them “a scary issue,” and says borrowing money is “like taking a drug.”
…low rates, by almost definition, [are] building bubbles; building real estate bubbles; building bubbles even in the art market.
• For some Americans, Icahn’s message is a wake-up call…
But his warnings should sound familiar to Casey readers.
Regular readers know the Federal Reserve dropped its key interest rate to zero in December 2008…and has kept it at zero ever since.
Yesterday, we explained how near zero interest rates have made it ridiculously cheap to borrow money to buy stocks, bonds, houses, cars…and even a college degree.
• Ridiculously low rates have led to some very dumb financial decisions…
For most of the 1980s and 1990s, interest rates hovered between 5% and 10%.
This relatively high cost of borrowing acted as a “brake” on spending. It stopped people from putting money into bad business ideas, foolish real estate projects, and extravagant consumer goods.
But for the past seven years, there hasn’t been a brake: just runaway borrowing and spending.
• Seven years of zero-percent interest rates have turned the economy into “Wonderland”…
As Icahn mentioned, easy money has created an asset bubble in the property market. Regular readers know that commercial property prices are at record highs. They’re now 18% higher than during the last property boom.
Icahn also says easy money has created a bubble in the art market. Last year, the value of the global art market hit a record high…The European Fine Art Foundation estimates the market’s size at $54 billion.
And like us, Icahn believes easy money has created a dangerous bubble in junk (also known as “high yield”) bonds:
…the little guy, the middle class investor, has nowhere to go with their money but into the market or, even more concerning, high yield bonds that are very risky.
JPMorgan reports that the number of junk bond issues soared 483% between 2008 and 2014. In this low-rate environment, investors have had to hunt for yield…so they’ve piled into junk bonds, which pay high yields but are very risky.
• Icahn also thinks ridiculously low rates have goosed U.S. stocks…
The S&P 500 has more than doubled since the Fed pushed rates to zero seven years ago.
On top of that, the current bull market in U.S. stocks is one of the longest in history. It’s been running for 79 months…two years longer than the average bull market since World War II.
Icahn says one big reason stock prices have gone up is that companies are “making earnings with financial engineering.” Like us, he worries that buybacks and deal making are causing earnings to look better than reality.
Instead of taking the money that they can borrow and really investing it in machinery [or] in their workers to make them more productive, what they do with the money is almost perverse. They just go in and buy another company to show analysts on Wall Street that earnings are going up, so their stock will go up and it's financial engineering at its height.
Icahn says the property, plants, and equipment owned by U.S. companies are the oldest they’ve ever been. Instead of building new factories or buying new machinery, companies are buying each another. Or buying back their own stock.
Earlier this month, Fortune reported that mergers and acquisitions (M&A) activity in the U.S. has already surpassed $1.5 trillion for the year. This breaks the previous all-time record set in 1999.
U.S. companies have also borrowed trillions of dollars in cheap money over the past seven years to buy back their own shares. This year, companies in the S&P 500 are on pace to buy back almost $1 trillion worth of their own stock. That would be an all-time record.
• The Fed’s decision to hold rates near zero for seven years is unprecedented in modern history…
Like us, Icahn thinks we’re living through a grand monetary experiment.
It's like giving somebody medicine and this medicine is being given and given and given and we don't know what's going to happen – you don't know how bad it's going to be…
Icahn has been investing for decades. He survived Black Monday in 1987, the dot-com crash in 2000, and the 2008 financial crisis. But he thinks the easy-money “Wonderland” bubble could be the worst yet…
I've seen this before a number of times…And I think a time is coming that might make some of those times look pretty good.
• Icahn isn’t the only big-time investor worried how the Fed’s experiment will end…
Shortly after Icahn released his video, Raoul Pal wrote, “I have to admit I agree 100% with Carl Icahn’s video.”
Pal is one of the world’s top “big picture” investors. He used to run a large hedge fund…but he made so much money that by the age of 36 he retired from managing money.
Pal thinks global financial markets are very fragile right now. He’s one of a few respected investors to predict that the U.S. economy will soon be in a recession.
In an interview this summer, Pal said:
And now I am hearing the smartest investors in the world, whether it’s Icahn or Druckenmiller or Robertson, they are all telling you to be careful, that this is really, really dangerous. And the people aren’t listening because the party is still going. And nobody is telling you that you are the party, that you are drunk and that the police are about the break up the party. Well, they are telling you but you don’t want to listen because you are having such a good time.
Pal went on to say that this party could end very badly.
The magnitude of that downside is also probably very large. The odds are stacking up for something very bad.
Next month, you can meet Pal in person at our 2015 Casey Research Summit. He’ll join Doug Casey, Marc Faber, James Altucher, and many other investing all-stars to discuss how to prepare for the end of the “Wonderland” economy.
It’s a great opportunity to mingle with some of the top investing minds on the planet. VIP guests will even get to smoke cigars and drink scotch with Doug Casey.
The summit takes place October 16-18 at the five-star Loews Ventana Canyon Resort in Tucson, Arizona. We hope you can join us. Click here for more information on the 2015 Casey Research Summit.
Chart of the Day
Carl Icahn says U.S. companies have used buybacks and deal making to boost earnings. This “financial engineering” has made the U.S. stock market appear healthier than it really is…
Today’s chart shows GAAP earnings-per-share (EPS) for companies in the S&P 500. GAAP stands for “Generally Accepted Accounting Principles.” It’s a standardized way to report earnings. Icahn calls it a “tougher metric” to fake than the headline earnings figures most companies report.
The 2010 through 2014 figures are for the calendar year. The 2015 figure includes earnings from June 2014 through June 2015.
As you can see, earnings for companies in the S&P 500 have gone nowhere the past three years. Yet, the S&P 500 has gained 32%.
Icahn says investors are “paying a huge multiple” for stocks. And he wonders,
What is going to happen to that market? Who is going to buy your stocks when those earnings start coming down?
Delray Beach, Florida
September 30, 2015
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