“What Does Politics Have to do With Investing?”

Website: www.thecoffeecanportfolio.com

There are three types of edges in the investment game: informational, framework and behavioral.  I believe one of my biggest edges is the ability to apply a consistent non-interventionist framework which better models the real world than the popular Keynesian playbook.  This goes well beyond monetary policy to foreign policy, regulatory policy, antitrust policy and trade policy.  It also applies to industries with heavy government intrusion such as education and health care. 

Where others see a natural state of chaos in need of top-down control, I see a natural state that is bottom-up and runs on its own.  The trouble only starts when the central planners exert themselves.

The reaction to Covid is a case in point.  Order vs. chaos explains why President Trump, health care czar Anthony Fauci and the state governors responded in an authoritarian manner, individual liberties were attacked and the “experts” were not to be trusted.

As it turns out, anticipating how Covid would play out  was critical for investors:

1. We were skeptical of a massive $6 trillion stimulus bill most “economists” assured us was absolutely necessary.
2. We were prepared for a wave of inflation following the mailing of three rounds of stimulus checks and the Federal Reserve expanding its balance sheet by 115% in two years to pay for it.
3. We faded the flight to apparent “safety” of government bonds.  (The 10-year yield went well below 1% and now stands at 4.07%.)
4. We felt that fears of Covid were overblown and that the virus would eventually run its course.  Taking the long view led to buying retailers at bargain prices during the lockdowns.
5. We were critical of the government-rushed vaccines (initially dubbed “Operation Warp Speed” by Trump) and said the stocks were a “no touch” in the December 2021 issue.

I realize taking on politically sensitive topics like Covid, wokeness, China and the Israel-Palestine conflict risks turning away subscribers, but it is a risk I’m willing to take.  The last thing the world needs is another conventional, politically-neutered investment letter.

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Kevin Duffy is principal of Bearing Asset Management which he cofounded in 2002. The firm manages the Bearing Core Fund, a contrarian, macro-themed hedge fund with a flexible mandate.

Bearing gained notoriety during the Great Financial Crisis by betting against stocks like New Century Financial, Fannie Mae, Bear Stearns, and Lehman Brothers. Duffy wrote extensively on the housing and credit bubble, including articles, “Alan, We Have a Problem,” “Mr. Mozilo Goes to Washington,” and “Honey, I Shrunk the Net Worth.” In May 2007 he gave a speech in NYC titled, “It’s a Mad, Mad, Mad, Mad World,” identifying root causes of the bubble. A month later, he issued a warning in an op-ed for Barron’s titled “For Whom Do the Bells Toll?” The Bearing Credit Bubble Index was cited by Marc Faber in speeches and The Gloom, Boom & Doom Report.

Prior to Bearing, Duffy cofounded Lighthouse Capital Management and served as director of research from 1988 to 1999. He chronicled the excesses of the Japan and technology bubbles of the late 1980s and late 1990s, respectively. The firm was later sold to Fisher Investments.

Duffy bought his first stock at the age of thirteen. He earned a BS in Civil Engineering from Missouri University of Science and Technology and has a passion for financial history, Austrian economics and pithy quotes. He also publishes a bimonthly investment letter called the Coffee Can Portfolio.

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