Carl Icahn has more money than 99 percent of the people on planet Earth. When he speaks, his fellow power players listen right alongside laymen. Icahn recently announced that he is “more hedged than ever”. He also raised eyebrows in the investment community with his prediction that “…a day of reckoning is coming.”
Trusting Icahn’s prediction for the global economy and his statement about investment hedging as a form of unsolicited, completely free investment advice is not exactly prudent. Though Icahn is revered in investment circles, he does not have a perfect track record when it comes to playing the market. However, his alleged motivation for hedging is worth exploring in-depth.
Why Carl Icahn’s Opinion Matters
Icahn is a notorious Wall Street bear. His hedge fund, Icahn Enterprises, has had a jaw-dropping short bias for two straight quarters. All in all, Icahn Enterprises has a net market exposure of negative 149 percent.
It is clear that Icahn thinks the stock market is overvalued. The question is whether he has flawlessly timed a looming market fall-off or if he has jumped the gun.
It is worth noting that Icahn does not pen monthly letters to his investors. He picks and chooses his increasingly rare media appearances with precision. Bloomberg’s Erik Shatzker recently had the opportunity to sit down with Icahn to discuss the motivations for his bearish outlook.
Why Carl Icahn is Hedged More now Than Ever Before: Overvaluation
When Shatzker asked Icahn why he thinks the stock market has been on a tear compared in the midst of a sluggish global economy, Icahn got right to the point. He quickly noted that stock valuations are extremely high. Icahn also stated that he does not feel comfortable making any significant investments at current prices.
Though Icahn was quick to point out that “good” companies still exist, he also stated that the market is egregiously overvalued at around 20 times the value of the S&P.
Icahn attributes this overvaluing to the recent introduction of zero percent interest rates. Such interest rates have spurred massive stock buyback programs from all sorts of publicly traded companies. As a result, these companies are not reinvesting in capital such as new machinery, new technologies, acquisitions or the addition of more labor.
Rather, they are pouring money into the purchase of stock. Anyone who understands the basics of economics knows that businesses’ failure to invest money in capital does not bode well for the future.
The Main Problem is a Lack of Capital Spending
Icahn harps on the fact that businesses are no longer investing capital like they used to. Capital spending has dipped four percent in the last quarter alone. If capital spending were to increase, it would help get us back on a manufacturing track in which we actually produce highly coveted goods rather than services.
The problem is that it makes more financial sense for companies to take advantage of those tasty zero percent interest rates for stock buyback programs. As a result, manufacturing is decreasing, hiring has stagnated and stock prices will likely fall at some point in the near future.
Bears like Icahn regularly point out that our economy has become service-based rather than manufacturing-based.
Icahn’s Analogy for the Federal Reserve
When pressed on the issue of negative interest rates and the increase in corporate stock buy-backs, Icahn laid out a disturbing analogy. He compared the Federal Reserve’s negative interest rates to a rich family that overspends on luxury items and vacations. The focus is on having fun in the moment while “printing up IOUs” that the wealthy family expects to be accepted based on its good name.
As Icahn pointed out, the problem with this situation is that it can only last for so long. Eventually the family goes broke. According to Icahn, we are going broke and zero interest rates only serve to build gigantic bubbles that will inevitably pop.
Icahn’s Predicted “Day of Reckoning”
Icahn believes the perfect economic storm is brewing for an international financial meltdown of epic proportions. The dollar is gaining strength yet its increase in value is somewhat offset as it will decrease earnings of companies based outside of the United States.
This is also cause for concern as the S&P is strongly tied to international earnings. Investors should prepare to be underwhelmed with disappointing earnings reports across the board. Though Icahn did not offer a prediction as to when the stock market will dive, he suggested the drop will likely occur within the next year or two.
Regards,
Ethan Warrick
Editor
Wealth Authority
