Jesse Livermore wore the investing crown for almost a century...
Back in the 1920s, Livermore was a pioneer in the strategy we'd now call day trading.
He didn't care much about buying and holding good companies. He cared about sentiment. Livermore made a career out of big, concentrated bets that paid off quickly.
Before mountains of financial data were available for free online, Livermore figured out how to monitor market sentiment. And that helped him stay ahead of big market crashes... including the Great Depression.
In 1929, he called around to various banks and noticed a pattern. His connections seemed far more cautious about giving out loans than usual. That was Livermore's sign that companies would soon go bankrupt and stocks would crash.
He bet against the stock market in a short sale and made roughly $100 million in that trade. That's more than $1.7 billion in today's dollars... which is why many call it the "greatest trade of all time."
But these days, billionaire hedge-fund manager Bill Ackman has his own claim to that title. At the onset of the pandemic, Ackman – who runs successful hedge fund Pershing Square – turned $27 million into nearly $2.6 billion.
Today, we'll explain how Ackman made the right call at the best possible time... and why he's preparing for another home run.
Pershing Square is known for betting big... usually on stocks.
It made more than $2 billion on railroad Canadian Pacific Kansas City (CP) in the 2010s. And it lost more than a billion dollars betting against multilevel marketing company Herbalife (HLF) toward the end of that decade.
But Ackman's best trade ever had nothing to do with the stock market... It happened in the credit market.
In late February 2020, Ackman was nervous. The COVID-19 pandemic was in its early stages. He thought there was a decent chance the virus would lead to temporary shutdowns and a massive market panic.
As we now know, he was right.
He bought $27 million worth of credit default swaps ("CDS")... insurance contracts that protect investors against losses from bond defaults.
Ackman's bet paid off almost 100-fold. As investors panicked, the value of his CDS bet rose to $2.6 billion in less than a month.
None of Ackman's stock bets can match that.
It looks like Ackman is gearing up for a similar bet today...
Once again, he thinks stocks are going to take a beating. And once again, he's turning to the credit market.
Ackman doesn't think inflation or interest rates are coming down anytime soon. Regular readers know we agree... the Federal Reserve has been clear with its "higher for longer" mindset.
Fed Chairman Jerome Powell thinks interest rates will stay above 5% through at least the end of 2024.
That's why Ackman is betting against 30-year U.S. Treasurys.
U.S. Treasurys are a good proxy for financing costs. And today, Ackman believes they're far too low.
If the market catches on to higher-for-longer inflation and interest rates, two things will happen...
First, long-term Treasury yields will start rising. When Ackman announced this bet in late September, the 30-year Treasury yield was about 4.5%. He said he thought it should be closer to 5.5%. Yields have already risen to about 5% since then.
And remember... as yields rise, prices fall. Bonds trade at a discount, while investors demand higher returns to compensate for perceived risk.
So because Ackman bet against 30-year Treasurys, his bet is already making money.
That's the first outcome of the higher-for-longer environment. The second is that stocks will fall.
High inflation and high interest rates make it harder for companies to generate profits.
Plus, U.S. Treasurys are considered far safer than stocks. The U.S. government is the safest lender out there. So as Treasury yields rise, investors don't have as much incentive to invest in riskier stocks.
Once again, Ackman's bet seems to be paying off... and fast. Treasury yields are already rising as he predicted. That's going to hurt stocks.
Now is the time to follow Ackman's lead – and diversify your portfolio...
Ackman is known mostly as a stock investor. But he's no fool... He knows there's a time and place for every asset class.
For the credit market, that time is when economic uncertainty runs rampant. Ackman is a step ahead of most investors. He has already noticed the opportunity in credit, and he's readying the troops.
Higher inflation and interest rates will hurt stocks. Investors who have all their money in equities are in for a world of hurt.
But when the pain arrives, plenty of safe, steady bonds will yield high-single to low-double digits... with way less risk than stocks.
And the savviest investors will follow Ackman into the credit market.
October 10, 2023
Editor's note: When a downturn hits, billionaires like Bill Ackman and Warren Buffett don't ride the stock market lower – and they certainly don't sit on the sidelines.
Instead, these investing legends turn to an opportunity that's completely outside of (and far safer than) stocks... corporate credit.
For a limited time, Rob and his team are offering 50% off their brand-new Credit Cashflow Investor service... featuring a way to make legally backed, equity-like capital gains no matter where stocks go next. Plus, you'll receive $7,400 in bonus research and special reports. Learn more here.