What the Smart Money is Buying Now

Dear Reader,

I've been thinking a lot about an expression I learned when I worked on Wall Street.

If you don't buy stocks when they look absolutely terrible, you will never buy a bargain.

And what got me thinking about it is the housing market.

The Numbers

In July, there were an estimated 51.3% more home sellers than buyers.

For every 100 buyers, there are 151 sellers.

That's the second highest level on record.

And the number of active home buyers fell to 966,000 — the lowest on record since they started keeping track.

For the first time in memory, fewer than a million Americans are looking to buy a home.

Here's why.

The Trump and Biden administrations sent checks to people during COVID.

Everybody loved getting that check.

But it caused inflation.

People started buying houses.

The average home price in America roughly doubled — from about $200,000 to $400,000.

Now the market is adjusting back down.

Because here's the iron law of housing.

Home prices always have to approximate local incomes.

When they don't, banks won't lend, buyers can't qualify, and prices drift lower until they do.

That's exactly where we are right now.

80% of major US metro areas are now classified as buyer's markets.

Miami and South Florida lead the way — sellers outnumber buyers there by 154%.

Prices are drifting down.

But they haven't gone down far enough yet.

And that's causing a lot of trouble.

What Smart Money Is Doing

This is where it gets interesting.

Berkshire Hathaway just bought Taylor Morrison Homes for $6.8 billion.

It boosted its position in Lennar Homes by 30%.

It bought D.R. Horton stock.

And the Gates Trust just purchased $352 million worth of Home Depot.

This is what Wall Street calls countercyclical positioning.

Going against the cycle.

Buying great companies when nobody wants them.

Now, I want to be very clear about something.

When I say if you don't buy stocks when they look absolutely terrible you'll never buy a bargain — I don't mean garbage stocks.

I don't mean companies with inconsistent earnings or weak balance sheets.

I mean strong companies run by good management with healthy balance sheets that are simply weathering a crisis.

Companies that are conserving cash and making high-return-on-investment decisions even while their sector is in pain.

Those are the companies smart money buys into the wreckage.

Because they see around the corner.

They see that these stocks are trading at a discount to what they're actually

worth.

Maybe half of what they're worth.

Buying a dollar for 50 cents.

And when you stretch your time horizon out five years, the recovery from a situation like this tends to be very, very strong.

The Most Important Lesson

Smart money buys the wreckage before the recovery.

Not the garbage.

The wreckage.

Great companies, temporarily hated, trading at a discount to their true value.

That is what countercyclical investing looks like in practice.

And watching Buffett and Gates move into housing names right now — quietly, without fanfare — is one of the clearest examples of this I've seen in years.

Before I go, let me spend an extra minute on that phrase — a discount to true value — because the largest example of it in America isn't a stock at all.

It's sitting on the government's own books.

The United States Treasury owns 261.5 million ounces of gold.

In its own public monthly report, that gold is still carried at $42.22 an ounce.

A price Congress fixed back in 1973.

That isn't buying a dollar for 50 cents. That's the government carrying a dollar on its books for about a penny.

And twice in the last hundred years, when this country needed to solve a debt problem, it simply rewrote what that number was worth.

In January 1934 it happened overnight, by decree. Every paper dollar in every American wallet lost roughly 41% of its gold value while the country slept, and the Treasury booked a $2.81 billion windfall on the difference.

Which brings me back to the math at the top of this letter.

The average American home didn't really double from $200,000 to $400,000.

The measuring stick got shorter.

And in May, the board of the Export-Import Bank voted unanimously to lend nearly $3 billion to build a gold mine on American soil. Not a chip plant. Not a battery factory. A gold mine.

When Washington starts financing gold production directly — quietly, without fanfare — that is countercyclical positioning too.

It just doesn't come with a press conference.

Here's the full story, and the one American gold mine the government decided to fund.

Have a wonderful day.

I'll see you tomorrow.

"The Buck Stops Here,"

P.S. If you take one number out of today's letter, don't make it 966,000. Make it $42.22 — the price per ounce the U.S. Treasury still carries its 261.5 million ounces of gold at, in public, today. Every previous time this country revalued that number, the people holding dollars paid for it and the people holding the metal got paid. That is countercyclical positioning at the national level, and it is worth understanding before it happens a third time.

The full story is here.