We certainly live in interesting times. But, as many times as a news service or article will say that we live in the most (insert adjective here) time in history, I often think, well that’s an exaggeration!
Do you live in dangerous times? Perhaps but compared to various points of human history? Not even close. This isn’t gangs of New York or a time of war and the draft. Do we live in financially turbulent times? Of course but this is no Great Depression. Can you sell your stocks in a split second and move to safe treasury bills almost instantly? Yes.
Do I mean to. downplay our current troubles? Of course not. I just want us all to use perspective. I get that people have to sell newspapers and headlines need to be outrageous to get your attention. However, I prefer to read a good book and think issues though more deeply (my current book is HERE).
More Prudence, Less Blind Optimism
We benefited from some easy times the past 10 years, The everything bubble. Instigated by easy money policies, the everything bubble pushed up prices of not only stocks, but electronic fake money (ie crypto currency), art work, real estate (House prices should not have grown THAT fast), PDFs masquerading as art (NFTs) etc. Semiconductor stocks, are one specific mundane example of the everything bubble - when I got into this business, semiconductor/chip stocks traded at 8xs earnings - meaning, if the stock earned $2 per share, it was a $16 dollar stock (8x2). Magically however, in the land of Fed money printing and endless bailouts, these stocks trade at 20-40 times earnings! if all things return to equilibrium, as I believe they eventually do, what does that say for the valuations of chip stocks?
There are many other side effects (unintended consequence/trade off, etc?) from money printing. One unfortunate side effect is that when we input costs (like commodities) rise - and push through inflationary price increases on products we buy, the end user (us) doesn’t see price cuts when those same input costs fall back down. Let me give you an example: if you like Chipotle Mexican Grille and you order a burrito with avocado - you’re ordering a meal whose input costs had gone up dramatically this past year. Chipotle then raised prices - but now that input prices are declining a bit, it’s likely Chipotle won’t cut prices > resulting in permanently higher inflation for us. Bad for us, good for corporate profits (so we must make sure we own stocks if we are going to vote for money printers!).
(rant starts here) That being said, it doesn't matter if the Fed slows down price increases with higher interest rates - we will NEVER go backward on prices (outside of a depression). Which is seriously painful for most people. Side note: perhaps we all need to think about whether our politicians think it’s ok by us if they keep borrowing and spending. because it means life gets very expensive. Not right away but eventually. Furthermore, if rates were to rise a few more percent, our national debt ($30 Trillion) interest will be 3xs our defense spending ($30 trillion x 6% = $1.8 T annual debt interest) meaning at the same time life is getting very expensive, government has to cut spending tremendously -likely on some important programs - to cover interest costs. This is third world country stuff and it’s sad that we are approaching it.
My point is that what the market gives, it takes away. We need to behave like most investment ideas could actually be too expensive at the current time. We need to be prudent. Just because stock prices have fallen 20-50+% (depends on sector) in the past 8 months, does not mean things are now cheap. So therefore, our approach must be one of realistic expectations in an inflationary/rising rates environment. Though I am not sure if the Fed can raise rates too high - like Volcker did in the 1970s/80s - because 4-5% is enough in this highly financilized environment to crash things. But I also don’t think inflation just goes away next year as the Fed starts printing money again (that’s what many people think).
That being said, I and many others expect a rally (in fact as I write this, the market has rocketed off of Jerome Powell’s words of tempered rate hikes). Even with a rally, I think big picture presents choppy market where individual ideas will outshine the performance of the entire index. And it wouldn’t surprise me if we get a rally followed by one more big drop in markets. There are signs of recession, and the Fed is not in position to fix it this time. They have to raise rates to fight inflation at the same time our economy is slowing - when they’d usually be lowering rates to support the economy. You know I’ve said this for years but to be more blunt, the Fed is a disaster. Incompetent book educated technocrats that they are - are now stuck - they went to the money printing well too often and now they are forced to raise rates in a recession. Remember these are the same guys who were printing $1.5+ trillion of dollars last year as inflation rose to 10% - insanity.
Themes and Some Random Thoughts
What I am thinking in terms of investing themes:
if we can get 5-6% yields we should start grabbing them. Maybe rates move higher and we add more at higher rates and roll over the previous holdings as they mature. But with recessionary pressures, the higher rates I’d like to get on government bonds may not happen. Therefore 3-5% return guaranteed is something I want to accumulate.
Nuclear is back and we want to be involved. Our current primary involvement is indirectly through Sprott Inc which manages a uranium ETF. I will add other key exposure here too.
Cash flow is important - a “long/short” approach works as companies that will never earn real cash are shorted and companies earning good cash/paying dividends/buying back shares are bought. The Calamos Long Short Fund is our exposure there.
Earning returns in all market types will be important - hence grabbing good yields, and doing strategies that can work in all markets like “Merger Arbitrage.” We have exposure through a Merger Arbitrage and “event driven” funds.
Energy is important - people who think we will be all electric in 5 years have no clue of the reality. This is not going to happen. And in fact, the drive (no pun intended) toward electric has driven lithium prices up over 300% in the past 18 months. This is not how you replace oil. Furthermore, the copper needed for this electric revolution is equal to more than we currently output globally. And FYI most copper mines have been open a while. There aren’t too many new major discoveries and certainly governments are getting in the way of developing new resources for the electric economy, so I’m not sure how it is going to happen. And think about this - there are currently 1.2 BILLION people with no electricity. Another 2-2.5 BILLION people have unreliable or expensive energy. You know what they want? What you have - a fridge, AC, a car, internet. This won’t be supplied with solar. Therefore, gas and oil and the development of these properties is key. We have exposure in energy.
Metals are important as are other commodities. Sprott being a financial firm that focuses on natural resources also gives us exposure to gold, silver, platinum, palladium, uranium and other commodities. I plan to add more exposure here as we need copper, nickel, lithium, cobalt, iron ore and more for electrification.
Real estate - prices may come down but the need for housing is real. We currently have exposure to northwest Florida real estate through the St Joe company. I will look for more real estate opportunities - not just at homebuilders and mortgage companies - but companies with undervalued real estate on their books. Side note: if I can find good ideas, water rights will be a HUGE area to invest in.
Health care innovation - it’s a marvel watching our health care technology industry. It’s an area I think will continue to grow through all kinds of economic conditions. The problem is I am not amn expert researcher in medical ideas. So I defer to a good fund - The Eventide Healthcare and Life Sciences Fund which focuses on cutting edge medical tech that can ethically change lives.
Other random thoughts -
We must keep an eye for more tax increases at least until midterms. I am a fan of gridlock because the less these people do, and the more they have to deliberate to gain consensus, the less dangerous they are to all of us. I am hoping for a hopelessly divided congress. You know that advice that says “don’t just do something, stand there!” - I like that advice for politics, picking scabs and other things better left alone.
Charitable Intentions - thank you for those of you that filled out my charity questionnaire a few months ago. As I begin tax strategizing for this year into our tax forecast sessions, that will help me craft your strategy better. For those of you with bigger charitable plans, I have discussed Donar Advised Funds. Here is more information on those: DONOR ADVISED FUNDS.