“Make new friends but keep the old, one is silver and the other is gold.”
– Author Unknown
The words above were etched on a wooden plaque that hung in my family’s kitchen. Mom was sending us a message and she’d point us to those words anytime we were quick to push aside an old friend for a new one. As I listened to a number of the presentations at last month’s Strategic Investment Conference, silver and gold kept coming up. As did the industrial metal, copper. Make new friends but keep the old… today’s On My Radar continues the sharing of my high level conference notes with you. I walked away with some actionable ideas. Gold and silver were high on the list. The new friend is copper.
But before we dive in, the Fed raised rates this week and bond yields sank lower. Many expected the opposite reaction. If you missed last summer’s mortgage refi opportunity, I believe you are going to get another chance. Interest rates appear to be heading back down towards their July 2016 lows.
And what are the implications of Fed policy on the U.S. stock market? Ned Davis Research’s Ed Clissold pointed out in a tweet late yesterday, “Today’s #FOMC decision is a reminder that even slow tightening cycles eventually impact the stock market. #fed @NDR_Research.”
The chart Ed shared in his tweet follows. Here is how to read it:
- NDR compares market gains during slow tightening cycles (black line in chart) vs. fast tightening cycles (red line in chart) vs. non tightening cycles (green line in chart), and more.
- It looks at what happened historically to the stock market in periods when the Fed was quickly raising rates vs. slowly raising rates – like the current cycle.
- The purple line is the current Fed tightening cycle that began in December 2015.
- Note how NDR breaks out % Gain During 1st Year and % Gain During 2nd Year. We now find ourselves in year 2. Purple line (right-hand side of chart).
- Year 1 gains averaged 10.8%
- Year 2 gains averaged -1.8%
- The green line shows non-cycles… markets do better when the Fed is lowering (easing), not raising (tightening), interest rates. “Don’t fight the Fed” as they say.
Over the last several weeks, I shared with you my notes from John Mauldin’s outstanding Strategic Investment Conference. We’ve reviewed Dr. Lacy Hunt’s presentation, as well as Mark Yusko’s presentation. Sobering.
When looking at the U.S. only, both believe (as do I) that the current economic cycle is aged, the market remains extremely overvalued and forward return opportunity is low.
- Lacy said, “Your starting point conditions matter.” They are ultra-low interest rates, a $4.5 billion Fed balance sheet and 372% debt-to-GDP. “It means that a small degree of monetary restraint (Fed raising interest rates and exiting Quantitative Easing (QE)) has a very quick impact on economic activity.” We have now seen four “small” rate increases by the Fed.
- He said, “Without exception, every single recession since 1945 was preceded by a monetary tightening cycle before the recession.”
- Mark Yusko said, “Seven times a new president has come in after an eight-year term and seven times we’ve had a recession. This eighth time is not going to be the first.” He also shared the following chart, among many others, pointing out that:
- When tax revenues are negative, it means people are doing less well.
- When people are doing less well, you can’t just paper over it.
- Tax revenues are turning negative. It means we have a problem.
Depressing… right? Yes, if you are solely focused on U.S. stocks. But don’t get depressed. There is much opportunity.
Shortly after the conference, I met with a Philadelphia business owner. An avid reader of Mauldin’s popular Thoughts from the Frontline and an attendee of the recent and many past SICs. I asked him what he got out of the conference. He said he once again walked away with a number of actionable investment ideas and added, “What I gain in returns has far surpassed the price of admission.” Mauldin should hire him as a spokesperson.
This week, I share with you once again my notes from the conference. I took so many notes, so I’m trying my best to spread the delivery to you out over a number of weeks. Today, let’s take a look at the Energy panel. I particularly liked what Ross Beaty had to say. The silver company he created and on whose board he still sits, Pan American Silver, is worth $2.8 billion. The value of Beaty’s mining holdings: $450 million (Forbes, 2010). Beaty gave up the mining game and turned to geothermal power. Google him.
You’ll also find select notes from Louis-Vincent Gave’s excellent presentation. Gold, silver and copper were high on Ross Beaty’s list. He’s making new friends with green energy and keeping the old. To which, I find myself in agreement.
So dig in, but as you do be mindful that past performance cannot guarantee or indicate future results and investing involves risk. Further, what I share is by no means a recommendation for you to buy or sell any security. Talk with your advisor regarding suitability, needs, goals, time horizon and proper portfolio sizing, etc. And please feel free to shoot me an email if you have any questions.
Grab that coffee and find that favorite chair. Click on the orange link below. And have a great weekend!
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Included in this week’s On My Radar:
- Investment Ideas – Energy, Metals, Government Bonds and EM
- Concluding Thoughts on Investing
- Trade Signals — NDR CMG U.S. Large Cap Long/Flat Index Signals Reduction in Exposure from 100% to 80% Exposure
- Personal Note
Energy Panel – Ross Beaty and Marin Katusa, Moderated by Grant Williams
Ross is Chairman of Pan American Silver Corp. He is a geologist and resource entrepreneur and an internationally recognized leader in both non-renewable and renewable resource development.
Marin is Founder, CEO of Katusa Research. He is an author and renowned investment strategist in the resource sector. Previously, he was the chief energy investment strategist at Casey Research.
My notes presented in bullet point format:
- We are living in as profound an energy revolution as the switch from wood to coal and coal to oil…
- Solar is here, it is cost competitive, it is one-tenth of the cost it was 10 years ago.
- We’ve had a revolution in the transmission of energy and in things like better refrigerators, better light bulbs.
- Coal and uranium (think nuclear fuel) driven power are dinosaur products. Uranium, it is extremely expensive to produce and there is lots of it around. The main use is in producing electricity. Solar will take over. Bearish on uranium.
- Bullish on copper. It is an electricity metal. Copper is used in new renewable energy, pumps, cars, etc. It is a winning metal. It