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I want to elaborate why we’re positioned the way we are. I think it makes sense to start with where we’ve come from.

For a very long time, we have had a stock market driven by low financing rates. This made any place where you could grow quickly through debt look pretty attractive. The most obvious place that happened was tech stocks. Thus, at this point some very large tech stocks somewhat dominate the broad market indices. This started to look really crazy around the beginning of September of last year. Was tech going to eat the world?

Towards the back half of last year, cyclical stocks started to perk up in anticipation of how well an economic reopening would treat their companies. That certainly makes sense to a point, but to what point, exactly? For instance, Exxon Mobil is now up 46% from a year ago, and JP Morgan is up 61%, while the economy is down in the same period. Sure, the economy is likely to improve further, but to what extent is that already priced in?

That’s been the game, so far. First a truly epic drive into potential growth, followed by a headlong dive into cyclical stocks. The commonality for the last year has been that the junkier the equity the better the returns, which perhaps reached a crescendo with GameStop this year.

What next? Opinions are all over the map.

Probably the most common opinion (Door #1) is the idea that a reopening combined with Trillions in stimulus will continue to drive cyclical stocks to the moon. As I said above, to what extent is that already priced in? How much further can it go? We’ve already seen a variety of issues. PIMCO, for instance, has pointed out that China’s credit impulse (the change in new credit issued as a percentage of GDP) appears to be rolling over. That’s troubling, as they are big manufacturers. They’ve also been driving the price of plenty of items they buy, whether it be industrial metals, oil, or semiconductors. If they’re slowing down, that’s a sign that the expected reopening may not be as robust as hoped. Also, Lance Roberts (via puts it nicely by saying the stimulus is centered on consumption, rather than creating jobs. This can create a “sugar rush” of stimulus, but then it disappears and you crash back down.

Stock prices materially impact investor sentiment, and the idea behind Door #2 is that tech stocks will continue to carry the market. That idea has lost a lot of followers. I actually think this idea is more realistic than the first one, but I don’t think it will look exactly like it has in the past. We have seen enormous P/E multiple expansion in tech stocks, which I don’t think we can expect again. I also think that high momentum can still potentially work, but a lower percentage of those stocks will really move. A lot of what happens in tech is likely to be determined by what happens with interest rates (as I noted at the start of this blog). I wouldn’t really expect tech to lead, but you’ll probably be able to find decent performers.

Rates are at the center of a lot of narratives. Do we hit 2% on the 10 Year Treasury? Would that be a problem? Is the recent move in rates done (or at least the first move)? First, I’d say we’re already seeing an impact from this move. Those high growth stocks (think ARKK or TSLA) have been getting killed. The market in general hasn’t been able to deal with the rate rise, as the growth stocks have become so big. Of course, energy and financials certainly haven’t cared about the move in rates.

Along those same lines is the inflation question. It seems like the whole world sees the coming of inflation in the next few months, if only due to base effects (the change in inflation over the past one year). Deflation was strong last spring, so as we lap that it’s hard to see how you can’t have inflation. To me, that’s very well recognized, and thus probably not all that material. More interesting is what happens after this spring. The Fed is confidently declaring that inflation is transitory, while others are confident that sustained higher inflation is going to stick around. For that matter, I can find articles claiming we are headed for hyperinflation or for a deflationary tsunami. The full range of opinions is out there.

For my part, I think inflation is always messy. I’m pretty confident, for instance, that we can already see sustained food inflation. There have been tremendous food problems in the world, along with the common supply chain issues seen in everything. Food seems likely to be an inflationary issue. On the other hand, we have energy. Could energy go higher? Sure, but there’s a lot of mothballed energy production ready to come out with sustained higher prices. Could we hit $100 oil? I doubt it, but it’s possible. What I really question is our ability to see $100 oil, or $70 oil for that matter, sustained for any length of time.

Given all this, how are we positioning our portfolios? Ultimately, we’re focusing on Door #3.

What I mean by that is there’s already been a tremendous amount of capital chasing those two big ideas behind Doors #1 and #2. We haven’t held much in the tech trade, but we do own some economic reopening stocks. That’s been great, but I look at those as potential trims going forward. As shown above, there are already holes in the reopening idea, and the market has been pretty good about sniffing out changes.

To me, both of the popular options behind Doors #1 and #2 are pretty played out. I think what’s easier is to look to what things will look like after the spring stimulus. A lot of places, particularly off Wall Street, seem to echo the concerns that the stimulus represents a sugar rush, after which the economy and market face a sugar crash. You’ll be lapping these stimulus programs, so the base effects comps get a lot tougher.

To me, the safest places are defensive stocks that can be found in areas like Staples, Healthcare, and Defense. They’ve generally been ignored in the middle as people have been buying the barbell of Tech and Cyclicals. When will the Defensives start going up? Well, they seem to have stopped going down, which is a good start. You never know when the market is going to start pricing something in, and often it starts slowly, then all at once.

What we have been doing is slowly getting into these names at good prices. Most have done reasonably well, and some have done great. There are still good opportunities out there, and we’re focusing on judiciously adding to those areas. While we’re building positions we expect to be likely long term winners, we’re still somewhat invested in the honeypot of the day, financials and energy, though not as much as we had been. How long can we expect that to last? Hard to say. While some people think the move can last much longer, I’m already worried. We’ve seen great market performance since the bottom on March 23, 2020 – for almost a year, and a lot of that was anticipating what happens now. What if the reopening is found wanting? We may find out in the next quarter or two.

Take oil, for instance. Over the last week or so, a lot has happened to oil to help push it up. After a weekend of good news, though, oil is down. Is that a big deal? Maybe, maybe not, but it always worries me when an asset can’t move up on good news.

In addition, behind Door #2 we’ve taken the latest swoon in tech stocks to buy a bit more. Nothing too exciting, but I think over the next several months we’re likely to see rates come back down, which I think will broadly help to support tech. I don’t expect tech to drive the market, but I think areas of it are buyable. The one area I wouldn’t buy is the ARKK/TSLA-like areas, which you could also call high growth. To my mind, a lot of those names have been driven by options speculation, which has encouraged copycats. That was great on the way up, but is likely to be painful on the way down.

We also have some other legacy positions that we’ve owned for a while. First are utilities. We have trimmed them, but in retrospect we probably should have trimmed more. That said, at this point I think they’re likely to have a lot going for them. A lot of them represent cheap plays on green energy. If and when rates retreat, they should get more attractive as well.

Lastly are precious metals miners. It’s been popular for the last several years to expect them to inversely track real rates, which basically means that as expectations of economic growth get better, gold miners should do worse. Longer term, though, people more often have looked at M2 money supply growth to predict miner prices. As I expect you know, in the last year-plus, we’ve seen M2 money supply absolutely explode. That should be a good sign for long term miner prices.

As an aside, it shouldn’t be a great surprise that those two indicators of future miner prices are used, and that they’re generally connected. Debt generally slows down economic growth, as you have to service the debt, plus it eliminates the potential to use the debt for other purposes. Every time we’ve had a big surge of debt, we’ve seen the long term trend of economic growth slow down. I don’t see how this time is any different. That lends further credence to the idea that what we’re likely to see here is a sugar rush and crash, as that would be more in line with historical examples, such as 2008.

As such, I think it makes enormous sense to invest in gold and silver miners here. The risks at these levels seem quite low, while the rewards seem very high. The only problem is that I don’t know when we have liftoff. Will we need to wait for signs the economic boom isn’t what it’s cracked up to be? The announcement of the stimulus package? More solid plans of an infrastructure stimulus? My attitude is that anytime you see an explosion of debt, you end up with higher gold miners down the road. It doesn’t bother me to be patient.

In general, it seems likely we shouldn’t see interest rates climb much more, as it causes so much damage to a heavily indebted country that has leaned on low rates to finance good times. Both the Fed and international central banks have made noises about preventing rates from moving very high. What would change that? Looking at history, I think the Fed will happily support low rates until we see something approaching full employment. At that point, inflation gets too messy, you have big problems, and you need a Paul Volcker (Fed Chair 1979-1987) to give the market its medicine. We’re a long way from that point.

I feel like we’ve been too cautious a fair amount over the last few years, but this is the most comfortable I’ve been with our portfolios’ positioning for a good while. I’m just trying to pace through risks and opportunities. Right now, the popular trade is rushing to economic reopening plays behind Door #1. That’s fine, but it’s certainly not risk free. Expectations have become pretty high. Could that trade continue? Absolutely, but it could also reverse, and eventually it’s easy to see how it could reverse pretty hard. We even added to our reopening ideas just last week, but at this point, I’d only add to the idea when price is on your side and the idea is likely to have relatively long life. See what’s been happening in tech lately? There’s no reason exactly the same thing can’t happen to cyclical stocks at some point down the road.

We’ve also been adding to tech while it gets hit. Why? In general, anytime you see something that looks like panic, you’re going to want to at least think about buying. We started out with very small tech exposure, so it doesn’t bother me to add a little bit.

Finally, could this reopening surge go for a while? Sure, but people are likely to want to hear good news from companies in April with earnings reports. If they don’t get that, there could be trouble. As things stand now, I’m fairly comfortable where we are. To the extent that I’d add something now, it would more likely be a long term hold rather than the latest hot stock. At this point, reopening moves have come a long way. I’m sure we don’t have everything right, but I think we’re in a reasonable position, and I’d like to think that becomes more readily apparent as the year moves along.