The Mirage Within The Market – A Current Snapshot
When looking at the history of financial markets, there have clearly been periods of excess and speculation – some much more extreme than others. In older times existed the Tulip mania and South Sea bubbles, while more recent times include the well-known Dot Com era of the late 1990s. During each period, investors who participated would always provide an explanation – fear of missing out, the dawn of a new era, perceived scarcity of assets – you name it.
The reality is that the mirage that appears in front of these participants eventually disappears while they hold the rotted remnants in their portfolios. In today’s landscape, crowd psychology has been pervasive when investing in the over-owned and overvalued tech arena. For example, we have seen high profile tech companies split their stock (a move that creates no economic value and reminiscent of the late 1990s), which drove their speculative prices even higher.
We saw investors betting that Tesla TSLA (a company that for a brief period had a market cap greater than Walmart WMT despite generating a mere fraction of its revenue) would be included in the S&P 500 index, only to be disappointed and create a subsequent rout in its share price. Per Dave Rosenberg, nearly a week ago, the five largest stocks in the S&P 500 (all large cap tech) have a combined market cap that “equals the smallest 389 stocks”. These speculative moves are nothing new to the sight of veteran investors but have been significantly more pronounced in the last few months.
Most recently, Softbank (the Japanese conglomerate) led by founder Masayoshi Son had bet billions in short-term options on US tech stocks since the summer, along with many retail investors, compounding the explosive share price growth in the sector. Per the Financial Times, “earlier this summer Goldman Sachs GS estimated that a fifth of all S&P 500 options traded in the second quarter had a maturity of less than 24 hours, up from around 5 percent in 2011-2016.” Speculation is in season. Softbank was built on being a visionary in the world of venture capital based on a long-term investment horizon. Options trading includes the element of time decay – perhaps trying to play a fast game of “catch up” after being burned by imploding unicorn companies reflects a ‘decaying’ investment philosophy.
The speculation is taking place during a monetary era where the Federal Reserve is no longer concerned with price stability, as the Powell-led Fed is engaged in “flexible” inflation targeting. The Fed is willing to sacrifice price stability for maximum employment. In a time where the US dollar remains overvalued on a trade-weighted real effective exchange rate basis, the runway is clear for higher inflation, as so much of the continued fiscal spending ahead of us (largely monetized by the Fed) will be targeted at the consumer. Remember, there is always a lag with inflation. Inflation is like a landmine. One — it’s dangerous. Two — you don’t really see it until you are in very close proximity. Even then, many won’t see it until they have stepped on top of it. In the end, the Fed’s new inflation approach should shine on precious metals and gold mining companies.
Gold is at the same level it was in 2011 (despite the additional monetary stimulus) while the gold mining stocks, which have reduced capital expenditures, shored up balance sheets, and are returning cash to shareholders, are still over thirty-five percent below those 2011 levels. Furthermore, gold as an asset class is under-owned with almost no institutional ownership. Simon Mikhailovich, co-founder of The Bullion Reserve recently stated that Western institutional and high net worth investors own almost no gold today but in the 1970s, they allocated 5-7% to it.” As there is more evidence of interest from pension funds and endowments, we see a tailwind in this asset class heading into a period of inflation. As Rick Rule, the CEO of Sprott US has stated, “Gold is an asset class that Wall Street can’t spell.” As we see a 1970s-like stagflationary environment ahead of us, it is appropriate to hold the shiny metal and its mining counterparts in an investment portfolio. As the writer-philosopher George Santayana stated, “Those who cannot remember history are condemned to repeat it.”
The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, SIPC & HighTower Advisors, LLC, a SEC registered investment advisor. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates. This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness