Some people may say “Mike, get a life!” yet – I spent a good deal of last night unable to sleep in thinking about the economy. The disconnect between Main Street and Wall Street is particularly troublesome for me to process when I see “blood in the streets” and the Nasdaq at (almost) its all time high. This makes no sense!
In this article (which will be a little longer than normal) I want to give members my observations of what I see happening – but first I will start with guidance – with one addition:
1. Own Gold: Up to 10% of your portfolio. Since I have given this guidance, gold has been the best performing asset class. UPDATE: The club is in advanced due diligence on a gold project that makes sense for club members. I will keep you posted.
2. Maintain a very large position in cash. I believe we will see the house of cards we call the economy, collapse and those with large cash positions will be able to take advantage of these, once in a lifetime, asset buying opportunities. The only caveat is – the fact the Fed is equipped to prop up the economy through unlimited force feeding of liquidity into the economy & could succeed in keeping all assets artificially propped up which would be bad for those sitting in cash and owning gold. Generally, when the stock market is moving up – gold falls out of favor.
3. 30 days ago, I stated weight heavily in oil – in your portfolio – because the world needs oil and most large oil companies need oil to (at minimum) trade in the range of $40 to $50 a barrel to survive. The easiest strategy is to own oil ETFs and these ETFs are up over 50% but I believe there is still more room for them to move as oil prices will, over the next few months, likely hover above $40 a barrel. Oil has been the best performing asset class over the last 30 days.
4. At the club we will be looking at Real Estate Opportunities in the coming months; however, the big caveat will be-if the Fed stimulus is able to prevent deflation and an asset blow up. If so, then the Real Estate opportunity may not be what we hope for – but current owners of properties will be happy as Real Estate could maintain its value. I see commercial Real Estate Property values collapsing and this might be an area we look at as many commercial tenants are going out of business.
So the new guidance I would like to give you is that, in addition to gold, I want you to consider silver for your portfolio.
I believe silver is powering into a new bull market after getting clobbered in March. Typically, silver tends to follow upward movements in gold but several months after gold’s movement upward. Silver is a much smaller market than gold and any attention it will get will see disproportionate moments to the upside. There is risk but, in the risk/reward scenario now is the appropriate time to ensure you own silver. The best way is to own actual bullion or in America pre 1965 dimes, quarter, half dollars and dollars – but currently many of these are selling at a premium. As a pure play the ETF “SLV” is a conservative way to invest in silver and Pan American Silver is one of the largest silver producers on the planet with symbol PAAS.
Investors only seem interested in silver when they expect gold to continue to move upward. It is an asset that can quickly be abandoned and ‘sell offs’ can happen quickly. The best time to buy silver is when it is inexpensive compared to gold levels. The easiest way to calculate this is the gold/silver Ratio. In other words, how many ounces of silver does it take to buy one ounce of gold? Right now with silver trading at $17.24 an ounce and gold trading at $1735 an ounce that ratio is 1735/17.24 or it takes about 100 ounces of silver to buy one ounce of gold. Since 1969 this ratio has averaged 50.9 so based on this formula silver is trading at about half of its historic value compared to gold.
Investors will perceive getting more value from silver investing than gold investing as the concept of hedging to protect investor portfolios grows in these turbulent times.
Now let me move onto some general observations that kept me up most of the night and why I have concerns about the outlook for the world economy:
-I think we will see a slow economic rebound in the pandemic’s immediate aftermath, but consumer consumption will drop and weaken this short-lived recovery. Ordinary people will be forced to pare back on their consumption, and we will start to see this in July when the extra $600 per month unemployment benefits stop in July.
-On Friday night I went to YardHouse which is a well known deep pocketed restaurant chain owned by Darden Corporation. Darden is a large publicly traded company. The manager at the local Yardhouse told me they are doing about 30% of normal volume due to the fact they can only fill the restaurant at half capacity. The bar in the restaurant was closed and he said that – alcohol is were they make all their margins – and the food service is low margin.
Then on Saturday night I drove to 2 local pubs I like to go to and have a beer. They serve food so they can be opened as part of Phase 2 openings in Vegas, and both were closed. Then I decided to drive around further and several small restaurants that I know were still closed. I do not know if they will ever reopen. When the economy reopens, we are not going to see restaurants, hotels, casinos hire back at levels pre pandemic and unemployment will stay at double digit rates for many months and possibly years.
I have read reports that it is estimated that up to half the restaurants in New York will never reopen. How can they survive with such tiny margins and only allowed to be at 50% occupancy?
-The battle between the USA and China will continue and this will create a wave of deglobalization. That will cause supply chains to break and prices to rise. Currently there is a trade war and technology war. USA has decided Huawei is not going to have access to US semiconductors and technology and USA has shut down the transfer of technology to China and China to the USA. China has been more authoritarian, and we see that manifested now with the control it is placing on Hong Kong.
-The only reason the markets are moving higher is because of the Fed’s massive monetary stimulus. It is also supported by the fact that people expect the news about the pandemic to improve and a vaccine will be found. Also, we are now seeing an interesting situation where people are getting unemployment checks and there has been a surge in day traders as many more people spend time at home. It is interesting to note that many laid off workers are making more on unemployment than at their previous job and based on my interactions, this seems to be the norm and not the exception.
Employers will be able, with high unemployment rates, to hire workers back at lower wages without benefits. It is staggering that we gained 22 million jobs between 2009 and 2019 and now have lost 30 million + in just a few months.
-I believe we do not have enough testing capability in America, and we will see a 2nd surge of Covid in the Winter of next year. I think other people are thinking this way as well and, as a result, are saving money instead of spending it and we will see a slash in discretionary spending that will hit Las Vegas particularly hard (where I reside). In Germany and China, where they already opened a month ago, restaurants still remain empty.
-We are already at 28% unemployment in Las Vegas – which is the highest in the nation.
Members remember a few years ago when the club hosted Keith Smith the CEO of Boyd gaming as a speaker at a club event. He spoke about why Nevada was much more diversified and would not suffer as badly in another Recession. I disagreed and said we are mainly diversifying into sports which is also discretionary spending and I debated with him that, in the event of another downturn, Las Vegas would, once again, be the hardest hit. A lot can happen in the next year but get ready for cap rates to become compelling in the Las Vegas Real Estate market again. It will probably take about 12 to 18 months before we see price collapse. Again, this could be offset by Fed programs – which is something I cannot predict.
-Many are arguing that the Feds ‘force feeding’ of trillions of dollars will cause inflation. If so, then longer term interest rates will have to increase and if that happens the economy will crash. We cannot sustain this massive debt – and taxes will have to increase. Otherwise, with higher rates, there will be massive cuts in all government health programs, military etc.
-I do not see pandemics stopping. The Wet markets in China are reopening. I have been there and seen it myself and I know it is part of a long tradition, although it still sickens me. When you put these exotic animals into cages they interact and create viruses that spread to humans. In our lifetime we have seen HIV, SARS, MERS, the swine flu, ZIKA, EBOLA and now COVID 19.
The bottom line is consumers are not going to spend at levels pre pandemic and the stock market is currently trading at 23.5x next year’s earnings. That is complete insanity. The Fed will do all it can to flood liquidity into the system; however, there is a real possibility in the next 3 years we will see a DEPRESSION – especially if the pandemic is not able to be contained.
Remember in early January at the club meeting I spoke for 90 minutes on my outlook for the economy for 2020 and I stated that no one was discussing the possibility of a recession. I spoke, for most of my talk, that this was a possibility and gave 3 reasons why (one of them was a pandemic). Gold and oil were the right calls for investment – when the guidance was given. I am working on a gold project that makes sense and will be watching closely the opportunities that will arise in the coming months and again encourage members to take a much higher portfolio position in cash.
Finally, I am very pleased to let members know that Mark Skousen, has announced FreedomFest will be held this year at Caesar’s Palace Hotel. The dates are July 13 to 16 and I know I will see many members at the event. Remember parking is now free (they had no choice as casinos will have to rely heavily on locals again – but I am sure that, in the case of a full recovery, in the future – when we see 40 million visits again they will forget the locals and charge for parking)
To see a complete list of speakers, ticket info and the agenda go to www.freedomfest.com.
In Mark’s words,
“FREEDOMFEST 2020 WILL BE REMEMBERED AS AN HISTORIC EVENT-THIS YEAR WE BATTLED THE NOVEL CORONAVIRUS, ENDURED THE UNPRECEDENTED GLOBAL LOCKDOWN AND FOUGHT THE MOST POLARIZING AND IMPORTANT POLITICAL CAMPAIGN SINCE WORLD WAR 2. WE ARE ENGAGED IN A GREAT BATTLE OF IDEAS.”
Be safe members!
Investment Club of America President
Disclosure: I am not a licensed financial advisor. Any action step you take as a result of my writings is at your own risk. I have no person benefit from any of the guidance I provide above including if you buy tickets to Freedomfest.