Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
Happy Saturday, all. Cheers to a great weekend ahead. Let’s recap the past couple of weeks in our world. Stocks to all-time highs? Yep. Interest rates super low? Yessir. Tax changes done? Nope. Infrastructure bill complete? No, but we can award partial credit. A bipartisan agreement was reached in the Senate which is a step. However, word on the street is that it’s nowhere near what Speaker Pelosi & Co. will accept in the House so who knows/no one knows. Will we finally see the Squad Democrats hold the centrist Dems’ feet to the fire? It could be the “can’t miss” TV of the fall – what could be more fun?!?!
While it’s been relatively quiet this August, the financial news overall has been positive. Corporate earnings that were reported for June were very strong. Unemployment is trending lower, and we are even seeing some wage inflation (imagine that). In addition, some of the commodity price inflation seems to have been overblown and has settled into a manageable level. The Fed hasn’t started to taper so we have no Taper Tantrum. The one topic of non-positive news is, of course, COVID-19.
On that topic, it’s safe to say that your guess is as good as any. Given that the topic has turned into a political melting pot of misinformation and distrust the best we can offer is a bunch of words of association: delta variant, increased cases, booster shots, vaccine passports, Israeli surge, endemic, mask dispute, lab-leak-theory, lockdown, and the list goes on and on and on into the night. From a concern-for-humanity standpoint, I think we’ve learned that there isn’t a great source to provide any sort of prediction (we have to make our own decisions and take care of ourselves). From an economic standpoint, we do not see the appetite for another stringent lockdown and that’s what really matters to the markets. This article on what is going on in Israel seems relevant given their high inoculation rate compared to the rest of the world. Okay, enough of that.
We have been making some minor adjustments to portfolios over the last couple of months. Nothing super exciting that you can bring in for show-and-tell but little things on the margins. With rates low, we continue our position of wanting to take advantage of rising rates (traditional bonds will go down, “floating” will not) so that’s an ongoing process. “Micro buying” isn’t a technique that will show up in financial textbooks, but that’s what we are calling it – in spots we are buying little bits of stocks. The current dynamic has been that a company reports amazing earnings, but expectations were so outlandish that the stock sags for a couple of days which makes for an opportunity. Lastly, we did pull the plug on the stock, Alibaba, for now. It’s a fantastic story with immense upside. Unfortunately, the Chinese Communist Party has really put the screws on U.S.-listed Chinese companies. It’s a long story but it’s providing an overhang that’s sapping upside and could even result in delisting. In our core positions, Alibaba moves out and is replaced by an ETF of American cannabis companies. We will be discussing that segment more in the weeks to come as it’s a rabbit hole in and of itself.
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Gold Plated Tombstone
Fifty years ago, this week, then-President Nixon took the U.S. dollar off the gold standard. This change was announced as “temporary” which as we now know, has been very permanent. Since that time, there have been investors with strong bullish takes in gold as an investment. We lovingly call these friends, “gold bugs.” The argument has been that the precious metal was the foundation for the most important currency in the world and without it, the U.S. dollar would eventually devalue to the point that we’d be using them to start fires. Well maybe not quite that extreme but people have made fifty-year careers screaming from the rooftops that gold was the place to be. It’s time that we can finally close the chapter on that story.
We have argued that gold, like silver, like oil, like widgets, is just another “thing” that can be an investable asset. The price goes up and down. Hopefully, you find someone to buy it from you for more than you bought it for. There are times and places for all investments and it’s important to be open-minded to everything in the investing landscape. The difference, however, is that gold investors sold the story as an inflation hedge, a currency protection, and something that would perform when things went south. We now have enough data and enough stressful situations to conclude that’s just not the case.
Take a look at this chart below courtesy of @allstartcharts. There are a couple of things going on here…first, you can see on the top that the Gold ETF has recently reclaimed the highs it hit in 2012 (yay). That’s good, right? Well, sure it’s good that it has gone up with literally every other thing in the world the past two years, but we need a basis for comparison. The bottom line on the chart is the Gold ETF performance versus the stocks of the S&P 500 which just hit 16-year lows. So, through the crisis of 2008-09, the recent pandemic, and historically unprecedented monetary easing, it’s still making new lows. Whoops.
Going forward, could it outperform stocks in a year? Sure. That’s why like any other investment class, it’s worth considering at a modest level. However, at this point, it’s underperformed stocks so significantly for so long that it’s impossible for it to catch up. Unfortunately for many, the damage has been done. Now, try talking to a true gold bug and they’ll tell you something along the lines of, “it’s just starting to happen…now is the time…you’ll see.” 🙂
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