As we look out across the investment opportunities available to investors today, the phrase ” In the land of the blind, the one eyed man is king” keeps rattling around in my head. However, the version that keeps coming back to me again and again is ” In the land of no return, those asset classes with even the slightest hint of return are king”. Whether it is royalty trusts, farmland, MLP’s, or whatever, assets and asset classes whose traditional return profile have hardly made investors giddy have now become the go to investment. Granted, some of these asset classes do possess the benefits of secular shifts (Farmland, pipelines, etc.) but it is clear to us that the reach for yield has morphed into a reach for yield at any price. It seems like any asset whose income stream can be monetized (and leveraged) is being driven to nosebleed levels.So, what is the proactive investor to do? In our opinion, there has never been a better time to avoid the low level perspective and take the 30,000 foot view. Massive amounts of Central Bank created liquidity will have consequences for currencies and real asset prices. BUY STUFF.
The Economist recently discussed the sudden massive influx of Hong Kong Dollar buying in response to the Russian Crisis. Russian oligarchs, ostensibly in response to the recent sanctions, were fleeing to the safety of what they consider to be a politically friendly environment. This influx caused a great deal of frenzied U.S.Dollar buying in order to retain the HK dollar/US Dollar peg. In addition, it also was reported that the strong bid to high end London real estate appears to have severely diminished, most likely due to a diminished Russian appetite for safe haven buying. What is interesting about these flows of capital is that the search for safe haven assets is now dictated by the “safety” of the political environment, and not necessarily by the perceived riskiness of the asset itself (stocks/bonds). Much like those seeking political asylum for purposes of exercising their basic freedoms, capital seems to be seeking out its own level of freedom. Clearly this kind of thinking bodes well for hard assets, particularly those with a higher degree of liquidity. Hard Assets Are Apolitical. BUY STUFF
We were quite amused at recent comments by Fed Governor Lockhart regarding a shift in Fed policy occurring when ” They can see the whites of their eyes”. This comment would be funny if not for the fact that markets have gone “all in” on the accuracy of Fed policy. Not only has Fed policy exacerbated the amplitudes of what used to be called the normal business cycle, they have sought to rewrite history by emphasizing their forecasting acumen when clearly none exists. The prize for the appearance of perceptiveness has to go to Mario Draghi, who is able to make similar bold predictions within the context of a Central Bank policy that simply has to make promises to successfully achieve their policy goals (whatever it takes… ad infinitum). I know that we are walking a fine line here when we rehash the same point over and over, but history and markets ( in our opinion) will ultimately prove that such professed tea reading skills are completely without merit.
We were somewhat surprised to see a tag line in the FT today denoting the shale industry as being “Fed Resistant”. What a sad commentary on responsible Central Banking. The tried and true market adage used to be ” Don’t fight the Fed”. That might have to be amended however to ” Don’t let the Fed fight you”. Central Bank activity has become so aggressive and pro-active over the past several years, that a simple unwinding of this hap hazard strategy will virtually ensure that those on the other side of this mis-pricing will feel the brunt of this realignment. We have been very upfront about those areas of the market that we feel, and still feel, are “Fed resistant”- Hard Assets. Join the resistance movement: Buy Stuff.
The recent decision by Credit Suisse to exit their commodities business, marks the latest in a long line of Commercial and Investment Banks that have made the conscious decision to exit their respective commodity businesses. This decision reminds us of previous exoduses in the past, such as in the late 90’s when Merrill Lynch left the business, only to re-enter in the early part of the 2000’s. As Chuck Prince astutely remarked in response to the frothiness of the credit markets in 2007,” as long as the music is playing you’ve got to get up and dance”. Well, faced with additional capital requirements and a myriad of Dodd-Frank related regulations, the decision by banks to not dance is probably the proper response. However, if one believes (as we do) that there is no better contra-indicator of value (outside of Central Bankers) than the behavior of Bankers, than this decision clearly indicates that the commodity area is ripe for outsized returns.
I often make the statement that I would like the words ” He was early” emblazoned on my tombstone. From Farmland in the late 90’s to the drillers and the refiners in the early 2000’s we seem to be both blessed with foresight while at the same time cursed with an inability to frame that foresight within a reasonable time period. In short, it seems like we are always playing the waiting game, which as we all know, sometimes feels less than comfortable. Being early often feels like being wrong, and one has to continually revisit the underlying investment thesis to make sure that being early is not simply a refusal to admit ones mistakes. We have to admit that the environment over the past several years has simply not validated our thesis with respect to hard assets vis- a- vis financial assets. The question is: Are we wrong or Are We Early? Clearly the answer to this question will ultimately unveil itself, but in the interim we take comfort in the fact that fiat currencies rarely reign supreme over extended periods of time, particularly those that are expressly being devalued via Central Bank actions. The antidote to falling currencies is to hold stuff.Continue to Buy Stuff.
I never thought I would ever say this but I was thinking the other day how I long for the days of Alan Greenspan as Fed Chairman. Don’t get me wrong, I think that his arrogance and wrong- headed thinking rank right up there with the worst of the Fed Chairman. The Maestro’s long diatribes ranged from the appropriateness of adjustable rate mortgages, to the shape of the oil futures curve. One thing that he did however was couch the Fed intentions to always shelter the capital markets under a cover of obfuscation. Our most recent Fed Chairs feel no compulsion to “fake it”, their role is to micro-manage the capital markets and no one should be under any misconceptions otherwise. In fact, the latest Maestro is particularly adamant that the suppression of rates has not necessarily created anything that she can’t handle. Our response to that is: “We Will See”. We were describing the state of markets the other day to someone using the accident victim as an analogy. The capital markets/global economy in 2008/2009 experienced a self-inflicted crash, followed by a near death experience. The expanded role of Central Banks was initially to save the patient. However, their ever expanded duties included administering morphine, gassing up the new car and pulling it around front for the quasi-healthy patient to take another joy ride. The problem is that how many near death experiences can one person have, and no one car crash looks like another. As we have discussed, one would expect a certain amount of Central Bank hubris, given that markets have recovered in such a sharp and unexpected fashion ( who would expect that sub-prime loans are exploding and that AAA CLO’s containing the crummiest of credits are exploding as well). However, markets have a way of acting in very non-linear ways and the belief that macro-prudential market regulation will do the trick ignores the speed at which dislocations can occur. Fade Chairman Yellens woman’s intuition: BUY STUFF
The recent movement towards more on-shoring of production as well as the recent explosion in global tensions across a number of borders has gotten us thinking about the security of the global commodity supply chain. Whether it is the Mideast or Asia or Eastern Europe, we are suddenly faced with multiple flash points in what traditionally have been fairly stable regions (Mideast excluded). Combine these tensions with a general global shift towards protectionism, and we could see the focus of commodity purchasing mangers shift from price, to availability of supply at any price. The composition of global trade over the past 15 years has occurred against the backdrop of a benign political and social environment. This subsequently has afforded commodity end users the luxury of longer, more responsive global supply lines. However, in a post crisis world, there have been several important shifts which potentially threaten the accommodative nature of the existing supply chain. One shift has been the emphasis on the part of producers to produce more profitably coincident with their inability to tap global capital markets. Another important shift has been the move towards resource nationalism with countries impeding the export of raw materials in favor of providing more value added at the country level (Indonesia, South Africa, etc.). Both of the aforementioned have the combined affect of reducing the availability of supply. Juxtapose these developments against the climate that exists on the political and geo-political fronts and we feel we have the beginnings of what could be a new worry: availability of supply at a reasonable price. Buy Stuff and maybe some warehouse space
The one singular characteristic of todays capital market environment that has been the most perplexing and frustrating has been the complete lack of concern for what “might” happen. As we have discussed, low rates and the absolute manic focus on additional yield at whatever cost, has produced an almost universal catatonic state. Nothing is more indicative of this than the markets complete lack of attention to the potential for reflation/inflation. We forgive the equity markets for their lack of focus as they have the attention span of a six year old, but it is curious that the Treasury Market continues to remain oblivious to what are emerging signs that pricing pressures are already upon us. Slack in the labor market, spare capacity, and seasonal one-off factors are only some of the reasons given as to why we should ignore what are clearly clouds on the inflationary horizon. Perception is reality however, and the reality of low long term rates will remain until the broadly held mis-perception on inflation/reflation changes. The argument is also made that inflation/pricing pressure will never come to bear primarily because we would have already seen it if it were going to take hold. Our feeling is that all of the liquidity sloshing around has flowed into the easiest parts of the capital markets (debt and equity markets), next up are the hard asset/commodities markets which will in turn lead to overall broad price increases, which will then ultimately flow through to wages. We have never seen the kind of uncharted, unfettered Central Bank action that we have most recently experienced, so rest assured that when this inflationary cycle unfolds it will most likely not look like anything we have seen before. Buy Stuff
Much has been made about the lack of volatility, relatively speaking, across almost all parts of the capital markets. The dampening down of what would be considered normal volatility has again been laid at the feet of the command and control Central Bankers.We are not surprised however as the prevailing attitude is that low rates cure all ills, when in reality, low rates create more ills. We all should be quite attuned to the sedative effects of low interest rates on investors perceptions of real risk, if the recent crisis has taught us nothing else. Thus, when we see potentially serious geo-political flareups such as Iraq or China/Korea, any hint of serious concern is smothered quickly by the “whatever it takes” mentality inherent in all Central Bankers. However, as Bertolt Brecht said ” Because things are the way they are, things will not stay the way they are”.