We are in the decade of hard assets

Tuesday, 15 August 2023 — South Melbourne

[7 min read]

Dear Reader,

Here’s an easy question for you, ‘which decade was better for shares…the 1920s or 1930s?’ How about the 1970s or 1980s?

One more, the 2000s or 2010s?

No two decades in the market are ever the same.

Why?

The drivers that created a period of under or over-performance are in a constant state of change. Nothing in markets remains static. Unloved sectors suddenly find investor favour. Cheap stocks become expensive. What was once hot, becomes cold.

Judging by the positive market action so far in 2023, my gut feeling tells me investors are banking on the 2020s rhyming with the 2010s. This optimism is not supported by history.

The 2010s were a winning decade for paper assets. Tech stocks. Junk Bonds. Cryptos. Anything that looked good on paper (and, backed only by paper) captured investor imaginations. An abundance of cheap money helped finance fanciful dreams.

The 2020s are going to be an entirely different decade. Unloved ‘hard’ assets — precious metals and commodities — are setting themselves up to be the standout performers of this decade.

Why?

Because the consequences of the idiocy — ultra-low rates, money printing and the demonisation of fossil fuels — that drove the value of paper assets up in the 2010s are going to make themselves known in the 2020s.

Recent issues of The Gowdie Advisory have looked at the history of markets to show why the conditions of our recent past are unlikely to be repeated in the future.

Here are some edited extracts…

‘What could fuel another spike in inflation?

‘When attempting to define the future, it’s instructive to look at past patterns.

‘In a recent update to clients, research firm, Variant Perception, looked at the correlation of the firm’s proprietary Commodity Contango Index (advanced 18 months) to the pricing of the Commodity Index.

‘For reference purposes…

‘“Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset's price is expected to rise over time. That results in an upward-sloping forward curve.”

Investopedia

‘Where the red line (Contango Index) goes, the black line (commodity prices) tends to follow.

‘In looking 18 months ahead, the red line (the futures price of commodities) indicates higher costs are coming.

‘The commentary beneath the chart states, that within the commodity complex, “Energy stands out as the top industry…”

‘In recent weeks there has been a steady uptick in oil prices…with West Texas Intermediate (WTI) going from US$68 on 1 June 2023 to around US$83 today.

‘Cycles rotate from UP to DOWN

‘…even when economic output, over the long term, remains relatively stable, the performance of the Dow Jones Index varies quite considerably…

‘For the ease of this exercise, I’ve numbered each period 1 to 8.

‘The first two periods were complete contrasts in the Dow’s performance relative to GDP.

‘In Period 1, the US economy grew at 8% per annum, however, the Dow managed to eke out a paltry 0.1% per annum.

‘Yet, in Period 2, with GDP growth at a pedestrian 1.4% per annum, the Dow raced ahead…pumping out a stellar 19.5% per annum.

‘Why the polar opposite outcomes?

‘The answer to that question can be found in the Shiller PE (Price to Earnings) Ratio.

‘The numbered troughs and peaks align with the timeframes of Secular Cycle periods.

‘The median PE for the US market (calculated from 150 years of data points) is around 16 times.

‘However, there are times when investors conspire to push the multiple higher or lower.

‘Investor outlook and the emotions attached to that outlook (be it for the good or bad times to never end) heavily influence the movement (in both directions) of the multiple.

‘Why share investors should be really worried

‘Over the long, long term, shares do deliver superior performance.

‘However, not every decade is a winner for share investors.

‘Some decades, like the Roaring Twenties and the post-2010–21 period, can “shoot the lights out” for investors.

‘However, there are decades when markets just shoot you down.

‘This graph shows the “Worst Returns by Decades” and what caused markets to behave so badly.

‘The market has TWO Achilles Heels:

1. High inflation — caused by governments running much higher budget deficits to fund war efforts.

OR

2. Starting the decade with a High CAPE (cyclical adjusted PE) ratio

‘Previous ‘worst decades’ have resulted from exposure to one or the other Achilles Heel.

‘This decade we start with…BOTH.

‘High inflation AND High CAPE.

‘Governments, faced with either default or print, are going to print.

‘The vilification of fossil fuels has all but locked in a decade of oil crises (like the 1970s).

‘And, as the above CAPE chart shows, the rotation from a HIGH to a LOW multiple on corporate earnings has been happening (to varying degrees) for 150 years. Why won’t it happen again?’

In the coming months, I expect paper assets to pass the ‘asset of the decade’ baton to hard assets…it’ll come in the form of a market downturn few are expecting.

Shares are likely to spend this decade (or, even longer) treading water while last decade’s unloved assets suddenly find favour.

The focus will shift to those boring investments of…gold, silver and gold miners.

And, as we know, the way to create wealth is to buy BEFORE an asset becomes the hot topic at BBQs.

Brian Chu, editor of The Australian Gold Report and founder of The Australian Gold Fund, knows this sector inside and out.

Brian’s knowledge of and passion for the precious metals sector is second-to-none.

His forensic analysis of precious metal trends and the gold mining sector is why, over the past seven years, Brian’s private family fund has tripled the return of the ASX Gold Index.

We are on the cusp of a seismic shift in investor sentiment…much like the optimistic 1920s gave way to a more pessimistic 1930s.

In these periods of heightened nervousness and uncertainty, people want to hold onto tangible assets.

You’ll hear more from Brian Chu later this week. Stay tuned…

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

Dear Reader,

In our 2006 book, ‘Empire of Debt’, we pointed out that empires are typically ruined by a combination of disastrous financial policies (debt and inflation) along with reckless military adventures. We forecast that the US would suffer both scourges. The cost of the latter almost guarantees the former. The US’s ’foreign policy’ establishment — Pentagon, defence industries, Congress, embassies, foreign aid…along with involvement in NATO, IMF, World Bank etc — costs US$1.5 trillion per year.

So, here’s an update.

Even today’s press suggests that Russia is winning the Russo-Ukrainian war. Despite months of reports on how the Russian military was falling apart, the latest news shows that Ukraine’s ‘summer offensive’ has failed…and now the Russians are counterattacking. Moon Of Alabama reports:

‘Western media have finally changed course. They are now admitting that the much-promoted Ukrainian counter-offensive has failed. In fact, they acknowledge that it never had a chance to win in the first place.

‘The Hill, The Washington Post and CNN now agree that the Ukrainian army will never achieve its aims.

‘In the northeast around Kupyansk the Russians have started their own offensive which has the Ukrainians on the run. Ukraine has ordered the evacuation of the area:

‘A mandatory evacuation has been ordered for the Ukrainian city of Kupyansk and its surrounding areas, as Russia intensified shelling of Ukraine’s northeastern Kharkiv region and claimed to have captured Ukrainian positions near the city on Thursday.

‘But Kupyansk is a Russian city and people refuse to leave.’

Megapolitics

Things are not always what they seem. And sometimes, the real meaning is hidden far below the surface. Like the North Atlantic — on the surface, chilly winds blow…and icebergs endanger big ships… while deeper down, a huge undersea current brings water from the southern seas to warm a whole continent. Empires have their own purposes and destinations, too. From the Abbasid Caliphate to the Zulu Empire, they dominate…and then they die.

You don’t have to be a military genius…or get secret updates from the CIA…to see that the West’s proxy war in Ukraine is not going as well as expected. The Military/Industrial/Spook complex controls the surface weather reports. And it has a keen interest in seeing things a certain way…not necessarily as they are, but as they would like you to think they were. So, to see what is going on, you must look beneath the waves.

The mainstream press made it sound as if Putin’s aim was to march across Europe like the Huns in the 5th century. If so, he had to be stopped.

And he was. Like the brave Polish knights who beat back the Muslim army of Mehmed IV in 1683, the Ukrainians put on their armour and stopped the Russians at the gates of Kyiv. By that reckoning, Putin has clearly failed. His forces are now holed up in the Russian-speaking Eastern provinces of Ukraine where people wanted to leave Ukraine anyway.

But there is no evidence that Putin had any further ambitions than those he openly declared: trying to protect its southwestern flank from further NATO encroachment.

Ulterior motives

In either case, the Russians — who were said to be such an offensive threat to Western Democracy — are now fighting a defensive war. In deep trenches…protected by mines and artillery…the defenders are hard to dislodge. And from Gettysburg to the Somme, attackers usually suffer huge losses and gain nothing. The ‘summer offensive’ was no exception.

Which leads us to a little question: how come? Military observers must have known that Ukraine lacked the air support and the artillery to roll over Russian defences. Why did they let the attack go ahead, knowing it would produce little more than burnout tanks and lifeless bodies?

The same question might be posed about the whole war. How could the US and NATO lose a war in the Ukraine? US GDP is US$24 trillion. EU GDP is US$18 trillion. Russia’s tiny US$1.8 trillion economy is no match.

A clear victory would have sent the Russians running back to their homeland…begging for peace in order to avoid a NATO invasion. Then, beaten and humiliated, Russia would be no further danger.

But there was considerable danger and uncertainty. The Russians might ‘go nuclear.’ There could be chaos...confusion…and maybe a civil war in Russia.

The idealists hesitated. They say they want ‘regime change’ in Russia…but Putin’s most likely successors are more nationalistic, more anti-West than he is. And if the war were meant to protect democracy, it has been a dismal failure.

Responsible Statecraft:

‘Kyiv has outlawed opposition parties, arrested opposition leaders, closed opposition newspapers and broadcast media, cracked down on religious freedom, and indicated that presidential elections scheduled for 2024 will not be held if the war is still underway.’

‘They wanted war’

The ‘neo-realists’ drew back too. They want to play the game, not upset the game board. Pursuing a winning strategy would be too risky for them. Besides, the US has no plausible interest in bumbling around the Eurasian steppes.

Already, John Mearsheimer sees the war in Ukraine as a mistake. Rather than giving battle to Russia in Ukraine…the US should prepare to confront a more worthy opponent in the Far East. A better strategy, he says, would have been to join forces with Russia to oppose the Chinese titan. As it is, the war pushes the Chinese, Russians, Iranians and others, into an alliance against the US…and even provides them a tutorial on current US military hardware and battlefield tactics.

And so, we have our answer; there never was a realistic path to victory, neither for the realists nor the idealists.

In March 2020, Antony Blinken and Boris Johnson pressured Volodymyr Zelenskyy to not accept a diplomatic settlement. They wanted war. They provided just enough help to keep the war going, but not enough to end it.

It is an imperial war, after all. As a pretext for transferring more wealth and power to the ‘experts’ and their gun-toting enforcers, it has been a great success for all of them. But its deep purpose is to weaken the empire, not strengthen it.

And so, it continues. A beautiful quagmire…

Regards,

Bill Bonner,
For The Daily Reckoning Australia