IN-DEPTH: TRANSCRIPTION - LONGWave - 02-09-22 - FEBRUARY – Investment Themes for 2022
Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
I would like to continue in this month’s LONGWave from our recent UnderTheLens Macro video with our 2022 Investment Themes.
In our February UnderTheLens video we outlined our Macro Themes for 2022. Based on this we clearly see some major investment opportunities in 2022.
When the central banks are following policies of easy credit, expanding balance sheets and low interest rates, markets normally rise. Like the tide coming in, all boats rise. However, when the policies are reversed as normally occurs with a change in the business cycle and the tide goes out, then boats normally fall with the tide.
Periods of falling tides are stock pickers markets. Rising tides on the other hand are proven to be great for simple passive ETF Index funds.
2022 is going to be about picking the right sectors and types of Investments. It requires research, knowledge and experience. This has not been required for some time as you could buy almost any ETF and make money or simply “Buy the Dip”.
In this session we will discuss our 2022 Investment Themes highlighted here in red which build directly from our Macro Themes.
All these Investment Themes can be found on the MATASII web site within the three sections: 1- Strategic Investment Insights section, 2- Triggers or 3- the Gordon T Long Macro section.
Weakening US political leadership and mounting serious Geo-Political risk, we believe will be a catalyst for troubles in the US Dollar and opportunities in Precious Metals, which have been mostly dormant in 2021.
The US Dollar will face many of the issues we have expressed in previous videos which include the rapidly deteriorating US Twin Deficits of the Trade Deficit and Fiscal spending Deficit. The US Current Account is also now problematic as it increasingly feels the pressures of Global De-Dollarization.
We expect the Dollar as represented here by the DXY to begin falling in 2022 towards its 80 WMA where it will find initial support.
However, further pressures in cross currency adjustments from currencies, such as the EURO, we suspect will take the DXY even lower later in the year to approximately $80. This is most likely to occur as the US mid-term elections cause further problems.
We show the DXY weakness here as a black dotted line on the right which finds support from a number of technical lines shown by converging dotted grey lines.
US Dollar weakness has traditionally been a positive for Gold denominated in Dollars since it takes more dollars to buy the same amount of gold when the dollar weakens.
We see 2022 being a good year for gold which is in a major upward trend after experiencing a consolidation over the past 18 months.
We have strong technical indications of the formation of a classic Cup and Handle pattern in Gold which appears very close to rising to complete the pattern as shown by the dotted black line on the right in the red ellipse.
A completed Cup and Handle pattern is very bullish for Gold and suggests the long term trend continues in 2022.
Caution however is warranted. Gold is understood to be well controlled by the global bullion banks and therefore prone to manipulation. Presently, though the dollar has fallen abruptly, its price has been relatively flat. This is because Gold also moves with US real rates. Falling US real rates push precious metals higher. Real Rates have recently been rising aggressively from ~-1.2% to ~0.6% which has been almost exactly countering the weakness in the dollar.
What has been pushing US Real Rates higher has been the massive issuance of US Treasury Protected Securities or TIPS. The US Government has issued the largest amount of TIPS in history of ~$76B in just the last 3 months ending in December. To put this in perspective this is 5% of the total outstanding amount of TIPS.
If this action continues then gold could be taken lower as shown here by the red projections. There is little doubt that the current Inflation pressures the Federal Reserve is facing is causing this. We hope to go into more detail on this in an upcoming Newsletter.
The Silver: Gold Ratio appears to have found longer term support. As such we see it rising.
We see Silver soon beginning its Primary Wave 3 up. Currently we see Silver outperforming Gold in the Near to Intermediate Term.
Out of control US Inflation, not seen since the 70’s, along with slowing economic growth is seriously damaging the Federal Reserve’s reputation with many feeling the Fed is caught in a trap of raising rates to fight Inflation while crippling an already steadily weakening economy. Much of this being a direct result of bad policies such as reversing US Energy independence and driving energy prices much higher. A potential Recession in an era of Stagflation is not something anyone has seen since also in 70’s.
Bond Yields, Credit, Real Assets and Value versus Growth all have investment plays in this type of scenario.
We have been warning for some time that cracks will soon be seen in the Credit markets. Rising rates, chronic illiquidity and rising defaults were highly likely to trigger a storm in corporate bonds with over 20% of them being Zombies.
We have posted this chart many times warning when we were at the top to “Watch for Deterioration Rate” after the Fed had sold all its holdings. We posted it in block letters as shown here.
Since then the collapse has gotten strongly underway. US Credit spreads are now decidedly blowing out with High Yield Corporate Bond yields back at their highest since the Covid shock in April 2020.
This chart is showing High Yield but it is also occurring in Investment Grade where a inordinate number of IG corporates are classified at the lowest level of “CCC”. In our assessment they are actually JUNK bonds in disguise!
Since the 2008 Financial Crisis there has been a feeding frenzy in corporate bonds as low rates and insatiable demand allowed any junk companies unfettered market access.
What did they do with the trillions of dollars of debt they raised? Did they spend it on new plant and equipment, or creating new jobs and markets? Nope! Most of it has been spent buying back equity (share-buy-backs) which pushed up the stock price and, and coincidently, management bonuses!
Additionally, there is zero liquidity in corporate bonds. Central Banks have been backstopping bonds with QE programs – which have ended. The sell-side, the banks, don’t make markets anymore – capital regulation and the transfer of risk to the BUY-side (investment managers), means leading bond deals is just a fee business for them.
The biggest dealers are now firms like Citadel Securities which commoditize trading through programs like buying RobinHood’s retail order flow.
As one long time analyst recently observed:
“When a bond crash comes the market will set like concrete!”
The 10Y US Treasury as represented here by the TNX Yield is now seeing yields shoot higher to over 1.9% and near the top of what has been overhead resistance. The 20 WMA has crossed the 40WMA as both rise along with the 80 WMA. We expect yields to continue to rise until the Fed is forced into Yield Curve Control. We can expect that anytime once we are over 2.1%.
Rising Rates are going to hurt over valued equity markets but will be good overall for Real Assets.Many have performed extremely well already. We were beating the drum on these in the fall of 2000 (as shown by the red circle). However, some now need time to consolidate their stock appreciation before heading even higher.
We see Grains for example continuing to be strong throughout 2022 since they are Real Assets that relative to other hard assets have not seen as strong a run up – as of yet! Food is something markets generally have not talked about for a long time. It is going to a major concern over the next two years.
We also see the continuation of the shift from Growth to Value which has been underway for awhile now. We are off the highs shown by the parabolic rise on the right. The last time Growth got this mispriced relative to Value was during the run-up to the Dotcom Bubble breaking in 2000.
Fundamentals are increasingly becoming important as factors such as Free Discounted Cash Flow mean something when credit becomes harder to come by or rises in cost. Corporate balance sheets are loaded down with debt that any increase in credit costs with be magnified with lost margins.
Value over Growth appears to be ready to run much higher now that Financial Repression in the form of the Federal Reserve artificially holding down interest rates comes to (at least temporarily) an end.
Rising rates are not good for the major US technology stocks with high Price/Earnings ratios. We should expect their PE ratios to contract to reflect this and potential global economic slowing.
The Top 10 market capitalization stocks in the S&P 500 are highlighted here. They have been carrying the overall indexes as we have pointed out numerous times over the last few years.
Overall their PE’s average in excess of 32. If they were taken out the market PE’s would approximate 18.
If PE’s were just to lower to 15 then it would be a major correction in the Top 1o because most of the market has already felt the pain in 2021.
US Technology stands at peak premium but is now being undermined by falling relative earnings.
They are currently floating on air. The US Tech sector is currently seeing its support withdrawn.
PEs will have to soon be adjusted downward.
The Big 7 are only now beginning to feel the pain. We can expect more to go as support is substantially lower.
We talked about Dollar Weakness earlier but there are positives with a falling dollar. It is likely to add momentum to what we have been writing about for some time and that is the unfolding Commodity SuperCycle.
The 30 year Commodity Cycle low is in. A little later than expected but then we have never seen Monetary Policy like we have been witnessing over the last decade.
Once we hit the lows as we saw in 2020 and we warned of at the time, we were off to the raises …. And fast!
The Goldman Sachs Commodity Index is up 194% and only now testing overhead resistance.
The CRB Commodity Index is up similarly and approaching overhead resistance.
Both need to soon consolidate before moving to new highs in this long term rising cycle.
A Weak Dollar will only propel them higher sooner!
We have spent a lot of time lately on trying to understand what the political Climate Change Tsunami is going to mean from an investment perspective.
Green Bonds, trading in Carbon Credits, Offsets and Streaming are exploding rapidly as are Green Hydrogen and safe nuclear technologies. We have covered off some of these in recent Newsletters and our 2022 Thesis Paper on the subject.
Despite the goal of Net-Zero De-Carbonization by 2050 and a US Carbon-Free Electric generation grid by 2035, Fossil Fuels are not about to be jettisoned as fast as many believe.
We are presently trading in the area of $100/bl for WTIC.
Like commodities in general we can expect some consolidation ahead after coming off ~10/bl in 2020.
Longer term many are expecting $150-$200/bl. before we achieve these de-carbonization levels through Green technologies. We are in that camp at MATASII.com.
There is little doubt about 2022 unfolding as a volatile year for the equity markets if January is any indication.
We have had to adjust our “Thought Experiment” slightly based on the degree of correction we witnessed.
SLIDE 36 – THOUGHT EXPERIMENT
We have adjusted our thought experiment slightly to reflect the Q1 rally as a counter rally versus stretching for a slightly new high at 4900. We now believe the Intermediate top has been put in at 4820.
SLIDE 37 – CONCLUSIONS
What can we conclude?
- Turmoil and Instability will mean significant volatility in all markets,
- Inflation and Slow Growth will prove a major problem for the US Federal Reserve,
- 2022 Will Be A Stock Pickers Market:
- Discounted Free Cash Flow and Fundamentals will matter,
- Value versus Growth
- Hard Assets will Increasingly be in Vogue,
- The era of a “Nifty 50” (or today called the “FAANGS”) in over,
- Passive Index buying will prove problematic for many ETF’s,
- The New Technology leaders will be Green because of massive Government spending, incentives and Regulatories,
- The Federal Reserve cannot be counted on to “have your back”!
As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2021 turn out to be an outstanding investment year for you and your family.
Thank you for listening