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If You’re Not Long, You’re Wrong

Summary:
This week I visited beautiful Vancouver to attend the CEO Martini Party. The annual event, hosted by Stockhouse, is an opportunity for business leaders representing a number of industries to connect and meet with newsletter writers and potential investors. It was great to catch up with some old faces and to get to know some new ones. I want to thank Cindy Broad and everyone else at Stockhouse for putting on another successful event! In my keynote address, I explained why I’m bullish going forward despite signs that the world could be facing its worst economic slowdown since the financial crisis. Just this week, the International Monetary Fund (IMF) downgraded its 2019 growth forecast to 3 percent, a significant drop from the past couple of years. The reason for my bullishness is simple:

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This week I visited beautiful Vancouver to attend the CEO Martini Party. The annual event, hosted by Stockhouse, is an opportunity for business leaders representing a number of industries to connect and meet with newsletter writers and potential investors.

It was great to catch up with some old faces and to get to know some new ones. I want to thank Cindy Broad and everyone else at Stockhouse for putting on another successful event!

In my keynote address, I explained why I’m bullish going forward despite signs that the world could be facing its worst economic slowdown since the financial crisis. Just this week, the International Monetary Fund (IMF) downgraded its 2019 growth forecast to 3 percent, a significant drop from the past couple of years.

If You’re Not Long, You’re Wrong

The reason for my bullishness is simple: Bad news is good news. Policymakers and heads of states see the threat of a slowdown and are more likely to enact stimulus measures to prevent a full-blown recession. This is especially the case in nations with upcoming federal elections—the biggest one being the U.S. presidential election.

President Donald Trump is under pressure from a series of House investigations, not to mention an impeachment inquiry that’s near guaranteed to result in official articles of impeachment. Be that as it may, Trump is the only U.S. president that I’m aware of who sees the market as a barometer of his policies’ success. Every morning, after he wakes up and coifs his hair in the mirror, he wonders what his administration can do to drive stocks higher. We’ve already seen aggressive corporate tax cuts and a wave of deregulation, and we may expect to see more as Trump seeks reelection. So even though you may not like the man’s governing style or his Twitter activity, he always has investors’ interests in mind.

Fiscal-Monetary Imbalance Is a Global Growth Headwind

If You’re Not Long, You’re Wrong

The same cannot be said of policymakers in the European Union (EU), where much of the slowdown is currently happening. Germany, the world’s fourth largest economy, is facing a recession. The problem is that there’s a massive imbalance between fiscal and monetary policymaking. Instead of doing as the U.S. has done—cutting taxes, rolling back business-killing regulations—EU strategy has been to keep rates at near-zero or lower. Denmark, for instance, now pays borrowers to take out a mortgage.

This is unsustainable, and there are many market watchers, including Bill Gross, who believe we’ve seen the end of what negative rates can achieve. In his most recent investment outlook, the legendary co-founder of PIMCO says that zero-bound easing may have helped asset markets over the past decade, but it will not be enough to keep the bull market running.

Central bank governors “are becoming wise to the negative effects of rates at zero (or less) that literally rob small savers and larger financial institutions such as banks, insurance companies and pension funds of their ability to earn historically ‘guaranteed’ carry,” Gross writes.

To prepare for “slow economic growth globally,” he has a tried-and-true solution: “High yielding, secure-dividend stocks are what an astute investor should begin to own.”

I agree, and Gross’ advice is in line with what I told listeners at the Stockhouse event this week: If you’re not long, you’re wrong.

Gold Continues to Look Attractive in a Low-Rate Environment

Lower-for-longer rates also favor commodities and gold prices. The last time we saw gold go in a cycle like this, it went from the mid-$200s up to $1,900 an ounce. You can easily get a fivefold increase or more in its price, which is why I believe $10,000 gold could happen the longer supply trails behind money supply.

Speaking of gold… On October 31, I’ll be participating in a webcast on investing opportunities in the gold mining industry. I’m excited to tell you that I’ll be joined by mining legend Pierre Lassonde, who recently said that the yellow metal could hit $25,000 by 2049. To register for the webcast, just email us at [email protected]. Slots are filling up fast!

A Year Since Canada Legalized Recreational Cannabis

One year ago this week, Canada became the first major country to legalize recreational cannabis for adults. (Uruguay was the very first to do so, in December 2013.) As such, a few other countries—including Luxembourg, Mexico, New Zealand and Russia—are keeping their eyes on Canada to see how things are going.

And with good reason: It’s estimated that the size of Canada’s recreational market will hit $5.2 billion by 2024, up from $569 million in 2018, for an incredible compound annual growth rate (CAGR) of 44.4 percent.

As I told you, I was in Vancouver this week, and the local news spent a lot of time reflecting on this important milestone. I was surprised to learn that, despite legalization, a significant percent of Canadians still get their cannabis from illegal sources. About half of Canadians said they bought supply from a legal source in the first half of 2019, while a whopping 42 percent said they bought it from an illegal source.

If You’re Not Long, You’re Wrong

The main reason for this is that rollout has been cautiously slow. To date there are only seven official BC Cannabis Store locations in all of British Columbia, none of them in Greater Vancouver.

The same caution is being taken with edibles, which became legal for the first time this past week. (“Edibles” is the catch-all term for THC-infused products such as gummies, cookies, beverages and topical creams.) Even though they’re now legal, they won’t actually be on store shelves for another few weeks as the Canadian government begins accepting applications from companies seeking to produce and sell the products.

It’s a work in progress, but an exciting one nonetheless. For early stage investors in particular, there’s definitely money to be made.

Meet the World's 10 Youngest Billionaires

Gold Market

This week spot gold closed at $1,489.85, up $0.75 per ounce, or 0.05 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 0.03 percent. The S&P/TSX Venture Index came in up just 0.31 percent. The U.S. Trade-Weighted Dollar fell 1.10 percent.

Date Event Survey Actual Prior
Oct-15 Germany ZEW Survey Current Situation -23.6 -25.3 -19.9
Oct-15 Germany ZEW Survey Expectations -26.4 -22.8 -22.5
Oct-16 Eurozone CPI Core YoY 1.0% 1.0% 1.0%
Oct-17 Housing Starts 1320k 1256k 1386k
Oct-17 Initial Jobless Claims 215k 214k 210k
Oct-17 China Retail Sales 7.8% 7.8% 7.5%
Oct-24 Hong Kong Exports YoY -7.0% -6.3%
Oct-24 ECB Main Refinancing Rate 0.000% 0.000%
Oct-24 Durable Goods Orders -0.5% 0.2%
Oct-24 New Home Sales 710k 713k

Strengths

  • The best performing metal this week was palladium, up 3.26 percent as its one-week lease rate reached the highest since January, indicating physical supplies are tight. Gold traders and analysts in the weekly Bloomberg survey were mostly neutral on the metal’s price outlook as the market awaits the upcoming Fed meeting. Gold did advance on Wednesday after an unexpected drop in U.S. retail sales. The metal also got a boost from increased trade war tensions. China threatened “strong countermeasures” if the U.S. enacts legislation supporting Hong Kong protesters.
  • U.S. retail sales declined for the first time in seven months, suggesting that consumers are starting to become shaky, reports Bloomberg. The value of overall sales fell 0.3 percent last month, below estimates for a 0.3 percent advance. Slowing retail sales fueled economic worries, which can boost gold’s appeal as an asset class.
  • The Dutch National Bank (DNB) released bullish statements on gold this week. “Gold is the perfect piggy bank – it’s the anchor of trust for the financial system. If the system collapses, the gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security,” said the DNB on its website. The Netherlands is the world’s tenth largest holder of gold with approximately 612.5 tonnes in its reserves.

Weaknesses

  • The worst performing metal this week was platinum, down 0.66 percent as hedge fund managers cut net bullish positions to a seven-week low. Turkey’s gold reserves fell $181 million from the previous week, according to central bank data. The central bank’s holdings are now worth $25.8 billion, and are still up 44 percent year-over-year.
  • China’s slowing growth is now spilling into gold jewelry demand. According to forecasts from Metals Focus, jewelry consumption is set to drop 4 percent in 2019. Investment demand is also forecast for a 20 percent decline. Higher metal prices are also hurting jewelers. Chow Tai Fook Jewellery fell as much as 4.6 percent after it announced it will record an unrealized loss of up to HK$1 billion.
  • Jewelry demand has been muted in India too due to higher prices, but higher prices are good for investment demand, which had slowed in recent years. Investments in gold exchange-traded products (ETPs) in India has recovered this year, in part due to rising comfortability in making online purchases. Metals Focus said in its monthly note that recovery is expected to continue, but the size of fresh investment inflows may be limited by the attractiveness of equities. President Maduro of troubled, but gold-rich Venezuela said this week that he has decided “to approve a full functioning gold mine for each governor’s office.”

Opportunities

  • According to delegates at the London Bullion Market Association (LBMA) annual conference, gold will rise to $1,658 an ounce by October 2020. Last years’ attendees “pretty much nailed” the metal’s rally in 2019, reports Bloomberg. The group also forecasts silver at $23 an ounce next year, rising 11 percent from today’s $17.60 level. Lastly, the attendees predict palladium will reach $1,924 an ounce by this time next year. Palladium is closing in on $1,800 an ounce as a supply deficit persists, according to Australia & New Zealand Banking Group.

If You’re Not Long, You’re Wrong

  • Suki Cooper, precious metals analyst at Standard Chartered Bank, says that the next push in gold prices will come from retail demand. In an interview with Bloomberg, Cooper said that “retail investors almost want confirmation of further rate cuts, some weakness in the equity markets before they move into good. The next leg higher in 2020 is going to be led by the retail side.” Speaking of more rate cuts, the Fed looks almost certain to cut rates for a third time later this month.
  • Sprott CEO Peter Grosskopf is bargain hunting for stakes of mining firms that have taken a tumble, reports Bloomberg. Grosskopf said that if big producers don’t buy up their smaller rivals, then “the juniors will consolidate among themselves to create bigger companies.” Iamgold Corp is also bullish that more deals could emerge. “With so many companies chasing so few deposits, there’s certainly an opportunity for further consolidation in the industry,” says Iamgold chief financial officer Carol Banducci.

Threats

  • Ray Dalio said that “big unique things are happening” in the global economy and that it’s “in a great sag.” The billionaire investor said impetus from measures such as rate cuts and tax cuts is fading and that a lot of long-term debt maturities are coming such as pensions and health care that are a burden. Dalio says one of the reasons for slower growth is a large wealth gap, which is a disparity that also leads to an education gap.
  • In another credit warning, S&P Global Ratings says that the number of weakest links grew to 263 in September from 243 in August and are near a ten-year high. Weakest links are issuers rated B- or lower by S&P Global Ratings with negative outlooks. Twenty percent of the weakest credits are in the consumer products sector which has seen 52 downgrades this year versus only 5 credit upgrades.
  • Bloomberg’s Lisa Lee reports that leveraged loan investors are “getting increasingly angsty, and their fear may be a harbinger of more pain coming in credit markets.” Leveraged loans are performing worse than junk bonds, which is surprising since they have been considered a lower-risk way to invest in junk-rated companies. Lee adds that “the loans have grown into a $1.2 trillion market” and that “safeguards and protections for investors have weakened.”  While most economists rightly argue you can’t have a recession without a credit blow up, the green brown shoots are beginning to show their color.

Index Summary

  • The major market indices finished mostly up this week. The Dow Jones Industrial Average lost 0.17 percent. The S&P 500 Stock Index rose 0.54 percent, while the Nasdaq Composite climbed 0.40 percent. The Russell 2000 small capitalization index gained 1.56 percent this week.
  • The Hang Seng Composite gained 1.44 percent this week; while Taiwan was up 2.67 percent and the KOSPI rose 0.79 percent.
  • The 10-year Treasury bond yield rose 2 basis points to 1.755 percent.

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October 18, 2019

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