On Target Newsletter

In this issue:

  • Gold
  • SID – the self-inflicted Covid disaster
  • Stock markets: good, mediocre and rubbish
  • Natural resources
  • Baiting the American bull
  • Electric cars

The Dawning of a Golden Decade

The pandemic hit us without warning and more seriously than any of us could have imagined. It has destroyed some of us financially, damaged most of us, and raised big questions for all of us about our futures. Do we now have to make major changes to the way our family wealth is invested for our security and comfort in the years ahead?

One thing is sure for almost all of us… we don’t have enough invested in gold.

Ever since I began writing this newsletter and its predecessors many years ago I have argued the long-term case for the yellow metal. Those who followed my advice have done well, especially through bad times for other investment assets.

A metric I’ve always liked is that one ounce of gold bought a fine toga in Roman times; after 2,000 years it still buys you a good quality men’s suit. Can you think of any other readily-available, freely-tradeable, convenient and universally-respected kind of money and investment asset with such a track record?

When the world crashed in March, gold initially lost value. In times of great stress in financial markets, it’s an asset that can be turned into cash quickly and at low cost. But this time gold, as it has before, snapped back sharply, recovering faster than almost all other assets. For weeks it has been trading in the range $1,690-1,750.

It has always made sense to have some gold in your portfolio…

► It provides good long-term returns. Since its link to the dollar was scrapped in 1971 and gold has been freely traded, its value has grown at an average rate of 10 per cent a year in dollar terms, significantly more in most other currencies.

► Its correlation to other major asset classes has been low in both good times and bad ones, so it can mitigate losses in times of market stress.

► Historically its inclusion in portfolios has improved their risk-adjusted returns.

► It’s a mainstream asset that is liquid — instantly convertible into cash almost everywhere in the world.

► It’s without credit risk – its value isn’t matched by someone else’s liability that you have to be aware of and worry about.

► If it’s important to you to keep some of your wealth confidential, even secret, from governments, relatives or whatever, gold is well suited to that need.

How is the current pandemic crisis and its outcomes likely to affect gold as an investment?

Ronald-Peter Stoferle and Mark Valek of the precious metals consultancy Incrementum say in their latest magnificently-detailed annual report In Gold We Trust that for now markets are in the grip of disinflationary pressures, heading towards deflation. But the gigantic spending and easy-credit expansion plans adopted in response to the pandemic crisis suggest that governments will go to extremes to combat deflation.

“Even more radical measures such as the implementation of MMT, helicopter money, increased financial repression measures such as cash restrictions, and low negative interest rates, can be expected in the course of the next few years.” (MMT — Modern Monetary Theory — are policies that abandon debt as the primary constraint on increased government spending; helicopter money is handout money to everyone, preferably in a way that forces people to spend the benefit, not save any of it; financial repression is when savers are forced to accept interest yields below the rate of inflation).

“The general situation in the financial markets is about to change fundamentally,” Stoferle and Valek predict. Disinflationary pressures will be broken. Governments will eventually achieve the inflation they want to see. “Inflation will be the dominant investment theme in the coming years.”

That will be “good news for inflation-sensitive investments such as gold, commodities and mining stocks.” Portfolios containing them will not only deliver good returns but also be better able to resist future shocks… from viruses or whatever. The investment boutique Artemis Capital, after analyzing crises of the past century, recommends that global portfolios should contain 19 per cent gold and 21 per cent commodity-based strategies.

The Swiss are renowned as thrifty, financially-conservative people. A new study by the University if St Gallen shows that gold now rates equally with real estate as their most preferred investment.

How well can investors expect to do out of it?

Gold price targets for 2030

Stoferle and Valek say that if global money supply growth is about the same as in the past they expect to see gold priced at about $4,800 at the end of this decade. If money supply expands faster — at the same average rate as it did in the Seventies — their model suggests a gold price of $8,900 by 2030.

Silver should do relatively even better. ‘There has rarely been a better time for the prudent and clever contrarian investors to invest in silver than now.”

However, a final word of caution… Gold has been rising strongly for some time, even reaching new all-time highs in almost all currencies. As optimism is already quite elevated, the Incrementum analysts say “the short-term upside potential is limited” and “a temporary correction would not surprise us.”

If that happens, it will be great, offering a useful opportunity to plan your buying of physical metal (bullion coins and bars), paper gold (exchange-traded funds), and the shares of precious-metals mining companies.

Update on SID: the Self-Inflicted Disaster

It’s becoming increasingly clear that what I call SID – the Self-Inflicted Disaster of anti-pandemic policies – is a terrible price the world is paying, in terms of consequent unnecessary deaths, destruction of businesses and human suffering.

Most people are not yet aware of this because of the media obsession with the mounting numbers of deaths blamed on the virus. Those deaths, sad as they are, are almost never placed in perspective – relative to population, relative to infection/death ratios of other countries, relative to mortality from other infections such as influenza.

Here are some examples:

► Although Covid-19 is now blamed for fewer than half a million deaths worldwide. A wave of common influenza killed 1½ million in 2017-18. I don’t remember governments in a panic shutting down their economies then.

► The number of Covid-19-related deaths in the US – the latest figure as my report went to press is 115,736 – is only 352 for each million of population. That’s not so bad if you compare it to Britain, now 616 for each million people, or Italy’s 569.

► The American federal agency, the Centers for Disease Control, reckons that the country’s virus-related mortality rate is only 0.26 per cent, or barely more lethal than a bad ‘flu.

► Almost all those who die from Covid-19 have other pre-existing serious medical conditions – 96 per cent in Italy, according to that country’s ISS health institute. That’s why some now call it “the euthanasia virus” as most victims would in any case die within a year or so from other diseases.

► Half of all fatalities in the US are of those older than 60, so the fatality rate for working-age people is probably more like one in every 500 cases – about twice that for the average ‘flu season. In Italy the average age of those dying has been 80.

Two major mistakes: lockdowns and border shutdowns

We know that SID is a consequence of governments’ panicky reaction to extreme forecasts of deaths made by epidemiologists (it’s said that their reputation as forecasters is as dodgy as economists’, very few of whom saw coming the Global Financial Crisis).

Governments’ two big policies were to shut down economies with the lockdown lunacy of stay-at-home orders, and to close national borders. They were bad choices. And the devastating consequences are obvious.

Almost all Covid-19 infections occur in homes, nursing homes, public transportation and hospitals. This explains why lockdowns have failed to prevent most deaths in countries where governments reacted late and without following the successful model of Asia.

The “medicine” of lockdowns has even proved to be as poisonous as the disease they were intended to address. In advanced countries many have died because of suspension of treatments for deadly afflictions such as cancer, heart disease.

In poor countries many are dying from malnutrition; millions have lost their jobs and, without income, have no food for their families. The South African government admitted publicly what few governments have dared to do – that it expected the national shutdown itself to kill many thousands of people. In fact almost certainly more than the virus – so far, fewer than 1,500

It’s now well known that the risk to life is concentrated on the elderly. In Italy the Health Institute has reported that 96 per cent of all Covid-19-rated deaths were patients with serious pre-existing other life-threatening conditions. Their average age has been around 80.

Instead of lockdowns on those with little or no risk from the virus what governments should be implementing are policies focused on those mainly at risk… the elderly.

The second major mistake was to close borders, with devastating consequences for all travel-related industries such as airlines, hospitality and tourism. The policy has been effective in some cases – Australia has had only a hundred Covid-19 deaths, Thailand just 58. But it would have cost a fraction as much to allow controlled inbound travel focused on virus-free certification, testing and minimal quarantining.

The third major mistake was to shut schools. It’s become clear that children face almost no risk from Covid-19 and aren’t carriers of the disease to those who are at risk, their grandparents. Only two children under the age of 15 died from Covid-19-related infections among the more than 30,000 who have died in Britain. An international commission couldn’t find a single case of a child under ten infecting an adult anywhere in the world.

To sum up the situation… “We’ve little evidence that putting a plastic bag over a whole country is epidemiologically sound,” says The Spectator’s Lionel Shriver. As we retreat from SID there will need to be a properly professional inquest to determine “what this bandwagoning hysteria accomplished… apart from economic ruin.”

It’s become clear that there’s a dogged retreat from facing up to realities driven by the vested interests of epidemiologists, politicians afraid of admitting the scale of their mistakes, and a ghoulish mass media obsessed with promoting scare stories.

If you think that’s an exaggeration, look at the figure for the death-toll in India, which gets a lot of publicity because it’s such a big and important country: just seven deaths per million people and a mortality rate of less than 3 per cent of those infected.

The Good, Mediocre and Rubbish: All Doing Well

Wild speculation in stock markets has been adding froth as a new set of  traders have been piling into investments on a scale that leaves almost all experienced investors aghast.

One example is a new hydrogen-fuelled vehicle manufacturer that has yet to sell a single vehicle, Nikola Corp. After going public its stock trebled to a nearly $30 billion market cap.  The stocks of bankrupt companies such as the car rental giant Hertz, shale oil and gas majors Chesapeake and Whiting Petroleum, department store chain J C Penney, have been trading like crazy.

Seemingly we can blame the pandemic on a new class of largely young speculators trapped at home by lockdowns and deprived of sporting events to gamble on.

However there has also been remarkable strength in shares generally as the five leading technology companies – Microsoft, Apple, Amazon, Alphabet and Facebook – have again outperformed the market as a whole in the bounceback from March lows.

“Wall Street is betting that the companies with the strongest balance sheets – and the digital platforms with the widest reach – will come out ahead whatever the shape of the post-crisis recovery,” says the FT’s Richard Waters.

Merchants everywhere are racing to make up for lost sales by boosting their on-line presence, bringing a boom for a wide range of tech suppliers. Many are companies offering the digital tools needed to build an on-line presence and to reach and engage on-line customers such as Twilio and Wix.

Others whose shares have risen strongly are Shopify, which is adding physical warehouses to its digital platform for retailers, and PayPal, the on-line payments company, whose shares are now worth three times as much as Goldman Sachs’.

Longer-term the major risk facing Big Tech comes from mounting pressure on politicians and regulators to curb their power and tax them much more effectively.

A wall of money shields shares against bad news

The remarkable strength in equities seems to conflict with the logic of a global economy in serious trouble. That can be attributed to a wall of money – a different form of craziness by governments in hysteria trying to neutralize the damage done by their own anti-virus policies. Most investors seem to believe they can count on money-pumping policies to persist in spite of – or because of – the damage companies are suffering.

Investors are generally ignoring negatives such as the impact of high unemployment and demand constrained by much higher savings rates by both businesses and consumers.

And longer-term negatives. Growing public unrest, exacerbated by the pandemic, raises the risk of government policies that redistribute wealth in the coming years. Higher taxes, more regulations and a more inflationary environment all pose a threat to corporate profit margins, ultimately clipping equity returns.

Shamik Dahr, chief economist at BNY Mellon Asset Management, is optimistic that there will be a strong global recovery. But he reckons that equities are running ahead of underlying conditions. That makes sense for investors to buy “insurance” for their portfolios in the form of sovereign bonds, gold and other hedges “given the balance of risks at the moment.”

An ‘Excellent Entry Point’ for Investors

A well-known rule for successful investing is that it pays to buy when there’s “blood on the streets” – when a bad-news panic has driven prices down to levels so low, valuations so low, that the assets are a screaming buy… for those with the courage to do so.

GMO, the big investment manager, argues that now is just such a time for natural resource companies.

Already cheap to start with, their share prices have been crushed by the pandemic to discounts as much as 80 per cent of the market average for equities as a whole. “Resource equities have gone from cheap to cheaper and now register at the cheapest levels ever recorded.”

There are both tactical and strategic reasons to invest in the sector…

► While prospects for individual commodities or companies will change over time, the world economy will continue to need natural resources to function. The dangers to prospects for fossil fuels are well known, but the world “can’t transition from fossil fuels to clean energy without the materials that clean energy relies on… copper, lithium, nickel, vanadium,” and so on.

► When commodity prices are relatively low, as has been and continue to be the case, capex is slashed and supply is taken off line – more or less guaranteeing future supply shortages. Low commodity prices cure low commodity prices.

► Companies tend to do better than the commodities they produce. From 1926 through till the beginning of the past decade the energy and metals firms outperformed the S&P 500 by an average of more than 3 per cent a year in real terms. As commodity prices fell over the past decade, median dividend payments increased by 70 per cent. Looking forward, “commodity producers are likely to deliver yields two to three times higher” than the broad equity market.

► The possibility of inflation offers another reason to invest in the sector. Historically, resources have performed well in inflationary periods. They’ve not only kept pace with inflation, but actually increased their purchasing power by an average of around 6 per cent a year. During those periods equities generally lost purchasing power by an average of 1½ per cent.

GMO concludes: “Resource companies have had a rough go of it in recent years, but at these valuations investors have a large margin of safety even with very conservative assumptions. While the short-term prospects are uncertain, we believe this will end up being an excellent entry point for long-term investors.”

Baiting the Bear is a Dangerous Business

US president Donald Trump ignored increasingly urgent intelligence warnings about the danger of Covid-19 from January, dismissing anyone who claims to know more than him, and trusts no one outside a tiny coterie led by his daughter Ivanka and her husband Jared Kushner, says the FT’s Edward Luce.

However, says the well-known credit strategist Michael E Lewitt: “It was entirely predictable that Mr Trump would react badly to the flood of often unfair and vicious criticism aimed at him by the media and Democrats.

“The attacks started even before he took office and have been unrelenting. They included the Russian hoax, and the questionable attempt to impeach him that wasted a great deal of time and distracted the executive and legislative branches, as well as the Supreme Court, from the business of governance.”

Democrats and their media surrogates, as well as Obama’s Justice Department and the FBI, “made a deliberate decision to delegitimize” Trump. Regardless of how you feel about the man, Lewitt says, “this behaviour was wrong, unpatriotic and contrary to the best interests of the American people.”

Democrats abused the rule of law in a variety of ways (“corrupting the FISA process and the impeachment process, among others”) to try to bring down the president, while the press “tossed aside any pretence of objectivity” and became an arm of the Democrat National Committee. This ruined its credibility… although the only important pro-Trump TV mass medium Fox News “ruined its own credibility in response.”

Lewitt says the Democrats are playing with fire in attacking a man “who possesses little political experience, questionable self-control, and limited knowledge of the world.” They know their attacks stoke Trump’s worst instincts, doing everything possible to trigger him to make dangerous statements and decisions that pose risks to US national interests.

The risk now is that Trump will grow increasingly desperate if his poll numbers weaken and will “go further off the reservation to try to win re-election.”

Lewitt also has an interesting viewpoint on the current uproar over the way America treats its Blacks. He says the biggest challenge to racial equality is that it’s derived from government policies that entrench existing economic conditions.

The two most significant policies are the Federal Reserve’s low interest rate policy, which grants an enormous and unearned advantage to owners of capital, and the US Tax Code, which also favours capital over labour. These two legal/structural forces reinforce the advantages of the wealthy, who tend to be white and male, over the poor, who tend to be non-white and female.

“We can keep passing civil rights and anti-discrimination laws, but they won’t move the needle until we eliminate the deeply embedded economic advantages that sharply tilt the playing field in favour of groups that never suffered racial or gender discrimination that limited their economic opportunities.

“Until we change our laws to equalize the treatment of capital and labour, wealth inequality will continue to widen and intensify the social tensions that are exploding on our streets today.”

Cars: ‘Faulty Analyses and Political Shenanigans’

If people shy away from mass transit because of fear of infectious diseases and favour commuting in personal cars, as appears to be happening in America, that will be good news (for a change) for the automotive industry.

On the other hand, says energy consultant Allen Brooks: “The industry’s investment in electric vehicles (EVs) – driven by the need to meet tighter emission standards and government bans on fossil fuel-powered vehicles – may force automakers to build them at the expense of other vehicles, which are cheaper to own and operate.

“The biggest problem for automakers is that the technology to build EVs is hugely expensive… and their cost is not competitive with internal combustion engine cars.

“The massive investment to develop EVs may force the auto industry to consolidate to address its current financial woes. But every downswing will be fought by the auto unions and politicians.

“As renewable energy struggles to gain scale its economic case continues to be undercut by faulty analyses and political shenanigans.” The use of levelized cost of energy (LCOE) for comparisons misapplies capital costs and essentially calculates for the marginal cost of renewable power.

“Comparing renewable projects that last for ten to maybe 25 years ignore the cost to rebuild them so their economics can be compared to fossil-fuel plants with 40-50-year operational lives. The cost to overcome the intermittency of renewables is never factored into the calculations, either.”

Global Giants Shift Production to Safer Places

Supply chains were developed over decades to take advantage of China’s cheap labour costs. As those costs have risen, multinationals have started to diversify their operations away from China. The escalating conflict between China and the US and the way the Covid-19 pandemic has exposed other countries’ sometimes extreme dependence on Chinese sources, have stepped up the pace of diversification away from China.

A major example of this is Apple’s move to switch production to India, which is being dubbed the next labour superpower. It’s reported that Apple is planning to switch nearly a fifth of its iPhone and other electronics production from China to India.

The IMF estimates the growth of supply chains accounted for almost three-quarters of the increase in international trade between 1993 and 2023. The Bank for International Settlements estimates that global inflation would have been a full percentage point higher were it not for the supply-chain-enabled efficiencies of global production.

As part of a global backlash against globalization in general and China in particular, nations are threatening to bring back their offshore production platforms – “reshoring.” Stephen Roach, former chairman of Morgan Stanley Asia, says although this may well increase security of supplies, it will also mean higher-cost domestic producers.

“The anti-China weaponization of supply chains promises to riddle global production systems with bottlenecks.”

Qiao Liang, a retired Chinese general and director of its Council for Research on National Security, asks in an interview originally published in the Hong Kong-based magazine Zijing (Bauhinia):  “How can the US today want to wage war against the biggest manufacturing power in the world while its own industry is hollowed out?”

An example, referring to Covid-19, is the capacity to produce ventilators: “Out of over 1,400 pieces necessary for a ventilator, over 1,100 must be produced in China, including final assembly. That’s the US problem today. They have state-of-the-art technology, but not the methods and production capacity. So they have to rely on Chinese production.”

General Qiao dismisses the possibility that Vietnam, the Philippines, Bangladesh, India and other Asian nations may replace China’s cheap workforce: “Which of these countries has more skilled workers than China? What quantity of medium- and high-level human resources was produced in China in these past 30 years? Which country is educating over 100 million students at secondary and university levels? The energy of all these people is still far from being liberated for China’s economic development.”


The Hongkong dilemma: China isn’t about to back down from imposing its will on Hong Kong but this is forcing companies and countries to choose the side they think will eventually prevail, Eoin Treacy says in his investment letter FullerTreacyMoney.

Siding with China means accepting “genetic databasing of potential protestors, organ harvesting, millions incarcerated for ‘re-education,’ intellectual property theft, debt traps for emerging markets, extraterritorial censorship, forced adoption of 5G networking equipment…

“The benefits are access to China’s highly protected market” and the potential of being allowed to invest in it.

Savings: Dividend cuts are a major blow to pension funds that depend on income to finance their outflows, but they’re only part of the slow-burning worldwide crisis in financing retirement.

The major measures to deal with it are essentially retire later, reduce benefits or save more.

One scheme that has been very successful in the US is Save More Tomorrow. It’s used with company retirement plans. It doesn’t require employees who sign up to pay anything more immediately, which encourages them to join. Instead, they commit in advance to allocate a portion of their future salary increases towards retirement savings.

French bank BNParibas says Save More Tomorrow “may have helped approximately 15 million Americans significantly boost their savings rate.”

Investing in property: Many elderly people don’t understand that sending your data for storage “in the cloud” isn’t really anything of the kind. Your stuff goes into store in big warehouses scattered around the world. There are now enough of these data centres to constitute a new property asset class.

Two groups dominate this global business: Equinix and Digital Realty. Their shares together have now surged to a total of $100 billion. Most data centre companies are structured as real estate investment trusts for tax reasons.

Analysts say they stand out as a safe haven in difficult times such as these, as they are recession-proof.

Recovery: The Federal Reserve expects a significant rebound in America next year but does not expect it to be powerful enough to fully unwind the decline seen this year. That is likely to result in a very uneven recovery with stocks that do not depend on a physical presence – they do most of their business on-line — doing fine, while lower foot traffic and lower concentration of patrons will weigh on retail and fast casual dining in particular.

Debt: Much of the government support for businesses crushed by lockdowns has come in the form of loans that are to be repaid. Corporate debt levels were high even before the crisis. And governments have hardly begun to decide how they’re going to repay the prodigious amounts they’ve borrowed in a panic. Is anti-Covid a perfect recipe for a global debt crisis?

Inflation: The consensus view is that the Covid crisis will do so much damage to supply of goods and services that we’re going to experience deflation, with inflation coming through much later. In the US the market expectation rate for annual inflation five years forward has risen from a mid-March low of 0.86 per cent to 1.54 per cent.

Germany: It’s starting to look as if the consensus in favour of shutting down fossil-fuelled power stations is crumbling under pressure from the mounting tide of economic realities. Support for the Green party has plunged from 27 per cent a year ago to 16 per cent.

Robotics: The pandemic’s onerous requirements for safe working for factories such as space between workers will encourage companies to use more automation to replace humans and more “cobots” (collaborative robots) working side-by-side with human workers.

Telecoms: One analyst suggests that the US government’s opposition to China’s Huawei 5G networks appears to be motivated by concerns that they don’t have backdoors installed in the software for the benefit of US national security agencies.

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