Mellon on the Markets: Lessons and looking ahead

It has been a while since I wrote (as opposed to Zoomed) one of these letters and I thought I would do one in advance of the Alternative Proteins Master Investor Webinar Day that I am attending on March 4th. The schedule looks great so please sign up – already nearly 1000 have!

Since I last wrote, my book Moo’s Law has been published, with a virtual launch featuring some of the key players in the New Agrarian Revolution. The companion investment vehicle we set up a couple of years ago, Agronomics, has soared in value along with enthusiasm for the new Cellular Agriculture industry. This industry is totally revolutionary and will disrupt all sorts of foods and materials, so it will be well worth tuning in in a couple of weeks’ time.

The past couple of months have been interesting, to say the least. I think the abiding image of the craziness of our market times will be of the self-styled Roaring Kitty fellow wearing what looks like a superman outfit, with a headband and tennis-like sweatbands. This as he settled in to “work” the Reddit message boards and try and trade his way to a quick fortune.

Of course, Game Stop has ended in tears, at least for now, and even the Robin Hooders foray into silver fizzled out pretty quickly, though it was helpful for Master Investor holders of what is known as “the devil’s metal”. It is called that because of its volatility and because it quite often undoes those who sally forth into trading it.

While there was nothing to Game Stop other than a desire on the part of generally small-time traders to sock it to hedge funds (and in this they succeeded by bloodying Melvin Capital), the whole event was instructive. The first lesson was that ultimately value will out, and a ludicrous valuation on a dying company just because it was highly shorted and a new member of the board was appointed, will eventually fall to earth.

The second is the gamification of trading, with the Robin Hood and other apps providing a kind of video gaming experience to users. This isn’t altogether a bad thing as it brings more people to the markets, even if a lot of them end up as sacrificial lambs.

The third is that the fragility of financial markets under duress was yet again highlighted with trading suspensions, margin calls, and Congressional investigations all being the consequences.

All of this nonsense is partly due to the extraordinary expansion of money supply, particularly in the US, where at one point earlier this year the broad money supply was growing by more than 25% – which is potentially and probably will be highly inflationary.

Yes, a large part of this is due to the Fed’s (and other central banks’) desire to support pandemic hit economies, but some of it is just plain foolish. Its rather like having a small fire (inflation) in a part of your house and throwing large amounts of petrol on it. No wonder Bitcoin has been roaring away- people just do not trust fiat money and while I am not a fervent believer in cryptocurrency, it is clear to see why BTC has been motoring.

In contrast, gold (but not silver and platinum, or indeed copper) has been in the doldrums for a little bit. There is talk of how bond yields are rising (a little) due to rising inflation expectations, and that that’s a drag on gold.

In my opinion, although there is something to that premise, the larger inflation protection afforded by the precious metals complex means that investors should keep the faith.

All the money printing and vast stimulus packages , coupled with a clear line of sight to the end of the pandemic, mean that the inflation I have been forecasting (along with others) is coming fast.

This means that you should own gold, silver and platinum and that they should be a good part of your portfolio . As regular readers know, I like Condor Gold and have just taken half of a placement to enable it to do further drilling to find more resource on top of its already large proven reserves. I am also a fan of much bigger Kinross and American Barrick as well as Australian minnows Zenith Minerals and Dart Mining.

One early warning sign of the particularly large debasement of money in the US (it’s big in other areas, but not AS big and the relative percentages are what is important here), is the current decline in the US dollar. The pound – my favourite currency in the past year – is nearing its upside against the US dollar but still has considerable room to run against the Euro. I also like the Japanese yen, which could rise 5% against the dollar by year end.

Meantime, the Japanese market has been very strong and recovered the 30,000 level on the Nikkei, the first time since 1989. I would keep holdings there, as Japan remains cheap.

The US, in contrast, reminds me a bit of Japan in 1989, with many stocks frankly ludicrously priced, particularly in the “green energy” space, and in certain technology areas. The big FANG stocks, along with Tesla, have latterly stalled, and probably rightly, as they face a period of increased regulatory scrutiny and of increased competition.

I do not really like much in the US market but have been a fan of GM as an alternative to Elon’s Magic Carpet, as GM is a clear leader in autonomous driving as well as electrification. On that subject, Porsche and VW look to me like good investments for their electric efforts.

I was going to do something about investing in hydrogen as an additional meta-thematic play, along with longevity and food, but the area is now so hyped, and my legs didn’t carry me onto the bandwagon fast enough, so I am avoiding for now.

The UK is the cheapest major market. I am still buying Lloyds Bank shares on setbacks, as I think it could be up 50% in a year or so and pay a dividend. Its not a well-run business, but the challenger banks mostly don’t seem to be either. Big banks are not generally good long-term investments, but the time is right to play them for now. Other ones include HSBC, Société Générale, and ABN Amro.

I also own Phoenix Group shares in the UK, and its life insurance business will benefit from continued restructuring of the industry. Tesco seems like a no brainer to me as well, especially as a hefty dividend is about to be paid in respect of the sale of the Thai business.

I have mentioned Marks and Spencer as a recovery play, and I continue to hold. Also, BT, surely an excellent private equity take out candidate, and the cyclical travel businesses IAG and Whitbread.

None of these companies is a firelighter but all are undervalued in my opinion.

I also like Turkey as a longer-term undervalued play and suggest looking into an ETF for what surely will be a country that eventually lives up to its promise.

Overall, the easy gains in many markets have been made, and, as the recovery (which will be very powerful in the UK by the way) takes hold, some of the excess froth of the past few months will be blown away.

In a nutshell, rates will continue to rise, the Dollar is in for a long-term decline, commodity prices will continue to rise, and gold and silver are a continuing must have. Japan and the UK are the most attractive equity markets.

Happy Hunting and see you on the 4th of March.