Mellon on the Markets: Now is the time to be cautious

Inside the mind of the Master Investor: Jim Mellon reveals his latest thoughts on the markets…

Another year has flown past in the context of the Master Investor show. Those of us who attended, I hope, can agree that it was the best yet. Over 3,200 individuals thronged the Business Design Centre in Islington, London, with well over 100 exhibitors and a really fascinating roster of speakers. The organisers deserve to be congratulated on a brilliant delivery and execution. I was very happy to be there and to host a drinks party for exhibitors afterwards.

I went on a Brittany Ferries “mini cruise” (Plymouth to Santander and back over 48 hours) to prepare for my own talk, which focused on the importance of “metathematics” in portfolio construction. Being a lover of rough seas, I got my wish, and I am afraid that is where we are headed to in markets. I am pretty convinced that despite optimistic talk of “melt ups” and renewed optimism over (some) tech stocks, that we are heading into a rocky period sometime this summer.

The flurry of offerings in the US, such as Lyft (NASDAQ:LYFT), Slack, Pinterest (NYSE:PINS), and coming up, Uber, indicates that venture capitalists and other early backers of loss-making behemoths are looking to cash out. This is not a positive sign for the broad market, and despite apparently bullish signals from liquidity measures, and still strong economic growth in the US (but not, generally, elsewhere) there’s a storm brewing.

My friends at Macroeconomic Economics tell me that they think only a few weeks remain in the bull market, and they advocate shorting growth stocks, selling high yield bonds, and buying gold in spades. They think that there will be a tightening of US dollar supply, imperilling the emerging markets in particular, and that this will be no mere “flash crash” of which we have seen plenty in the past few years.

Now is the time to be cautious

I don’t know if I buy the outright “sell” signal that they are highlighting, but I would be pretty cautious going into the summer. I know that gold has been very disappointing in recent years, but I guess that is the price of an insurance policy. Now may be the time for readers to up the ante and get a few gold coins, stocks or whatever to store against the hurricane.

In a short-term deflationary bust, which we may be about to experience, gold always seems to perform well.I personally like Condor Gold (LON:CNR) and Highland Gold (LON:HGM), as well las any large ETF, physical or futures form of the yellow metal. There were also a couple small Canadian companies which I met at Master Investor, Quebec Precious Metals (CVE:CJC) and Auxico (CNSX:AUAG), both of which could do well.

Now, of course, not all stocks will fall and not all companies will fail; there are a few dividend yielding stocks which are worth tucking away – examples include some UK ones, such as BP (LON:BP.), Shell (LON:RDSA), Direct Line (LON:DLG), Legal and General (LON:LGEN), and especially beaten up, Standard Aberdeen (LON:SLA).

And once the liquidity crunch becomes evident and scary (and it will), then the Fed and the other central bankers will loosen their purse strings and print as fast as the Venezuelans, with a rebound on the cards for mid-2020. Politicians and central bankers will bow to the mob and print rather than do what is necessary to restore financial rigour to the de-normalised financial system.


This will just further distort economies, and far from satisfying the populace on narrowing the widening wealth gap between the rich and the poor, will only serve to widen it. So, we can expect a continuation of the cycle of the past decade or so, except this time the rollercoaster ride will be really violent.

I have made the point before that the most vulnerable of stocks are those that are over-owned, and they tend to include those with seemingly endless bright prospects. At the risk of sounding like a broken record, I think Facebook (NASDAQ:FB) sits at the top of the heap. Last week it reported reasonable earnings but provided $5 billion for a fine in the US from the FTC in relation to Cambridge Analytica. The market reacted positively, thinking that that was that, and in the context of $45 billion of cash, the amount is relatively trivial.

But this is NOT the end of the matter; every single government where Facebook plies its trade will be looking to the golden goose to yield up its eggs, and many more billions will flow outwards in due course. Facebook is a wonderful short, and whatever “news” comes out (e.g. a Facebook payment system, WhatsApp monetisation etc.) the fact is that this business has peaked, and it is trussed up like a Christmas gift to cash hungry governments everywhere.

I also mentioned at the Master Investor show that I thought the mobility revolution (for the most part) was overhyped and that some of the cash-burning giants (Tesla, Uber, Lyft, Lime etc.) were outrights sells (in the case of those already public). Tesla reported terrible earnings and is falling fast; Lyft has fallen sharply since its IPO; Uber has cut its IPO price drastically. Keep selling is my message here. But buy the picks and shovels of the electric revolution – and that means lithium.

Metathemes to the rescue

In terms of the metathematics that I like, two stand out. One is longevity. There isn’t a lot to buy here yet, but RestorBio (NASDAQ:TORC) in the US looks good to me, and ultimately our own Juvenescence will go public, so watch out for that. The new edition of our book Juvenescencewill come out some time later this year and will have more details on companies that are fast emerging as winners in this sector.

Anthony Chow (info@agronomics.im) is in charge of our efforts in clean meat (lab grown meat) and this is going to be a MASSIVE industry. Anthony is well versed on the industry landscape and no doubt clean meat will be a big feature of next year’s Master Investor event, the day for which has been fixed as 28^th March 2020. You can register now HERE, and I would, as I believe that we will be heavily oversubscribed.

My central message is to be very wary; investors in Patisserie Valerie will be sorely aware of how something can come from left field and hit you in a painful way. Today, there are too many complacent investors out there, and something is going to hit them. Don’t let it be you.

One thing I recommended at the Show was Neil Woodford’s Patient Capital (LON:WPCT). Neil has been unfairly traduced, I feel, and will bounce back. With a long-term track record such as his, he is the classic case of “buy on the dip”. High quality fund managers (and we had a few of them at the show) are hard to come by. When they have the odd blip, that is the time to back them for the long term.

Happy Hunting!

Jim Mellon