Don Coxe, chairman of Coxe Advisors.
There is one over-arching reason why you should not be rushing from stocks into cash: too many experts who have been too bullish for too long have finally awakened to the problems of the American, European, Chinese, Japanese and Canadian economies at a time stock markets have been acting as if worry isn't warranted.
Yes, there have been the shrill voices screaming for a year that the end is near, but there are always such attention-seekers. They were not warning when Nasdaq was soaring from mere vanity to insanity in 2000, or in 2008 when Wall Street was stuffing shocking mortgage-backed paper into institutional portfolios.
I have certainly been cautious this year, emphasizing gold stocks when advising clients, and in the portfolio of the Coxe Commodity Strategy Fund.
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That gold and silver mining companies' shares have outperformed almost every asset class (except bets that Donald Trump would win the Republican nomination) is a fact that alerts you to two useful conclusions: first, stocks and bonds have been struggling for a year, and secondly, investors suspect that central bankers are scared: they resist raising rates, but they fear standing pat, so they are talking about or actually implementing negative rates. That prescription could be considered the monetary equivalent of a doctor who has had a patient on the same pill for six years without achieving a full cure, so he decides to try the once-fashionable remedy of bleeding the patient regularly.
Canadian investors face two big challenges that do not affect US investors: housing bubbles that inflate the supply of possibly dubious mortgages and pose big cost challenges for the economies of Toronto and Vancouver, and a deep recession in the oil patch that can only be cured by pipelines to the coasts and the United States.
(A Trump victory might send most Canadians into deep depression, but it would save the oil sands companies companies — and the entire Canadian economy — from the consequences of an even deeper depression in oil prices. Trump — and the Republican Party — are sworn to approve Keystone. The Prime Minister's approach to pipelines is guided by his concerns about global warming, even though IPCC scientists assert that bovine flatulence has a worse effect on the climate than gasoline. Perhaps the PM could join with Paul McCartney in campaigning for Meatless Fridays to reduce the cow population, thereby giving him climate virtue room to approve pipelines.)
The Canadian economy would benefit from higher oil prices, but it will not be able to capitalize on them fully if pipelines are vetoed by global warmists and First Nations leaders. The heavy oil U.S. refiners need will come from the lovely government-owned companies in Venezuela, Saudi Arabia and Russia — and the effect on the atmosphere will be worse.
A casual reader of financial news might assume that what the Federal Reserve will do to rates is the only really big concern affecting investors. I can remember the days when Paul Volcker was battling inflation to the ground without resorting to speeches or press conferences or letters to learned journals.
Today's Fed is populated by Economics PhDs who bask in the limelight of public performances.
The Open Mouth Policy was Ben Bernanke's innovation, and Janet Yellen and her colleagues have achieved the dubious feat of making Ben Bernanke seem somewhat restrained. I have told clients for two years that spending more than a few minutes a week reading about what the Fed will do is a serious waste of time. Yet it remains a core obsession of portfolio managers.
This past week, markets soared when the Fed did what I and most other observers expected: nothing. Years ago, I heard tales of virtuous strippers (including the famed Gypsy Rose Lee) who kept hinting that some day they would drop the last veils—thereby building their audiences' lusts and attendance rates. In December, Ms. Yellen and friends did boost rates for the first time in eight years, while suggesting four such squeezes were coming this year. (They made up for their lack of action by increasing the number of public appearances in which hints were dropped.)
If you are a pessimist on stocks because you are convinced the Fed and the European Central Bank will raise rates, then you may be pursuing the correct strategy but for the wrong reasons. You are in the same category as those Maple Leaf fans who have, seemingly forever, believed this will be the year when they reach the Stanley Cup Finals.
The biggest reason for pessimism on stocks is that the U.S. — and global — economies are too fragile for central banks to raise rates, even though rate boosts would benefit most banks and pension funds, and would raise the income levels of millions of pensioners.
The distinguished Niall Ferguson has long argued that the weak U.S. economy is due primarily to the sustained explosion of regulations — at federal and state levels. No one has proved him wrong — and the Obama administration has hugely accelerated its interventions since he first proposed this idea. (In the U.S., the quickest way to find out if someone is of the Left or the Right is to ask whether they are in favour of increased regulation of 1. Business and 2. The range of options in public toilets.)
The other reasons for worrying about U.S. stocks are so well known that we can list them and proceed: sky-high price-earnings ratios driven by stock buybacks, sliding S&P earnings for more than a year, toxic domestic politics, and perceptions that US global competitiveness is fading.
I'll add one other: the TED Spread has climbed sharply (from 44 to 75) this month.
Without getting into complicated explanations, let me just point out that the TED has, for four decades, been the single best warning that "something wicked this way comes." It has been a wondrous gift to my forecasting record.
The TED is the spread between London euro-dollar and U.S. T-Bill rates. (It measures the levels of risk as perceived by bankers. When overall risk levels in the financial system rise, bankers cut back on lending to other bankers, particularly those they think are weakest. )
This time, we are told that a change in SEC regulations has created the sudden climb. That should be "in the market" by month-end, which will mean that we shall have to mentally adjust to what was worrisome before compared to now.
If it continues to climb, you should reduce your risk exposure: bad news is coming for some big financial institution or institutions in the U.S. or Europe. (The TED reached 400 when the Continental Illinois Bank went bust and 340 in the midst of the Crash in 2008.)
Summing up, we keep getting closer to the next recession. No one knows what the central banks will do when that horror story hits.
"If it is not now, yet it will come. The readiness is all."
In the meantime, stick with what has been winning — precious metal mines, companies growing earnings and dividends, and high-quality bonds ... with an emphasis on U.S. assets as long as climate change policies drive politics in Ottawa and Toronto.
Don Coxe is chairman of Coxe Advisors LLC. Based in Chicago, he publishes the Coxe Strategy Journal for investors, and is an adviser to several commodity funds.