In the summer of 2009, I was a regular guest on CNBC shows like "Larry Kudlow." We believe we were invited to participate in those panel discussions because we were the token "bull" in the conversation, and I am obnoxious enough to state my piece against significant mental and verbal opposition. The US stock market had bottomed in March of 2009 and rallied explosively into the late spring and early summer. We felt that the March lows and big first move of the bull market were similar to the move the US stock market made in August of 1982. However, the choruses of experts were screaming that we were in a "bear market rally," and that only fools would buy stocks at those "inflated" prices. The widespread consensus back then appeared to be that the rally was only temporary. We believe the psychology of that groupthink was a great predictor of what has come to pass.
What reminded me of this is the news coverage and expert reaction to the recent collapse in commodity prices, especially gold and corn. When a bear market hits bottom, it does so because there is nobody left to sell. Ownership of the security or asset class moves dramatically lower than the average of recent years and the most recognized promoters of the asset class are being castigated in the media. Unless we missed something in the last two weeks, there has been virtually no talk of this latest bounce back in gold and commodities as being a "bear market" rally.
A recent Wall Street Journal report shows that around the world, individual investors have rabidly purchased gold coins:
SYDNEY-Sales of gold and silver coins are soaring despite the sudden plunge in the price of precious metals, benefiting mints around the world and driving the cost of the collector items to well above the value of the metal they are made of.
While traders dumped gold futures earlier this week on signs global inflation is easing and world economies are slowing, coin prices have been cushioned by high demand from gold enthusiasts who say coins hold their value over the long term.
We have yet to hear anyone screaming "sell the rally" on "Kudlow" or anyplace else in major media. The biggest fans of gold and commodities are not even being criticized for leading the sheep to slaughter.
Unfortunately or fortunately, we have a very good memory of who the biggest promoters of commodities have been during the last three years. Therefore, it is easy to track their opinion and keep watch for when they might be throwing in the towel. Another thing to watch for is when these formerly revered prognosticators get thrown under the bus for poor performance. Remember how excoriated Bill Miller and Bruce Berkowitz were in late 2011 for being overweight financials. Alas, we believe their misery was a good indication to buy financials in the fall of 2011, and both portfolio managers had stellar performances in 2012.
With all due respect, here is a recap of the biggest and most vocal promoters of the bull market or "super-cycle" in commodity prices and a picture of what their opinions were recently. We think these experts fall into four basic camps. First, commodities are attractive to conservative investors who see gold/commodities as an outlet for their political frustrations. Second, commodities are attractive to Malthusians, who believe that there is some magic population number, which would create massive scarcities and soaring commodity prices. Third, there are macroeconomic theorists who believe that "easy money" policies around the world are "debasing" the currencies and making gold/commodities more valuable. Lastly, there are wide asset allocators, who have convinced themselves that owning gold/commodities provides diversification, smoothing long-term returns.
Here are recent quotes from leading thinkers in each of these categories:
When people realize where all this gold is going, there will be a scramble to buy it back.
Our global economy, reckless in its use of all resources and natural systems, shows many of the indicators of potential failure that brought down so many civilizations before ours…
Gold has to go a lot higher over the next decade or so, because they [the world's central banks] keep printing money.
Go-anywhere managers are worth paying attention to because they have no biases toward any country, sector or asset class. Right now, many of the best ones are decidedly bearish.
Rob Arnott of the $28.5 billion Pimco All Asset All Authority Fund says it is "reasonably likely" the U.S. will enter into a recession in 2013, and "a near certainty that we at least have a major slowdown." Arnott and his peers favor assets ranging from short-term emerging-markets bonds to preferred stock to gold bullion."
When the media blasts these highly respected managers for their support of the gold/commodity markets, investors abandon them and the funds they run, and the ridicule becomes a cacophony, we believe that's when you'll know that it is a good time to look at commodities. For right now, we don't hear or see any evidence that this rally in gold/commodities is anything other than a real "bear market rally." Shall we scream that for you?
The information contained in this missive represents SCM's opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.