This week, we talk to Fund Manager, Al Housego, responsible for managing 4 funds with Crystal Wealth. His funds are weighted towards resources equities and bullion. At this time, Al believes that the general markets are overbought and in a prime spot for a major crash.
So what will cause things to finally come unglued? Al believes that is too hard to point out, but it could be a black swan event. Share buybacks have declined, S&P companies have record debt, and with QE 3 being open-ended, there is still a great deal of inflation latent in the marketplace.
The bounce back from the bottom in gold stocks has been one of the strongest in history and thus indicates a major bull market is in place. A correction of some sort is likely but the overall direction is clear.
Analysis is showing the move up in gold will be the strongest and biggest in history, the longer it takes the higher it will go. This is fuelled by the unprecedented amount of money printing that has taken place in the past eight years. Gold is the one thing that can maintain its value in the face of inflation.
Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is a new guest to the program, Al Housego. He is the portfolio manager at Crystal Wealth. I will further my introduction a little bit, but first off, Al, thanks for joining us on the program today.
Lead Portfolio Strategist, Crystal Wealth, Al Housego: Thanks for having me.
CK: Al, you managed four different funds for Crystal Wealth. You are working with a good bit of money. One of the funds is resource and precious metals-focused; another one is a bullion fund and then, you also have a factoring strategy as well as a hedge fund. I guess let us start off with a general thesis outlook on the market. With somebody being weighted towards bullion that usually means that they are a little bit negative on the general equities. Is that the case at this time?
AH: Yeah. I follow a couple of analysts and economists. Dr. Robert Schiller from Yale University, he is one guy that I follow very closely with his Schiller P/E. It goes back to 1880, 136 years of data. It is a rolling ten-year price-earnings ratio. Right now it is just showing that the markets are very high valuation wise. It has only been higher about three times in history: before the crash of 1929; before the crash of 2000; before 2008-2009 and now. It is implying a future return right now over the next ten years of 0.2% per year. That is something that I just cannot recommend to clients. We are trying to go market-neutral other than our bullion and precious metals fund, market-neutral investments.
CK: Yeah, going on bullion and the gold equities especially a couple months ago is a great contrarian play if you were not interested in investing in the general market. At this point, the market has been kind of topping off. It looks like if you look at the S&P, as an example, for over a year it has been balancing around, but the long-term trend looks like a top. Most of these market events we can look at 2008 or 2000 there was a catalyst that really knocked them down. Have you identified at this point what you might think the timing will be for the market to finally start heading south instead of continuing flat or going up?
AH: Well you never know what is going to happen. It could be a mistake, at Fed policy. It could be a black swan that we really do not see coming. Not many analysts saw oil dropping from $100 down to $26. I think that helps the economies of the world, high oil cost to drag on economic output so it is probably helping, I mean that is a tailwind to growth, and yet it still does not look like it is helping much. S&P 500, I think I just saw today the last four quarters of that negative earnings growth. Share buybacks have started to decline even though they have been the largest, single component of share buying over the last five, six, seven years. I think that helped elevate these P/Es even higher. I think they are probably falsely lower because of all the buying.
You hear good stuff about the companies in the S&P500. They have got record cash but they also have record debt. I think some of these buybacks have been - some companies have good cash flow and they are using real cash and some are borrowing money so that debt stays on the books. Rates are ultra, ultra low which helps to fund and finance these buybacks. But if you are not putting your money to use for something that is helpful in the long run like productivity gains, new factories, whatever, you are just financial engineering return or P/E, at least P/E, a good P/E number, prices/earnings number but it is not real.
So what will make it turn over? If you look at a long-term chart in the S&P it really looks like it is rolling over. It looks like a distribution dome back in 2007/2008 we topped and rolled, and it looks even more extended, but it looks like a definitely rounding top here so it could be who knows what will trigger but something will. It always does.
CK: Well, let me ask you this. With the market topping off and you have got major investors; George Soros' public trades just came out and he has gone short with, I believe, about a $400M bet against the S&P at the same time he is going long gold. Obviously, you are long resources. Are you going short the market?
AH: Yeah, I am actually short right now, one of my funds. I have a couple of analysts that I follow. They have buy signals, sell signals, so we are short right now with the trailing stop loss, so I think the upside is limited. I mean it could break out to the outside that is unknown. Fed policy could change. They could cut rates again. They could go QE4. I do not think they even have to announce because I think QE3 is actually open-ended. They can go infinitely if they want to. That was what could propel the markets up.
Gold should react well to that although it did not react well to QE1, 2, and 3. But I think there are a lot of leaks and inflationary pressure there. I think gold is reacting to that. You see guys like Druckenmiller. He has put a sizable chunk of gold in his hedge fund. I have been following Eric Sprott for a long time. He has been very vocal for Dalio, I think he has got a good position in gold. I like his quote and I will paraphrase: If you do not own gold you know neither history nor economics. I think it is a good hedge against an eventual hiccup here in the markets.
CK: I think a viable concern for many gold investors is if we do have a general market crash could we have a repeat of 2008? Now circumstances are different in that in 2007 gold stocks were already on a six- to seven-year tear, so they were pulled down by the general market crash, whereas today gold stocks even after the last four months are still depressed historically. Are you concerned, as a gold investor and an investor in the gold equities, that an S&P, Dow crash could pull down gold bugs as well?
AH: It can, but normally they would be inversely-related. If the market is crashing usually - I mean the gold stocks can get hit early, but they tend to usually buck that trend. I think the last four years the gold stocks had been absolutely crushed to historically low levels relative to the price of gold. I think they were grossly undervalued. We see one of the best bounces off of a bottom in history. I think that is a telling sign. I think this is the beginning of a major bull market in gold and gold stocks, and yet even with this really good move off the bottom, we are up 75, 80% here, we are still undervalued.
But I think there is got to be some digestion of this up move. There would definitely be a correction at some point. We might go higher in the gold stocks in the short term. But this next pullback will set the stage which I think a lot of smart money is getting in and I think they want to get in at a lower price and if it does dip, I think that will be a lot of fund managers and smart money backing at the truck here when it does correct. I will be one of them. Definitely, I think that is the opportunity. It is hard to be patient when it is running away from you.
CK: Well, there has been a pretty incredible move since January as you just pointed out. We put out a chart this morning via Palisade Research. I am not sure if you got to see that, Al, but...
AH: I did.
CK: Oh, fantastic! It essentially just compares the bull market that we have had the last four months to the beginning of the bull markets in 2008 and 2001, 2002. We are a bit overextended and you just alluded to a possible pullback which we think might happen as well. But at the same time, gold stocks have not been this cheap in 90 years based on a lot of metrics as they were back in January. Even if there is a pullback do you think this is going to be severe enough of a pullback for people to even notice? I mean are we going to have a 20, 30, 40% correction in these stocks?
AH: I would love one. But you know, Richard Russell said the bull markets try to buck you off and take as few people up as it can. I think there are a lot of disbelievers out there still, lots of market calls from analysts that gold is going to go back down to whatever $1100, $1000, $900. Still.. and yet you see huge buying in physical out there still with China, India, Russia. I think there is a real backstop there.
We might not get the pullback that we expect because the markets tend to never give you what you want. If we got a 20% correction people would say, "Okay, here we are. Now I will buy one and get to the bottom," and it might run away on you again. It might be a shallow correction. That is my fear, is that we will not get the deep correction, if you look at 74, 75, I mean I think the stocks pull back about 77% from the initial leg up. I think that was the strongest move ever, up until now. Everyone is looking that it might be the same, but I do not know if we are going to get there. I hope so. But we might not. It might be a shallow correction and it runs away again and leaving a lot of people behind. That is my fear. I will try to buy all the way down incrementally.
CK: Well, it is Friday after market close and just for fun and speculation let us talk about how this bull market could end which is probably four, five, six, seven years away. I have heard a lot of people shy away from predicting the gold price and there is really no point in doing it because nobody knows. But let us just talk in very broad numbers. I would think it would be unusual for a market that has taken five years to come down from $1900 to end anywhere close to $1900 making me think we should have a much higher gold price. HUI hit a high of $600 something. It bottomed around $100. We are back to $220 at this point. Any ideas, just from looking at history, as to where we might end up? Nobody can predict exact numbers, but have you given any thought to that?
AH: Oh, yeah, lots. I mean I follow Elliot Wave Theory. Alf Field, he does not write anymore. He has not written for years, but he thought the next leg up which probably started in January would be the longest and strongest move in history. One of the guys I follow now, Ron Rosen, he is on www.321gold.com. He thinks that the correction from the 2011 high, $1920 range, what is called a running flat correction... and if that is true then it pretends a massive epic move up in the price of gold.
If you look at the return line from the bottom in 2000, June of 2001 and 255, the return line right now is $6200 around the end of 2017. That line keeps going up as time goes on so price and time did get to the all time... whenever it does peak out. The longer it takes the higher it will go. I think that shows the latent epic amounts of money that are in print in the world with QE1, 2, 3 in the States. Japan is printing a trillion a year. The EU, Britain, they all have money printing programs that buy their own debt. It is ludicrous. We have negative interest rates. It is insanity. Hard assets like gold, silver, platinum, palladium, all of them, but especially gold, have always been the winner long term over five thousand years. There is no counterparty risk. If you have it in your hand there is no counterparty risk. It has to be the best defense out there. It is the greatest asset in the history of the world.
CK: All right, well, Al, I do not want to take up any more of your time. Al Housego, portfolio manager at Crystal Wealth which can be found at www.crystalwealth.com. Al, I know that you say you are very busy and things have picked up the last few months. But if any of our listeners really want to get in contact with you is there any way for them to reach out?
AH: Yeah, they can email me. They can even phone me at my office. I am in British Columbia in the Okanagan. Do you want me just to get my number or email?
CK: Yeah, that would be great.
AH: My phone number is 250-546-0244 or you can email me email@example.com.
CK: Al, many thanks and have a great, long weekend.
AH: Thanks, you too. I appreciate it.
Al Housego CFP, CIM is associate portfolio manager and lead portfolio strategist of Crystal Wealth. He manages four portfolios including resources and precious metals.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.