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Podcast Episode 5: Czech Republic, Alternative Assets

Includes: CEE, ESR, TRF
by: The Atlas Investor

Jordan: Hello, everyone. Welcome back to the Atlas Investor podcast with Tiho Brkan. Thank you so much for joining us today for episode five. Hey, buddy. How are you doing today? Are you ready for episode five?

Tiho Brkan: I'm great.

Jordan: It's a pleasure to be with you again today to record this. And I wanted to ask. So where are you today, and what will you be covering in this episode five?

Tiho Brkan: I'm in the Czech Republic, also known as Czechia, in the capital city of Prague. And we'll be discussing real estate in Prague. We'll be discussing the economy, the business opportunities within the country, the recent elections that happened on the weekend. And then we'll be focusing on alternative assets in the global macro space, which I'm really really looking forward to, Jordan.

Jordan: Okay, Tiho. So you are in the Czech Republic, you're in the beautiful city of Prague. Before we get to some general info about the country, let's talk politics, because the country's in the news lately. I saw a headline about this and you mentioned this to me before we got on the air here. They just elected their own version of Donald Trump. So give us some info about that and what that potentially means for the Czech Republic and Europe.

Tiho Brkan: Very interesting election. So this Sunday, the results came out from the Czech Republic or Czechia. The local citizens that voted seem to be very much anti-Europe, anti-European Union, anti-immigration, and to some degree, even anti-Islam. So quite a lot of controversy there for the overall European Union. The gentleman that won is a billionaire, similar to Donald Trump in some ways. Some of his policies are very interesting because he's pro-business, he's a businessman. He's also pro-Euro to a degree, but skeptical on the actually Euro currency, being apart of the common currency. He would like to keep the Czech Krona instead. He's also under investigation for some possible corruption between his companies and European Union subsidies that he's received. His views also towards Russia and China are much more positive, where he wants to do more trade. So yeah, all in all, very interesting.

But generally speaking, there's been a large sentiment shift with the Czech people who have voted quite conservatively, and the shift has gone from the left to the right in politics. Very interesting developments, Jordan. I just happen to be in the country as all of this is happening.

Jordan: Yeah, and let's talk about what that means for investors if anything… but first, let me go back for a second. Before we get to that, let's go back and talk about just general information about the Czech Republic.

Tiho Brkan: Of course. So this is a country that used to be part of what's known as Czechoslovakia back in the 80s, before the fall of the Berlin Wall and the Velvet Revolution that happened here, and the peaceful split-up. A few podcasts ago, I was in former Yugoslavia, where it wasn't so peaceful. It was a war - the Balkan War. This country divided itself peacefully into the Czech Republic or Czechia, and Slovakia. The capital of Czech Republic is Prague. The capital of Slovakia is Bratislava, which I passed through, but I didn't spend a lot of time there.

Our focus on this podcast is the Czech Republic, which has a population of about 10 and a half million people and is one of the strongest growing economies within the Eurozone, Jordan. They have one of the lowest unemployment rates. The GDP in 2017 is standing around almost 200 billion, which is pretty good for this central, small European state. If you think about it, this is half the population of Australia or half the population… even of Shanghai. So quite interesting from that perspective. The GDP per capita is $18.5 thousand. So as I've been traveling from Balkans towards northern Europe, yourself and the listeners/readers would have noticed that the GDP per capita is increasing. We're moving slowly towards more wealthier and wealthier states of the EU.

Something I want to talk to you about is Prague real estate, because once again, the stock market ETF is not available, which is unfortunate, because actually, if we were to look at valuations across the board, including the CAPE ratio, the price to book value, the dividend yield, the price to cash flow and price to sales, and to drawdown on the stock market in Czech Republic, overall - this is probably the cheapest stock market in the world, Jordan. But unfortunately, there's still no ETF.

Jordan: So then what does that mean for the real estate market? How is the real estate market priced there, and especially in Prague?

Tiho Brkan: Well, the Prague real estate market is currently priced let's say $4,700 US per square meter, which is around $430 per square foot. The interesting thing about the real estate market is that it's been in doldrums for quite a while until recently. So peaking around 2007-2008 before the global financial crisis, Czech real estate fell about 10-15% depending on the areas and the cities that were within the country, and kind of stayed depressed until 2014, primarily due to the global financial crisis first, the slowdown of the Eurozone economy second, and then the ongoing debt crisis in the Eurozone afterwards - most likely affected by the PIGS countries, but kind of affected the whole European Union. Eventually, we had some problems with Emerging Markets within the area, including Poland, Ukraine, Turkey, and so forth. This also affected the Czech economy too, as well as its financial assets.

But real estate has now been recovering and recovering rather sharply. I think Czech real estate is up about 20% over the last three or so years, and it's starting to make new all-time highs per square foot, per square meter, relative to 2007. And in particular, Prague is doing very, very well.

Jordan: Okay. So what potential opportunities do you see there in Prague? I know you can't go into exact specifics. But how could a real estate investor potentially benefit from the opportunities?

Tiho Brkan: So one of the interesting things about Prague is that it remains in its core shape and old state because it's one of the cities of Europe that wasn't really that affected from WWII. You know, when you look at the European Union, and when you look at the European continent as a whole actually, you will probably notice and understand that the four most popular or the four most visited cities by tourists are London, Paris, and Rome. The fourth one is Prague, and this is a stunning city, one of the most beautiful on the planet, actually. It's a real gem.

So the tourist arrivals are definitely booming. Prague itself has about seven million tourists that come here every year, and it's growing at double-digit rates according to some statistics. The overall tourist arrivals for Czechia are at 18.5 million. So tourism is really the core, one of the core elements of a strong industry in Europe, and we've been focusing on tourism from Serbia to Montenegro, from Croatia to Budapest in Hungary, and now we're in Prague, Czech Republic. And the tourist arrivals just keep increasing.

One of the great aspects of Prague's tourism is that it's not seasonal, Jordan. So this is really a strong sector. This is really a viable industry to invest your money, to start a business, and to offer something to tourists, because the arrivals are very high quality from the United States, from Germany, from China, from Korea, from Japan, from France, and the neighboring Slovakia and Russia is very, very high on the list too. So these are tourists that really have the strong purchasing power and come to see the beautiful city in Prague and its prestige, Jordan. I would say business opportunity-wise, tourism is the go. The only problem might be that its kind of saturated. And of course, Prague's been so popular for so many years, why not? Why shouldn't it be?

Jordan: Okay, so are there any other business opportunities that you see? And then secondly, what's the general taxes situation there like?

Tiho Brkan: Sure. So before we get into the tax situation, similar thing that's occurring within the whole of Eastern Europe, and I think Czech Republic stands out quite highly here together with maybe Estonia - which I'm not going to be visiting this time around in my travels, as its a northern Europe area of Scandinavia - is the tech sector, once again. So startups, AI, you know, biotech to a degree. Not in the Czech Republic, but in this sector. So very much a tech-savvy country. And you know, the students that are graduating and doing startups are already all working in quite a lot of these tech companies. When I met a few people on the ground, a lot of them are really obsessed with tech, Jordan, so you know, away from tourism, tech.

I would also that from what I've noticed, a lot of the companies are spilling over from Germany towards the Czech Republic, and it's boosting Czech Republic exports. This is really a mini version of Germany here, first of all, because it's bordering Germany, and second of all, I've noticed that Skoda, which is the Volkswagen subsidiary car company, is actually performing much better and selling more cars than Volkswagen brand itself. So the Germans are now investing a lot more money into Skoda and moving some factories over, some workers over, some technicians over. It goes to show that the Czech Republic is performing very, very well in what's been a, you know, a very difficult situation for the Eurozone economy as a whole over the last several years. Here, you have the highest growth rates in Europe, the lowest unemployment, and the lowest youth unemployment in Europe. So it's no surprise to see a continuous export boom as well.

Moving along, and now tackling the tax situation, I think one of the smart things that the overall Eastern Europe has done is it really reformed its taxes, something that's overdue in Western Europe and places like Australia and the United States and so forth. They really need to catch up in this department. The Czech Republic is not different to, let's say, we discussed a little bit about Montenegro, Serbia, and Hungary, which had very, very low taxes. The Czech Republic doesn't have taxes as low as Hungary, but it's pretty good. The corporate tax rate is 19%. If you compare that, for example, to Hong Kong and Singapore, which is 16.5 - that's very competitive. Individual taxes are 15%, and then if you're a high earner, the highest bracket is 22%, so that's quite interesting.

The wages here, the average wage is about €1,400 per month, which is relative to, let's say, Serbia or Hungary, is higher. So Serbia was €300 per month, or maybe a little bit higher if you remember from our earlier podcast. And then Hungary was about €800-1,000 per month. So a lot more purchasing power here, and GDP per capita. And you know, the taxes are still very competitive.

And then looking at withholding taxes, those are 15% on dividends and interest. And the interesting thing is the Czech Republic has quite a lot of tax treaties as well. So any company that's doing international tax planning will benefit from that, Jordan. So you know, very low taxes, very strong economy, growing wages and salaries, growing exports, booming tourism. There's a lot of positive things going on in the Czech Republic, no doubt about that.

Jordan: Yeah, very interesting info, Tiho. I mean, some great coverage on that country. So with all that said, what's your final verdict on the Czech Republic?

Tiho Brkan: Well, the final verdict here would be that if you look at the currency, the Czech Krona, it's been one of the best-performing currencies in the world over the last, let's say, 12 months. And basically, currency tends to price in the symptom of underlying economic activity, inflation, and monetary policy. So the currency speaks much louder than I do, and obviously, I agree with it. So you know, I'm very optimistic on the Czech economy, on the future of Czech assets, in particular, the stock market if I could play it - but also the real estate market. And I think in general, Czech Republic is one of the rough diamonds that's slowly becoming more and more polished within the Eurozone eco-system. It's actually performing on par, if not better and catching up to the status of Portugal and Greece. So it's not gonna be far the Czech Republic and its citizens are on level playing field to a lot of the other popular Eurozone countries.

Jordan: Okay, Tiho. So far in the first four episodes, we've discussed US stocks, foreign stocks, global currencies, and US treasury bonds. Now, this week, we're going to talk about alternative assets, which really, I mean, we could go on and on for several episodes, so we're gonna try and just condense it into one episode, talk about the main points. Now Tiho, usually a common portfolio would be a mix of higher volatility, risky assets such as stocks together with lower volatility, safer assets such as bonds. Some investors also choose to increase diversification by adding alternative assets. Can you please tell us just a little bit about alternative assets and how they might fit into a portfolio?

Tiho Brkan: Well, that's true. It would be my pleasure to talk about alternative assets, and this is my favorite area of investing, actually. Much more than stocks and bonds, even though I think my skill level is much more suited for stocks and bonds, being a timer and a trader, so to say. But alternative assets, the financial industry tends to break them down into real assets, private equity, and absolute return. To a degree, that's how they discuss it. But as you would probably grasp, and a lot of the readers would grasp from listening to me in the podcasts and also following my work over the years, I'm not that big of a fan of following the financial industry. So I think alternative assets are really attractive to private investors - wealthy families from you know, wherever they come from, whether it's the aristocrats in Scandinavia or the aristocratic families in UK and France, or the Jewish wealthy families or the New York wealthy families, and so on and so forth. Private investments, and in particular, alternative investments in this space have been used to preserve family wealth and grow family wealth over generations, for decades and centuries.

So alternative assets are, in my opinion, things that are not listed on the stock exchange, on the bond exchange, on the exchanges of the world, but investors can still play them. Some of these are precious metals, private partnerships, you have forestry and tree farms, you have fishing farms and fishing rights. You have gas wells and energy investments. There is commercial real estate, which is not publicly listed. There is residential real estate and luxury residential real estate. There's actually property development. There are cattle farms, which are very popular and huge from where I'm from - in Australia. And some of the wealthiest families in Australia have always had a portion of their wealth in cattle farms. And then you also have private equity and unlisted companies and having exposure in those. So this is a very, very broad area.

Then we can't forget some of the more common ones that are collectibles, such as antiques, art, rugs, gems, and diamonds. You have coins, rare coins, collectible coins. Plus rare alcohol, fine wines. And obviously, I already said rare books. And even the Queen has a famous stamp collection, which looking back over the last 100 years, I think has actually outperformed both the stock markets and the bond markets of the world. So alternative assets, Jordan, it's such a broad topic. There is so much to talk about. There are so many different things to invest in. A lot of them can be very illiquid - so without any liquidity.

A very difficult area to be an expert on all of them. Usually, an investor would be an expert in paintings and fine art. Somebody else would be very good at running ranches and cattle farms. Somebody's a great real estate developer, plus doing renovations. Also the ability to lease real estate and so forth. So yeah, you know, a very broad topic.

Jordan: Absolutely. So we're gonna zero in and focus on several of them, you could say several of the aspects of this area that we think the listeners are probably most concerned with. Now let's start with real estate, Tiho. Every podcast, we discuss a different country and city, a city that you visit, and today was no different as we talked about Prague, which of course, is one of the most beautiful cities in the world. Please discuss how you see Prague standing amongst other European global cities when purchasing an investment property. Also, what are some of the key elements to successful property investing?

Tiho Brkan: Sure. Well, it's once again, it's a very broad topic. I think when it comes to real estate investing, first of all as a foreigner, not a local but if you're a foreigner, you want to have the ability to purchase real estate there. You want to be accepted as an investor there, and somebody maybe that can reside there. That's something that I think the Czech Republic is becoming less and less open to, if you look at their elections on Sunday and the way that the overall eastern and central Europe is moving towards anti-immigration. But you know, staying with real estate though, you want to look at rental yields and cash flow. You want to look at the ability of whether you can renovate the property by increasing and forcing the value by improving it. You also want to have the ability to buy low and sell high.

Now, this is something we talk about in the financial aspect of what we do as traders. But financial assets are very liquid, so the price that I pay is the price that's currently trading in the market. It's very different with real estate, because it takes negotiations, maybe sometimes between two private investors. And if you can notice a mismatch in private assets, which are not very liquid, between a buyer and a seller where you're the buyer and the seller is actually selling way below market value, sometimes at times of 10 or 20% - real estate is one of the few assets in the world where you can just come in and purchase that asset, and within a minute, go the bank, have a reevaluation done, and you actually have made 10-20% automatically.

You know, maybe the seller needed money quickly and he was forced liquidating because of problems in his family, whether it's health or financial problems. Or maybe there was a fight and a divorce, or maybe the bank foreclosed the real estate and the mortgage went sour, there was a default. So any reason can create that.

With real estate, you also want to look at the valuations, similar to the stock market. I tend to look at price to rent ratio, and there are also rental yields. And then finally, you have to take into account the way you hold real estate, whether it's in your private name or whether it's done through a company or a trust - and also taxes connected to it. So looking at Prague for example. Prague doesn't yield as much as some of the global cities that we were discussing here. And also, it's quite expensive relative to some of them. But then again, when we look at the top tier cities, it's very, very attractive. So it really depends on what you think Prague is, which trend it's heading towards, and what might happen there.

So for example, Prague's price per square meter in the central area, right in the dead center, is $5,200 US per square meter. When we compare that to London, it's incredibly cheap because London is sitting at something like $27,000 US per square meter. New York is at $17,000. Vienna is surprisingly at $15.5 thousand, Singapore at $13,750, Toronto at $9,400. Sydney, which has also been in a huge boom, is now at $7,250, and Dubai is at almost $6,000. So you know, Prague is really the fourth most visited city in Europe, so when you look at Rome, when you look at Paris, when you look at London - Prague is the cheapest out of all of those. So there is an opportunity there.

But at the same time, because the Czech Republic local wages are not that high, so the price to rent ratio is at 27 times. When you look at Dubai, it's actually 19 times. The Dubai real estate is much cheaper valuation-wise. Sydney's at 23 times, Toronto's at 25, and then you know, once you start to get above that, it's really unaffordable and unsustainable for locals to purchase property in some of the cities such as Singapore, New York, and London. Hong Kong and Paris sometimes are others, too.

One of the interesting aspects of central European properties is the valuation of some of the price per square meter properties relative to their rent, because they have heritage value such as Prague, such as Vienna, so forth. In Vienna, you have $15,600 a square meter with incredibly low rental yields and an incredibly high price to rent ratios. So something like Vienna is incredibly expensive, and sometimes there's a reason for that, but other times, there's not. So a global investor who's looking for private deals should consider these prices and have the ability to maybe buy below this price - so below market value - and also a potential to renovate something.

For example, with me, I'm currently looking at a deal in Prague where I'm looking at a central piece of property very close to the waterfront. The pricing there is incredibly lower than what's listed here on my chart, for the listeners and YouTube viewers that are watching. So I'm able to buy, hopefully, at 20-25% below market value, which is an incredible deal. The apartment also comes in what's known as, in the Czech Republic or in other places too, as a shell and core finish - which means that the final designs and touches are done by the actual owner, and they adjust or integrate into their lifestyle the finishings and furnishings the way that they want.

And also, they can design and use final products within the apartment in the way that they want them to be used. So in this case, I have the ability to renovate the property, and I have the ability to purchase it at a much lower price. So the rental yield and the valuations of price to rent ratios don't really affect me as much as it would affect somebody that's buying a finished apartment, a fully renovated apartment and paying a premium for it. This is what's really important in property, Jordan.

So yeah, a lot to discuss there. Too long for this episode, and maybe we will touch upon it a handful of times more in coming episodes.

Jordan: Yeah. I want to get your thoughts on commercial property before we move on from real estate. But I have one follow-up I just have to ask, and I mean, I don't want you to give away all your secrets, Tiho. But maybe you could take the listener and the viewers, just maybe give them a general sense of how you find these particular deal. Because I mean, you can't just show up there and expect to get a really good deal the first day. I mean, there's probably some groundwork that you have to lay, and I'm just wondering, maybe you could take us through just in, without too much detail, in general how you go about finding these deals and opportunities.

Tiho Brkan: Yeah, of course, for sure. I mean, it's not really a secret. It's just a mixture of persistence and hard work, to be quite honest with you. So don't underestimate persistence and hard work. Basically, what most people don't want to do is what I do. My job is to be a full-time investor on behalf of myself, my family, and my clients, and even my consulting business. So when it comes to Prague or any other city, what I do that most people won't do is that I will look at the deal after deal and attend inspection after inspection, and look at the deal after deal some more.

So you know, before I think there's a good deal, I would actually look at another 300-500 deals over a space of a week, through the internet, studying it, and looking at relative valuation, positioning, and location, understanding the city beforehand. That's the study that you do before you even arrive. And I will do this for a city after city, and you know, have the whole knowledge of the global property on a relative basis.

So when I'm buying something, if I'm thinking about buying something in Montenegro and there's a new development on the waterfront that we discussed a couple of months ago in the podcast, called Porto Montenegro, and they're charging me €5,000 a square meter, and in Prague, I can buy something that's a steal in the center of the city and renovate it myself for €3,600. You know, you can see the relativity there. What's better? Obviously, it's not that easy, but after a while, you grasp it.

And also, the way you understand markets very well is to really just look at the deal after deal. For every property that I would consider buying, I would probably look at 500 deals. And then I would inspect maybe 10 or 15 out of those 500, most of which are total rubbish. But they give me the knowledge of the markets, so I know what's bad. And once you know what's bad, then you can start to figure out what's good, or at least what's decent. Out of the 15 or 10 that I would attend for inspections, I would probably consider only, you know, putting three to four on my list - on my watch list. And then comparing them later down the track with other things if they're not sold. Sometimes a property gets sold before I would make an offer, and sometimes I'm not cash flow rich enough to make an offer. At other times, buying a real estate is not really something that you should do when shares and bonds are down.

When it comes to real estate, you're really buying with a down payment with the ability for the bank to finance you, and that's a whole new topic that we should discuss in another podcast altogether. We're really getting into personal finance and organizing your balance sheets and income and expense statements so that you look and are presented in a way to the bank where you're financial IQ is high enough, and they understand and can see that you have the ability to service and pay back the loan. Because… real estate, really, when you are buying something for $10,000 a square meter.. like in Rome, for example, or Stockholm if that is your preference, you know, and you're buying 120 square meter apartment, you're looking at $1.2 million. Now sure, you can buy it all outright in cash, but a majority of the time, what the rich or the smart do is they use some of their equity and a majority of the bank's money, especially in an interest rate environment that we are in today.

So a lot of things that go into making the deal, Jordan, a lot of things that go into making the research, but a majority of it is just hard work. As I said, I will usually do what most people don't want to do, and that is that I look at hundreds of deals per week, all the time, in my spare time, you know?

Most people sit in a coffee shop, have a beer with their mates, they have a burger, they discuss what happened at work and so forth. I'm actually on my phone when I'm traveling and I'm looking at real estate deals. All the time, I'm on real estate websites. If I'm traveling next week from Prague towards Paris, I will be looking at real estate deals. I'm looking at what's happening in Paris. I'm looking at the tax situation and so forth. So you know, very long answer, I know. But generally speaking, it's the hard work that really makes you find the deals that are attractive and that really stand out. The hidden gems that you can turn rough diamonds into real polished ones after renovations, with the right location.

Jordan: Well, it's so fascinating, Tiho. I mean, thank you for that answer. Now before we leave the topic of real estate, maybe you could talk a little bit about commercial property. How can one value this area, and also what do you see happening here going forward?

Tiho Brkan: Well, commercial real estate falls under two scopes. We're not gonna touch the private commercial real estate too much, but we're looking here at publicly listed commercial real estate or REITs, which are part of the stock market sector. Basically, there are plenty of ways to value these companies and institutions and trusts that hold commercial spaces. Historically, the way it's been done through various ratios, but I think the best one is the spread, in my opinion. It's the spread between the treasury bonds or the government risk-free rate - so the treasury bond yield - relative to what the commercial real estate is paying out. And there should always be a premium there. I think that when the spread narrows, commercial real estate obviously is a tad more expensive because this is an interest rate sensitive part of the stock market. And when the spread widens quite meaningfully - like in, let's say, 2008, 2009, or let's say, 2001, 2000, in 1999 - this was the period when commercial real estate was attractive.

Today, in my opinion, not so much due to quantitative easing, artificial bond buying, and the suppressing of interest rates by global central banks. You know, from March 2009 lows to the current valuation levels and price levels, for example, United States real estate index has risen by some six-fold - and it's outpaced the stock market over the last, let's say, ten years. Having said that though, over the last one year, since FOMC has started to really hike interest rates and they've already hiked it four times - commercial real estate has really started to underperform. It's yet to make new record highs, which is on a total return basis a bad signal. The stock markets around the world have all been making new highs - whether it's Europe, whether it's Japan, or whether it's the United States.

So this is bear signal, in my opinion, and this is one of the areas which has become overpriced in recent years, and now it's failing to follow through towards higher levels, which, in my opinion, could be a bear signal that whenever the stock markets peak - and we haven't had a correction in a long time as we discussed, Jordan - this might be one of the first areas to drop and drop quite hard.

Jordan: Good to know. So definitely keep an area on that side of the market as a potential leading indicator for a correction.

Tiho Brkan: Definitely. That's what I would say so. Moving along from real estate, which I think I've discussed quite a lot now - and maybe some of our listeners might be bored with real estate because they're here for stocks and bonds, and other alternative assets. One area that you're an expert on that you've been covering for many, many years, and you built your career on is precious metals - in particular, gold, Jordan. So how about you give us a little bit of a breakdown on what you've seen in gold over the last decade or two, what you've seen in gold over the last couple of years, and where do you see gold headed? So let's start with the general aspect of gold over the last two decades and its cycle. Where are we in the cycle right now?

Jordan: Well, gold obviously performed very well from 2001 into 2011. It had, I believe, 12 years of annual gains. And we've seen a significant correction or bear market from 2011 to January 2016, or December 2015, I believe, is where gold made its lowest trade, right around $1045 an ounce. It had a really sharp move up in 2016, but only for six or seven months, and you could say the same about the gold equities. And since then, precious metals have been unable to take out that high. They've just been consolidating and trading in a range.

And if you look at a five year chart of both gold and the gold stocks, I mean, whether you look at the GDX ETF, or the GDXJ ETF - which is the gold juniors, and you can also look at the HUI Gold BUGS index, or any gold stock index - you look at those along with gold, they've been in this basing pattern, which really began after the crash in the first half of 2013, where gold came down from the mid-1,500s down even below 1,200. So gold has been basing for the last five years, and it hasn't been able to break up out of the base. Just about a month ago or so, we saw gold get up to about $1,360 an ounce, and that was close to the high in 2016, in summer of 2016, which was close to about $1,375 an ounce. But even though gold got up close to that point, that move wasn't confirmed by the gold stocks. They didn't come close to their 2016 highs.

And something else we should mention. The US dollar actually. I mean, the US dollar's had a very difficult year, and it actually broke down and made a new low this year relative to 2016. And so even though the dollar did that, gold did not make a new high. So there was a negative divergence there or a non-confirmation.

My outlook over the next couple months for precious metals is bearish. I think we're gonna go lower as nominal interest rates look like they're moving higher. And also, real interest rates, I think - which really drives gold - there's a strong inverse correlation there. I think real interest rates are going to move up in the short term. And so as far as the next several months, it looks to me like precious metals have some downside risks there.

So this big basing that we've seen since the middle of 2013, it just looks to me like this is going to continue into next year with a downside bias, and for precious metals - it looks like a real bull market is not going to begin until they can take out those 2016 highs. And I think for that to happen, obviously, in the fundamental side, we need to see real interest rates declining sharply, sharply into negative territory. And for that to happen, you really need inflation to increase substantially, or you need interest rates to decrease substantially. Or maybe if we see inflation start to rise much faster than expected, that is something that could really benefit precious metals.

If we're going to get a recession at some point in the next couple years, obviously interest rates would probably go down and that would, at some point, would benefit precious metals given that if you go back and you look at the last five or six years, the long-term negative correlation between the US stock market and gold still seems to be in place. I mean, it's not perfect, but if you look at it, if you look charts with a bird's eye view, it's really clear that there's a negative correlation there. And even if you just go back and you study the history of gold - I mean, gold benefits. The correlation between gold and equity is always changing, but most of the time, if you go back and look at the times gold has performed the best, usually, that's right after a bear market in stocks or it's during a bear market in stocks.

So I really think - to make a long answer short - for gold to really get back into a bull market and break the 2016 highs, we're going to need to see problems in the stock market. We're going to need to see a bear market or a real significant correction there. And in addition to that, we might need to see some higher inflation. I mean, headline inflation is around, I think 2.2% right now, and if that were to get to 3% or higher than that's something that could potentially benefit precious metals. So that's, that's my big picture take on precious metals right now.

Tiho Brkan: Very interesting, Jordan. Very interesting indeed. You know, I have to tell you, I could get used to being the interviewer and sitting on this side of the desk behind the microphone, and listening to smart, wise, intellectual people like yourself. I better write all those tips down so I can rush out and, well I was gonna say buy gold, but in this case, you don't want me to buy gold, which is very, very interesting.

I have a followup question. How do we know, or how should our listeners know if this is a base that gold is forming, or if this is a consolidation pattern before we have a continuation to the downside? What are some giveaways from your expertise in the precious metals market? What would you say is happening here?

Jordan: Well, I mean, that's a great question. It's very difficult to know because for gold to break lower and retest the low and possibly go to $1,000 an ounce, or the high 900s - fundamentally that means we need to see real interest rates rising pretty strongly. And so that would mean if you get a continuation of what we've seen in the last several years where you have inflation picking up a little bit, but if we get growth going up but inflation kind of staying at the same level, that is something that would be negative for gold. Obviously, the dollar is a very important topic. If the dollar were to break this rebound that we've talked about and if the dollar index were to break above its high at 103, that would definitely be negative for gold.

However, at some point, I think, I think a dollar that gets really strong at some point, that would become bullish for gold. But we don't know what the gold price would be at that point. You know, it could be much lower. But certainly, to go back to what I just said, if the dollar is in a resumption of the bull market, then obviously that's going to be negative for gold, and gold would have a chance to probably retest its low.

So there are so many factors to look at, I would continue to watch the gold equities, because if the gold equities are weak relative to gold and they start breaking levels before gold - that would be a signal that gold is probably going to follow the gold equities lower. There's not one specific thing you can look at. I mean, there's three or four things there. But I mean it's so difficult to know because gold is driven by so many different factors. And you know, how those things all come together in the next year, it's gonna be very interesting to see what happens.

Tiho Brkan: Definitely. I mean, I know gold is such an important topic for so many investors, some of which really, really dislike it as an asset class and don't want to touch it. Nonetheless, it's still a very important topic for them to see how it's going down, how it's not performing well, and so forth. And then, on the other hand, gold is such an important topic for investors who understand the importance of gold, diversification capabilities of gold in a portfolio, and also the long-term benefits of gold - even though it doesn't do anywhere near as good as the stock market. In some measurements and over the very, very long run, there are also a lot of research reports out there that show that - depending on when you measure the performance of stocks versus gold - gold can at times outperform stocks by a large amount. So you know, Jordan, thank you so much for that answer. I wouldn't be able to do anywhere near as good as that, so how about we move onto the rest of the commodities now?

Jordan: Sure, yeah. Let's talk about the rest of the commodities sector and in particular, energy and grains. What do you think is the best way to play these areas?

Tiho Brkan: Well, one of the mistakes I think private investors and individuals make when investing in commodities is they tend to go out and buy the futures (or ETFs) and they suffer the rollover cost. Commodities tend to have backwardation and contango. Backwardation tends to be good for you. Contango, not so much. So oil and energy - in particular, natural gas - they've been suffering from a major contango over the last decade, even longer, since I think 2006, 2007 and the peak in oil and in natural gas, all the way into 2008 peak when oil got towards $150 a barrel. My preferred way of playing energy is probably through the energy equities. They tend to perform well, they tend to correlate with oil, so if you want that exposure and correlation to the actual spot price, that's pretty decent. Not perfect, but pretty decent.

Having said that, with high dividends that energy stocks pay out, and no contango to worry about over the very long term, even though they kind of match each other in correlation, I think energy stocks tend to outperform and they're a much better way to play a commodity - an alternative asset space than say, futures.

Another way to do it also is through master limited partnerships. These pipelines are currently a topic of political sphere of NAFTA agreements between the US, as Trump reorganizing these agreements, renegotiating them with Canada and Mexico. But these pipelines tend to run all around the world, also between, let's say, Russia and Europe with natural gas, or between United States, Canada, and Mexico. And in the United States, in particular, there are ETFs that you can use to play this space, and it's much better to hold these master limited partnerships than it is to, let's say, play the commodity futures once again. Because they're very, very high yielding. And for those investors that have optimized their taxes very well, the yields are fully received and not taxed - with tax-sheltered investment vehicles, especially in the United States. And when it comes to investing in this, it's also very, very smart way to obtain total returns in a much better way than, let's say, playing the CRB index.

So yeah. I definitely think from my aspect - I've always been an investor in energy stocks from the alternative space, and continue to do so at the right points in time. When they get oversold, when the dividend yields spike, and when energy is crashing and it's a very much a bearish story - I like to be an investor, Jordan.

Jordan: Now Tiho, should private investors consider portfolio exposure to the grains?

Tiho Brkan: My clients do, we do invest in grains from time to time. If you look at the history of grains, which is basically soybeans, wheat, rice, and corn - these four grains, in particular, three outside of rice - they have had a history of ups and downs, booms and busts. So traders have to have the ability to buy low and sell high, more than any other sector of commodities, in my opinion. This is the area which predominantly is ruled by demand and supply… less so by the dollar and by liquidity, and by hedge funds.

All kinds of other things which have negative views from the financial sector point of view, where they say that there's a huge amount of speculators in oil and that a million, millions and millions of barrels are traded every day or every minute on the stock exchange, but there's only 98 million that are consumed, and so forth. You know, and so it goes.

When it comes to grains, I think demand and supply is predominantly the main driver. So I think investors need to be able to study weather patterns, El Niño and La Niña, and they need to understand the oversupply and undersupply. In particular, investors don't really understand how to be contrary in the sense, because whenever you have a collapse in price, farmers tend to produce less of that grain, and they tend to do less planting of that grain. As silos, inventories build up, inventory supply levels stay very, very high. We are much closer to the bottom than the top. What investors do usually is they buy commodities like this on shortages. That's when the price is spiking and the price is very expensive. Whenever you have a shortage, farmers are already planning in the next year or two how to increase the supply, whether the shortages came because of the drought or other weather effects, or too much rain or not enough rain and so forth. Depending on which soft commodity we're talking about, you need to be counterintuitive and you need to do the opposite of what you normally would.

So I like to buy grains when there's a huge oversupply. I like to sell them on shortages whenever they have their spikes in price. But generally speaking, this has been a very tough area to invest, because oversupply has continued since 2015. Any kind of a rally in the grain sector has been sold off. So generally speaking, not a good performing sector right now, extremely depressed. I think eventually what this creates, it sows the seeds for the next bull market if you want the irony of that joke. So there you go.

Jordan: Very nice. Now let's turn from extremely depressed to the other side of the coin and some areas that there's extreme optimism in right now. So Tiho, private equity, and venture capital. These have been buzz words over the last several years, especially with what has been happening in Silicon Valley. Now how can a private investor play this space?

Tiho Brkan: They're very, very difficult to invest in. Private equity's really something that endowment funds are focusing on, and they're the buzz words right now. It's making all the news and basically from that aspect, a very well diversified portfolio they run, is seeing a reduction in stock exposure and more of an increase towards private equity and venture capital investments - where the focus is another buzz word which has been over the last few years is unicorns and startups and biotech startups, and AI is now a big one.

So a very, very popular space. It's very difficult for retail investors, private investors to play this. You have to be extremely wealthy, and you have to have the ability to participate in a fund. Let's say you come and join Peter Thiel's fund - he has a great track record - but most of these funds are closed and you need a large amount of capital to be an investor there. Millions and millions, if not hundreds of millions.

One way that retail investors and individuals can play it is via a private equity ETF - PSP - which basically tracks private equity companies as a part of an index or a portfolio. There's a quite a significant tracking error and fees, however. The index does have much higher volatility than the stock market. Private equity companies carry a large amount of leverage, and they do buyouts using leverage the similar way that I've discussed before: buying private real estate using bank's money as well, and not your own equity as a whole.

So generally speaking, large moves on the upside, there was a drawdown of almost 90% during the GFC of this index. At the same time, the recovery has been terrific because, from about 85% down, we're getting towards all-time new highs. I mean, it's only taken a decade, right?

But nonetheless, very good performance. So you can see a doubling in this space every several years. So it's quite interesting because when these companies perform, they perform extremely well. And when it's a bull market, when the economy's growing and when the interest rates are decently priced for private equity firms to borrow and to allocate their cash towards something - the returns are astronomically high. The dividend yields paid out by these companies as a result of that makes holding this index a very smart thing in an uptrend. However, during downtrends and during panics, these stocks and this index can fall dramatically, so be careful. Be very careful indeed.

Jordan: Now Tiho, it's not easy to give a final verdict on such a massively broad asset class as alternative assets. However, perhaps you can just tell us which of these assets you're investing in and which assets currently present more value relative to the others.

Tiho Brkan: Well definitely. You summarized it well. I think first of all before I get into that, I would like to say that investors need to know what they're doing. They shouldn't listen to me, they shouldn't listen to you - even though you're much smarter than me, Jordan, and your gold views are terrific, mind you. Nonetheless, investors should know what they're doing, and if you're an expert yourself in real estate, or you're an expert yourself at forestry, investing in forestry or cattle farms or buying paintings, and you have a love affair with art, this is what you should do. And you'll probably excel in it if you put in the large amount of time, effort, and energy needed to become successful.

Having said that, I'm participating in private real estate, so residential real estate. I always have. My family's also in construction and renovation, so that's a natural spin-off for me to continue to invest there. Investments in this sector (real estate), which investors should stay clear of, I think are publicly listed REITs in the United States. Less so foreign assets, outside of United States, like Eurozone and Asia. I think emerging markets REITs are quite attractive too.

I would say the precious metal sector is still consolidating and we don't know what will happen next, so we should be watching the price. But the coiling signals that eventually gold will make a decision towards the upside or the downside, and a lot of that, as you said, has to do with the dollar, in my opinion. And we will find that out soon enough.

I think energy has been one of the worst underperformers over the last ten years, so since the peak in 2007. Yes, it did make a temporary higher high in 2014/15, but energy has been a disaster over the last ten years, going sideways. Looking at my data all the way back 100 years for the US energy sector - this has been the worst three-year underperformance and a five-year underperformance since the Great Depression. So energy sector's something that my clients have been allocating funds to at the right times, especially when there's panic selling, and will continue to do so, especially because of the price, the price to book valuations, the CAPE valuations are probably the most attractive out of all the US sectors.

And we continue to look at grains, let's say, over private equity. We continue to look at energy stocks over real estate. So I like to buy something that's cheap and stay clear of something that's expensive unless of course, momentum is driving that and new highs are being made. But whenever momentum slows down, like US REITs, but the price is very overvalued, it could be a hazard, so it's worth paying attention to. In the end, like I said, alternative assets, such a broad scope, such a broad sector for investing. But I think to summarize, I would say the Queen has beaten us all, Jordan, because her stamp collection has beaten stocks, bonds, REITs, forestry, cattle farms, fish farms, and just about anything else that anyone does.

Jordan: Is there an ETF where we can piece of that yet?

Tiho Brkan: I don't think the royal family has given us the license, given anyone the license or the rights to do that. So maybe, maybe in the future. We'll see.

Jordan: Well Tiho, that concludes episode five of the Atlas Investor podcast. It was one of our longest episodes, probably the longest episode, thanks to one of your favorite asset classes, alternative assets. There's so much to cover, and I think you did it very well. Now Tiho, for episode six, where will you be and what do you plan to cover?

Tiho Brkan: I'm going to Paris, the most romantic city in the world. I'm very lucky that I'm accompanied by my beautiful girlfriend as well. And I'll be covering Paris, I'll be covering the stagnant French economy, the socialism that's going on there, the high taxes, and all the wonderful things including French patisseries, croissants, and Notre Dame, the Eiffel Tower. And you know, we'll throw in a bit of global macro talk as well, Jordan. We'll keep this one a surprise, so tune in for episode six to see what we'll be discussing.

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