Sometimes it is valuable to look at the past when we are trying to determine what path certain assets may take going into the future. Looking at prior cycles can give us a peek at some likely outcomes. Just as important, I believe, is to make sure we are looking at circumstances that are similar. This does not mean what is most recent but what is most like the scenario we are seeing today.

Many people believe that because it appears that we are entering into an unprecedented economic downturn that asset prices will collapse. Many believe that by the Fed raising interest rates an economic slowdown will lead to a deflationary collapse.

I have written in the past that I believe that since this is a supply problem and not a demand problem that, because of lack of production and also a global auction for needed commodities that costs will continue to rise.

While it may seem counterintuitive at first, there are many reasons to believe this thesis.

  • US dollar being debased on purpose
  • Global onshoring which is inflationary (Deglobalization)
  • Lack of production of basic goods
  • Wars, famines and natural disasters
  • Mandates and regulations which make it harder and in some cases uneconomical to produce what is needed.

These are just a few reasons. In addition, I read an article by a firm that I consider to be the cutting edge in the resource space Goehring and Rozencwajg.

I should start by saying that most of my contemporaries who are calling for deflation are basing their findings on what they saw in 2008. In my opinion that is a mistake since in 2008 commodities had rallied HARD and I participated- making outsized gains from 2003-2007. The energy and materials sector in early 2008 made up 20% of the S&P 500- a 30 year high. (G&R) In 2008 the party ended and these same stocks got hammered along with everything else.

I believe we have the exact OPPOSITE set up today. For historical precedent G&R takes us back to the great depression of 1929-1937. Keep in mind that this was a deflationary depression and it is likely that this depression that we are likely in the early innings of right now could be an inflationary depression which would indicate even HIGHER prices.

Unlike the 2008 swoon we are now entering a period when the energy and materials sector in the S&P are just 5.4% and, just as back in the “Roaring 20s” they were virtually left out of all the gains and mania- just like today. According to G&R- “A simple equity portfolio made of equal positions in gold miners, oil producers, base metal miners, and agricultural companies made just before the stock market collapse in September 1929 more than doubled a decade later. By comparison, at the end of the period in 1937 the total return of the S&P 500 was still down nearly 50%. By 1946, when the S&P 500 reached its pre-crash levels the same natural resource equity portfolio had tripled”.

I believe that the situation we are in right now more resembles the situation from 1929 rather than 2008. I also continue to believe that the world is moving away from fiat (conjured up from nowhere) “money” and those producing real goods will want to be repaid with something of corresponding value- something REAL.

I believe that hard assets and the companies that mine or manufacture these things will FAR outperform the high-fliers of the past few years as people get back to realizing that if nothing is produced, we all can’t maintain our lifestyles -or maybe even our lives.

Production matters. Profits matter, price paid vs. value received MATTERS. Even though it hasn’t seemed to matter in the recent past- history tells us all of these manias die the same way- they go up far more than anyone can imagine and those companies that have little, if any earnings crash and burn. There is a load of examples out there today.

Don’t look backwards- look forward. What is most likely to go up from HERE?

Who cares if a stock is up 1000% if you didn’t own it? The idea is to buy low and sell high.

I believe that MANY companies will collapse because they are carrying too much debt and the economy is collapsing- making it harder to keep paying interest on that debt-let alone paying it off. As rates rise bond prices generally fall. Higher interest rates will likely hurt real estate going forward.

About the only assets I can view as “cheap” today are those being artificially held down like gold, silver and platinum. I also believe that MANY companies that are producing hard assets (natural resources) are compelling buys at the levels we see today also. Even the gold miners are historically undervalued here. BUY LOW- SELL HIGH.

Be Prepared!

Any opinions are those of Mike Savage and not necessarily of those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only be a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices are overall rising.

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