Above, we noted the potential political consequences of inflation. Certainly, inflation, and erosion of real wages, is a primary element in the electorate’s increasing dissatisfaction with the current administration. It is not the only one, however. In many metropolitan areas, including those that saw protests in favor of police reform in 2020, crime rates have significantly escalated from pre-pandemic levels. That has led to a backlash from the electorate; incoming Virginia governor Glenn Youngkin ran, in part, on a law-and-order ticket.
There is still plenty of time for things to shift before November, and we would not be surprised to see an effort by the administration to position itself more towards the center and away from its more radical wing. Whatever the outcome, that would be a good thing in our view — as market pragmatists, we tend to be centrists, and in favor of policies that offer predictability, stability, and the rule of law. History amply demonstrates that revolution ends up serving no one but the revolutionaries — and certainly not the downtrodden whose interests they claim to serve. Invariably, these latter fare worst of all.
Stock Specifics
- In a rising-rate environment, we like financials — particularly regional banks, which make most of their money from fees and net interest margins, rather than from capital markets and securities-related business as big banks do. Net interest margins have been a headwind for a long time, and are beginning to become a tailwind.
- As we’ve noted a few times, we also like some legacy carbon energy producers. Their products will remain essential for the global economy for decades to come, no matter what the official decarbonization plans, and they will have robust cash flow and distribute it to shareholders. While PEs will remain constrained, there is room for some PE expansion if the oil price continues to rise, which will likely be the case, if inflation has indeed moved into a structurally higher channel.
- China has recently begun to ease, and an easing trend there would be positive for some base metals.
- All of our fundamental interest in dominant tech themes accelerated by the pandemic remains: electrification, digitization, software, fintech, and all the panoply of Fourth Industrial Revolution technologies and industries. However, companies that received excessive valuations in the liquidity-fueled euphoria of the past two years are coming back to earth and it may take quite awhile for them to recover (some never will, as is always the case — particularly the extreme meme stocks and SPACs). With all of that said, the themes are enduring — it’s just that we think there will be better entry points ahead.
- We remain long-term positive on gold. There is also more short-term momentum building in gold, and it is acting better technically. Buying volume is up for the major gold miners, and we are seeing more demand for gold shares than we have seen for some time. After ignoring rising inflation throughout 2021, inflation-defense gold buyers may be starting to pay attention. Also, there may be more European gold buying as the likelihood of Russian incursion into Ukraine becomes more likely, and the United States indicates its basic disinterest in acting to defend Ukraine. So far, it is a constructive near-term move, but it’s early to call this a new bull market for the yellow metal.
- We see that the declines in bitcoin and some critical DeFi ecosystem assets are attracting late-to-the-party institutions — so we expect a bottom to be found. In other words, we expect bitcoin to rally after a correction that may last awhile longer — but bitcoin is far from dead.
Thanks for listening; we welcome your calls and questions.
