|The dollar did the opposite, declining steadily all through Wednesday to end the day down 1.1%. That is a very significant move given that we’re talking about the world’s reserve currency.|
It had fallen another half percent on Thursday when Trump stepped in with some damage control.
“The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar. Our country is becoming so economically strong again and strong in other ways too.”
-- President Trump at the Davos Summit
Is that what Trump actually wants or thinks? I think not. He is a trade protectionist and a capitalist who from the earliest days of his campaign decried the strength of the US dollar.
Whether he thinks it or not, Trumps comments talked the dollar up and gold down. The yellow metal is back below resistance and I still just don’t know if it will move up notably again in the next four weeks.
Whatever happens, the plan remains the same. If gold does break up through resistance, seasonal selling will be less important because the summer doldrums will be moderate. Take profits/use seasonal strength to sell only those stocks you no longer want to own. Hold those you have chosen as your bull market bets. And use slight summer weakness to add to positions or buy into good new opportunities before this thing really goes.
If gold doesn’t break up before March, we will have a more normal summer doldrums. That means seasonal selling will be more important – lock in gains on lots of stocks, with a plan to buy back in to those you really like mid-summer.
Also, whichever case happens I will be trimming back the portfolio in about a month. It is simply too large and includes some stocks where it’s becoming apparent the thesis isn’t playing out. I’m still holding out for a bit more seasonal strength before making those sells.
I wish I saw only green lights ahead for our investments, but while the outlook is better than it has been for years there are also risks on the horizon.
Broadly, the risk is this: that we pile into mining stocks based on this bullish commodities outlook and then the US stock market corrects or crashes, pulling everything – including commodities, even though they don’t deserve it – down with it.
I don’t need to argue again that US stocks are expensive and that this bull market is long in the tooth. Those things are all accepted now, but so too is the mantra that A bull market is a bull market until it isn’t a bull market – and for now we remain solidly in the first half of that sentence!
That’s an acute fear. Underlying the fear of an acute event like that are a series of arguments around why US economic prospects aren’t that rosy.
I am the first to admit that I was wholly committed to that camp until recently. I just couldn’t see enough strength in the data to substantiate the stock market. Then I realized I was looking for a link that doesn’t really exist: the stock market rallied strongly because quantitative easing created immense inflation in financial assets, without helping the real economy that much. However, stock market strength fed the idea that the economy was recovering. And it actually was, if inordinately slowly.
Now we’re at an uneasy juncture. We have economic growth in the US, slow but steady. It’s good, but it still doesn’t justify stock prices. And yet growth now means monetary changes – rate hikes and tightening – as well as fiscal attitudes – backing a weaker dollar – that have the real potential to derail growth.
And here’s the key: should growth be derailed, the fairy tale falls apart. Inflated stock prices were supposedly based in a US economy recovering far faster than any other in the world…but if that recovery stops, the basis is gone. Then what?
I spend too much time thinking about these things. Right now my sense is that these threats to US growth will still take some time to manifest. As such, a stock market crash or correction based on weakening fundamentals is still a ways off. That works just fine from a metals investor standpoint – we just need two years of opportunity please!
I can’t have a sense of when or if the acute threat might manifest. That’s the same challenge every investor currently faces: how much longer will this go? Talk of market melt up and investor euphoria is increasing, but these things can last a long time, especially given that international growth is just joining the party. The supposed rationale keeps getting stronger, even as the valuations get stupid and the reality of actual growth forces monetary and fiscal moves that, ironically, threaten it all!
The Letter continued with a look at specific economic risks and how to monitor them...