A Legendary Investor Jumps Back Into Gold
The Fed could be more 'dovish' than you think... Kashkari wants more inflation... A legendary investor jumps back into gold... Why copper prices could be headed much higher... P.J. O'Rourke: Weathering the political #*%&-storm...
The Federal Reserve has officially said it expects to raise short-term interest rates up to three more times this year...
But an article published yesterday suggests additional hikes could be less certain than Fed statements indicate.
In a post on open-publishing platform Medium, Minneapolis Fed President Neel Kashkari said he doesn't believe the Fed should raise rates anytime soon.
This is unusual – and potentially important – for two reasons. First, Fed officials rarely publish their thoughts... let alone on such a public platform. Second, Kashkari is a voting member of the Federal Open Market Committee ("FOMC"), which sets rates... meaning his opinion could carry some weight with other voting members.
According to the post, he believes the risk of raising rates prematurely are far greater than the risks of letting inflation rise too high. As he wrote (emphasis added)...
The FOMC has extraordinarily powerful tools to deal with a surprise burst of inflation. We can always raise rates, quickly and aggressively if need be. And my view is that there is strong commitment among FOMC participants to maintaining our 2% inflation target.
However, the closer we are to the zero lower bound, the fewer tools we have to deal with a surprise of low inflation or economic weakness. From a risk management perspective, that suggests, if we are to err, it is better to err on the side of being more accommodative than being more restrictive.
Why do we bring this up?
It's another piece of evidence that, after years of battling deflation, the Fed and other central banks may be hesitant to react to rising prices as quickly as they otherwise would.
These same banks have unleashed unprecedented amounts of stimulus over the past several years... meaning there's plenty of "fuel" to push prices much higher. Now that inflation is stirring, it could get out of hand before central banks wake up.
We continue to recommend avoiding long-duration bonds... and staying long precious metals and high-quality stocks.
Bloomberg reports legendary investor Stanley Druckenmiller has had (another) change of heart...
Druckenmiller famously held nearly 30% of his portfolio in gold last year, and he made a fortune as prices rallied through the summer.
He then made headlines in November when he told financial-news network CNBC he had sold his massive gold positions following Donald Trump's election victory. As he said at the time, "All the reasons I have owned it for the last couple years, it seems to me they may be ending... It's as hopeful as I've been in a long time."
Now, he has apparently reconsidered...
In an interview with Bloomberg on Tuesday, Druckenmiller said he began buying gold again in late December and January, essentially reversing his November sale.
When asked why, he said that virtually every country – including the U.S. – is now trying to actively weaken its currency. He also cited increased uncertainty around the Trump administration, and noted gold had gotten cheap again: "Gold was down a lot, so I bought it."
So far, his timing was nearly perfect...
Gold bottomed near $1,130 an ounce in late December and has been rising ever since.
It's up another 0.5% today to around $1,240 an ounce, a gain of nearly 10% since Druckenmiller began buying again. And as we discussed yesterday, bigger gains are likely ahead.
In the commodities markets, copper prices were up sharply again this morning on growing fears of shortages...
The Wall Street Journal reports workers at BHP Billiton's Escondida copper mine in Chile – the world's single largest copper mine – have voted to start an indefinite strike on Thursday, following weeks of failed negotiations. This would halt production at the mine responsible for 5% of global production.
Today's news follows another large disruption last month...
On January 12, the Indonesian government unexpectedly banned copper exports from Freeport-McMoRan's (FCX) massive Grasberg mine – the world's third-largest copper mine. According to Jefferies analyst Christopher LaFemina, this halt alone has removed more than 2% of global supply from the market.
Copper had already been surging since last November's election, likely on the expectations of higher inflation and industrial copper demand under President Trump. But according to a note from investment bank Goldman Sachs this morning, these disruptions could soon add "fuel to the fire"... and push copper into a supply shortage for the first time since 2011. As Bloomberg reported...
"We expect copper will move into deficit in the coming months, driving the next leg higher in prices," Goldman Sachs Group Inc. analysts including Max Layton and Jeff Currie said in a report received Wednesday. While the bank's six-month target remains at $6,200 a metric ton, risks surrounding the forecast are skewed to the upside, they said. Copper for delivery in three months advanced 1.6% to $5,890 in London on Wednesday.
Our colleague Ben Morris recently turned bullish on copper, too...
Back in November, he noted copper prices had broken out to new highs. He has been waiting for a good, low-risk opportunity to buy ever since. And last week he finally got it. As he explained in the February 1 issue of DailyWealth Trader (DWT)...
Like many other commodities, copper dropped hard starting in 2011. It fell from more than $4.50 per pound down to less than $2 in early 2016... a 58% decline. It was a brutal bear market. (For comparison, gold fell 45% from its 2011 peak to its 2015 low.)
But as legendary natural resource investor Rick Rule likes to say, "Bear markets are the authors of bull markets." In other words, after a valuable commodity suffers through a bear market, keep a close eye on it... A bull market is likely setting up.
In DWT, we checked in on copper back in November. After trading sideways for most of 2016, the metal had just broken out to a one-year high. Here's the chart we looked at then...
Again, Ben didn't recommend buying at that time. Copper had soared nearly 15% in just 12 days, and buying then would've been risky. He suggested waiting for a pullback – and a lower-risk entry point – before buying.
Of course, the market rarely makes things easy... Rather than pulling back, copper continued to move higher.
But last week, Ben finally had a low-risk setup... and recommended buying a fund designed to track the price of copper. More from the issue...
One of the best and simplest ways to profit from a rise in copper is with the iPath Bloomberg Copper Subindex Total Return Fund (JJC). Like many commodity-tracking funds, JJC lags the actual price gains in copper... But not by much. Over the past five years, its down just seven percentage points more than copper itself. That's an acceptable "bleed rate." (Over the past 12 months, JJC is actually up slightly more than copper.)
As you can see in the chart below, JJC just broke out of a big downtrend. It came back down and tested that breakout, then rallied to a new high...
Ben believes a new bull market is starting... But because copper has already rallied significantly, he recommended buying a smaller-than-usual position initially to manage risk...
Today, I suggest buying a half position in JJC. If you would normally buy 100 shares, buy 50 shares now...
Successful trading is all about managing risk. Copper looks like it's starting a new bull market... And our upside potential is big. But copper has already had a nice run. We don't have to jump in with both feet from the start to make good money...
We can cut our risk in half by buying a half position in JJC today. Then, once we're profiting, we can add to our position... and look forward to much bigger gains in the months and years ahead.
DailyWealth Trader subscribers are about even on the position so far. But today's news suggests higher prices are likely soon.
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The responses to Porter's Friday Digest request are still rolling in. What's on your mind? Let us know at feedback@stansberryresearch.com. And be sure to read on past the mailbag for the latest essay from regarded political satirist and Digest contributing editor P.J. O'Rourke.
"I just got around to reading the Friday Digest. Thanks for the response, but more importantly thank you for a bit of entertainment as well as I was laughing along the way. The only thing you guys could have done to be 'more clear,' would have been to 'talk slower' :)" – Paid-up subscriber Doug R.
"Porter... Portfolio Solutions has set me free! As an Alliance member, I used to try to read all the many writings of all of the Stansberry experts, and dig out which ideas made the most sense to me for investment. With Portfolio Solutions, I have invested exactly according to your schedules, adjusted to make use of most of my funds, using both The Capital Portfolio and The Total Portfolio.
"With this base confidently established, I now use the remaining relatively small share of my funds to 'chase rabbits', or ideas that aren't represented in the portfolios, but that still strike my fancy and don't require that I touch my 'base' investments. I can read or not at my leisure without pressure to make the very best investment decisions, trusting that my friends at Stansberry are doing that for me. Now if I can just decide on what to do with all this free time! Thanks very much for giving it back to me." – Paid-up Stansberry Alliance member Jackson G.
"Porter: In response to your mailbag, the directions given were very clear... To your point about a reader's question about the rationale of the 'why' for a position, I just drilled down on a name I'd didn't know much about – both the one page summary and the full write up to better understand the decision. Very helpful and very well done." – Paid-up Stansberry Alliance member Mike O.
"Porter: I have been an Alliance member since 2009 and I cannot say how delighted I am with your service! It just keeps getting better and better, and Portfolio Solutions are a wonderful addition to your services. Bravo!
"I just wanted to make a quick comment about the questions in [Friday's] Digest. As you noted, a number of them asked about a Buy Up To price for the securities in the portfolios. I have subscribed to a number of different financial newsletter services, and yours, in my view, provides the best advice, in part because every recommendation is accompanied by a Buy Up To price. In short, you have conditioned us to expect Buy Up To prices with every recommendation!
"I must admit, when I first looked at the portfolios, I wondered where the Buy Up To prices were. However, I decided that you intended us to buy the positions, and the prices I was seeing were very similar to the reference prices, so I just went ahead. So, it does not surprise me that the most common question was 'Where are the Buy Up To prices?' We have been trained to expect them :-)) Thanks again for your terrific service!" – Paid-up Stansberry Alliance member Tim B.
Regards,
Justin Brill
Baltimore, Maryland
February 8, 2017
Weathering the Political #*%&-Storm
Gosh, we're having a lot of political weather these days...
A snowy blizzard of executive orders in the midst of a heavy rain of opposition to the executive signing them... a populist heat wave in the heartland, accompanied by a cold snap of icy disdain on both coasts... tornadoes in the trailer park of government regulation... floods of indignant protests... droughts of common sense... trade-policy tidal surges... hurricane warnings on the Republican lawmaking sea, while a Democratic high-pressure zone threatens to becalm all legislative action... and enveloping everything, the usual fog of politics, now more of a pea soup than ever.
Porter says, "Politics doesn't matter." That can be hard to believe when we're weathering a political #*%&-storm. But it's worth reminding ourselves why what Porter says is fundamentally true. I would add just three words to Porter's dictum: "Politics doesn't matter... compared with us."
We are individuals. Politics is a bunch of people, a crowd, a mob. Individuals are better than mobs. If you're flying with a few individuals, you're probably on a Gulfstream G3. If your flight is mobbed, you're probably in coach.
An angry individual (usually in a middle seat) might attack you. But you stand a chance against an individual. You stand no chance against an angry mob. (Especially when they're trying to get huge carry-ons into tiny overhead bins.)
Also, the individual might not be angry. The individual might buy you lunch. (If you switch seats and give him the window.) From a mob, you get a lynching, not a lunch. (Never mind how many free lunches our mob of politicians promises.)
We are individuals, which means we work. Politics – famously – doesn't work. Or perhaps you're retired, which means you did work. Maybe politics did work, too, once upon a time. But that would be back when the Constitution was being written. And if we're still paying a pension to Thomas Jefferson, someone should look into things at the Social Security Administration.
Politics is "all taking, no making." Everything that is made gets made by we-who-work not them-who-politic. And all forms of work are good. Let no one be denigrated for flipping burgers. I know what would happen if I were on the other side of the counter at McDonald's. You'd get a Big Mac that was shoe leather on one side and cow sushi on the other.
All work is noble. Raising kids and keeping house is maybe the most exalted work of all. Try not raising them. Leave kids under 12 on their own for even a few days and see what you get. (It will be as dramatic as Home Alone starring Macaulay Culkin, but less heartwarming.)
For that matter, leave kids over 12 on their own for a few days. My wife and I did this, and take our word for it... Don't do it.
A house doesn't keep itself, either. When I was a bachelor, I experimented for years with the self-cleaning, self-tidying, "free range" domicile. I learned... a number of things, including what a bad idea it is to put paper plates in the dishwasher.
We are individuals, and specifically, we are individuals reading the Stansberry Digest. Let's take a moment to give ourselves the credit that we're due for being more important than politics.
We are individuals in the free market. We accumulate capital – or do our darnedest to. We manage that capital.
Everything that is made gets made with capital. Just like breakfast gets made with bacon, eggs, toast, butter, coffee, and orange juice.
We supply capital to people who have a good idea for a profitable use of capital. (Make breakfast!)
If the free market didn't exist, capital would still be needed. An "air breakfast"? No thanks. But the capital would have to come from politics, not from individuals.
If the market were controlled by politics rather than individuals, would politics be as good as individuals are at allocating the right amount of capital to make breakfast?
Even assuming that the politics were honest and efficient (a laugh), the answer would be no. Politics would allocate three times the amount that breakfast costs to make – on the condition that we're all served muesli, goat-cheese yogurt, egg-white omelets, and three glasses of kale juice because that's what's good for us.
If the market were controlled by politics rather than individuals, would politics allocate the right kind of capital to make breakfast?
Again, no. In the free market, we have this remarkably simple, quick, highly flexible, low-transaction-cost method of allocating capital. It's called money.
When the market is controlled by politics, the political system quickly runs out of money. We saw this in the Soviet Union where, according to the official exchange rate, the ruble was worth 1.78 to the dollar. After the fall of communism, the ruble was floated on the free market and promptly sank to 1,247 to the dollar.
In a politically controlled market with worthless money, we wouldn't get bacon, eggs, toast, butter, coffee, and orange juice for breakfast. We'd get to chase a pig, apply for a special permit to raid the neighbors' hen house and milk their cow, stand in a bread line, have a coffee tree planted in our name in a public park in our "sister city" in Nicaragua, and all the orange juice we want on a government-sponsored trip to Havana to increase political understanding between the U.S. and Cuba.
Politics doesn't matter – because we individuals won't let it!
We'll weather this political #*%&-storm just like we weathered the previous one that lasted for eight years. In fact, we'll weather this one better, if the gale-force winds of the free market are indeed unleashed by the current political meteorologists.
Politics doesn't matter – and let's keep it that way!
Regards,
P.J. O'Rourke