Sprott Media: Soaring Prices Are A Sign Of Trouble

By Albert Lu – May 17, 2019

DEFENSE WINS CHAMPIONSHIPS

I’ve heard it many times from many people — in the National Football League, defense wins championships.

But is it true?

Is a team’s defensive prowess the determining factor in its success or failure?

Perhaps it was true at one time. But in today’s pass-happy league, where new rules favor shootouts over shutouts, is it still the case?

While the point is debatable, one thing is not.

SCORING DRIVES REVENUE

And the NFL knows it.

When it comes to the economy, central banks have learned a similar lesson — easy money is good for everyone, at least for a while. The economy booms, stocks soar, the politicians are happy and the academics in the Eccles Building look like geniuses.

So, it’s no surprise that, given a choice, our monetary stewards would favor loose policy over tight reins.

And the result? Big numbers, just like in the NFL.

From 2009 to 2018, the Dow Jones Industrial Average rose from 9,034 to 23,327 — almost 10% per year. The rise in technology stocks has been more dramatic, with an annualized gain of over 18% since April 2009.

Moreover, the popularity of passive index investing and IPOs has concentrated much of the attention, and capital, in a handful of mega-cap darlings.

But will growth stocks and tech unicorns lead investors to victory or leave them disappointed, wondering what happened?

DEFENSIVE INVESTING BEGINS WITH STRONG FUNDAMENTALS

Mike Larson of Weiss Ratings is concerned with what he sees. Larson, who writes Safe Money Report, draws some interesting comparisons between current conditions and the dotcom bust of the early 2000s.

“A whopping 85% of the companies coming public today failed to report a single penny in profit in the twelve months leading up to the IPOs.”

According to Larson, this has occurred only one other time in U.S. history: 1999, during the dotcom bubble.

As examples, he points to Uber — whose valuation rose 2,222,122%, from $5.4 million to an estimated $120 billion, in nine years — and to DoorDash, which was recently valued at around $7.1 billion.

Neither company has earned any profits thus far.

Another example is WeWork, which recently filed for IPO. The company reported it doubled sales from last year but lost $264 million in the first three months of 2019.

THE FINAL SCORE IS WHAT MATTERS

In football, it’s the point differential that matters. Whether it’s 10-7 or 53-50, you can’t allow more than you score.

Likewise, in investing, your gains must overcome your losses. One big bust can wipe out a decade or more of gains.

Unfortunately, as Larson points out, evidence of an emerging bust is easy to find.

“What we’ve seen in our own proprietary data … is that things started to transition after [January 2018]. The same kinds of stocks, for example, that were leading the market before January of 2018 — which would be your offensive, high-growth, cyclical type names — started to lag at that point. And it was really the more defensive, yield-oriented, higher-rated type, recession-resistant companies that were taking the lead.”

Furthermore, he notes that the industrial, material and financial sectors underperformed, whereas real estate investment trusts, utilities and other defensive stocks took the lead.

And despite a super year so far for the S&P 500, over the last one to two years, the index has made little progress.

COMPARISONS TO THE TECH BUBBLE

Larson, who observed the dotcom meltdown firsthand, is quick to point out that the 85% of last year’s IPOs didn’t make any money in the year prior to their offerings — a situation we have not seen since the peak of the dotcom bubble.

“There’s a lot of inherent volatility and dangerousness in speculating in some of these tech names.

“It shows you why you have to be defensive. If you’re looking for prudent, sustainable profits, you’re going to find it in some of those other sectors that offer …  yield protection, higher Weiss ratings, recession resistance.”

These are all important since some data, such as the yield curve, point to a possible recession within 12 to 18 months.

THE SAFE-MONEY STRATEGY

In light of the changing environment, Larson advises his readers to shift to a more defensive posture by raising cash and by rotating out of offensive positions into defensive sectors — a move that, according to him, has paid off.

“The idea again is to focus on safety — safe yields and safe money.

“I also like gold and gold derivatives: gold miners, for example. You’re in a market where overall market volatility is going to go up; it’s already going up.

“In this emerging economic position, boring is good. You want to own companies whose operations are less glamorous.

“Making money isn’t boring. Making money is fun.”

And we can all agree that there’s nothing offensive about making money.


See Mike Larson with James Rickards, Nomi Prins and Danielle DiMartino Booth and many others at the 2019 Sprott Natural Resource Symposium in Vancouver, held July 30-August 1, 2019. Details at SprottConference.com.