There’s an old visualization that’s used in different scenarios about a duck floating on a pond. The water looks calm. The duck looks calm. However, underneath the surface the ducks feet are paddling rapidly. The duck paddles and paddles, and yet to the casual observer, the duck isn’t moving fast and seems to be totally at peace. And so it is with our current financial markets.
On the surface, everything seems peaceful and nice. Calm even. Volume is so low, I forgot it was the middle of the week and thought that it was a Friday in summer and everyone except for me had headed out of town. The average are treading water. As I write this, the S&P 500 is showing exactly 0 points up. And yet…
Oil is taking out 2008 highs. Due to the US’s insane ethanol policy, which takes food and makes it expensive, inefficient energy, we have corn rallying almost 5%, and taking the rest of the ag space with it.
As readers know, I’m not in the hyperinflation camp. However, one doesn’t need to believe in hyperinflation to see that certain inputs are slated to rise, while at the same time, stores of wealth will deflate. We’ve spoken about this environment in the past and it has served us well on the whole. In this era of biflation, inputs such as energy and food may continue to see price pressures. An increase in geopolitical tension only serves to embolden politicians to call for “self-sufficiency”, which in turn will lead to higher energy prices and subsequently higher food prices. At the same time, lower consumer spending coming from high unemployment and large debt constraints will continue to pressure retailers and the traditional stores of wealth (real estate, bonds, equities) alike. So investors need to choose their spots.
We already have high exposure to energy and precious metals, and are maintaining it. We recently increased our exposure to the agricultural space through a new ETF, CROP. Its main advantage is that it has small cap exposure to global agribusinesses, lower exposure to chemicals than MOO, and emerging markets exposure. Its main drawbacks are that its new and less liquid, and has a 20% exposure to China, which I am not keen on. Since it is only going in as a small allocation in the portfolio, the exposure to China is worth it for us, but it should be noted by potential investors. This is in no way a recommendation, just a highlight of the implementation vehicle we used. Also, there are rumors of direct farmland ETF’s on the way, which I will keep an eye out for. That being said, they may come at the end of the opportunity and might be a contra-indicator.
Lastly, speaking of the duck’s feet…notice that gold and silver are approaching all-time highs, the yen is finally weakening, and financials haven’t been able to rally. At the same time, multiple articles are being sent to me with headlines screaming that equities are the new safe haven. Absolutely not. Equities are expensive and any valuation metric that uses the current peak margins as a basis will prove misleading in the upcoming quarters. We’ll talk more about this element of the duck’s feet later in the week.
Relevant ETFs: GLD, SLV, CROP, MOO, USO