IEI - Flight-To-Safety Assets: Are They Really Safe?
2023-10-26 07:30:00 ET
Summary
- Gold got a new lease on life in October, up over 12% month-to-date on interest rate-driven recession fears and the recent armed action between Israel and Hamas.
- Bitcoin has soared since September, up 28%, in part on flight-to-safety buying and in part due to recent speculation about the SEC allowing the sale of a cybercurrency ETF.
- Curiously, tough talk from the Fed, "higher for longer," has sparked a flight from (selling) the UST 10-year (a real flight-to-safety alternative). This does not compute.
- Much of the trading in today’s market (60-75%) is derived from human (not artificial) intelligence-created computer algorithms that lack discernment and the ability to suss out nuance.
- The message of the market may differ significantly from the facts on the ground. Beware.
Gold
Nothing like the threat of Armageddon to bring people back to their gold-buying senses. What legions of companies advertising the legendary appeal of gold could not accomplish since the May 2023 peak of around $2070 per ounce, a savage attack by Hamas on Israel took care of in one weekend. I have commented on gold in the past. My conclusion then, as it is now, is that at best gold is a trade and not a great long-term investment.
On January 21, 1980, the price of gold hit an all-time (at that time) high of $850 an ounce. Back then, there were plenty of good reasons, as appear to be the case today, to own gold and to shun stocks. On February 13, 1980, the Dow Jones Industrials closed at 903.84. Today, gold closed at $1996.00. The Dow closed at 33,035.93. BTW, during that 43-year period, gold never paid a penny in dividends.
I know these are particularly disconcerting times for all of us, but I would urge caution before making an investment in gold. The end of the world is a very rare event.
Bitcoin
Bitcoin is a mystery to me. First, I have never seen a coherent argument as to why, with its volatility, it would be considered a currency or medium of exchange. Secondly, what is it backed by? I know on the dollar that the answer "full faith and credit" of the United States doesn't hold water with many, but fiat money has been a feature of the world economy for many years, and it appears to be relatively stable and does the job in settling transactions.
Yes, there is a scarcity factor with cryptocurrency. The vast array of cryptocurrency alternatives somewhat mutes the scarcity argument. Why would you want to own it unless you thought there would be someone down the road willing to pay you more for this electronic, albeit secure (supposedly), token than you paid for it. It appears to be a risk asset without the asset backing or revenue-generating ability of most common stocks.
It does not seem to be a safe store of value either. If you paid $60,000.00 for one Bitcoin in December 2021, you might be a bit wary of that claim. If you did, hopefully you don't need that money for some other purpose today.
Finally, there has been much speculation about the SEC allowing the creation and sale of an exchange-traded fund (ETF) that invests in cybercurrencies. The SEC continues to ponder the question. " Cryptocurrencies cap a winning week, bitcoin tops $30,000 on ETF optimism and flight to safety ." ((CNBC))
If allowed, the cryptocurrencies would definitely pop, but nothing I've said above will have changed. Again, lacking understanding of the crypto world, my only response would be it appears in the future misery will love company.
The 10-year US Treasury note
Since the bottom of the bear market that ended in March, 2009, everytime the alarm bells were sounded on potential economic weakness or geopolitical risks, buyers would show up for the 10-year, pushing the price up and the yield down. That has not happened this time, as the yield on the 10-year has pierced 5% on the upside. This would not be the case unless there were confidence on the part of the sellers that the economy was in pretty good shape (besides 'higher for longer')... also, as horrible as the current Israeli/Palestinian war is, it would indicate that there appears to be comfort that it will not widen.
The weakness (selling with the yield rising) in the Treasury would not seem to be symptomatic of fear, a flight to safety or the overall extreme negativity in the media or investing public.
Why the confusion?
I have seen numbers that indicate as much as 60-75% of daily stock trading activity comes from computer-generated, algorithmic trading. These are not thoughtful human beings parsing out the information but machines programed to search for key words or phrases and act on them. There is absolutely no discernment going on here. When the computer reads "higher for longer," (equating to recession or economic weakness) it might be a seller of economically sensitive stocks and a buyer of names that might be immune to weakness in the economy (wink wink, tech and the Magnificent Seven ). This is eerily familiar as the type of trading activity we saw after Covid-19 burst upon the scene. It is also reminiscent of the " Nifty Fifty " era of the 1970s. The wise thing to do now, as it was in those two instances, is to reverse the current computer play... sell Mag-7 and buy economically sensitive.
Energy: The Glaring Mismatch
Never has there been a more glaring mismatch of the facts on the ground for energy and the current trading pattern on the commodity and energy stocks. After the Hamas weekend raid on Israel on October 7, West Texas Intermediate crude spiked $3 a barrel the next Monday, closing at $85.97. That seemed to be an overreaction based on how the facts on the ground have changed dramatically since the first Arab Oil Embargo 50 years ago. However, the computers and human commodity traders knee-jerk reacted differently. As clearer heads have prevailed, the price of WTI has drifted back to $84.80. It now trades back and forth on economic slowdown concerns from the US and abroad, tempered by the continuing developments in the Middle East.
All of this totally ignores a secular change in the way oil-producing countries and companies have decided to run their businesses. With the continuing emphasis on moving to cleaner energy, these companies and countries have addressed and answered the question, "What do you do when your gravy train begins to dry up?" The answer is: stop investing in new production, curtail investment in existing fields, and maximize and redirect cash flow. This is why oil prices should remain reasonably stable, if not gradually increase. This is not a new topic for Kort Sessions. On June 6, 2021, we published " Green Energy Throws Fossil Fuel A Life Line ."
There is clear evidence of this inclination in two recently announced major energy transactions: Exxon/Pioneer Natural Gas and Chevron/Hess Corporation .
Exxon ( XOM ) and Chevron ( CVX ) are the gatekeepers. They are buying cheap reserves in the ground and will decide if and when to develop them. If this continues, the oil industry will began to look like the airline oligopoly. The carriers (oil companies) control the seats and routes (production) with the idea of keeping the planes full and profitable. Unbelievably, I've not heard of this issue being raised by the media. Nonetheless, if allowed to go forward, with most of the players not really seeing the bigger picture, it should be a big plus for the energy sector.
Meanwhile...
Today, market participants were selling supposed/guaranteed safe bonds (this shouldn't be happening unless the economy is doing better than expected). The recent upheaval in the Middle East and fear of recession should mean that Treasuries should get a strong bid. Stocks (including Mag-7) are declining, while gold and crypto continue in the ascendent. The Mag-7 stock decline makes sense (way overbought and over-owned and, in some cases, overvalued). The carnage in mid-cap, value and small-cap stocks does not make sense. Ascendant cryptocurrency and gold do not make sense with the yield on the 10-year heading north.
I'm confused.
Are you?
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Flight-To-Safety Assets: Are They Really Safe?