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The Retired Investor: The Reflation Trade

By Bill SchmickiBerkshires columnist

Over the past six months, an increasing number of investors have come to believe that a rise in the inflation rate is inevitable. That appears to be a sound bet from where I sit, even though the present data doesn't support that wager.

The argument for increased inflation centers around money. The world is awash in the stuff. Central banks have been printing money for years to stimulate their economies. Last year's pandemic only opened the monetary flood gates even further. And the trend is not over.

During the next few months, here in the U.S., the Biden Administration is proposing another $1.9 trillion in federal spending, which will then be followed by yet another multitrillion-dollar spending program for infrastructure. Wherever you look — China, Europe, Japan — it is the same story. And while governments spend, central banks print money.

Why, then, you might ask, is the inflation rate so tame? If you look at our Consumer Price Index (CPI), over the last twelve months the increase was just 1.4 percent. That is and has been, far below the Federal Reserve Bank's target of 2 percent. It is so far below their inflation target that the Fed has said they would be willing and happy to see inflation rise above that rate for some time into the future.

And yet, wherever you look on the commodity front, we see accelerating prices in soft, as well as hard commodities. Corn, soybeans, wheat, sugar, copper, lumber, oil, precious metals, and most other material prices have climbed well above the 1.4 percent year-to-year increase in the CPI. How can that be?

Because the CPI and many other inflation measures like the Producer Price Index (PPI) are heavily weighted in such things as services and rents. Inflation by mundane variables, like commodities, are usually not much of a concern. That is largely because commodity prices fluctuate, and (over the last decade or so) were in downtrends.

However, that period appears to be coming to an end. Some economists argue that the declining dollar after years of strength may have something to do with it. Since most commodities are priced in dollars, for foreigners, commodities have become cheaper to purchase in their currencies, sparking additional demand.

At the same time, after years of lower prices, mining and exploration companies reduced their spending budgets. Why produce more of something worthless and less? As a result, a large number of commodities are in short supply. We have to go back 10 years to the spring of 2011, to witness the kind of price increases we are seeing in at least 35 different commodities.

All of this has been occurring while most of the world's economies are struggling to remain above water, thanks to the coronavirus pandemic. But now we are in the midst of a worldwide vaccination program. If successful, we can expect a turnaround in economic growth. What will happen to commodity prices once global economies begin to grow again?

Demand will increase quickly, while supply will take much longer to revive. That is a recipe for rising prices. Inflation, therefore, is all about expectations. If buyers of copper, for example, expect prices to increase in the future, they will gladly pay the going rate today to avoid higher prices in the future. I believe we are experiencing just such a change in sentiment when it comes to future inflation.

By the time this trend shows up in the CPI or the PPI, which could take many more months, inflation will be marching higher along with economic growth, so be prepared. If I were you, I would think seriously about putting some money to work in this area.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by OPI. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

The Retired Investor: Asia: The Investment Case

By Bill SchmickiBerkshires columnist

Investment managers have spent the last decade buying and selling U.S. equities largely to the exclusion of the rest of the world. That made a lot of sense, since the S&P 500 was the best performing index in the world during that period. But times are changing.

While our U.S. stock averages did well again in 2020, Asian stocks did equally as well, and in some cases, they did better. Some of that performance can be attributed to the declining dollar. A weaker dollar benefits U.S. holders of foreign equities, and most analysts expect the greenback to weaken further this year.
 
However, that is not the only reason for investing in Asia. Overall, valuations are cheaper, much cheaper, than the lofty prices of many of America's stock market darlings. I know that many investors believe that valuations don't matter in this environment. They argue that as long as the Fed has our back, and the economy re-opens, company earnings will grow into these sky-high valuations.
 
I say they don't matter, until they do. Buying Asian equities at a reasonable price in 2021 removes much of that valuation risk, in my opinion. But valuation is only part of the story. I agree with Credit Suisse that says Asian stocks are entering an "earnings super-cycle" that could last for 3-5 years. They expect Asia's economies to come roaring back from the demise of the pandemic this year, thanks to several life-saving vaccines.   
 
While America wrestles with a winter surge of cases, deaths, and shutdowns, most of Asia is already rebounding from the COVID-19 pandemic. Their economies have suffered less than the U.S., thanks to more enlightened governments and populations that have worked and sacrificed together.
 
Another big change is the importance of China to the region. China has replaced the U.S. as the principal engine of growth in Asia. While a Trumpian America has turned inward, eschewing regional trade agreements and erecting barriers to free trade, Asia has done the opposite. I have already written about some of their cooperative trade agreements such as the Asian Regional Comprehensive Economic Partnership (RECEP), which includes China, Japan, South Korea, Australia, New Zealand and others.
 
There are also some interesting trends in countries like Korea, China, and Japan that offer lucrative opportunities for the astute investor. Progress in clean, renewable energy, something lacking in our own country over the last four years, is making leaps and bounds overseas. Asian countries, backed by governments that are fully on board with the concept, continue to invest in solar and wind energy, various environmental initiatives, as well as in areas such as electric vehicles (Evs).
 
It is one of the reasons that Tesla, the number one player in EVs, is building an enormous new facility in China.
 
These changes will have enormous benefits for the Asian auto industry. Japan, for example, is planning to phase out gas guzzlers over the next ten years, which will revolutionize their massive auto export industry. China, not to be outdone, is already fostering several start-ups in the EV business as well.
 
Over the past three months, the trend toward "value investing" has caught fire, as a way to play the re-opening of the U.S. economy. Investors are buying up bank, consumer discretionary, natural resource, and industrial/materials stocks. I would rather look in the Asia Pacific region, and in India, where just about every investment is a value play.
 
You want mines and metals, look no further than Australia. Banks and real estate, try Singapore. Consumer stocks, what about investing in companies that sell to the billions of consumers in China?
 
Also, remember that technology is just as big in countries like Korea (DRAM chips) and Taiwan as it is here. Big foreign semiconductors, digital data centers, and internet companies are listed and readily available for purchase on our own stock exchanges. In fact, just about every country in Southeast Asia, India, and Indonesia are easily available through the purchase of exchange traded funds (ETFs).
 
One big criticism on investing overseas has always been the questionable accounting of overseas companies, along with the risk that various governments often have a track record of meddling with individual companies for political purposes. We can point to companies, such as Luckin Coffee in China, as a dishonest accounting case in point. However, today, recognizing this investment pitfall, most countries are cracking down hard on inaccurate company reporting and those executives at the helm. This week China sentenced to death a banker convicted of taking bribes.
 
As for government meddling, over the last several years, the U.S. government has done as much as China or any other country to influence and alter the fortunes of public companies. Just think about the Congressional hearings and White House meddling in companies such as Twitter, Facebook, Apple, and Amazon (to name a few).
 
In any case, the combination of a declining, dollar, reasonable valuations, and higher growth prospects makes Southeast Asia, including Japan, a much more attractive bet, in my opinion, than just sticking with the U.S.A. 
 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by OPI. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

The Retired Investor: Where Have All the Christmas Trees Gone?

By Bill SchmickiBerkshires columnist
If you are one of those eleventh-hour holiday Christmas tree shoppers, you may be out of luck this year. Fresh balsam furs and other varieties of the traditional Yule symbol are hard to find.
 
Blame the pandemic on the scarcity, but at the same time, celebrate the fact that more families than ever before are getting together this holiday season.  And decorating that tree could be an intensely personal experience for the whole family.
 
My wife, Barbara, and I actually set up our tree on Thanksgiving weekend. Given our ages, we chose to forgo turkey day with our loved ones, who reside in Manhattan, and tried to fill that emotional hole with something else. We found that rather than being one of those chores on our holiday "to-do" list, this year we took our time, and yes, savored the tree decoration experience together. I must confess it also helped us relieve a bit of those COVID holiday blues.
 
Most Christmas tree grower associations are reporting that retailers are doing a brisk business throughout the nation as consumers spend more of their dollars on experiences, rather than gift products. Last year, Americans purchased more than 26 million live trees, worth about $2 billion, according to the National Christmas Tree Association, based in Colorado. The association represents about 75 percent of the U.S. Christmas tree supply. That number was lower than 2018, largely due to an increase in demand for artificial trees.
 
Price may have something to do with that, since live trees seem to get more expensive every year. This year, with all the home improvement household spending, the median price for real trees is expected to be up by 7 percent to around $81 a tree. That is a 7 percent increase over last year and 23 percent higher than 2018. For many, that is a steep price to pay for picking pine needles out of the rug over the next three months.
 
Still, I guess for a millennial family who can make a day of it, the price is worth it. This year, many more city and suburban dwellers have piled into their cars, make the trip to their favorite tree farm somewhere out in the "wilderness," and selected the family tree together. I am sure you have seen countless of these holiday trophies, netted, and firmly tied to the roof of the car, making their way back home to be plopped into a tree stand in the living or entertainment room. 
 
This year, the National Retail Federation believes the majority of consumers are more interested in holiday decorations and other seasonal items because of the pandemic. Lights for the tree and to decorate the outside of the home are also in demand, as are wreaths and garland. Pandemic-themed ornaments such as Santa Claus wearing a facemask, or ornaments with inscriptions of "Merry Christmas 2020" are especially popular.
 
The decoration demand was so great that retailers such as Walmart, Costco Wholesale, and At Home Group Inc., which are known for selling holiday items, were caught off balance. Many retailers under-ordered due to the shutdown earlier in the year. As a result, many stores have ended up with bare shelves in the holiday decorations and ornaments section this year since last-minute resupplies are difficult to come by.
 
This year, thanks to the coronavirus, the holidays will be different. Most of us know that. But no matter the size of your tree, or how many ornaments are upon it, or how many presents you received, if you have been lucky enough to avoid being infected — count your blessings. That should be more than enough to make this holiday season your best. 
 
Happy Holidays and Merry Christmas.
 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by OPI. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

The Retired Investor: Oil's Comeback

By Bill SchmickiBerkshires columnist
Earlier this year, the price of West Texas Intermediate crude oil slumped into negative territory for the first time in history. Oil traded at a negative $37.63. Today, that same barrel of oil is changing hands at $47.48. What changed?
 
More than any other sector, the coronavirus has had a devastating impact on the global oil and gas industry. Declining consumer demand in the first quarter of the year in combination with high levels of energy production threatened to exceed worldwide oil storage capacity. OPEC plus, the oil cartel, took action on April 12 by cutting oil production by 9.7 million barrels per day, but by then it was too late. By April 20-22, you couldn't give away a barrel of oil and prices responded in kind.
 
By the end of the first quarter, more than 40 U.S. oil producers collectively wrote down $48 billion worth of assets, which was the largest quarterly adjustment since 2015. The losses were so bad that many investors sold banking stocks, concerned that several banks with energy loans outstanding might go under as a result. None of that happened, largely due to the quick action by our central bank's guaranteed loan program, and a huge slug of government fiscal spending.
 
Fast forward to today, where the revival in energy prices is somewhat remarkable given the present surge of COVID-19 cases. In my opinion, the oil price increase is all about the expected return to our pre-pandemic way of life. The hope is that as the coronavirus vaccines do their job, we will see an increase in worldwide demand for transportation, which is the principal driver of oil prices. 
 
The re-opening of the global economy will lead to higher consumption of diesel and natural gas as industrial businesses ramp up to full production. There should also be an upsurge in demand for refined energy products that are used in just about every industry.
 
In the short-term, I believe the continued price rise in oil will be dependent on what OPEC plus decides to do with production. As of last week, the cartel and its outside members agreed to gradually increase oil production by no more than 500,000/bbl. per day starting from January 2021. Here in the U.S. (where we are considered to be the world's main marginal producer) both our small and large oil companies have curtailed production and plugged wells.
 
There are other reasons that demand for oil may outpace supply. Unlike some industries, you can't just turn on the spigot and produce more oil and gas. There is a lead time involved in the process. A result of the economic downturn, nearly every oil company has had to cut investment spending this year. That meant a reduction in the development of proven reserves, which in the short-term doesn't matter much, but if demand picks up it could become a supply issue next year.
 
Companies upstream from these producers, the drilling and exploration contactors, as well as oil service companies, have been cutting back as well to stay solvent. Currently, oilfield activity is down 5 percent, the lowest in a decade. To reverse direction, this industry requires time. And a lot of it. All of the above could create an on-going imbalance in supply and demand leading to further price hikes.
 
In addition, the trend towards renewable energy sources has finally caught the attention of the largest oil corporations. Both politically, as well as from a long-term profit motive, alternative energy is attracting more investment. It is siphoning off the cash that had originally been ear-marked for traditional energy production. That trend seems to be firmly in place. Government incentives to do even more investing in the future may well reduce the investment spending necessary to increase the supply of oil and gas. This could all result in a perfect storm of higher oil prices next year.
 
Looking at the stock market, while energy stocks in general have enjoyed double-digit price rises over the last month, the energy sector overall is still down 32.9 percent so far this year, compared to the S&P 500 Index gain of 15.3 percent. My bet is that energy equities continue to close the gap in performance through 2021 as the price of oil climbs.
 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by OPI. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

The Retired Investor: Bitcoin Is Back

By Bill SchmickiBerkshires columnist
After a three-year hiatus, cryptocurrencies have returned and are attracting the attention of investors. Will this time be any different?
 
Readers may recall the Bitcoin craze that sent the largest digital currency to an all-time high of $20,000 in 2017 and spawned numerous copy-cat cryptos like Ethereum and Litecoin.
 
You may also remember that all of them came crashing back to earth and ignominy where they have languished, unloved, until this year.
 
This week, Bitcoin hit a new three-year record of $19, 857. If that is news to you, there is a reason for that. After the last buying frenzy and subsequent crash, the financial media has taken a more cautious approach in touting cryptocurrencies. Until recently, Bitcoin has barely been mentioned in the press.
 
Another big difference is the number of new Bitcoin. More and more companies, many of them traditional financial institutions, are taking an interest in using and trading Bitcoin, and other digital currencies such as Ethereum and Litecoin. JPMorgan Chase & Co., as well as several other Wall Street firms, have expressed more than a passing interest in owning and trading these currencies.
 
In addition, more and more firms are accepting Bitcoin as payment. As of mid-year 2020, more than 160 companies allow their customers to pay with Bitcoin, including such heavy hitters as PayPal, Microsoft, AT&T, and Shopify. And it is no longer just the retail investor and "hot money" guys who are buying and selling crypto. A growing number of institutional investors are dipping their toes into the arena in search of better returns. Simply parking their spare cash in a money market fund (where it earns next to nothing) is not an option for many.
 
In one recent famous incident, a public company in business intelligence, MicroStrategy Inc., announced in July a new strategy in which it would invest its substantial excess cash into various assets instead of low-yielding money market funds. They chose Bitcoin as one of those alternative assets.
 
At last count, the company held 38,250 Bitcoin with an aggregate cost basis of $425 million. It is worth more than $730 million today. As a result, many traders have used the company's stock as a proxy to play Bitcoin. The share price has often tracked the price of Bitcoin rather than the fortunes of the company's main business. Other investors are identifying listed companies with any exposure to cryptocurrencies. In some cases, traders are bidding up their stock prices by more than 100 percent.
 
The same thing happened on the last go-around with cryptos. So why is this time any different? Aside from the big bets that respected investors like Paul Tudor Jones and Stan Druckenmiller and other institutional players are making, the overall environment has changed.
 
Most risky assets are already at record highs. Low interest rates provide little to no return and, according to the Fed, will remain that way for the foreseeable future. Then there is the U.S. dollar, which is dropping like a rock, making lower lows almost very day. 
 
Does that mean cryptocurrencies are somehow a better bet than they were three years ago? No. I expect the volatility that easily cut Bitcoin in half in a matter of weeks could happen again tomorrow. The digital currency markets, while maturing, are nowhere near stable, and won't be for a long, long time. It is not a market for the faint of heart. Over Thanksgiving and into Black Friday, for example, Bitcoin dropped more than 10 percent in 36 hours. It bounced back by Monday, but you catch my drift.
 
As for me, I have added cryptocurrencies to investments I will now follow daily, because I do believe that this asset class will become more meaningful over time. If you are itching to purchase, my advice is to wait for a pullback, which should come somewhere between $20,000-$25,000 Bitcoin. I would except a 20-30 percent decline, so wait for it!
 
Bill's forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
 
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by OPI. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     
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