This will be a year few of us will forget. We had record lows in interest rates, a record
decline in stock prices followed by a record rally in stock prices, new highs in bitcoin and
gold, negative oil prices coupled with 9 months of quarantines. Let’s talk about what
might be next.
World stock markets declined about 40% in 30 days when COVID-19 lockdowns started
in February. This was the fastest decline from their highs in history. Following that low,
stocks recovered and went to new highs. The rally was selective in that large-cap tech
stocks did well while most of the real economy stocks did not. Apparently in lockdown
we only need I-Phones, Netflix and electric cars. The biggest winners in our accounts
were Apple and Tesla’s stock. Tesla went up over 700% and Apple was up 75% this year.
These two stocks carried our accounts. The market for our value stocks picked up in the
fourth quarter and we think that will continue. That said, they continue to lag the
market averages this year. Someday earnings and cash flow (which value stocks are
judged on) will matter more than companies that generate revenue growth with little
profit. A resurgence in value stocks started in November, but it’s too early to say if that
trend is now a secular shift as it was back in 2003 and 2009.
We have stayed fully invested in this market until we took partial profits in Apple and
Tesla last quarter. We will be potentially reinvesting part of that money in large-bank
stocks as a “play” on rising interest rates. Bank stocks are still cheap and “hated.” We
continue to look at oil stocks that we mentioned in our last report. We are anticipating
more production cuts in U.S. oil produced. As of this writing, production is only down 2
million barrels a day from its peak (13.1 million barrels a day) and we think that decline
will increase. Same goes for COVID-19 restrictions easing up. The world is still in
lockdown, and it’s a factor in decreasing energy consumption (transportation is 20% of
oil consumption). The vaccines are here, which we think will be great for economic
growth in Q2. Our government also approved another trillion-dollar stimulus plan that
will go out in Q1. We think the fooler for 2021 is how strong the economy could be by
year-end. Consumer balance sheets for the most part are in good shape. People want
out of the house and we think it could be a lot of fun by summer. As the economy
recovers, so will oil use.
We want to point out with the chart below the rapid growth of money in circulation. As
you can see the increase in M2 is way larger than anything we have seen for the past 20
years. As we have written before, this money has to go somewhere. We don’t see it
staying in financial assets forever.
As we noted in our Q1 report, the Federal Reserve has free rein to print all the money it
wants until inflation comes back (see chart above). Right now the Fed is printing $120
billion a month. This seems excessive to us. Most of that money has been going into
large-cap growth stocks (tech), gold and bitcoin. When (some say if) inflation comes
back, the Fed will start pulling that money out. When they do, this won’t be taken well
by the stock or bond markets. Our desire to own oil stocks is a bet that when they do
well, the general market will not. As much as we love the green movement, it will be
decades before we replace oil in our everyday lives. Solar and wind power represented
3% of the energy produced in this country in 2019. Renewables as a group are at 11%.
Inside renewables are wood burning, biofuels, geothermal and hydroelectric. We don’t
see those growing enough to replace oil and natural gas. The valuations for these stocks
are very low. We continue to watch them.
We want to finish up this letter by talking about large macro trends. We do not believe
the changes in the presidency or Congress will change Trump’s anti-trade policies. The
names are going to change but we don’t think their actions will. In December, the dollar
made a two year low versus other major currencies. We believe that trend is just getting
started. Our irresponsible fiscal and monetary policies are going to continue. We are
going to have large trade and budget deficits. Eventually these factors effect our
currency in a negative way. When the dollar initially declines, it is viewed positively by
U.S. investors because American companies gain an advantage over foreign companies.
Over time this view changes to one of concern about the value of their money. In 2008,
the dollar made all-time lows while oil was trading at $150 a barrel. The dollar making
new lows was part of the reason for oil going up. Gas at the pump was $4, which helped
push us into a recession. When the dollar goes lower, oil prices tend to go higher, which
is what we witnessed in 2008.
When an inventor in the United States came up with a new widget for sale in 2008, he
outsourced the production to China. With restrictions in free trade continuing, we think
in 2021 outsourcing will be more difficult. We do not see the Chinese supply chain
HOLDING down prices as much as they did in the past. There will be less competition
from them as we continue to restrict U.S. companies from doing business there. This will
have the effect of raising prices at the same time our currency is declining. This is not a
great combination for easing monetary policy. We think this scenario is the most likely
one to occur over the next five years, and it guides our view on what companies to own.
If you have a different view, let us know.
Thanks for your support this year. We hope you have a great year in 2021 as we finally
put COVID-19 behind us.
If you would like a copy of our ADV II or privacy policy contact us at 417-882-5746.
Sincerely
Mark Brueggemann IAR Kelly Smith IAR Brandon Robinson IAR