Daily Gains Letter

In the Age of Austerity, Where’s the Next Great Trade?

By for Daily Gains Letter | Mar 14, 2013

140313_DL_clarkThe joke is on us. Record highs are always impressive, but really, the stock market has only returned to where it was in 2000. That’s a long time to go without any gains from equities, and it illustrates that the business cycle definitely exists in capital markets. This is not a bull market; this is a recovery stock market.

Really, the stock market’s over performance in the late 1990s was pretty obvious. Most investors knew that the bull market in technology stocks was going to end, and a lot of investors cashed out before the party ended. The 80s and 90s were the golden decades for the stock market—one of the biggest bull markets of all time. When the stock market peaked, the best trade going was in bonds, which have been riding their own bull market—until now.

So, in the age of austerity, what’s the next big thing? I just can’t see it being the stock market, even though stocks aren’t expensively priced yet and there are always good businesses to consider. Real economic growth just isn’t present right now in the global economy, meaning big gains won’t be coming to the stock market. And I don’t see how interest rates can go any lower, so the bull market in bonds is over. Currencies are going to be very volatile in the age of austerity, with high sovereign debt and manipulation by central banks. So what’s the next great trade?

I figure it’s in resources, but gains aren’t going to be evenly distributed among the many commodities, and they won’t be realized at the same time. Like Jim Rogers, I love agriculture as an investment theme. Global warming, scarcity, and demand are huge fundamental positives for the agriculture sector. The best trade for this bull market is in land, but not every individual investor can go out and buy a farm.

We know that gold and silver are in consolidation, and that’s no surprise; the price of gold has been in a bull market for 12 straight years. But I still believe in $2,000-an-ounce gold. When will it happen? I don’t know.

I expect the next big buy low/sell high trade will be in natural gas. This is more of a long-term trend, but it is an investment theme with lasting potential. The oil and gas production boom is really good for the U.S. economy, and I think there will be a lot of jobs created in this sector throughout the rest of this decade. Near term, however, oil and natural gas prices won’t experience a bull market because of the production boom. Even though power plants are switching to natural gas, the production glut is real, at least for now.

Resource investing is tricky. Some opportunities are available from the stock market, but many more are not. The great thing about the exchange-traded fund (ETF) as an investment product is that it has opened up a whole new way for investors to express a view, both long and short, with their money.

In terms of an investment strategy for your portfolio, the stock market is likely to keep ticking higher over the near term. Then we’re in for a break, and I hope it’s a big one. Not because I want people to lose money, but because it will offer a better opportunity for adding to dividend-paying blue chips in investors’ portfolios.

Everything operates in a cycle. Both the stock market and bonds have had their bull markets. The next cycle favors real assets, and we’re on the cusp of a long period of inflationary woe and opportunity.

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