Gold, Guns, Tobacco and Whiskey

I am not commenting on what was in Humphrey Bogart’s saddle pack in the 1948 production of “The Treasure of the Sierra Madre”. The asset categories in the title are some of the best performing stock groups so far this year. We do own gold but have held off on guns, tobacco and whiskey. And what a year gold is having!

2016 is starting out as the worst year ever for the Dow Jones and S&P 500. As of February 3, the Dow is down 6% and the S&P 500 is down 7% year to date. Both indices were basically flat for 2015. Many Hedge Funds (you know, the “smart money”) went out of business last year while others suffered extraordinary losses.

Volatility has been tremendous. It’s not uncommon to have the Dow up 200 points in the morning and then see a reversal and finish the day with the Dow 200 points lower. Not a single IPO was priced in January; something not seen in years.

S&P 500 One Year – 2/3/2015 to 2/3/2016


So what is the outlook for 2016? Recession talk is getting louder and louder. Will the Fed raise rates again this year as planned? What happens if they don’t?

Bloomberg had some interesting comments on the matter: “Go ahead, make a prediction about 2016. It’s easy if you try. Don’t worry if you’re wrong. You can always come up with a new one next week.”

“That’s what a growing number of Wall Street analysts seem to be doing as they revise their forecasts almost as soon as they have made them.” They went on to say: ” You can’t really blame the strategists. Just think, every week, central bankers come out with new statements. They make mistakes. They’re running out of ammunition to support markets. Central bankers watch stocks and bonds, which are increasingly moody as investors, in turn, watch central bankers. The global economy is clearly slowing, but by how much? Who knows. Nobody trusts China. Whither oil. Analysts at big banks are clearly struggling to make sense of it all.”

We’re all in uncharted territory with the grand experiment of the world’s central banks. The best of the best remain absolutely clueless!

The clueless are now setting us up for the possibility of “NEGATIVE INTEREST RATES” in the U.S. It means what is says. Banks may charge you to hold your deposits. The U.S. Treasury could issue bonds whereby you get back less than you put in.

Do you think it’s not possible? The Financial Times reports today: “The universe of negative yielding debt around the world grows beyond $5Trillion as central banks indicate further easing. If major government bond markets are right, the global economy is sliding towards recession and central bank easing policies will pull borrowing rates deeper into negative territory.”

Many big investment firms are hoarding cash and many investors are becoming skittish and increasingly bearish on risky assets. Markets hate uncertainty. It is in great abundance now. It’s hard to see how stocks and riskier bonds could experience a sustained rally until a greater degree of confidence sets in.

To finalize, we are maintaining relatively low levels of equity exposure now as the volatility returns day after day. Stocks and other assets are being “re-priced” based on the slowing global economies and the ongoing depression in the oil patch. Patience should be rewarded!


J. Brock Hamilton
February 2016