Brian Hunt sits down to interview Eric Fry … the state of the stock market … metals, gold, and bitcoin … inflation fears, and far more
What are the main drivers of today’s bull market in stocks?
What are the most dangerous sectors to avoid?
What’s happened to gold? Has bitcoin replaced it?
What asset class appears to have recently begun a multi-year bull market?
What about the social proximity trade as the world re-opens… and inflation… and the impact of social media on the markets?
Today, we’re going to dive into all these questions and more by eavesdropping on a recent interview between two of the smartest investors in the business – macro specialist, Eric Fry, and InvestorPlace’s CEO, Brian Hunt.
Last week, Brian interviewed Eric as part of a special, members-only webinar for Eric’s Investment Report subscribers. However, the content was so valuable, we decided to share it with our broader Digest readership (after editing out references to specific investments reserved for paying subscribers).
There’s a great deal of valuable, actionable content to cover, so enough introduction – let’s jump right in.
***The broad state of the stock market
For any newer Digest readers, Eric is our global macro specialist and the editor behind Fry’s Investment Report. As a macro investor, he evaluates markets and asset classes from a big-picture perspective to identify attractive opportunities. Once something is in his crosshairs, he digs down to find the right, specific investment to play the opportunity.
It’s been a powerful strategy. In his decades in the business, Eric has dug up more 1,000%+ gaining investments than anyone we know of in the newsletter industry.
Meanwhile, Brian is InvestorPlace’s CEO, and an accomplished investor in his own right. He’s also a fantastic investment teacher, having penned a series of classic, free essays in the InvestorPlace Education Center, which I strongly encourage readers to check out. The content reads like a masters course in real-world investing.
With that context behind us, let’s get into the annotated interview. I’ll jump in here and there to help us cover more ground.
Brian: What’s your take on what the big movers of the market are right now?
Eric: It’s certainly an interesting market. I think it’s unique in the sense that it’s predominantly a liquidity-driven market, rather than a valuation-driven one or an economically-driven one.
There are a lot of folks throwing a lot of money at it. It started about a year ago with the additional government stimulus efforts, and a lot of people just went straight into the market with a lot of that money.
We saw a little bit of a pause, got the next round of stimulus, and lo and behold, we have new stock market-highs across all the indices.
Beneath the surface, there are some sectors that are much stronger than others. There are certainly pockets of what I would call excess – really extreme, irrational activity. And then there are the sectors that appear perfectly sedate and normal. Maybe too quiet.
The big-picture appears a little tough. Valuations in general are quite high and it makes the stock-picking exercise a lot more challenging.
Brian: It’s so driven by record amounts of liquidity that one could make the case that valuations don’t even matter anymore. All that matters is how hard the Federal Reserve keeps the pedal to the metal.
Eric: That, and – it’s always dangerous to say “this time is different” and I don’t think this time is different. I think the stocks that are climbing to excessive valuations will give back a lot of those gains over time, so that part is not really different.
What is the different element now is the whole social media impact. I call it the “game-ification” of the stock market. So, that influence is more visible in pockets of the market than others. It’s wild that a social media influence can propel a stock 100%, 200%, 300%, or even 1,000%.
I think there’s a perfect metaphor for what’s happening. There’s an ETF in registration, the symbol is BUZZ. This ETF will buy the most “buzzy” stocks in social media.
It is literally a case of hype driving the investment decision rather than investment success driving the hype. So, it’s a funny kind of inversion of normal investment practices.
Brian: Where do you feel there’s a lot of froth, so potentially danger, at least in the short-term?
Eric: The renewable energy/green/eco-centric stock world. So, electric vehicles (EVs), many things to do with renewable energy, and many things associated with non-proven green technologies. It’s a very “hypey” world out there.
Jeff here. At this point, Eric refers back to an Investment Report issue from recent months that compared Tesla and Volkswagen. Specifically, the idea was why Tesla was a stock to be cautious about, while Volkswagen was a stock to buy.
Valuation was a huge reason for this. To illustrate, as of the time of Eric’s issue, the recent cost-per-vehicle-produced-in-a-year for Volkswagen was $11,000.
Meanwhile, the Tesla investor would have had to pay about $1.7 million per vehicle … which is 149X more expensive than Volkswagen.
It’s this type of valuation-excess that Eric believes is important to avoid today.
As I write Tuesday morning, Tesla has just released earnings. In short, the company made more money with its bitcoin trading than its car sales. Tesla’s stock is down over 4%.
Meanwhile, since Eric highlighted Volkswagen’s strength (mid-February), its stock is up 53%.
***A long-term bull market in metals
At this point in the interview, Brian switches the conversation to the various mining companies supplying the materials for many of today’s leading technologies. He notes how these companies receive less hype, so their stock-price uptrends are more reasonable, suggesting more gains to come.
Brian asks if Eric still feels bullish about this metals-uptrend.
Eric: Yes, I do. Obviously, there’s been a great, bullish run throughout the base metals complex, like copper, nickel, manganese, and vanadium. Lithium just had a really nice move.
That whole group has had a really nice move – the elements themselves. So, related stocks have compounded those gains in the underlying commodities, and have done very nicely.
Have they priced in too much of a gain at this point? Maybe they’re a little ahead of themselves, but I still believe this is the early part of a long-term and powerful move.
There are a lot of industry insiders in the EV world, including guys like Elon Musk, that understand very clearly that the long-term struggle to secure the metals required to build EVs, or related technologies, are going to require shockingly large quantities of these metals. And those shockingly-large quantities are not readily-available.
And so, I still think you’re going to see prices rise and margins expand for the companies that are in a good position to provide them with those metals.
Brian: Is your take on this situation that it’s not so much a one- or a two-year trend? It’s more like a five-or 10-year trend because the massive amount of supply that we need takes a very long time to bring to market?
Eric: Yeah, I think that’s exactly right. I believe it’s a long-term trend.
It’s always a little bit scary to make a pronouncement like that about anything in the commodities market because the commodities market tends to be a boom/bust market. It’s really, really hard to make linear projections in any commodity market.
So, given that massive caveat, I believe that we’re going to see sustained, growing, long-term demand for metals like copper and nickel. I think pricing will react.
You can’t simply bring new supplies on of either one of those metals, and there’s not a ton that’s in the pipeline in terms of new mines that are coming into production.
Also, there’s not any economically-viable recycling of lithium-ion batteries at the moment, so more than 90% of those batteries are ending up in landfills, which, by the way, isn’t very green, but that’s what’s happening.
So, for the foreseeable four or five years, it looks like those markets are going to be pretty tight, and the main companies that are producing those essential battery metals should be making a lot of money and margins should expand. I still expect that.
Jeff here. At this point, Brian and Eric discuss some specific ways to play this metals boom that are a part of Eric’s Investment Report portfolio. But it’s not long before Brian switches to the conversation to gold.
***Will gold shine again, or has bitcoin usurped it?
Brian: The big question for the gold-owner is “have investors broken up with me?” Is bitcoin the better-looking version of me?”
I think you and I are of the mind that the government is likely not stopping with the amount of stimulus it’s poured into the market now. I think a lot of people, a lot of companies, are addicted to stimulus and cheap rates. So, the question is “will gold ever rise again?”
Eric: This relates to something I said at the outset here, that’s one of the things that’s different about the markets today is the social media impact, and I don’t think gold is immune from that impact.
Cryptocurrency, bitcoin specifically, is not expressly a social media phenomenon, but certainly it’s benefited.
I don’t think there’s any question – anyone who’s been around the gold market a long time, even a short-time, would understand that linking current government behavior both from the Fed and fiscal policy, meaning all the stimulus packages, to the gold market… if you were to take past precedent and apply that to the current situation, you would have a current gold price that’s $4,000 an ounce, or at least something much higher than it is. That isn’t happening.
What is happening is bitcoin is going up…a lot.
Generationally, who buys bitcoin, who buys gold? The gold buyer tends to be older; the bitcoin buyer tends to be younger.
But I’m not yet ready to swear off of gold. I suspect that when the hypey part of the stock market settles down, reverses, craters, or whatever it does, you’ll see a similar settling down in other hypey asset classes.
I would put bitcoin in that category. I’m not saying it’s not legitimate, all I’m saying is it’s overhyped.
Once that settles down, you might see a return to a more-traditional connection between monetary policy, fiscal policy, and the gold price.
This is a long way of saying I think gold still has a good shot at moving a lot higher over the next year or two. But if current trends continue, and bitcoin goes to $100,000 or $200,000, you probably won’t get a gold rally. But I think it’s a risk worth taking.
Jeff again. Eric and Brian briefly touch on silver. In short, Eric is bullish here too, perhaps even more so than gold.
The conversation then targets social proximity trades as the global economy reopens.
Eric believes we’re still early in these opportunities. Today, he likes beaten-down travel stocks. He doesn’t believe they’ll be 10-bagger trades, but he sees lots of 2X and 3X potential.
The first wave of investment opportunities are things like airlines, hotels, or perhaps a retail REIT. The second wave will be comprised of less obvious opportunities – things like perfume, or cosmetics, or online dating companies.
These are opportunities that aren’t on the forefront of our minds as a trend, yet they are very real trends nonetheless. Consider what moving from Zoom to in-person work will mean for new wardrobes, personal styling, and grooming (and perhaps weight-loss if you’re like me after a year of shut-downs).
Eric notes that a critical “must do” when it comes to the social proximity trade is to avoid a company that’s truly on the cusp of bankruptcy from the lockdowns. Beyond that, many beaten-down companies should enjoy strong growth as our economy roars back.
***How inflation could affect your wallet and the market
Before wrapping up, Eric and Brian touch on Inflation. (We recently published an important essay on inflation written by Brian, detailing how it’s already causing certain asset prices to soar – if you missed it, click here.)
Eric references his mentor, Jim Grant, who would say that there are various types of inflation. When the prices of things we consume go up, we call it inflation. But when the prices of things we own go higher, we call it genius, or a bull market.
But Eric says that inflation is simply a different facet of the same phenomenon – lots of liquidity flowing toward an asset that’s in excess of the supply.
Today, Eric says there is inflation happening in the real world that people are feeling, no matter what the government is telling us. If it keeps rising, it will likely undercut demand for stocks, bonds, housing prices, and so on.
Eric believes the U.S. government has embarked on a path that invites inflation. Tying back to a previous topic, he believes this could be good for gold.
It’s important to understand that Eric is not suggesting doom-and-gloom. But he does believe that runaway inflation – if it happens – could affect specific parts of the market for several years.
We’re running long, so we’ll wrap up.
Bottom line – social proximity trades will be money-makers over the next couple years… battery metals are likely due for a multi-year bull… gold’s 12–24-month outlook is cautiously bullish, but could be impacted by what happens with bitcoin… and keep an eye on inflation – it’s already here, despite what we’re told. And the higher it goes, the more it will likely impact stocks, bonds, and real estate.
To access the entire webinar as an Investment Report subscriber, click here.
Meanwhile, we look forward to bringing you additional bonus content like this from our analysts in future Digests.
Have a good evening,