What are the main drivers of today’s bull market in stocks?
What are the most dangerous sectors to avoid?
What asset class appears to have recently begun a multiyear bull market?
What about the social proximity trade as the world reopens … and inflation … and the impact of social media on the markets?
Today, I’m going to dive into all these questions and more by publishing a partial transcript of a recent conversation between myself and InvestorPlace CEO Brian Hunt.
A couple of weeks ago, Brian interviewed me as part of a special, members-only webinar for my Fry’s Investment Report subscribers. I had a great time doing it — and I believe Brian and I shared some great information — so I’ve decided to share part of it with my broader Smart Money 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 State of the Stock Market
Brian Hunt (BH): What’s your take on what the big movers of the market are right now?
Eric Fry (EF): 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 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.
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BH: 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.
EF: 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 “gamification” 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%.
BH: Where do you feel there’s a lot of froth, so potentially danger, at least in the short term?
EF: The renewable energy/green/eco-centric stock world. So, electric vehicles (EVs), many things to do with renewable energy, and many things associated with nonproven green technologies. It’s a very “hypey” world out there.
A Long-Term Bull Market in Metals
At this point in the interview, Brian switched 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 asked me if I still feel bullish about this metals uptrend.
EF: 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.
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BH: 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?
EF: 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.
At this point, Brian and I discussed some specific ways to play this battery metal boom that are a part of my Investment Report portfolio. But it wasn’t long before we switched to the conversation “social proximity” trades as the global economy reopens.
Back-to-Normal Trades
I believe we’re still early in these opportunities, and I especially like beaten-down travel stocks. While I don’t believe they’ll be 10-bagger trades, I see a lot of 2X and 3X potential.
The first wave of investment opportunities are things like airlines, hotels, and retail. 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 virtual to in-person work will mean for new wardrobes, personal styling and grooming.
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A critical “must do” when it comes to the social proximity trade is to avoid companies that are truly on the cusp of bankruptcy from the lockdowns. Beyond that, many beaten-down companies should enjoy strong growth as our economy roars back.
Before wrapping up, Brian and I touched on inflation.
In order to do so, I referenced my mentor, Jim Grant, who often says that there are various types of inflation. When the prices of things we consume go up, Jim used to say, we call it inflation. But when the prices of things we own go higher — like our homes or stocks — we call it genius, or a bull market.
The inflation we’re facing today ties into this phenomenon — lots of liquidity flowing toward an asset that’s in excess of the supply.
Today, 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.
The U.S. government has embarked on a path that invites inflation.
I’m not suggesting doom-and-gloom. But I do believe that runaway inflation — if it happens — could affect specific parts of the market for several years.
Bottom line: Social proximity trades will be moneymakers over the next couple years … battery metals are likely due for a multiyear bull run … 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.
Regards,
Eric Fry
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On the date of publication, Eric Fry did not own either directly or indirectly any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls —in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.
