There was some news you might have missed, about the investment performance of various asset types throughout the first quarter (Q1), 2017. Normally, we hear about the top-performing sectors within a given sphere, such as which indices, which funds, which ETFs, which currency futures, did the best.
What you may not have heard, however, is that most of the top-performing assets - those at the top of the top, were not paper assets at all. In fact, only 2% of the top performers were paper, meaning that if you wanted a good opportunity to outperform, you had to be positioned in something tangible.
When comparing common investment sectors and indices, the top 2 spots and half of the top 6 performers were precious metals. Rounded out by live hogs and cattle, that left only 1 paper investment index in the top 6. Since less than 2% of Americans farm, or have the desire and/or location to raise hogs or cattle, the best way for the average American to have grown their asset base in Q1 was by owning precious metals. With Gold up 7.5%, Palladium up 12.9%, and King Silver up 13.85%, one might be tempted to avoid this sector going forward in 2017, but it would be a huge mistake, for a variety of reasons.
When considering where to invest new capital, investors, corporations, and governments have to consider not only the forward momentum and growth of any individual sector or asset but also the potential for gains going forward. Sometimes it is wise to avoid investments that have had a recent run-up in price, as it may not be sustainable over time.
When one looks at the P/E ratio of the major stock indices and the stocks contained therein, combined with the real rate of growth (or lack thereof) in the underlying economy, it should give one pause about investing new capital in stocks, in an unprotected fashion. There is little to celebrate about the upward mobility potential for stocks, considering the decreasing spending power available to the average American consumer.
Outlook for Bonds and Banking
The outlook for bonds is only slightly better than stocks. Not because they have more potential for growth, but rather because they might not drop as far or as fast as stocks when contrary winds begin to blow. Losing less is not exactly a good sales pitch or a good reason to purchase bonds.
Additionally, there are signs of trouble in the auto loan markets, with record numbers of subprime auto loans entering default. Many of these loans have been packaged into debt securities and sold in the marketplace, as subprime home loans were before the financial crisis. American consumers have taken on record levels of personal debt as of late, and the same perilous lending conditions associated with the subprime mortgage lending crisis appear to be surfacing again, further endangering the bonds used to securitize these mortgages.
Besides all this, bonds are at the tail end of a 30+ year growth period of favorable interest rate policies, with the most recent trends pointing towards higher interest rates, a further headwind for all things bond.
When we survey the offerings available in the banking industry, there is little worth getting excited about. While interest rates have risen slightly, they are still not significant enough from a consumer's point of view, to justify parking savings in traditional deposit products.
With an offer of "deposit insurance" to protect their capital, many forget that when interest rates are paid out at 1% or less, they are guaranteed to have less buying power available for their funds coming out of those accounts, than when they put them in. We recommend this only for the shortest of short-term funds, that might be needed on a moment's notice. Such accounts are only slightly better than cash itself, from an earnings standpoint.
What about real estate?
This is also a valid asset class, but the housing market is approaching the frothy levels last seen before the real estate crash of '08, with homeowners more leveraged than ever. Retailers are scheduled to close thousands of locations across the US in the coming years, making it less than promising in many commercial sectors.
The Upside of Different Investments
With other assets near all-time record highs, and with significant headwinds, we believe there continues to be excellent value in the precious metals market and is largely why we currently recommend clients allocate new investment capital there.
Sure, it is great to point out that half of the best performers for Q1 2017 were precious metals; especially to clients that took our recommendations last year or earlier this year. But when we survey the landscape for potential future winners, we believe the metals have a long way to run, with significant tailwinds in their favor, helping to propel them beyond previous highs in the years ahead.
Even with recent gains, palladium is 14% below its peak value, gold is 34% below, and silver 60%. So while these metals have recently had a nice jump, they have significantly higher to climb from a technical standpoint, especially silver and gold. We believe this is one reason why record amounts of silver are being imported and purchased by Americans, and also why there will continue to be.
Often times, fund managers will scour the universe of stocks for good performers, even near the end of a reporting period, so they can "own" good performers in their fund when the annual reports are published. Had they bought those same stocks earlier, the added growth in investment performance of their fund would have been advertising enough.
By acting now, American consumers can invest in one of the few remaining sectors in America today that offers a fair value, with limited downside, and considerable potential for continued growth. General Patton correctly said many years ago, that "Americans love a winner.” Perhaps no winner is loved more, than one that can keep on winning.
We believe that right now, the greatest potential for winning rests with the sector that swept not only Q1, 2017, but many other segments of time in the 5000-year period before that. Everybody loves a winner - especially one that is poised to keep on winning, with more proven experience winning than any other asset class on the planet, in all of human history.