‘We’re not in there for the next 20%, we’re in there for the next 300%.’ Two veteran managers on a neglected asset.
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So far, it looks like another fence-sitting day for most equity investors. And that’s understandable given a looming Fed meeting, auto strikes and now surging oil prices.
Our call of the day comes from a pair of veteran money managers who see big volatility coming and offer ideas on how to protect from it. They are Harris “Kuppy” Kupperman, founder and CIO of Praetorian Capital, and Louis-Vincent Gave, CEO of Gavekal Research, who jointly spoke to financial platform Real Vision in an interview that aired on Monday.
They both weigh in on how easy monetary policy and generous fiscal policies are going to work against markets. “Everything is priced on the 10 year (Treasury yield), and it keeps fighting and bouncing and seems to have broken through 4%,” said Kupperman, who warns 6% is possible, at which point “most risk assets blow up.”
How are they investing? Kupperman says he’s bullish on hard assets that are below the costs of producing them, and which have a lot of cash flow or which he thinks will have lots in the next year or two.
“We own a lot of uranium, we own a lot of offshore energy, we own a bunch of land. None of this stuff, particularly, needs the economy to function. I don’t have a strong view of what happens with GDP, I think the fiscal stays stimulative, but I can see a world where the 10-year blows up and fiscal isn’t enough. In [2008], a bunch of subprime things blew up and the whole financial system froze, and it didn’t matter that oil was at $140, because the whole system fell apart,” he said.
Gave notes energy has bucked the Iran-Saudi deal, Middle East peace, and growth worries from China, Europe and now the U.S. over the past six months. “Everything should have pointed toward energy taking a breather, and instead, it continues to grind higher. I love something that contradicts common belief and I particularly like energy for another reason. I tend to believe that energy today is the ultimate anti-fragile asset,” he said.
He says over the past 35 years, investors could buy the stocks they wanted and reduce the volatility with U.S. Treasurys, which would protect them from any big shocks to the system, but that hasn’t worked for 2.5 years.
“So I think we’re moving into a world where energy is the new anti-fragile asset class, it’s the new thing that actually diversifies your portfolio. Meanwhile nobody owns it, because it’s a very small part of benchmarks because of ESG constraints because of a terrible decade between 2013 an 2021, lots of reason to not own it,” he said.
Read: What the ‘mysterious shrinking’ of Wall Street’s fear gauge means for stocks, according to DataTrek
Soon, lots of quantitative models are going to start recognizing energy investments are a good diversifier for portfolios, says Gave. But “guys like Kuppy and myself, guys who are almost religious about it, we’re not in there for the next 20%, we’re in there for the next 300%,” he adds.
Kuppy says the energy investments he likes fit his criteria of really beaten down investments for decades. “Think of the inflation. We’re not back anywhere near where we were the first half last decade in terms of spending, but oil-field services everything costs twice as much,” he said.
He owns energy services companies, because they are trading dirt cheap when it comes to equipment replacement costs, with no debt and lots of cash.
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“It’s gonna be volatile but Louis is right…I’m not playing for the next 20%. These things get overbought and oversold, everyone gets tossed off their scent. You’d be amazed at how many people bought these things and sold and bought and sold and made no money while they keep going up. You have to just have a view and ride.”
The markets
Stock futures ES00, -0.50% YM00, -0.54% NQ00, -0.72% are softer and Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y are steady, with the focus on oil prices CL.1, 1.41% BRN00, 1.01%, which continues to surge. Chevron CEO Mike Wirth sees oil likely hitting $100 a barrel. The dollar DXY, meanwhile, is under pressure. German bund yields BX:TMBMKDE-10Y are near a 12-year high after an ECB official said rates will need to stay at record levels for an extended time.
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Editor/reporter at MarketWatch
1yKudos to Real Vision for the terrific interview this was based on.