Studying economic cycles is one of the most fascinating professions to be in. I have met the most incredible people over the years and I’m just getting warmed up.
One of the most important correlations I’ve found in finance, which billionaire bond manager, Jeff Gundlach, has uncovered as well, is that commodities rally late in cycles – then, a recession follows.
In close to 18 months of publishing the Portfolio Wealth Global letter, this might be our most alarming letter yet.
Today, I want to touch on two critical matters that directly affect your daily lives:
- China announcing a 180-degree change to their U.S. treasury buying policy.
- Preparing for a 6-12 month recession period.
We’re very late in the game. This business cycle and investment cycle is all but finished – stocks are trading at all-time highs.
I remember in 2009 when my partner and I sat down and looked at valuations for world-class businesses, which pay our rising dividends for decades, the type that have made Warren Buffett a multi-billionaire, and couldn’t believe how cheap they were.
Today, not even one Dividend Aristocrat is cheap. Compare that to the days following the crash, when most people were emptying their brokerage accounts just when the intelligent action would have been to double-down.
For example, in 2009, I bought Stanley Black & Decker, a global provider of hand tools, power tools and related accessories, mechanical access solutions, in what we saw as a no-brainer investment back then. Today, of course, the company is fully priced and I’m not adding to my position:
Stock markets have been rallying for 9 straight years of gains.
No one saw this coming, but the eternal principle of buying undervalued world-class businesses works in any economic environment.
Now, though, we’re in the final innings, and contrary to what many gold bugs and hard assets enthusiasts have been screaming for throughout this decade, this time I agree with them – the commodities super-cycle is beginning.
You see, for economies to function efficiently, commodities prices need to be low, as well as inflation.
When you pay less for things, there’s more discretionary income, which leads to higher levels of savings, increased spending, elevated levels of investments, and more reassurance.
Oil prices, for instance, impact how much it costs to commute to work, to take a flight, to run machinery, and to transport goods.
Materials prices impact how affordable it is to build housing, to complete infrastructure plans, and to manufacture products.
Lower inflation levels allow businesses to make long-term plans without fear of economic storms.
But, as demand for goods and products increases in the late parts of a cycle, while supply of materials subsides, due to years of low prices and mine shutdowns, the final phase of each boom is characterized by a real assets boom, like the one we’re weeks away from entering.
China knows this and wants to use this to its advantage.
As the world’s largest consumer of materials, China wants to ensure it pays less for metals, so it is cutting the lifeline of the U.S. debt machine by stopping to purchase treasury bonds.
It is forcing America to change and this is outright war.
Investors are currently super bullish. Therefore, we need to be extra careful.
In 2018, do these 3 things:
- Make sure you’re a valuable employee on the way to becoming indispensable, because in 2 years, we’ll enter a recession and layoffs will be made.
- Focus on the resource sector for the 1st time in 7 years.
- Save money.
You’re going to see people around you feeling better, buying expensive toys and gifts, going on vacations, and renovating their homes – don’t be fooled. Now is the time to squeeze huge profits from the late stages of this cycle and brace for impact.
China knows it and now you do as well.