Note 1: We asserted in our June 18th commentary that WTI crude oil will definitively rise above $100 a barrel this summer, driven by the ongoing U.S. economic recovery, steady oil demand from China (the country’s short-term credit crunch is over), and pockets of strength in the Euro Zone. WTI crude oil is at $103 as I am writing this. And no, it is not due to unrest in Egypt, as Brent crude did not rise much on a proportionate basis. The narrowing of the spread between the price of Brent and WTI crude is also the best evidence of a U.S. economic recovery.
Note 2: In our late January newsletter, we asserted that gold was due for a major correction. We advocated a short position in gold. With gold at $1,660 an ounce at the time, we argued for a 12- to 18-month price target of $1,100 to $1,300 an ounce. Today, the price of gold sits at $1,220 an ounce. In just five months, the price of gold has hit our price target. Bottom line: We are revising our price target for gold. Our new position calls for a 6- to 12-month price target of $1,000 to $1,200 an ounce. The two most reliable psychological indicators for a tradeable bottom in any asset class are: 1) Panic, or 2) Indifference. The best time to invest in any asset class is after years of investors’ indifference. That–along with other screaming buy indicators–was the reason why I invested in physical gold and unhedged gold miners at under $275 an ounce in late 2000. Of course–unless the U.S. mints a new currency–the price of gold will never see $275 an ounce again. So far, we haven’t witnessed much investors’ panic; nor indifference towards gold. With U.S. real interest rates (the ECRI Future Inflation Gauge just hit a 7-month low, even as long-term Treasury rates are spiking up) hitting new cyclical highs, we believe there is at least one more major sell-off in gold before there could be a tradeable bottom. The Dow-to-Gold ratio today sits at 12.4. I would only consider investing if the Dow-to-Gold ratio rises to 15, or above. Avoid gold, for now.
Now, let’s get on with our main commentary. About 400 years ago, Descartes famously remarked “I think, therefore I am.” Descartes tried to prove his own existence by linking his thoughts to his consciousness. In other words, Descartes argued that because he cannot be separated from his thoughts–and because thoughts exist–therefore, he exists.
But Descartes was wrong. Equating one’s consciousness with one’s thoughts is mere identification with one’s ego–a path to endless pain and suffering. We are at our most enlightened state when we live in the present. A glimpse of a beautiful object, attending a concert, or seeing your loved one for the first time in a long time–these could all quiet our minds for just enough time to witness the beauty and truth in our own existence. Unfortunately, human beings–just like Descartes–have equated our identities with our own, rigid set of thought/belief systems for thousands of years. Such unconsciousness on a global scale has led to mass intolerance, discrimination and hatred, directly resulting in mass genocide, global wars, and witch-burnings–down to petty arguments over politics and household chores. It is sheer madness. A madness that many societies (e.g. the Middle East) still have not awaken from.
On a more practical level, an individual cannot invest successfully unless he awakens from such unconsciousness. Just like the natural laws of the universe, there are certain axioms any investor needs to follow; however, these axioms only provide the larger framework, and as of today, are not yet complete. Sir Isaac Newton explored the meaning of gravity, but lost his entire fortune in the aftermath of the Great South Sea Bubble. Investors are taught from an early age to follow benchmarks ranging from valuation ratios, cash flows, inflation, and GDP growth, to central bank policy, energy policy, technological breakthroughs, and finally to more esoteric indicators such as the VIX, various investment surveys (useful from a contrarian perspective), and sentiment data via Twitter feeds and Google Trends. An investor who is unconscious–i.e. one who follows a rigid set of thoughts and belief systems–cannot make outsized returns, since most investors follow such rigid thoughts, and by definition, most investors cannot beat the market. Sir Isaac Newton tried to follow such physical laws whilst speculating in South Sea stock. Both the final run-up and the subsequent collapse would catch him completely off-guard. Later on, he would remark “I can calculate the movement of stars, but not the madness of men.” The final exponential run-up in technology stock prices in early 2000 offered yet another example. Investors who failed to acknowledge this “New Era” missed the bull market in 1996, 1997, 1998, and 1999; many blue-chip funds under performed and numerous money managers lost their jobs because their rigid set of belief systems prevented them from owning technology stocks (at the peak in March 2000, the NASDAQ Composite traded at a P/E of 260). Of course, they were eventually proven right. But being “early” in the financial markets is just a nicer way of saying one was wrong. Similarly, many investors who were caught in the 2001 to 2002 bear market did not realize the rules have changed yet again.
I made this same mistake when I began investing in college. I tried to predict stock prices with factor models using linear regression analysis. I studied modern portfolio theory and was fascinated by real options valuation models. I thought the bull market in technology stocks would go on forever. I was unconscious. Thankfully, I did not remain unconscious for long. I managed to catch the tail-end of the technology boom; sold all my technology stocks in early 2000 (and warned others to do the same), and was 100% short the NASDAQ by late March 2000. The lesson I learned: Regimes come and go; belief systems are overturned (even thousand year-old systems such as the Chinese dynastic system in 1911); and something faster, crazier and more unbelievable will always come along.
A study of human history yields an endless chronicle of conflicts, wars, famines, mass slaughters, rape & pillage, and general misery. For sure, such a dismal record has been punctuated by glimpses of human goodness and progress in mass consciousness. e.g. The unprecedented prosperity and the promotion of peace during the “New Kingdom” period in Ancient Egypt, the export of Greek culture during the Hellenistic period, the harnessing and control of new technologies during the Han Dynasty in China, and of course, the European Renaissance and the Enlightenment. But it was not until the adoption of the United States Declaration of Independence–inspired by the writings of John Locke, and documents such as the Magna Carta, the Petition of Right, and the English Bill of Rights–did a major society finally begin to embrace the concept of human equality, freedom, and other basic, “inalienable,” rights.
In my opinion, the 56 delegates who debated and signed the Declaration of Independence as part of the Second Continental Congress represented the gathering of the most talented, progressive, and yet pragmatic, men in all of history. The Declaration of Independence–riding on concepts clarified by Enlightenment philosophers such as John Locke, Voltaire, and Rousseau–is the definitive document which defines the United States of America to this day. Yes, the U.S. falls short in many places; that is to be expected as the U.S. represents an ideal–an ideal that all of us should continue to strive for. It is thus no accident that the U.S. remains the most attractive center for entrepreneurs, hard-working immigrants, innovators, and the world’s best and most creative minds–despite our shortcomings.
In the wake of the Pearl Harbor Attack by the Empire of Japan, Admiral Yamamoto is alleged to have remarked: “I fear all we have done is to awaken a sleeping giant and fill him with terrible resolve.” Ever since the collapse of the technology boom and subsequently, the events of September 11th, the U.S. has been rudderless. Over the last 12 years, both the U.S. political and corporate leadership have failed the world, and reneged on too many broken promises. However, not all was lost. There have also been flashes of brilliance. e.g. the completion of the Human Genome Project in 2003, D-Wave’s progress in the development of a quantum computer, the advent of 3-D printing (a trend which I have tracked since 2007), shale fracking and horizontal drilling in the energy industry, and nanomedicine and nanotechnology in general–leading to advances in targeted cancer treatments, more efficient conductors, and stronger/lighter-weight materials.
As we have covered in our newsletters and commentaries, we are confident that the U.S. is on the cusp of a new technological revolution. It takes strong leadership, a functional financial industry, the right markets, and a bit of luck to commercialize the many, revolutionary technologies that we have written about. The U.S. is already undergoing an energy revolution–the rise in domestic crude oil production over the next several years will surpass the last domestic oil boom in the 1950s and 1960s. The 1950s/1960s domestic oil boom drove U.S. manufacturing and industry to unprecedented heights–and led to the creation of the U.S. middle class. The rise of 3-D printing, along with advances in 3-D scanning technology, means we could create our own tailored t-shirts in our own homes. I envision a timeline of just five years. Eventually, we will be able to “print” more complex objects with more differentiated parts. Together with cheap natural gas prices, the U.S. is already experiencing a renaissance in “in-shoring” and “in-sourcing,” beginning with low-labor content goods.
Slowly but surely, the U.S. giant is awakening. The economic recovery since 2009 is merely a precursor–a big, giant yawn. Our expertise and networks in healthcare, technology, and energy has placed CB Capital right in the center of the next technological boom, driven by American ingenuity, focus, and honest hard work. We are looking forward to the ride.