Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long every stock in this post (Image credit to Pixabay)
I’ve tried writing this update many times over the last few weeks, but I just kept coming back to the title of my last note: “If it ain’t broke, don’t fix it”. The energy sector continues to work as a theme while the world questions just what kind of risk premium can be put on the gotta-have-it commodities. Inflation is on everyone’s lips, and the developments in Ukraine have put the Fed in a bit of a quandary. If inflation is running hot because of global shortages in energy and materials (assuming that’s what’s going on in those markets), then would “aggressive” Fed rate hikes have any impact on the prices of the commodities that are driving the underlying inflation? To do that, you’d have to increase supply (Fed can’t do that) or decrease demand for commodities (only way to do that is to cause a recession). While the Fed can remove liquidity from the system, it can’t do anything about where the remaining liquidity chooses to hide. I don’t know about you, but my screen clearly showed “gold and energy” as the two shelters in the storm today, and that’s becoming a recurring theme. And while energy has been a pleasant place to be for a while, gold has actually started to shine a little more as of late. I think that’s because managers are starting to think about where to hide as the tech stocks with no earnings (or trading at crazy earnings multiples) continue their declines in the face of some I-sure-hope-this-inflation-doesn’t-stick-around numbers. Likewise, managers who are long the traditional 60-40 debt-equity portfolio split are probably starting to think about hiving off some of that negative-real-yield debt in exchange for a few percentage points of gold in the portfolio — you know, just in case.