‘Grossly Overvalued’ Stocks Face Global Rotation, Says Fund Manager

David

The gold market has lost trillions in market cap over the last couple weeks. We'll get your sentiment on precious metals and your reading on the latest economic data.

Adrian Day

CPI 4.2% headline, highest since April 2023, driven by gasoline. Core 2.9% still above Fed target. Initial jobless claims 225k, highest since early February. Non-farm payrolls beat expectations. Confluence: inflation higher, jobs beat, but jobless claims also up.

Adrian Day

The jobs report beat expectations but virtually all jobs created were local government or healthcare. 4.8 million people working part-time wanting full-time work. 6.2 million people want a job but are no longer counted as unemployed. Total 11 million underemployed or unemployed looking.

David

Assume Strait of Hormuz remains closed, WTI above $80. Can the American economy adjust to $83 oil without entering recession?

Adrian Day

At just over $80, oil is meaningfully below previous peaks on an inflation-adjusted basis. It's close to the lowest 20th percentile of inflation-adjusted prices for the last 20 years. The oil price itself is not particularly worrisome.

David

China is cutting crude imports from 11.7M bpd to under 9M bpd, helping ease supply shocks. But SocGen warns the market will require higher oil prices as inventories deplete. What's your take on oil direction?

Adrian Day

I agree with SocGen. When the strait opens, many countries will rebuild stockpiles, including the US which depleted its oil stockpile. On a longer-term fundamental basis, oil will go meaningfully higher over the next few years.

David

The ECB raised rates this week for the first time since 2023. This reminds me of 2008 when they raised rates right before the Lehman collapse. Is this a policy mistake?

Adrian Day

The ECB doesn't have a good track record. Central banks focus on the inflationary effect of higher oil prices, but every oil price spike in the last 80 years has led to a recession (1974, 1990, 2000, 2008).

David

Will the rise in oil translate to core CPI and PCE products? If so, the Fed will raise rates.

Adrian Day

At 2.9%, core is still almost 50% above the Fed's target. When oil moves up, that price moves through the entire economy to every good transported. A higher oil price for any period will definitely translate into higher core inflation.

David

Can we expect higher interest rates this year?

Adrian Day

I don't think the Fed will raise rates, especially with Walsh coming in as new chairman. But they are much less likely to lower rates as long as oil stays high. A majority of FOMC members have indicated preference for fighting inflation.

David

So no move from the Fed, but bond vigilantes will push the long end of the yield curve up regardless. That's bad for gold.

Adrian Day

Correct. For the last 3 months, the dollar has been moving up and interest rates moving up. Higher interest rates and a higher dollar are quite negative for gold.

Adrian Day

In the immediate term, the war continues, dollar goes up, long-term rates go up, Fed doesn't cut - all of that could see gold under continued pressure. But once the war ends, relief on oil will be an excuse to cut rates.

David

People sold either because they thought gold was due for a pullback at $5,500 or because they don't think the Iran war will last.

Adrian Day

War is actually hurting gold. Looking back 50-60 years, with nearly every negative geopolitical event, gold moves up in advance of the war and drops right afterwards. The Russian invasion of Ukraine was a perfect example.

David

Are you worried about gold repeating 2011?

Adrian Day

We could have a deeper correction, but this is not like a longer-term fundamental end. We've had very little retail speculative interest. In 2011, gold was a topic of conversation everywhere. We had none of that speculation this time.

David

SpaceX IPO'd today at one point worth more than $2.6 trillion, more than Canada's GDP. With the Mag 7 pulling up the entire market, what do you do in that environment?

Adrian Day

We shouldn't be in the business of predictions. We should look at risk and reward. The market today, particularly big cap tech growth stocks and the AI sub-sector, is very risky.

David

Are you still mostly concentrated in resource companies outside the US?

Adrian Day

I'm a bottom-up investor. We're finding value in the UK market, Hong Kong, Singapore, Brazil. World stock markets ex-US are trading at 50-year relative lows to the US. We've had a 13-year period of US outperformance. We're due for rotation out of big tech growth into defensive and value stocks in the US, global stocks, and emerging markets.

David

As a fund manager, are you more incentivized to sell gold holdings because of frothiness in tech posing systemic risk?

Adrian Day

There's systemic risk. Everything drops. Gold stocks tend to fall sharper but come back sooner, as in 2008. It's a time to be defensive and have cash, but not to sell everything trying to buy back cheaper. People rarely succeed at that.

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