Have investors turned cool on hard assets...?
TRANSCRIPT of an interview with Peter Cardillo, chief market economist, Rockwell Global Capital, and Hard Assets Investor's Mike Norman.
Mike Norman, Hard Assets Investor: Hello everybody, and welcome to HardAssetsInvestor.com. I'm Mike Norman, your host. My guest today is Peter Cardillo, chief market economist at Rockwell Global Capital. Peter, thanks very much for coming on our show.
Peter Cardillo: My pleasure.
Mike Norman: Let's talk a little bit about the outlook. We've seen very strong equity markets recently. And that comes against a backdrop of I think increasing worry about the economy, the sequester, looking towards perhaps a slowdown. Yet equities seem very buoyant. And on the other hand, we've seen a big correction in commodity prices, notably gold. Now gold has bounced off its lows. How do you sort of put the puzzle together here right now?
Peter Cardillo: Well, to begin with, there's one powerful ingredient that the market has right now, and that's the Federal Reserve, which continues to pump liquidity into the marketplace. And of course now the Japanese are doing the same. And most likely the ECB is probably going to lower interest rates.
Mike Norman: How come gold went the other direction? If they're pumping in supposedly all this liquidity—which frankly I've got an issue with, because they're also taking out a tremendous amount of interest income when they do these monetary operations—but that being said, why did gold go down?
Peter Cardillo: I think the reason for gold going down was mostly technical. Now if you want to look at it from the fundamental viewpoint, let's face it, there's no inflation; at least that's what the Federal Reserve and what the Central Banks are telling us—that core rate inflation is well anchored. And it is to a certain degree.
Mike Norman: But if you look at TIPS—Treasury inflation-protected securities—they're trading like at a zero rate practically. So it's not just that that's what the Fed is telling us, or the government.
Peter Cardillo: The market is convinced of that; there's no question about it. We had a drop in oil prices, we had a drop in food prices, even though the headline is that inflation can spring up at any time. But the truth of the matter is that the economic decline in Europe has been stronger than we anticipated, than the markets anticipated. And as a result of that, you had China about a year and a half ago raise interest rates, managed to break the inflationary spiral that was taking place in China.
And so that combination of weaker economic activity in Europe, inflation going down in China, and obviously oil price is the key to inflation, pretty much stable. So when you had that type of ingredient, it worked in favor of the Fed. Now that doesn't mean it's always going to stay that way.
Mike Norman: Are you saying maybe then that commodities are right and equities are wrong? That commodities are sort of reflecting the slowdown as you mentioned in Europe and China, maybe sequester here? And that the equity market is running on sort of a valuation support because of low interest rates. But are you saying it's unsustainable?
Peter Cardillo: No, I think in the short term it's unsustainable because if you look at the Q1 growth results so far, earnings were actually up about 2.2 percent from last year at this time. And that really surprised me. But again, there's a caveat to that. And that is look at revenues growth; that's been declining. And certainly guidance has been very murky here; it's been on the rise. I think it's probably at the highest level we've seen in about 2 1/2, three years.
So basically the earnings season is wild. Companies have beaten in terms of earnings; there is definitely a weakening trend in corporate growth earnings. Now that brings us back to: Then why does the market continue to move higher? Why doesn't the market forecast perhaps second- quarter earnings actually being negative?
Again, it goes back to the fact that we had a tremendous amount of liquidity coming into the marketplace by the Feds. Now, so far the Fed has had a very fortunate period in the sense that they have not rekindled inflation. And that's due to the ...
Mike Norman: But do you think that's going to happen? Look, let's take this whole sort of paradigm of hard assets, which became very hot, in vogue, over the last six or seven years. People wanted to own tangible hard assets: gold, metals, oil, grains, this sort of thing. There's been a cooling-off period. Do you see this as an opportunity for longer-term-oriented investors to get into these assets?
Peter Cardillo: Absolutely; no question about it. And I just want to bring out one other point: the fact that interest rates are near zero, and that's almost on a global basis—Japan and now Europe, etc.—that in itself attracts investors to the equity markets. You have a lot of good companies paying 2-3 percent beating the bond market. So that is a major plus for the equity markets. While holding onto hard assets, right, they're not interest bearing ...
Mike Norman: You're saying hard assets is not the place ...
Peter Cardillo: No, I'm not saying that. I'm saying I think the reason we saw a correction in commodity markets—and in particular in gold—was due to the fact that it was more technical, and based on the fact that people were looking for a return. When the price of gold stopped going up, it suddenly halted capital return. And as a result of that, we had a technical correction. Should you be buying gold at these prices? Absolutely.
Mike Norman: But what's going to bring back the positive trend? What's going to bring back the bullish trend?
Peter Cardillo: Well, eventually we're going to see higher rates of inflation. And eventually we're going to see a weakening Dollar. So I think the ingredients are being set for another run in gold. Now, that doesn't mean it's going to happen next month or the month after. Sure, in the short term we could see gold gain maybe 3-4 percent from these levels. That's an easy objective to obtain just from a technical viewpoint. But gold needs to be purchased for the long, long, long term.
Mike Norman: But why are we going to see a weaker Dollar? If we're sort of entering into our own period of austerity, austerity is like we're not printing as many Dollars, we're printing less. Why are we going to see a weaker Dollar if in fact we're actually going to be issuing fewer Dollars?
Peter Cardillo: We're going to be issuing fewer Dollars. And in fact for the first time in about four or five years, we're going to probably see the budget actually dwindle somewhat.
Mike Norman: Quite a bit actually. It's forecast I think at about $800 billion. I've seen some forecasts a year or two out down to $400 billion, which as a percentage of GDP, would be like nothing.
Peter Cardillo: I think that's wishful thinking. But in any event, we'll chat about that later. I think the Dollar is going to weaken because while there's no question the trends in bringing down the budget are in place, the fact is we're going to have weaker economic activity. So while we have the sequester impacting the economy presently, and while the unemployment rate is going to still stay pretty much stuck in the 7.5-8 percent range for most of 2013, the Fed is not going to move.
So eventually the unwinding of the balance sheet is going to probably cause inflation. And we're going to see gold prices move higher again.
Mike Norman: Thanks very much, Peter Cardillo; nice to see you again. That's it for now folks. This is Mike Norman. We'll see you next time. Bye-bye.