Ted Oakley: How Smart Money Is Positioning in Energy, Gold and Cash

Kitco NEWS

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Video Summary

The market is celebrating potential rate cuts, but consumers are feeling the pinch of rising prices and inflation. This disconnect highlights a potential divergence between optimistic traders and worried everyday people. The speaker argues that the consumer's perspective reflects the reality of the economy, with many families struggling to make ends meet due to increased costs for essentials like groceries and education.

The traditional rules of investing may be challenged in a market driven by passive investing and expectations of central bank actions. However, the core principle of value still holds: buying assets for less than their worth is sound, while overpaying is not. A strategy involving a safety net, like treasuries, doesn't preclude participation but rather indicates a cautious approach to investing at extreme price levels, focusing on picking and choosing investments rather than going all-in.

Smart money appears to be exiting the rally, evidenced by retail and institutional money pulling out even as indexes reach new highs. This divergence suggests that individuals might be getting caught in an algorithm-driven rally, unaware of the underlying selling. Experienced money managers are raising cash, a move less common for them, indicating a caution that individuals may overlook, believing the central bank will always intervene. The speaker emphasizes that extreme market movements often correct in the opposite direction over time, underscoring the importance of risk management.

Short Highlights

Consumers across income levels are struggling with rising prices for essentials, making ends meet increasingly difficult.
Traditional investing principles still apply, emphasizing buying assets at a discount and avoiding overpaying, even in a passively driven market.
A significant portion of money managers are raising cash, signaling a cautious sentiment that contrasts with individual investors' continued participation in the rally.
Risk management is paramount, as extreme market movements tend to correct, and avoiding substantial losses is key to long-term success.
Holding physical bullion is recommended as a currency hedge due to the expectation of a long-term dollar decline and increasing global distrust in major currencies.

Key Details

Consumer Struggles vs. Market Optimism [00:00]

The market is cheering and anticipating rate cuts.
Consumer data indicates worry about finances and expectations of higher inflation.
The speaker believes the consumer has a better read on the real economy.
Families, including upper middle class, are experiencing financial strain due to rising prices for groceries, education, and other essentials.
It is becoming increasingly difficult for people, especially those on lower incomes, to make ends meet.
Wall Street often overlooks the struggles faced by Main Street.

The market's cheering, expecting these rate cuts, but the data from the average consumer is showing that they're worried about their finances and expect higher inflation.

The Enduring Principle of Value in Investing [00:14]

The question arises whether old investing rules are broken and if fundamentals matter in a market driven by passive investing and Fed rate cut expectations.
The fundamental principle that a dollar is a dollar still holds true.
Buying a dollar for 80 cents makes sense; paying $1.20 for a dollar does not.
Having a safety net, such as 35-40% in treasuries, does not mean one is not participating in the market.
It signifies being particular and not going "all in" when prices are at extreme levels.
The strategy is about picking and choosing investments and understanding what one owns, rather than making an absolute call to be completely out or completely in.

Well, I know people get to thinking about that, but a dollar is still a dollar.

Smart Money Exits as Rally Continues [02:21]

Retail and institutional money are actively pulling out of the rally even as indexes hit new highs.
This divergence suggests smart money might be selling into an algorithm-driven rally.
Historically, at market highs, late players and often individuals get "bagged" because they continue to buy.
Many experienced money managers have started raising cash, a move they rarely make.
Individuals tend to continue investing, believing the Fed will always protect the market.
This approach works until it doesn't, and market extremes tend to correct in the opposite direction over time.
Risk management is emphasized as the most important aspect of money management to avoid significant losses.

If I'm earning you know 80% of what the market is earning with only 50% at risk, see that that risk reward right there works.

Conservative Investment Strategy and Outlook [03:39]

The speaker was holding a significant position in cash previously, about 50%.
The current approach involves holding about 45% liquidity across the board in treasuries.
An example is given where the market is up 11% and their performance is up 8%.
This is considered doing "really, really well" because there is less risk exposure (earning 80% of market return with only 50% risk).
Buying long-term bonds and chasing yields is considered the wrong approach.
The outlook is that by this time next year, the Fed will likely be raising rates again to combat inflation.
Buying 20 and 30-year paper now is not advisable.

And I think I think that's what people forget to see on the on the bond side, we just don't feel like you can ever buy long you'll buy long-term bonds and you'll chase these yields in here.

Key Metrics for Evaluating Companies [05:23]

The market is currently ignoring traditional valuations.
Key metrics to focus on when evaluating a business for investment include:
- Balance Sheet: Debt-to-equity ratio is crucial; companies heavily laden in debt require more careful consideration.
- Free Cash Flow: This is the cash remaining after all expenses and capital expenditures for reinvestment. Free cash flow provides the ability to increase dividends, buy back stock, and pay down debt.
Projections are made for company earnings up to five years out, discounted back with an inflation number (currently around 3%).
The aim is to buy at a discount to these estimated future earnings, providing a buffer against being wrong.

For us, there's four or five things, but one, you know, I'll just start with a balance sheet.

Gold as a Currency Hedge and Global Trends [07:11]

Physical bullion is held as a core currency hedge.
This strategy is seen as an indication of a long-term thesis.
The speaker maintains that the dollar will likely continue to decline long-term.
To offset this potential decline in a conservative fixed-income strategy, owning some gold bullion is necessary.
Many major countries are aligning against the US, with countries like Russia, China, and India buying gold.
These countries are not buying back into US assets, particularly treasuries.
There is a loss of faith in many currencies, including the dollar, sterling, euro, and yen.
Owning gold bullion side-by-side with other assets is a hedge against this uncertainty.