But, as I have discussed since 2003 in my annual Surprise Lists, the broad consensus of investors is often wrong. Indeed, it is often the case that the very coalescing of popular opinion behind an investment tends to eliminate its profit potential.
As Howard Marks writes:
"First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in: 'The outlook for the company is favorable, meaning the stock will go up.'
Second-level thinking is deep, complex and convoluted. The second-level thinker takes many things into account:
- What is the range of likely future outcomes?
- Which outcome do I think will occur?
- What's the probability I'm right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future and with mine?
- Is the consensus psychology that's incorporated in the price too bullish or bearish?
- What will happen to the asset's price if the consensus turns out to be right, and what if I'm right?"
While the animal spirits may have taken over the equity markets and have ignored the gold market, we should recall that there is a reason why Keynes called them animal and not human spirits. That's because animals are a lot dumber than humans!
As excited as investors are about stocks, they are now uninterested in gold.
I remain a minority and outside of consensus regarding gold. However, given the developing and concerning conditions -- and lack of credible policy responses -- that I now see falling into place, the uncertainty premium should be rising and gold may be a beneficiary this year.
What is most surprising to me is that the price of gold has not responded to these uncertainties, providing a potentially favorable upside/downside ratio for the yellow metal.
I wanted to start today's opening missive with the way in which I concluded my 15 Surprises for 2017 -- the major theme being that "Donald Trump will make volatility and uncertainty great again."
I especially would pay attention to the three questions at the end of my column as they relate to the prospects for a higher gold price. Answer them yourself -- I have my own responses -- and act accordingly:
Some final words.
My outlook for 2017 is more gloomy than in years.
To me, the biggest surprises are (1) the abundance of complacent sheep that populate our financial markets today, (2) the rapidity in which the bloom comes off the Trump flower next year, and (3) that the market actually may do what is unexpected in 2017.
The Republican Party becomes divided and Trump's policy support loosens. Even the newly elected president's "A Team of Rivals" cabinet with vastly different philosophies and backgrounds becomes splintered, full of tension and conflicted, much like an episode of "The Apprentice." Unlike President Lincoln (who neither lacked for self-confidence nor needed to be the only voice in the room) and his ornery set of advisers, Trump's management style of an "Apprentice-like" administration does not produce constructive and cohesive policy.
With little strategic vision and a limited ability to effectively govern, the Trump administration's popularity quickly wanes as the trade-off from a slower growth world to a late-cycle policy experiment to stimulate growth fails.
Off of Twitter, absent regular press conferences and the delay/failure of policy, Donald Trump by year-end 2017 will be less ubiquitous and harder to find than he has been for the last 18 months and more like Where's Waldo?
All of which gets me back to the three questions that I have asked myself every morning over the last two to three years. These questions seem more appropriate to ask today than ever:
- In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
- In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
- With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?
Think about these questions as you approach investing in 2017 and consider embracing the contrary and even some of my "probable improbables" for a portion of your invested assets.
Risk happens fast in 2017.
As a possible manifestation of some of the concerns expressed above, the price of Bitcoin recently has ripped higher ($1,130), and Bitcoin, for the second year in a row, is the best performing "currency."
Finally, I would note that we have ransomed our economy because our policies have favored debt over equity and speculation over productive investment, placing gold in a more envious position:
- There is a federal debt load of $20 trillion, an annual on balance sheet deficit of more than $500 billion and a total annual deficit of over $1 trillion.
- There is nearly $49 trillion of public and private sector debt in the U.S. Every increase of 100 basis points in rates boosts debt service by $470 billion annually (that's 2.5% of GDP). This money that can't be spent growing the economy because it is paid to holders of U.S. debt.
Though it is always hard for me to value gold as I cannot produce an intrinsic value calculation, I believe the odds that gold will shine brightly this year are growing, and that the commodity may go from goat in 2016 to hero in 2017.
I have moved to a large holding in gold.
Position: Long GLD large; short GLD puts