Lee Quaintance and Paul Brodsky of QB Partners are concerned about runaway monetary inflation and the decline of the U.S.
In this week’s Barron’s Up and Down Wall Street, they address the question "Where to invest when the financial markets seem unduly risky and the risk/reward ratio generally unfavorable?"
"The answer, they believe, is that hard assets will provide more profits and carry less risk than most financial assets. And that since most "hard-asset derivatives (equity) remain unpopular among financial-market investors," they provide intriguing investment potential.
To illustrate, even with oil at record high prices above $80 a barrel, "energy-related public equities continue to be valued on implied assumptions of long-term crude prices of no more than $45 a barrel."
In like vein, they note that the equity-market valuations of certain global agricultural, precious and industrial metals, and mineral concerns are trading at a fraction of their future production/reserve values. Lee and Paul allow as there are valid reasons why such shares sell below their optimum value, but the discounting is typically much too severe.
Basically, their view is that "investors have not begun to allocate to these sectors en masse because we think they have yet to recognize the relationship linking money creation (and fiat currency declines) to the intrinsic value of natural resources."
They go on to explain that "most stocks that derive their value from natural resources are cheap because most investors that could sponsor such plays haven’t done so in 30 years." But the pros will be forced to change that stance when economic fundamentals give them no choice. And, in due course, they’ll be followed by the investment masses, who, as always, will be late to the party." (emphasis added)
I couldn’t agree more.
One last item of concern: Moral Hazard. Quaintance and Brodsky note that "financial-asset markets are not set up to
anticipate economic downturns, since it seems that Big Brother is always there to
bail them out."
I suspect Ben Bernanke is all too aware of this, and was part of his calculus last month, despite the 50 bp cut. Indeed, it may be part of what’s weighing against a cut in the October meeting . . .
Rudy in a Burka?
UP AND DOWN WALL STREET
Barron’s, October 15, 2007