Depressed Alternative Investment Assets Will Return to Vogue When Bubble Bursts
With the market continuing to break all-time highs, we examine alternative investment ideas in anticipation of the tide turning. The market can’t keep going up forever. When that nasty recession hits (circa late 2018 or 2019, I reckon), “growth” stocks will be the last place that investors want to be.
As investors know, growth stocks have been in vogue for the past several years. It used to be that “growth” entailed companies enjoying year-over-year profit growth in the double-digits. In non-tech-related industries, high single-digits. But the market melt-up in recent years has lifted all boats—growing and speculative. It seems like the only assets left behind are value-oriented.
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So what alternative investment assets are considered value investments? The commodity complex is synonymous with the term “value.” The base metals, such as copper, aluminum, and zinc are a few examples. Energy-related metals assets like uranium and tungsten usually trade on thin margins.
Stock market value investments include mining companies that dig these base metals out of the ground. But they also include a cadre of cyclical industrial stocks; the kinds of companies where profits fluctuate wildly in conjunction with the business cycle. We can throw utility companies in there, although their profits are quite stable.
So, without further ado, I’ll submit my list for the top alternative investment assets when the valuation bubble gets popped. This includes assets that can take advantage of the coming market decline, either directly or indirectly.
#5 Pay Down Debt
This isn’t an “alternative investment,” but the result is the same. So many people focus on portfolio returns that they overlook the fact that paying down debt faster can accomplish the same thing.
Think of paying off that $25,000 you owe on three different credit cards as paying yourself a dividend. Instead of gifting the bank 20% interest per annum on the principal, you retain the difference in savings. Extinguishing debt doesn’t just save you current interest, but future interest you would have paid by simply making minimum payments.
In the same way that retiring debt increases corporate cash flow, consumers can do the same. The results may not be as prolific as investing in the next Apple Inc. (NASDAQ:AAPL) or Microsoft Corporation (NASDAQ:MSFT), but it really adds up over time.
#4 Uranium
Uranium has been one of the worst-performing assets for some time. The triple nuclear meltdowns at Fukushima in March 2011 were an insurmountable negative catalyst for a couple of reasons.
First, nuclear power generation and new construction was halted in many countries, pending comprehensive safety reviews. Where national grids had spare capacity, paring back on nuclear became a primary option. Japan mothballed several facilities, even though it has little capacity to spare. Germany announced that it was phasing out nuclear altogether. We call this nuclear’s 9/11.
Second, demand for uranium is growing. There is a plethora of new nations looking to go nuclear. At least 45 countries are actively considering starting their own nuclear power programs. Furthermore, nuclear power is currently being planned or seriously considered in no less than 20 countries. China has 20 new nuclear plants under construction.(Source: “Emerging Nuclear Energy Countries,” World Nuclear Association, August 2017.)
So why do uranium prices keep plunging? Much of it has to do with the lengthy nature of the plant cycle. On average, it takes between 10 and 20 years from conception for a nuclear plant to go online.
That said, future demand projections are solid. The World Nuclear Association (WNA) 2015 Nuclear Fuel Report reference scenario projects a 26% increase in uranium demand between 2015 and 2025. Demand thereafter will depend on the ratio between new plants built and new plants retired. But the WNA reference scenario projects a 22% increase in uranium demand between 2020 and 2030. The rate of new plant construction will carry uranium growth to 2030, at least. (Source: “Uranium Markets,” World Nuclear Association, July 2017.)
Perhaps reacting to these robust demand dynamics, uranium prices recently showed notable signs of life. Spot prices rose from $18.00/pound to $24.50/pound by January 1, 2017 (in line with most commodities following Trump’s electoral victory). Prices have since moderated, but they are trading north of $20.00/pound ($20.70/pound to be exact).
For the ultimate value investor, uranium might be a smart play. When recession strikes, uranium demand will be impacted somewhat by faltering industrial electricity demand. But, much like utility consumption, it won’t crash, and prices are already deeply discounted.
The most popular uranium exchange-traded fund (ETF) is Global X Funds (NYSEARCA:URA).
#3 Classic Cars
Since the bottom of the Great Recession, the classic car market has boomed. This is best captured by viewing the Hagerty Market Rating—the industry standard in the classic car market.
The Hagerty Market Rating uses a weighted algorithm to calculate the strength of the North American collector car market (much like stock indices). It uses a variety of data—including market and transactional data—to deliver an accurate assessment of the market. It’s also inflation-adjusted, so it’s easy to make an apples-to-apples comparison.
Starting from just under 100 in early 2007, it rose to 186.09 in August 2015. While the index has steadily fallen from that time to around 157.42, it’s still trading near the upper-third of values going back to 2007.
| Market Index | Value | Date |
|---|---|---|
| Current rating | 157.42 | September 2017 |
| All-time high | 186.09 | August 2015 |
| Five-year high | 186.09 | August 2015 |
| Five-year low | 130.96 | August 2012 |
(Source: “Hagerty Market Rating – September 2017,” The Hagerty Group, LLC, last accessed October 11, 2017.)
Obviously, a recession will have negative ramifications for classic car prices. The negative wealth effect created by a crashing stock market should translate into less-robust sales figures for very expensive cars.
But, for car-lovers and the mechanically inclined, an opportunity to buy low might present itself. If Tesla Inc (NASDAQ:TSLA) and Alphabet Inc (NASDAQ:GOOG) succeed in cajoling the government to allow widespread adoption of autonomous vehicles, we wonder if the “nostalgia” factor for these beautiful cars will only skyrocket.
There’s definitely a long-term view involved. But recessions don’t last forever. The wealthy elite will always shelter money in their “toys.” Discretionary income will rebound.
And the best part is, parking money in this sector means avoiding a market crash that others will be embroiled in.
#2 Silver
Is silver an industrial or precious metal? The debate among silver enthusiasts rages to this day. In reality, however, it’s both.
Depending on market sentiment, silver is priced accordingly. In times of extreme fears of monetary inflation (such as in 2009, with the advent of the Troubled Asset Relief Program, commonly called TARP), silver can nearly keep pace with gold. That’s when silver’s precious-metal characteristics shine through.
Most of the time, though, silver is priced as an industrial metal. Silver is used in growing industries like solar panels, and increasingly in medical nanotechnologies. It’s also the No. 1 end-use material in the photography industry, which covers radiography (x-rays), both in medicine and industrial inspection of heavy machinery. Silver’s demand profile is increasing rapidly over time.
Now, what makes silver an incredible investment near the end of a recession is that it unlocks both silver’s precious metal demand (monetary inflation) and industrial demand (cyclical production increase) together. Instead of waning precious metal demand acting as a counterbalance for steady industrial growth, they work with each other when a new business cycle forms.
Throw in the fact that silver demand is in decline globally, supply constraints become an issue. Again, not simply from an increase in industrial production, but by way of investor demand through silver eagle coin sales from the U.S. Mint. During the Great Recession, the U.S. Mint regularly sold out of coins, and shipments from bullion dealers were routinely delayed for several weeks.
Unless you believe that the Fed will go against its playbook and let the economy sink without intervention, silver is a great place to park investment dollars. But not right away. Although it’s hard to go wrong buying silver at these depressed prices, lower prices are possible.
But, when America comes out of its next recession, expect prices to soar again.
#1 Gold
Gold is the obvious asset on our list. It’s almost surreal to call it an alternative investment, as it’s the world’s oldest form of money and accepted everywhere. We can thank Richard Nixon for that.
As everyone knows, gold is the ultimate insurance hedge from geopolitical risk, monetary debasement, and inflationary uncertainty.
Given the size of the credit bubble, partial allocation within a portfolio seems wise. It’s easy to cast gold aside after several years of never-ending appreciation of risk assets. But owning gold now is about thinking ahead.
If the central banks follow the same playbook to mitigate the next recession’s effects, there’s no telling how large the Fed might expand its balance sheet.
Yes, the Fed is planning on reducing its balance sheet by a couple trillion dollars or so. But there’s no guarantee that the Fed won’t walk that back if the next recession unleashes deflationary and destructive impulses. It could make the emergency $2.0-trillion TARP look like child’s play in comparison.
Gold exploded higher immediately following the last two recessions. Worries about monetary inflation was the key driver. I believe it will be the same during the next one because credit creation and sovereign deficits are much higher.
