As equity investors hover in a state of ambivalence due to the impending Federal Reserve meeting, auto strikes, and a sudden surge in oil prices, two veteran money managers foresee an upswing in market volatility. In an interview with financial platform Real Vision, Harris “Kuppy” Kupperman, founder and CIO of Praetorian Capital, and Louis-Vincent Gave, CEO of Gavekal Research, provide insights on how to safeguard investments amidst this anticipated turbulence. The duo expressed concerns about how current monetary and fiscal policies could potentially destabilize markets, with Kupperman warning that a possible 6% increase in the 10-year Treasury yield could lead to the explosion of most risk assets.
In terms of their investment strategy, Kupperman reveals a bullish stance on hard assets with significant cash flows that are valued below their production costs. Meanwhile, Gave points out the resilience of energy, which has defied expectations in the face of geopolitical tensions and growth concerns from major economies. He views energy as the "ultimate anti-fragile asset," and a potential key diversifier for portfolios. This comes as traditional volatility buffers, such as U.S. Treasurys, have failed to provide the expected protection against market shocks for the past 2.5 years.
Market Volatility Looms: Veteran Money Managers Suggest Hard Assets and Energy Investments
Amid a tentative trading day for most equity investors, the looming Fed meeting, auto strikes, and surging oil prices have all contributed to a sense of unease. Harris "Kuppy" Kupperman, founder and CIO of Praetorian Capital, and Louis-Vincent Gave, CEO of Gavekal Research, have shared their insights on the current market situation.
The Threat of Monetary Policy and Fiscal Policies
According to Kupperman and Gave, easy monetary policy and generous fiscal policies may work against markets. Kupperman has warned of the possibility of 6% Treasury yield, a level at which "most risk assets blow up." He emphasizes on valuing assets based on the 10-year Treasury yield, which has seemingly broken through the 4% mark.
Asset Preference for Protection
Kupperman has expressed his bullish stance on hard assets that are priced below their production cost and have a significant cash flow. These include uranium, offshore energy, and land. He believes these assets do not necessarily rely on the economy’s performance. He further suggests that the fiscal policy is likely to remain stimulative, but warns of a scenario where the 10-year Treasury yield skyrockets, and the fiscal policy is insufficient to counterbalance it.
Energy: The New Anti-Fragile Asset Class
Gave, on the other hand, has highlighted energy as an asset class that has remained resilient against several geopolitical and economic concerns. He argues that energy has become the new "anti-fragile asset class" that can diversify portfolios. He further anticipates that many quantitative models will soon recognize the benefits of energy investments as a diversifier. However, he and Kupperman are not merely seeking a 20% gain, but are aiming for a 300% return.
Investing in Energy
Kupperman mentions that his preferred energy investments meet the criteria of being significantly undervalued for decades. He owns energy services companies due to their low equipment replacement costs, absence of debt, and significant cash reserves.
With oil prices continuing to surge, and the dollar under pressure, market futures are experiencing a downturn. Chevron CEO Mike Wirth has predicted that oil could hit $100 a barrel. German bund yields are approaching a 12-year high following an ECB official’s statement about the need for sustained record-level rates.
In an environment of market volatility, diversifying portfolios with hard assets and energy investments could be a viable strategy. The insights of seasoned money managers like Kupperman and Gave suggest that these investments can weather economic uncertainties and yield substantial returns. However, these strategies are not without risks and should be approached with caution and in-depth analysis.