Dennis Gartman is about as raging a bull as you can find these days. At a time when many investors remain beaten down in the volatile “risk-on/risk-off” aftermath of the crash of 2008, and uncertain about how high taxes will go in 2013, the editor of The Gartman Letter looks at rising crude and natural gas production in the U.S. and sees the makings of the most promising economic circumstances in a long time.
Gartman told IndexUniverse.com Managing Editor Olly Ludwig that he’s not exactly pleased about President Obama’s re-election, but that doesn’t mean he’s wallowing in pessimism about the goings on in Washington, D.C. He reckons that while it may take time and great effort, Democrats and Republicans will do the right thing and cut spending, even as the “leftist” president goes ahead and raises taxes on the wealthiest Americans.
In all his optimism, Gartman is also bullish on gold, but not in the way you might expect. He’s not buying gold because he thinks the economy is going to the dogs and that the Federal Reserve is unhinged. Rather, he says that Ben Bernanke’s Fed is doing a fine job, and that investors should buy gold with a weakening Japanese yen. What’s more, Gartman even has his name on a quartet of funds now in registration that will allow investors to own gold in yen, British pounds and euros.
Ludwig: Could gold end lower this year?
Gartman: No. It ended last year at $1,566 an ounce. The odds of it closing unchanged on the year, I think, are zero.
Ludwig: I ask because you don’t see gold going through the roof these days, in spite of what the Fed is doing to keep bond yields so low. It has been falling and is now around $1,700.
Gartman: Well, the Fed is buying $40 billion to $45 billion worth of securities every month, but we forget that they're also allowing about $35 billion to $40 billion—if not more—to mature off on the back end. So the monetary base has actually not grown at all in the course of the last year.
Ludwig: So what is your general overview of how the Fed is performing?
Gartman: I think the Fed has done yeomen’s work since the autumn of 2008. Publicly, they're very clear about buying securities on a regular basis; privately, they're circumspect and quiet about allowing them to mature off. I think they have expanded all that they’ve wanted to. And I think they have done the right thing heretofore.
Ludwig: How might the Fed slowly extricate itself without causing some kind of a crash in the market because of a quick hike up in rates and what have you? I’m guessing you don’t buy that some nightmare scenario will happen.
Gartman: No, I just disagree completely with the nightmare scenario. I’ve only been in the markets for 40 years but I've heard nightmare scenarios for every one of those years. But the worst fears never seem to come to fruition. The better hopes almost always seem to come to fruition. And perhaps I'm naive in that respect. But those who have bet upon collapse have made very bad bets for a protracted period of time.
I think that the Fed has said that they intend to keep the overnight Fed funds rate low for a long period of time—into 2015. It’s probably ill-advised, but I'm not surprised that they’ve made that statement.
Gartman (cont'd.): You have to remember who the Fed’s constituents are. The Fed’s constituents are the nation’s middle to small banks. That’s who the Fed is concerned with. And the Fed knows that the best it can do is to make certain that the banking system remains liquid, solvent and lending.
And it also knows that the best thing it can do is keep the yield curve positively sloped. I think, probably by late 2013, we’ll start to see even the short end of the curve begin to move quietly higher. And the Fed has every intention of making sure the slope of the yield curve is positive, will be even more positive and remains highly positive years into the future.
Ludwig: So let’s circle back to gold for a moment.
Gartman: Gold has been under some pressure for the past several months as people have begun to understand that the Fed is not as violently expansionary as they had been previously. I think it’s a very crucial piece. And let’s be very clear: I'm bullish on gold—not in dollar terms; I'm bullish of gold in yen terms. And I want to make sure everybody understands that.
Ludwig: Right—I wanted to get to that and to these AdvisorShares products with your name on them that are in registration. But first, can you comment a little about what’s going on with the “fiscal cliff” and the broader fiscal picture in the U.S.?
Gartman: Well, I don’t think it takes wisdom to understand that we have a spending problem, not a taxation problem. The Republicans have a problem because the president won the election. And the Republicans did not take control of the Senate as they had hoped. The president won, dismaying though that may be. And he is going to make sure that, in order to keep his left intact, taxes will go higher.
Are there going to be increases in taxation on the millionaires and billionaires who earn more than $250,000 a year? No, that’s not going to happen. But he has to have something, and he’ll get an increase in taxes to the old pre-Bush levels, probably on incomes above $500,000, and more than likely on incomes of more than $1 million. He’ll win on that point.
But, I do think that the public is angry enough, and suspicious enough, and dismayed enough—and probably aware enough—that we really have a spending problem. Maybe I am naive, but I suspect there is enough power within Congress after the turn of the year to really get down and do something along the lines of the Simpson-Bowles plan.
Social Security is going to be extended. There's going to have to be an increase in the age limit. And we’re living so much longer nowadays, we have to allow people to retire later or take Social Security at a later date.
I really think that after the turn of the year—not before the turn of the year—there will be debates in Congress. The debates will be long and they’ll be arduous. But I think that wisdom will finally eventually prevail. Call me naive. Call me optimistic. Call me what you will. But I think the country is prepared for that sort of thing.
Ludwig: So you're kind of framing it all in terms similar to what your general observation was about the sky not falling—you're not inclined to say that Washington is hopelessly messed up? Instead, you're inclined to say that, at the end of the day, Congress will implement tangible policies that are clearly moving in the right direction, even though you are dismayed that the president was re-elected.
Ludwig: OK. Let’s talk about oil prices for a moment. There was a recent Wall Street Journal article talking about the potential for the bottom to fall out next year. Do you agree that prices are about to fall precipitously?
Gartman: I am of the mind that we’ll never see $40 a barrel; and we’re out of $50 WTI and probably out of $60 WTI. I doubt, however, that we’re out of $70 WTI.
The issue is that people are not paying attention to what is happening here in the United States. The lunacy of those who believed in peak oil has at least gone by the wayside. There was no such thing as peak oil. We are finding more crude oil every single day in an amazing fashion, through the use of better technology. So there is a surfeit of crude oil around.
Take a look at West Texas Intermediate crude’s term structure. That term structure is in a huge contango—when the nearby futures are at a discount to the deferred; and each futures contract further out is at a premium. That’s how term structures function when there is a lot of supply and demand is reasonable.
It is astonishing what we've done in the United States. If we consider Canada as being all one unit of North America, it’s only a matter of a year or two before we are net exporters of energy. And Canada is going to continue to be our largest supplier of crude oil.
So, when the president stands in front of the crowds and says, “We need to end our dependence on Middle Eastern crude,” I raise my hand and say, “Hey, we did that five years ago. We are not dependent upon Middle Eastern crude. We are dependent upon Canadian crude. And we’re less and less dependent upon that with each passing day.” So, am I bullish in the crude oil market? No, except for untoward political circumstances that may develop from time to time in the Persian Gulf, I don’t see anything that helps crude oil at all.
Ludwig: Now, if the price of oil does drop, that’s going to be pretty stimulative to the economy, no?
Gartman: Oh, my word, yes! America’s corporate structure is as liquid as it has been in my lifetime, and American consumers are far more liquid than they have been in quite a while—even if much of that has been because of forgiveness of debt on mortgage. But, if we can get corporate money to come back from offshore, and address the uncertainty regarding the fiscal cliff, and let cheaper crude oil come into effect, we could have the strongest economy we’ve seen in a long period of time, despite the fact that we have a leftist president.
Ludwig: Let’s segue back to your particular focus on gold priced in yen. I'm mindful that these AdvisorShares products are in registration, and so you may have a limited capacity to speak about them. But let’s talk about the concept.
Gartman: OK. First of all, I come to the gold market with the concept that it is nothing more than another currency. I am not a gold bug. I don’t think the world is coming to an end. I am bullish on gold, but not because of dismaying circumstances prevailing in the Fed. I think that gold is simply nothing more than another reservable currency. So, just as you can buy yen and sell euros; just as you can buy euros and sell Swiss francs; just as you can buy Canadian dollar and sell sterling; and just as you can buy sterling and sell yen, you can buy or sell gold in all those other currencies.
Ludwig: So, for that to make sense, you need to have a very clear trend. Are we talking, for example, about yen weakness here? So, therefore, the price of gold could go through the roof, relative to a weakening yen?
Gartman: Yes. What you have is an election coming up this coming weekend that is likely to be won by Mr. Abe, who has made it abundantly clear that he expects the Bank of Japan to get on the stick and expand the supply of yen in an unlimited fashion. That’s an interesting term. He wants the Bank of Japan to supply an unlimited amount of Japanese yen in order to get Japan out of its deflation and into at least an inflation of 1 to 2 percent. That may not sound like much, but the deflation has been so intractable in Japan over the course of the last two decades that it may take an unlimited amount of yen to accomplish that task.
If he accomplishes it, the intention alone is probably enough to say, “All things being otherwise equal, do you wish to be long on the yen if the Bank of Japan is going to be printing it in unlimited terms? And, if not, what other currency might you wish to own?” Well, I’d rather own gold. But I think that means that buying gold in yen terms is the reasonable and proper trade.
If you look at a chart of gold in yen terms, over the course of the last several months, those of you who own gold in dollar terms, you ain’t feeling so good. Those of you who own gold in euro terms are feeling better than somebody who’s owned it in dollar terms. But you're not feeling that good. If you’ve owned gold in yen terms, you're feeling right sporty, thank you very much. And corrections have been quieter. Each low in gold and yen terms has been progressively higher. Each high in gold and yen terms has been progressively higher. I'm not that smart. But I want to buy things where each low is higher and each high is higher.
Ludwig: Now these AdvisorShares ETF in registration are basically giving you gold access through the lens of the particular currency that you choose to emphasize. You're saying, at this juncture, it’s the yen one that you want to look at. But, longer term, there will be a range of products for gold investors to fully exploit the opportunity out there.
Gartman: That is correct. And, given the fact that it’s in registration, I shall shut up now.
Ludwig: I respect that. Now, your optimism about the U.S. economy is really quite striking at a time when people remain in a funk. Talk to me about the texture of your optimism, and what is very prospective out there in the investment universe.
Gartman: Well, this will sound peculiar, but I think one of the best things that happened to the U.S. in the last 40 years was the collapse in housing prices. I think that’s very good for us. Why? Housing never should have been seen as an investment. Your house, as I like to say, keeps the rain off, and nothing more. And we have far too many people who have bought far too many houses, and far too many condominiums, who shouldn’t have, who had been given the ability to borrow far too much money. And we had an economy that, for a decade, was built upon building. And capital didn’t make its way into where it should have gone, into real plants and equipment and labor.
So money is going to find its way to where it should—into plants and equipment. That’s beneficial. The fact that the U.S. is going to be ostensibly energy self-sufficient is as powerfully bullish as anything you can imagine. The fact that corporate balance sheets are in as good a shape as they have been in my lifetime is powerfully bullish. And yes, the psychology is rather overwhelmingly nasty. That will change. It does. Anybody who has bet against the U.S. in the last 200 years has made a very bad bet.
Once the economy turns better, and people begin to understand the implications of energy self-sufficiency, we’ll go out and propagate ourselves again like mad men, which is a darn good thing.
Ludwig: The bullishness you described is so generalized that you seem to be saying that whether you favor index funds or individual stocks, it’s all the same thing.
Gartman: Go buy it.
Ludwig: So that is what you're saying?
Gartman: Absolutely. Go buy it.
Be careful when making fruit-basket comparisons; you’re likely to come up with lemons.
Movers and shakers in the ETF world are often just the opposite.
With the S&P 500 topping 2,000, it’s worth understanding how you ended up in the wrong large-cap ETF.
Pimco is going back to what it does best—generating alpha through fixed-income exposure.