‘Trader Vic’: Global Liquidity Inflating Stocks

March 22, 2013

HAI: How would you describe the correlation between commodities and stocks today, say, compared to two or three years ago? Has that changed much?

Trader Vic: That correlation is now beginning to change materially. Last year, the Dow Jones-UBS Commodity Index, which is usually looked at as a benchmark, was down. And it was down the year before. Meanwhile, stocks were fractionally up the year before, and last year they were up significantly in many cases. So the correlation is changing.

What’s the reason for that? Commodities are demand-driven. The primary demand-driven entity is China, which has been in a bear market if you look at the Shanghai composite since June of 2009. And China has some major problems that are not really being seen. India has also slowed. China and India are the primary demand drivers of commodities. So that’s a major underlying factor of why commodities are underperforming.

Main Street in America is being very frugal, and two of the most populous countries are in a slowdown. That is part of the demand structure, whereas stocks are different. Stocks are not necessarily demand-driven. Look at corporate America. The top-line growth in this whole recovery compounds in an aggregate of about 3 percent a year. All the returns come from firing people, from reducing costs, from tax benefits. We’re only collecting 15 percent of GDP in taxes, where historically it was 18 percent in round numbers. It’s lower because of the tax credits, mainly to corporate America.

Corporate America is getting a benefit. They give political contributions, and individuals generally don’t, not to the same degree.

HAI: Should every investor have commodities as part of their portfolio?

Trader Vic: Absolutely, no matter what the current conditions are today. The point is that nobody knows the future for sure. We can all guess and speculate. The whole point of what Harry Markowitz sold in 1952 to Milton Friedman when he presented his doctoral thesis on portfolio management was diversification.

You should have 5 percent of your portfolio in commodities. I would have probably a little higher percentage, such as 5 percent commodities and 5 percent gold and silver.

To not have commodities in your portfolio because they're not acting well now is like saying, “Well, I'm going to pick and choose in the S&P 500. And the stocks that are not going up, I'm going to sell them.” Well, the stocks that are going down are the ones that will go up in the future, and vice versa. Look at Apple. The key is to try to massage the allocation in terms of quantity.

HAI: What are some of the mistakes you see in commodity investing?

Trader Vic: Buying high and selling low. When commodities are down—and this would be the third year they would be down—you want to look to add to your allocation. You should be looking to add to that portfolio, not subtract from it, because commodities are cyclical. They’ve always been cyclical, and they always will be cyclical.


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