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Amrita Roy and Rob Isbitts are both bullish on gold and T-bills (0:25). Inflationary and deflationary tug of war, macro volatility and central banks piling into gold (1:25). Why liquidity is the glue that drives everything forward (5:00). This is an abridged conversation from a recent Investing Experts podcast.
Transcript
Rob Isbitts: Amrita Roy, you write about two of the most popular investing topics of our time, I think, macro market analysis and tech stocks. Your bottom line right now is you’re bullish on T-bills, hey, me too, and gold.
And although when it comes to gold, I have to say, it’s been a necessary evil for me over the years. So I’m really interested in hearing what you say about that. But what is top of mind for you right now?
Amrita Roy: Sure. Today, I think I’ll focus most of my conversation on more of the defensives in my portfolio, which one of them you mentioned is T-bills, given its risk-free rate of 5.25% makes perfect sense from a cash allocation standpoint, which earns risk-free interest.
And the second thing is gold. Like you said, it’s a necessary evil, but we are at a very interesting macro volatility environment right now where there’s really a tug of war between inflationary and deflationary forces.
And my bull case with gold over the long-term essentially is that gold has sniffed out the dynamic that the Fed’s 2% inflation rate may not be that achievable under the kind of macroeconomic indicators that we are currently getting.
RI: You are a macro strategist. You and I share that. Tell us what is in the hopper for you right now.
AR: Sure. So, like I said before, we are living in very interesting times when it comes to the overall macroeconomic environment. There’s really a tug of war between the inflationary and deflationary forces at the moment. We are in a fiscal dominant era with government deficits on the rise, and there is just a growing divergence between the haves and the have-nots.
And it’s just not about even individual consumers, you can see that among companies as well. The growing divergences between companies that have pricing power and companies that are just struggling to even meet their financing requirements. So this is actually creating a really sort of a stock picker’s environment.
So a couple of things. So to tie back to what I had said earlier in my previous podcast, I had talked about companies that actually will stand to benefit from this whole macroeconomic environment, which are driving their product innovations through AI, for example, and seeing deeper adoption in their platform spend, leading to higher margins, leading to better operating performances.
And those companies I had mentioned were the ones that are focused – that are specifically around industries such as cybersecurity or DevSec or even certain kinds of consumer tech companies.
But today, I want to focus, as I said, more on the defensive side, which is on the T-bills and gold, which I think are very interesting. So to take a step back, I’m a technological optimist. But at the same time, in this macro environment, I think it makes sense to be a Pragmatic Optimist first, in order to make sure that you have a portfolio that is balanced.
So when it comes to gold, gold is at a very interesting point in time, because there are two things that are happening that is making the case for gold. One is macro volatility, and the second is that central banks around the world are piling into gold.
When it comes to the macro volatility, we are seeing this very interesting thing where gold is moving in line with the 10-year real treasury bond yield. That is a little bit strange, but not strange at the same time, given sort of the era that we are in.
Essentially, when gold is going up in line with the 10-year treasury yield, it ultimately kind of means that the gold has already sensed out that, or in other words, it doesn’t believe that the Fed is going to meet its 2% inflation target, given the kind of hot CPI prints we are getting three months in a row and the repricing in interest rate futures at the moment, which is just pricing in two rate cuts.
So given this dynamic, I believe that along with the fact that that central banks are also pouring in into gold to manage their FX better or to improve their quality of FX, I think, gold has a real case at the moment for a long-term bull run in this macro environment, where also certain kinds of technology stocks will also stand to benefit at the same time. Interesting times, I know.
RI: So let me get this straight, Amrita. All that chatter about six or seven Fed rate cuts this year and all that happy talk and inflation’s gone for good and the Fed got it right and all that stuff, that was just another cyclical round of mainstream Wall Street, big firms with big voices, telling us happy talk, so that we would buy more stuff?
AR: Great point. I think when optimism starts to come, everybody gets very, very optimistic. Like I said, even in the previous podcast that I don’t, like I see S&P 500 continuing to chug along in the previous month, which it did for another 100 or so points because there was really no catalyst at that time given that Q4 earnings were over for S&P 500 to suddenly say, oh my God, I’m going to start to price in a hard landing scenario.
It was getting good earnings, like companies were presenting strong earnings projections; and B, we were also seeing inflation sort of steadying out, declining at the same time. But I think when markets start to freak, everyone starts to freak. So that is what is currently happening.
A couple of things, I think we often tend to forget what kind of a big fiscal dominant era that we are in, which is inherently inflationary.
And the second part is that end of last year, when the Fed almost sort of didn’t declare, but indicated that the inflation fight was more or less over that it had conquered inflation, the bond market sort of almost declared victory, which is exactly why the interest rate futures were pricing in way more rate cuts, I think, six to eight, way more than the Fed’s three rate cut projections.
This inherently loosened financial conditions and probably one of the main drivers of why we are seeing the CPI print coming hot once again for three months in a row at the moment.
But my thinking is that the bond market is currently doing most of the work by retightening once again. And we may once again see sort of inflation start to come down again, hoping that nothing breaks in the banking or in the treasury market, because liquidity is ultimately the glue that drives everything forward.
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