It’s not very often Money Morning editor Kris Sayce has time for a chat. Luckily for us, he kindly agreed to sit down and reflect on the year that’s been and the one that’s coming.
If you’ve read Money Morning for a while, you’ll know Kris doesn’t hold back.
So if you’d like to hear what your editor has to say about the state of play in the Aussie market, exciting opportunities in 2013 and even a few words for some old foes – take a look below…
Callum Newman: For new Money Morning readers: Why are you so critical of central banking?
Kris Sayce: I’ve made my case about this in Money Morning over the past four years. It’s quite simple: central banks are arch-market manipulators.
The board members of the Reserve Bank of Australia have the crazy idea that they can fine-tune an economy. They believe all they need to do is raise rates or cut rates and they can influence how people and the economy behave.
The fact is they can’t.
No one can micro-manage an economy to influence the actions of 20 million people. The Soviets tried to do it and failed. And right now the North Koreans, Cubans, Venezuelans and Chinese are trying to micro-manage their economies.
Given time, they’ll all fail too.
That’s right, even China. That’s despite comments from GE CEO, Jeffrey Immelt, who like many so-called capitalists, believes China is the model economy.
He told Bloomberg, ‘The one thing that actually works, state run communism […] may not be your cup of tea, but their government works.’
But if you read history, you’ll know that during the 1930s, many in the West thought the Russians were on to something with their economic planning. The US and other nations even sent delegations to learn from the Russians.
They reported back about the remarkable progress in the Soviet Union…without mentioning the Stalinist purges.
It took several decades, but eventually the Soviet Union collapsed. What does this have to do with central banks?
The actions of central banks are no different to the Soviet Union. It’s all about a small group of central planners believing they can pull levers and push buttons to steer an economy in their chosen direction.
In short, every time you hear the word ‘central banks’, just replace it with ‘central planning communists’. Don’t let their pin-striped suits fool you into thinking they’re capitalists.
They’re about as capitalist as I am the Pope!
Callum Newman: Gold has gone mostly gone sideways this year. What are your thoughts on gold in 2013?
Kris Sayce: Look, I’m not a gold expert. I can’t tell you why gold does or doesn’t go up on any given day. But what I do know is this: there’s a lot of manipulation going on with the gold and silver price. Again, it comes back to central planning communists (central banks).
Let me put it this way. The battle between central banks and gold is like a boxing match. They’re in opposing corners. Central banks can’t allow the gold price to rise too high because they know that the gold price reflects the devaluation of paper currencies.
The central banks were happy for gold to rise when the stock market went up during the 2000s. After keeping the price down for years, they happily released the spigot. Why? Because when stocks soared few people cared about gold.
But since 2008 more and more people have become aware of the destruction caused by the central planning communists.
The game is up.
The gold price has gone up, but now rather than allowing it to go higher, the central banks are determined to keep a lid on the price for fear that even more people will grasp how central planning communists are destroying wealth through inflation.
Eventually they’ll have no choice but to loosen the spigot again. I don’t know if that will happen next year, the year after or later. But I know it will happen, and that’s why I continue to add to my gold position, and suggest other people do too.
Callum Newman: What do you expect from the Aussie dollar next year? Why?
Kris Sayce: Many investors now view the Aussie dollar as a ‘reserve’ currency. Due to the government’s relatively low debt levels and the size of Australia’s resources base, it’s considered a safe option.
But stop and think about it. As I wrote in Money Morning a couple of weeks ago, Aussie debt is now up to $259 billion, and the government is running a budget deficit. Add to that the issues surrounding the slowing Chinese economy.
In short, the Aussie dollar will only be strong for as long as investors believe the government won’t go further into debt…and that the Chinese economy won’t collapse.
But right now I see many analysts making the same mistakes about the Australian government finances and the nation’s natural resources, as they made about Aussie resources stocks and natural resources five years ago.
Leading up to 2008 many people thought that mining stocks wouldn’t fall because those stocks had millions and billions of dollars-worth of resources in the ground. But what they didn’t realise is that a resource in the ground isn’t the same as a resource above ground.
Digging stuff out of the ground is expensive. And unfortunately, most mining firms don’t have cash at the ready. A small mining company could have a huge resource in the ground, but if they can’t afford to dig it up, it’s almost worthless to them.
In 2008 those mining stocks needed to raise a lot of cash in order to recover the resources. But when credit markets froze, it didn’t matter how much was in the ground; share prices fell through the floor.
The Australian government faces the same problem.
If China continues to prop up its economy and Aussie government debt remains low by international comparison, then the Aussie will stay high.
But when things go wrong, don’t be surprised to see the Aussie head south…and fast.
Callum Newman: Are you still bearish on Aussie property?
Kris Sayce: Yes. Next question!
Only kidding. To be honest, I’ve stopped paying much attention to Aussie property prices. I proved that the property spruikers were wrong when they said house prices couldn’t fall.
I also proved that house prices don’t double every seven years.
And to various degrees the price slump is progressing as expected. In Queensland and Western Australia it has been a rapid slump. Elsewhere (especially in Melbourne) it’s a slow death.
In the Northern Territory however, reports suggest that prices have taken off on the back of the resources rebound. But before the spruikers get too excited I’ll make one point.
Buying an investment property in the Northern Territory is like buying a small-cap stock. The price can take off quickly, but it can collapse just as quickly.
When you’re punting just a few thousand dollars in small-caps, that’s fine. You can cope with that volatility, and it’s easy to sell if things go wrong.
But property investors don’t have that luxury. The Northern Territory is a limited market, and the resources influence is just a flash in the pan. If you can get in and get out quickly then you may do OK.
But if you borrowed $500,000 to buy an investment property in the middle of nowhere, try getting out of that with less than a six-figure loss when NT house prices collapse.
In short, housing is still a bad investment. If you want to buy a house to live in, or a holiday home, go for it. But in both cases don’t assume you’ll make a profit. Housing is going back to what it has been for most of history, and that is an expensive consumption item.
Invest in housing at your peril.
Callum Newman: Did 2012 pan out as you expected?
Kris Sayce: In short, no. I didn’t foresee the size of the slump in risky assets. I expected something to happen. I expected a volatile market (as you’d know if you came to the Daily Reckoning Doomers’ Ball last year) but not this.
Fortunately, thanks to the asset allocation strategy I recommended at the end of last year, investors who spread their savings across cash, precious metals, and dividend paying stocks will have done fine.
But investors who kept their money in growth assets most probably haven’t done as well.
The market has been super-volatile all year and I’ll bet that most investors haven’t benefited from the marginal rise in stock prices. Many would have sold their stocks as share prices slumped during the year.
On the flip side, I’m banking on growth assets (especially small-cap stocks) to rebound in 2013.
Callum Newman: What was your investment strategy this year?
Kris Sayce: This year I used the same idea I’ll use again in 2013 – buying beaten-down stocks. I’ve done this in Australian Small-Cap Investigator, and of course I recommended five beaten-down blue-chip stocks in Money Morning: Harvey Norman, Qantas, JB Hi-Fi, Toll Holdings and Myer.
So far this strategy has worked well. And with the sheer number of stocks that have fallen this year there are still plenty of beaten-down stocks.
A classic example of how far stocks have been beaten-down are the two stocks I tipped in the November issue of Australian Small-Cap Investigator.
In terms of the size of their brand in the Aussie market, these stocks are blue-chip. But if you look at the share price and market cap, they fit right in with most of the high-risk small-cap stocks I look at.
It’s not unusual to see once great companies fall off the perch. Times change and sometimes it’s hard for companies to keep up.
The fall of Eastman Kodak in the US is just one example. It had a proud history and went from being one of the world’s biggest camera and film companies, to a company that quickly went bust.
Of course there’s no guarantee that won’t happen with the beaten-down stocks I’ve tipped this year. But with the stocks trading at bargain prices, almost all the downside risk is already priced into the stocks.
In fact, there’s so much bad news built in, I believe these ‘blue-chip’ stocks could pack in nearly a 200% gain next year.
Callum Newman: Explain your strategy for investing in 2013?
Kris Sayce: As I mentioned before, my 2013 strategy will be similar to this year’s strategy.
Let me show you a chart:
The blue line is the Aussie financial stocks index. Since the middle of this year, prices have taken off…they’re up about 20%.
Compare that to the performance of small-cap stocks. Since March, small-caps have dropped about 30%. And this doesn’t even take into account all the beaten-down blue-chip and mid-cap stocks.
So when I see a chart that has fallen that much it makes me more convinced that there are great opportunities in small-cap stocks.
But exactly where will I look for those opportunities? I still believe the technology and online media sectors will be the best performers next year.
I’ve already tipped seven stocks in this category and will look for other stocks to add to the buy list.
The key driver for this sector in the short-term is the National Broadband Network (NBN). Whether you agree with the NBN or not, it will have a huge impact on how consumers and businesses interact with each other.
That’s why I’ve backed internet and technology stocks since 2011, and it’s why I’ll continue to back them next year.
Callum Newman: If it’s true that the mining boom is over, which – if any – resource stocks are still worth investing in?
Kris Sayce: I leave the in-depth fundamental analysis on resource stocks to my old pal, Dr Alex Cowie. When I look at resource stocks I’m always thinking about getting the biggest bang for my buck.
That usually means buying a resource stock that’s out of favour or not even on the map of most investors.
I’ve done this before with rare earths stocks in 2008 and again in 2010. I did the same with natural gas stocks through 2009.
Over the past two years I’ve backed energy stocks again. And since 2011 I’ve jumped on the technology bandwagon.
But next year I’ll look at resource stocks too.
The areas I’ll look at are those stocks that have taken the biggest beating this year. Commodities such as iron ore, copper and uranium are at the front of my thoughts right now.
Callum Newman: Thanks for your time, Kris.
Kris Sayce: My pleasure.
Publisher’s note: Editor Kris Sayce has delved into the history books to discover how a ‘Big Money Secret’ made one ordinary Aussie bloke richer than Kerry Packer, Andrew Forrest and Gina Rinehart combined. Not once…but TWICE. Now the force behind one of the world’s largest family fortunes could make 2013 a prosperous year for you. To hear more about Kris’s big money discovery, go here.