Late cycle investment ideas


This has become a mantra that the bull market will not die in old age. They ended in a recession. When we sit today, few see the downturn on the horizon. The International Monetary Fund even said that the world is experiencing “the largest synchronized growth in the world since 2010.” They expect global economic growth this year and next will be as high as 3.9%.

In the United States, the most aggressive commercial government has been helping positive economic momentum since the 1920s. Large-scale corporate tax cuts and reduced regulation of businesses are helping to arouse animalism. As the market continues to hit new heights, the value of your portfolio continues to improve, enjoying and cherishing this moment. Bull should be such a feeling. It is as good as it gets!

In the context of investment life, this era is short and scarce. They always follow the volatile and scary markets. As one of the great investors of the twentieth century, John Templeton should now be most worried about your investment.
People can only guess when the bull market will end. Maybe everyone is focusing on the wrong thing. Will the next recession be caused by the recession? Maybe the financial market will be out of the real economy? Maybe China will eventually have “Minsky moment” won the global economy? This is anyone’s guess.

Now how to do? Thinking about what happens next and how to position it, taking into account our position in the business cycle is a good starting point. I do not know whether it is in the seventh or ninth inning, but I happen to believe we have entered a later stage.
If you agree, the observation by DoubleLine’s Jeffrey Gundlach is particularly noteworthy. He said every recession in the past half-century has preceded the soaring prices of commodities such as oil, metals and wheat. He also believes that commodities are “cheap” at the moment and that the performance of commodities and stocks has been consistent for many years.

As a working concept, this theme is complicated. Commodities are considered speculative as the transaction involves leverage. They do not generate revenue, and unlike free-cash-generating stocks, the value of the good does not change over time. This is the result of zero-sum effort and the reason why commodities like wheat are about the same as in 1980.

If trading a commodity contract is not a problem, and for most investors there are other ways to reach out to the commodity. For example, having an oil company like ExxonMobil or an agricultural company like Archer Daniels Midland, or a gold mine like Barrick Gold, gives you an indirect exposure. This is the path taken by many investors.

The problem with this approach is that you run the risk of a correct assertion, but it is the wrong way to execute the essay. In fact, the management of these types of companies often responds to the dynamics of supply and demand. Many companies use the cash flow generated from good times to increase capacity (buy highs) and to discard assets when the cycle is unfavorable (sell-off). This undermines the shareholder value.

One way to gain access to goods without leverage is through a debt-free royalty and royalties company that does not need to worry about the value-crunching management team. Many of them pay for their income.

The royal family believes that they have the right to produce and sell natural resources. In public transactions, they typically benefit from a low-cost structure due to their small management team. Occasionally “employees” consist of only one law firm and manage the terms of trust. The manager in turn keeps the label of the hiring production company drawing resources and passes any profits to the trustholders.

The royalties trust is like having a production well in your backyard. If it is debt-free and permanent, you may not get any income from it at low prices, but you know that assets will not “disappear” in the hands of creditors. During the high price period, revenue above the cost of mining will be net profit. Two examples include Perm Basin Right Trust (PBT) and Sabin Trust (SBR).

The Permian Basin Royal Trust owns and controls the mineral rights of properties in the center of the Permian Basin, an ancient sedimentary strata spanning the western Texas border and southeastern New Mexico. Oil was first put into production in the 1920s.


Please enter your comment!
Please enter your name here