As the economy recovers, consumers are likely to rotate spending out of retail items and into other, bigger discretionary purchases, like vacations, said Gareth Soloway, chief market strategist at InTheMoney Stocks.
The equities markets are having another rough start to the week. The S and P 500 is down 0.8%. The Dow Jones is down more than 1%. The NASDAQ is also down. Gareth Solloway is joining us today. He is a chief market strategist at, in the money stocks. Gareth. Welcome back. Hey, thanks so much for having me again, David.
Thank you. You were seeing a interesting price action. So again, stocks are down. Gold is also down, but not a lot. You'd expect normally you'd expect gold to hedge against such movements, but 2020 has been unpredictable for everything. So what are you, how are you reading that? Yeah, so to me it seems like as we come into the end of November, that the markets are likely.
Going to have a weaker December and just to quickly frame this, and then we'll talk about gold, but basically you have a scenario where we've had a blockbuster in November and a lot of stocks are at all time highs or close to all time highs, even with what's going on with COVID. So you have this big election coming up in early January.
Now, normally the election results are all decided by the end of 2020. But we have this special election, which will decide who takes control of the Senate. Republicans are favored heavily, but the thing is here is that you have many multi-million even billionaire investors with tens of millions in gains long-term capital gains.
And the reason you could see selling in December is simply that. These long-term cap gains, which are currently at the 15% tax rate. If the Democrats were to somehow squeak out a victory for both Senate seats and take control of the Senate, you would likely have a doubling of that long-term capital gains tax come 2021.
So it's really Russian roulette for all of these people with big, big gains. Do you want to risk it, or do you want to sell your positions into the end of the year, guarantee yourself that long-term cap gains tax. That's currently in there, and then you can always rebuy the positions 30 days later.
Remember, that's the rule you sell and you just have to wait 30 days to rebuy and you don't have to risk paying double the tax on long-term capital gains. So. If I was someone and I'm a much shorter term trader. So I, most of my gains are short-term capital gains taxes, but if I was a long-term cap gains person with, you know, 10 or 20 or 50 million in taxes, I there's no way I would risk paying that doubling of a tax rate in 2021 on those gains.
So my guess is you'll see weakness there in the markets into year end. Everyone always assumes a Santa Claus rally. I'm not necessarily in that camp. What is a Santa Claus rally Gareth? Santa Claus rally is really, you know, everyone gets jolly and everyone's feeling great and you know, that's really what it is, you know?
So the markets tend to kind of float up into the end of the year. Um, it's usually what happens, but we've seen certain instances like in 2018, where that didn't happen. Um, in 2018, the federal reserve started to kind of hint at raising rates and the market through a major hissy fit. And the, you know, the S and P and the NASDAQ collapsed close to 20% in just six weeks.
Okay. All right. So, um, we're going to talk about charts and price action in just a minute, but I love talking MACRA with you. So we're going to start with that for now. So rotation out of the stocks is what you're saying into December because of an possible increase in capital gains taxes. Okay. That makes sense.
Federal reserve, monetary policy. Let's talk about that. How do you feel about Jetta Yellen being nominated for the treasury? Um, I think it's the safe choice. It's the choice that gets more money into the economy. I also think it's a long-term detriment to the economy and to the U S uh, you have a federal reserve that arguably has printed money.
Every time there has been any sort of bubble or creation of bubble, you could say the federal reserve is actually the culprit behind it. If you look at the late nineties with the tech bubble, uh, after that, they started to lower interest rates and put in easy lending practices. Which enabled the housing market bubble.
And then we know what happened with that one. And then now they've done it 10 fold ever since that crisis leading into COVID and print it even more money, push more money into the economy. Their balance sheet has expanded trillions and trillions of dollars this year alone. Um, and Janet Yellen's fed chair.
She's a former fed chair. So you have the federal reserve on one side of the government and arguably the federal reserve on the other side of the government now, which is going to mean more and more money. So it's, it's kind of. Short-term it, the market's probably like it. And I think we did see a rally when her name was first floated, but longer term.
I really fear for the, the dollar. I really fear for the economic situation. Longer-term with inflation. So yeah, Gareth let's talk about inflation. The last time we had quantitative easing, well, several rounds of QA throughout the last decade. Money supply increased dramatically over the last 10 years. So if you look at the empty money stock, which is what we're seeing now in 2009, the money stock was about 8.4 trillion.
Dollars right before the start of the pandemic this year. So before a limited QE this year, it was already at 15 trillion. So that's almost a doubling of the money supply over the last 10 years. Now, inflation has not risen exponentially. If you look at a year over year inflation rates in the U S they've hovered around 0.7, 2%, 3% in one year in 2011, but nothing more than that.
The, the expectation here from economists is that a limited QE is going to create really high levels of inflation, but that hasn't happened last time in the last 10 years, has it. No, it hasn't. Um, the one thing to keep in mind with is that it's usually a big lagging factor. So especially when you have what we just went through with COVID and what we're still going through with COVID, you've seen people hoarding money.
The savings rate has jumped. Uh, anytime you get this scenario where people are, are more concerned about their livelihood, their jobs, uh, the economy, people are going to put money away and not necessarily start buying things, Willy nilly. So. That creates a scenario where inflation in the short term stays muted, but longer term, it is going to.
Bubble up. There's no way you can just print unlimited amounts of money, trillions and trillions and trillions a year and not expect that inflation will bubble up. And the one thing of interest here is that if you look at the gold consolidation period, so if you go back to 19, 1979, when we hit $875 on gold per ounce, there was a 30 year consolidation period before we took out those highs in 2008.
Right? And now, if you look at the most recent high in 2011, just over 1900, it only took us. And this was in 2008, about 10 to 11, maybe 12 years to get back to those high. So notice the 30 year. Amount of time that it took versus just about 10 to 11 years. And that's what we should be paying attention to.
That's the expansion of that's driving gold up much, much higher than, uh, what happened in this, in the seventies and eighties inflation. You said it wouldn't bubble up? Uh, well it would bubble up. Because of this expansion of the money supply. Well, I'll give you a scenario in which of wouldn't, if nobody spends any money, if everyone's just, if any way, if everyone maintains their high savings rate from this year, let's talk about the savings rate from this year.
So we saw a huge increase, a spike in the savings rate in April. Then, then it dropped back down, not quite back at pre COVID levels yet, but mirroring, this is a personal consumption expenditures. Again. Drop in April spiked back up, not quite at pre COVID levels. The one thing that is at pre COVID level and actually beyond surpassed that is the retail sales.
So this chart shows retail sales in the st. Louis fed data. Surpassing pre COVID levels. So spike down again in March, where way back up and, uh, you know, this goes back to my, uh, theory about people not spending money and not causing inflation. Well, I think my theory would be wrong because clearly people are spending money.
Right. Yeah. In retail, people are shopping online of people. This is a thing, right? So, you know, just looking at my own family, we haven't gone out and taken big vacations. Usually every year we take one or two big vacations spent 10, $20,000 on these vacations. Um, we haven't done that, you know, with COVID.
Uh, what we have done is we bought my kids a big play structure for the backyard that was multiple thousands of dollars we've played. Uh, but more toys online before. We've done more shopping online. So you're seeing the retail sales do really, really well because people are not spending that vacation money.
Now the savings rate is up because the vacation money is so much that's being saved and only a portion of that is being spent on retail. So you do have a scenario there where in the short-term. People are doing the retail spending, but they're not spending on vacations and think about not traveling to work people aren't buying lunch out at work.
Um, the gas in the car. I mean, there's so many ways that the average American are able, are able to save money. Uh, while still spending on retail. And again, that explains why retail sales have recovered. So sharply, the one thing I will say is, you know, I'm short target right now, I'm short, best buy, and you might say, that's crazy going into the holidays, but you are going to see, as we get closer to a vaccine, the expectation is that retail sales will actually dip probably even lower, uh, for a short amount of time, PR to pre COVID levels or even lower than that.
Just because people bought so much. Over this period that now they can take a little break. They're going to shift their money. And just like me, I, I told my wife, I said, you know, honey, let's, let's go away for a month to an all-inclusive, you know, let's just go nuts. It's we we've been so confined in a house.
Let's just go have fun and spend tons of money on this stuff because of that. Right. So it's interesting. The savings rate. Uh, has declined mainly because people have not bought big ticket purchases, like, uh, vacations, but you think now we're going to see a rotation back into, uh, vacation items. Is that, is that what you're saying?
So cruise ships, airline stocks, are those going to do well then? Yeah. Yeah. I think, you know, again, you gotta be a little careful with the airline stocks, like American airlines, they've issued so much debt. There's still going to be a, you know, a long period here where people aren't going to get the vaccine just yet.
Um, I do think they survive, but in what form, that'll be the interesting thing. But in general, at Delta airlines and Southwest airlines, um, I would be a buyer on dips at these points. Yeah, absolutely. Because people are gonna, you're gonna see these vacations, you know, these destinations and airlines, they're going to be overbooked.
Because people want to go places so badly for a short amount of time for the, for three to six months after COVID people are just going to want to go have fun. And I don't blame them. I think we're all in that position. Right. What about the stimulus checks? Do you see more of that happening next year?
Because a lot of the retail sales were sustained through stimulus checks this year. That's right. That is right. Um, that's a good question. I think that the Republicans, if they continue to control the Senate will fight against any big stimulus. Not only because they see the stock market and your all time highs and say, well, why do we need it?
Even though we know that, you know, a good chunk of Americans don't have investments in stocks, but you also have this scenario where with that vaccine coming, they're anticipating, um, a reopening surge in the economy, which you likely will get. The question is, is with so many small businesses going out of business.
And even in the next three to six months, you're going to have a lot more going out of business will the recovery. When we see post COVID, meaning that vaccines are administered and everything's back to normal, what will the economy look like? And that's a concern to me because the small business we know has been the backbone of this economy and the big businesses have done great.
During this, the small businesses are struggling to survive and without help, a lot of them will go under. So it's tricky now, just one little other tidbit here. You have the potential for that election in January shifting. The the power balance of power to in the Senate, to, to the democratic side, if that were to happen, you would see in a tax rates likely go up, but you'd also see massive stimulus.
So a lot of people say, Oh, if the Democrats take the Senate, it's going to be really bad for the stock market because tax rates are going to go up in the short-term. Maybe. But I think once you start getting trillions and trillions of stimulus out there, it would, the markets would likely come back off of that.
Yeah. Okay. Let's talk about specific securities and assets. Now let's start with Bitcoin. It's. This is interesting. Gold is trending down. The Bitcoin just hit all time highs this morning. Well, it breached all time highs, setting new records. The theory here is that a lot of the money is rotating out of gold into Bitcoin.
I don't know if you see any correlation there. I do see a little bit, I think, you know, in general that it's it's the, this market is driven by smaller money right now, which is very about finding the hottest thing. And right now it's the cool thing to be in Bitcoin and it's going to continue to keep Bitcoin propped up.
Um, but I do think gold will remain a staple. I think gold will continue to be a safety asset that a lot of bigger investors want to have a holding in. I continue to hold 5% of my net worth in, in metals, myself. Well, with 5% of Bitcoin, it's just been my security and insurance policy that I felt comfortable with considering the periods we're going through.
Um, if you look at the Bitcoin chart and you guys can see it on my chart here is that we just hit that double top right here, just underneath 20,000. There's a chance that we could go as high as 22,700. The way I arrive at that target is very simple. If you look at the run that started in 2017 and topped out right underneath 20,000, it started around 1000.
So it went from 1000 to about 19,007 50 or so 19,500. And if you take that move the distance of that move, which is about 18,000 and change. And if you look at the low this year at 3,900, and you add that distance up, the measured move would take you to 2020 2,700. So even though I think I would never advise anyone at this point after such a massive run in Bitcoin to go long Bitcoin here.
I do think if you're still in it, you could see it move up to about 22 seven before it really tops out. Now, once it tops out, I think you're going to get a pullback of significance. I think you probably hit back to about 14,000. There's a small chance that you hit support here at 12,250, but the 14,000 level is the former pivot high from 2019.
That'll work as a big support area. A lot of big money will come in there, including myself. I would start to accumulate some more there at that 14,000 level. Yeah. So that chart was closely correlated with gold up until, I guess two months ago until we saw a huge divergence Bitcoin just continued to rally while gold fell what's causing this.
Well, first of all, do you think this positive correlation with gold and Bitcoin this year was at all warranty? Was it just a complete coincidence? No, I think it's definitely warranted. I mean, you know, you have a situation where Bitcoin is seeing new money, new institutional money, which is why I think it's decoupling a little bit here from gold.
You have gold, which has been an long-term staple of everyone's portfolio, every hedge fund, every, every fund out there and every big institution. And therefore it's going to trade more in align with the inverse of how the economic outlook is. So as we get closer to reopening, you're going to see golden and we've seen it pull back beautifully here.
Um, pull back as well. You know, the economy outlook of the economy is getting rosier. COVID vaccines coming. Okay. Gold pull back. Um, with Bitcoin it's a little different because it's such a new asset, especially for funds and institutions that even though. They're seeing, you know, even though we're seeing gold pull back there's enough new money, that's flowing into Bitcoin to keep it propped up in the short term.
And we just heard from PayPal recently, they were basically, they were buyers of about 70% of all new Bitcoins last month. So, I mean, that's, that's why it's performed much, much better in the short term than gold, but there will be a longer term. Revisiting of that correlation, where once you get the money and it needs to get into Bitcoin, it'll start trading along with gold again.
And I'd love to just show a chart here on gold guys. This is such a cool chart. Um, I did some calculations on where to buy gold on this pullback. And this is just a fascinating little example here. So just going back to this eight 76 high in 1979, or so if you look at this point right over in 2008 or so you pierced that all time high of eight 76, and then you retraced.
Three 82 Fibonacci level, right? So 38.2% Fibonacci was the retrace. And what's so cool about this is that we are repeating this historic move almost to a T. So if you look at the high pivot here at 19 1,910, we pierced the highs we got above 2000. And now we're retracing. And the expectation is that you should get a retrace of a Fibonacci three 82 again, and the bi-level becomes $1,749, $1,750.
What's amazing about that is just last night we had, I think, a low of around 1767. So, I mean, we are so close, but for those of you guys that are students of history with me and love looking at these longer-term charts, The parallels between what happened the last time it broke out and this time is just so cool.
So, so cool. So bottom line is begin, accumulating gold. Anything down in the 1750 level here is, is really in my opinion, it's the, it's the beginning of the next move up to a, to a, probably close to 3000 price targets. Okay. Let's finally touch on the other hot securities EVs. So Tesla, Neo, let's talk about that.
Oh, yeah. What to say about those? Um, they are amazing in their runs. They are also insanely overpriced, like just to put it in perspective. Neo earlier this year was on the borderline. They basically drafted their bankruptcy letters. Uh, the stock was trading at $2 a share. And in the beginning of COVID, they were basically going to have to file for bankruptcy.
The government came in there with a bailout and the stock then proceeds to go up about, you know, 11, 1200% to where the current highs are. Now it's pulling back today as it should, but just to put it in perspective, remember when the government here in the U S. Bailed out GM and Ford. Um, that would be the same as if when within nine months of the government bailing out GM and Ford, if they had gone to a multi-trillion dollar market cap, um, just how crazy that is.
And they we're talking within months of getting bailed out from bankruptcy. So, so these stocks. They're the hot stocks. Everyone thinks it's the new thing. The valuation is not feasible. You know, Tesla, you could argue that that's the biggest player in the room. So maybe that deserves a higher valuation.
But these other stocks folks, and again, there's a lot of people that are cold followers of these, these alternate energy stocks, uh, these, these electric car makers, but there's, there is, they will ultimately come in back to earth. There's no other opportunity or option here. So it's just a matter of waiting it out.
I happen to be short, a Tesla in short Neo as well. I had XPE V short. We just took 13% gain on it today, um, in, in my, one of my services. And, uh, that was just another car, you know, ultra. And an energy car player that fell down today, but over the next six months, I do expect those to come back to earth quite a bit.
Yeah. I think the evaluation is correct me if I'm wrong, but I think the valuations for some of these stocks, aren't really based on current earnings, it's based on future projections of, uh, investors really, really optimistic expectations on the entire like paradigm shift towards Evy, like an Eve culture kind of thing.
And so, you know, you're basically, you're basically projecting. Yeah. Yeah, I love that. I mean, the story is I actually have an electric car and I'm on the wait list for the Tesla cyber truck, you know, when it gets built. So I'm all about it. Uh, I'm huge on alternative energy. I have solar panels on my roof.
Um, but as an investor, especially one that's shorter term in terms of holding a swing trade for, you know, weeks or months, um, I look at them in terms of. Okay. Even if they were to grow, how fast would they have to grow over how many years to grow into these valuations? And then what ends up happening is that you see the Robin hood traders, which have really gotten involved in this market.
They are the ones that have run these stocks up and the bigger investors and the bigger traders are starting to look for pullbacks. And I'm not saying these stocks are going to zero. They're not, I mean, they're here to stay. But at some point it has to have a pull back after, you know, 1200% run, especially when you were borderline bankruptcy.
I mean, are you, are you evaluating these what? Well, last question. I'll let you go. Why are you evaluating these using automobile metrics or tech metrics here? I think you have to do both. I think what it is is it's a, it's a, it's a mid-level. So. So stock, like Neo doesn't really do the stuff that Tesla does in the energy or the solar side of things, although maybe they will in the future.
But, um, but even with Tesla, you take, you take what a, what a valuation is for a high-tech growth company. And then you also take an evaluation for a car company. And what I would do is I'd average them for a conservative view, uh, and then pick that valuation and say, okay, what is it really trading it?
These stocks are trading it. I think Tesla's trading at like, You know, 15 to 20 times revenue numbers, uh, not let it let alone earnings. It's a thousand PE on the earnings. Um, can they grow earnings into that multiple to a, be reasonable in a short amount of time, maybe? Um, I think you have a lot of other things with Tesla too.
Like it's getting added to the S and P 500, so there's a lot of hope that that's going to drive it up as well. Um, you know, in terms of its valuation currently. All right, Gareth let's, uh, continue this for another time. Thanks very much for coming on the show today. Okay, thanks so much, David, a lot of fun.
Thank you so much. Have a great day. Yeah, my pleasure as well. Thank you for watching Kitco news. I'm David Lynn, stay tuned. .