Episode Transcript
The Finance Ghost: Welcome to episode 259 of Magic Markets. Moe, I haven't really had much of a chance to chat since all the chaos around these Epstein files was released. We seem to oscillate between nausea and just wanting to kill a guy, but we'll leave it there.
We have other world news to talk about on this podcast that is thankfully much less disgusting, and that’s what’s going on from a macro perspective and what that means for commodity prices, precious metals.
We've seen some crazy moves in the past few days. Gold, your favourite, is being thrown around, but obviously that comes after a lovely rally.
I did see some remarkable local commentary from a particular fund manager about, "This is why we don't have gold and are very nervous of it," and everyone's like, "Oh, well done, you missed the sell-off."
I’m like, “And the 150% before that, did you also miss that while avoiding this 10% sell-off?” It's just… anyway. So we'll move right on from that as well, Moe. We'll just talk about markets and try not to get ourselves in trouble or vomit at the state of the world.
Welcome to Magic Markets. It's never dull, and we’ll stick to markets because that feels like a safe space compared to some of the stuff out there.
Mohammed Nalla: Yeah, markets are my safe space. I mean, who would have thought that? It's good that my mic was actually muted for your intro section because I was just laughing so much when you mentioned that fund manager: "This is why we don't do gold."
Gold's been phenomenal. One of the best-performing assets last year. It's like, "Oh, we don't do it because we've had a bit of a correction from the all-time high." I'm not going to pooh-pooh it, right? Everyone knows I'm a long-term gold bull.
I got very nervous. I'll tell you where I got nervous – actually, lower than where we are now. I got nervous at like $3,500. I was like, "Hmm, this looks a bit much," and then $4,000, "Oh, this looks like even more."
I haven't been adding to my position in this massive rally. But just last week, in the earlier part of the week, we actually had gold push all the way up to (I think it was just shy of, or maybe just north of) $5,600 an ounce. That is just phenomenal.
Then we had the Trump nomination of Kevin Warsh as his pick for Fed Chair, and I put these two together because the timing kind of aligned. It's not to say Kevin Warsh is bad for gold, but the timing aligned.
We had that come through, and you saw gold correct very sharply in the latter part of last week. It went from around (let's round it off) $5,600 an ounce. We're currently sitting around $4,600 an ounce, so that's a $1,000 swing.
That's absolutely massive. And again, for those who are late to the party, that can actually wipe you out. Now, why do I raise all of these things together? It’s because we're talking about being late to the party.
A lot of retail interest in gold (certainly recently, given the kind of rally we saw). And again, no signs that we actually saw some of the people who operated in the crypto universe then moving into gold, but with accessibility, the financialisation of gold, that possibly could have come through.
And so, the dynamics in terms of volatility then start to reflect what you're seeing in more financialised assets. I think that comes through.
But let's go all the way back to Trump nominating Warsh as his pick for Fed Chair. We've got Jerome Powell's term that actually comes up later this year, so the nomination is expected – we know that there are lawsuits against Jay Powell.
So, what does this actually look like? Why did the market react the way it did? Kevin Warsh is no stranger to the Fed. He's actually been a Fed governor – he was on the Fed Board of Governors a while ago, and his track record while he was a Fed Board Governor was actually quite hawkish.
I think it surprised the market a little bit (certainly compared to some of the other names that were being floated out there), because we know the Trump administration's really trying to pressure people into cutting rates and Warsh, arguably, is not necessarily going to go down that route to the same extent.
I say “to the same extent” because I think the political pressure in the US is real. I think when we talk about central bank independence, the Fed's independence is being tested completely.
With a newcomer like Warsh coming in – as I say, a newcomer to the Fed Chair role potentially; remember he's still got to get confirmed – there are some question marks around that.
Some House Republicans have actually said they're not going to confirm his nomination until this noise around Jay Powell gets investigated properly, thoroughly, and transparently. So yes, some noise.
But if Warsh is actually more hawkish than the market had anticipated, this is arguably bullish for the dollar. So, we saw the dollar rally in the tail end of last week.
I'll contextualise what a rally looks like, but on the back of a dollar rally, you then saw pressure come through in terms of commodities (because those are inverse – if the dollar's strong, commodities are slightly weaker).
Now, lastly, I said I'd contextualise what this looks like in terms of dollar strength. If you look at the dollar index (that's the trade-weighted dollar), it has actually been quite weak for some time.
Around this time last year, the dollar index was trading around 108 index points, and it actually pushed down to a low, early last week, of around 95 index points. That's absolutely massive.
So this bounce that we've seen, yes, it's bounced off 95. We're now up to around 97, 98 index points. Yes, it's been a bounce, but overall, the dollar has been weaker.
That's been supportive of commodity prices, and so all of this noise has come through in the markets. We saw big corrections in gold. We saw big corrections in PGMs. Silver coming through, even a little bit on copper.
And again, is this actually a structural trend shift? Time will tell. It depends on what path Kevin Warsh actually forges when he's sitting in that Fed Chair role, assuming he gets it.
But he's going to have to first mend some of the relationships within the broader committee – because remember, it's not just the Chair's decision, it's actually the decision of the overall Board of Governors. They get to vote on this.
So, let's see. I don't think we're out of the woods yet. My longer-term view is that the dollar's likely going to remain under pressure, and you can expect some of this volatility to come through.
Read on from that what you must, with regard to just the overall outlook for yields, as well as the outlook for commodity prices.
The Finance Ghost: Yeah, and obviously, I'm being cheeky about the news that came out of the asset manager saying, "Oh, we don't have a lot of gold." They did have some; they just had less than everyone else.
And of course, the point they were really making was, "Oh, well, it seems like it's overpriced." Fair enough, but the ‘fair value’ of gold… I mean, good luck figuring out what that is. It's literally sentiment.
It's not based on cash flow; it's really an inflation and fear barometer. And long term, it's very much an inflation barometer.
So, it's one of those things where you can either be incredibly bearish and sit on the sidelines and just lose out entirely. Because it's easy to say, earlier this year, "Oh, maybe gold was a bit too hot."
Sure, but you could have probably made almost the exact same argument for most of last year and then just missed this wonderful upswing. So, it's timing. That's the thing.
Markets are about timing – and an element of luck; there's no doubt about it. But here's the really fun thing. While everyone is talking about how the resources index is just gently falling over, it’s still up 8.3% year-to-date.
If you bought a Satrix RESI ETF and you came into it within this year, you are up 8.3% year-to-date. So yes, it's come off its high.
Mohammed Nalla: That's just one month, right? It's year-to-date for this year. That's one month. That's phenomenal.
The Finance Ghost: It's the old joke they used to make in tech. "Oh no, the market has crashed to levels not seen since the 9th of January. What are we going to do?”
So, unless you basically YOLO'd your life savings into it the other day on a day where silver was all over the headlines for going bananas, unfortunately then you kind of are going to get hurt like this. Because then you are playing the markets in the worst possible way.
Everyone learns that at some point, one way or another – hopefully with small amounts of money. Don't chase the crazy headlines. Yes, look for momentum, etcetera, but when it gets crazy hot like that, then you need to be super careful.
Remember when LVMH was all the rage, and the founder of that was the richest man in the world and on the cover of all the magazines? That was literally the top for LVMH!
It's amazing how this just plays out, over and over and over again. It almost doesn't matter what the underlying instrument is. Bubbles play out in exactly the same way across all these different assets, and something like LVMH is no different.
I'm looking at the chart now. I'm pretty sure that was in early 2023, when all of that was happening. It was trading at like €900. Now, €543. You would literally have been better off buying a Louis Vuitton product than buying the shares.
Mohammed Nalla: I think that's so important because I do this for some of my institutional clients. We do a quarterly report for them, and then I also do one at the start of the year. It's always quite interesting. What I try to do is map megatrends for the full year (I've been doing this for the last couple of years), and you're absolutely right.
We had Covid come through, and so it was all the vaccine producers; that was the megatrend. You saw those stocks rally, and then you saw them collapse.
Then you had the luxury goods because, post-Covid, everyone wanted to feel good, so they went and bought that. Then you had the GLP-1 (glucagon-like peptide-1) drugs, which again were the same thing – spike, and then fell off again.
So yes, you've got to pay attention to these megathemes.
Just to contextualise again, for my own sake as well as for the sake of our listeners, has my view shifted on gold? Like that fund manager, I rode gold for years when it actually was doing nothing.
For me, it was a rand hedge at the time because it was a nice, clean rand hedge. I view gold as almost a currency, if you want to look at it that way, and it was a great inflation hedge. Over time, that's now played out.
No, I haven't added to my position, certainly not over the course of the last easily six months, there and thereabouts. I was joking with my wife – I said all her gold jewellery now makes that a lot more valuable than my entire investment portfolio, and she was chuckling at that.
But the fact of the matter is, I haven't sold either. Because I think that I like it as a hedge against the kind of crazy times we're seeing, geopolitically. So, it's always going to have a role in my portfolio.
Am I buying now? No, not even after this correction. It's just, in my view, not a ‘fair value’, but it's run too hard. And so I'm sensitive to that. I'm not going to chase this, and if we see it back down to $3,500, then maybe I'll start to look a little bit more interested again.
But there is some bias there, because at $3,500, a couple of months ago, I was saying it looks so expensive. Your previous resistance level now becomes support, and so that's just contextualised.
I think this is a very important part to pivot our discussion now as well, because we've got to separate – I think it's so important – portfolio long-term asset allocation decisions from speculation. Gold, certainly recently, has become reminiscent of speculation.
And why I want to pivot the discussion is you mentioned to me off-air that something you wanted to touch on here is how do you get access (for the more risky part of your portfolio; for the trading portfolio arguably; maybe even for, if you have a slightly higher risk appetite, your main portfolio) to asymmetric returns?
Because I kind of bucket those in the speculation bucket. And we've discussed a number of things on the show – we've discussed options, how you can use those to hedge or get some upside optionality, or maybe even just produce asymmetric payoff profiles.
But Ghost, you raised something interesting. There is a way to get optionality, to actually get some of these asymmetric payoff profiles, without using derivatives.
I wanted to unpack this for our listeners because I think it's a very important and often overlooked aspect of just a very interesting part of what you could be doing with a portion of your portfolio. So, why don't you take us through that?
The Finance Ghost: Yeah, so basically, all an option is, is it gives you a potentially very, very good payout, ultimately. And in the case of an option, it limits your risk to what you've actually paid.
But you've got to be prepared to lose the option premium. You have to be able to say, "Okay, I’m taking a bit of a gamble (or a lot of a gamble, actually) and I'm going to bet 100 bucks, and I'm happy to lose the 100 bucks because I might make 300/400/500/600."
Fine – it's not investing. It’s a trading strategy, ultimately. It's a speculative strategy, let's be clear, unless you're using the options to hedge things – whatever, that's a completely different conversation.
So, for a normal retail investor looking to go and do this through their standard sort of brokerage account, they don't want to play with options, or they can't, then how do you do this?
Well, you've got to then look for names that have very asymmetrical payoffs. Interestingly enough, one of the ways to actually identify these names is to look at the common picks in stock-picking competitions.
Because in a stock-picking competition, absolutely no one cares if you came 68th. They don't even care if you came 9th. You just win, or you lose. That's it. You're not managing your own real money. You're not managing money for someone else. You’re certainly not trying to run a balanced fund (otherwise, you're kind of missing the point).
These stock-picking competitions, I’ve noticed, tend to weed out the most speculative stock positions imaginable. It's literally "get rich or die tryin’" – it’s the 50 Cent album trade.
And that means you're going to find junior mining all the time.
So, why does junior mining behave the way it does? Because the cash flows are just so uncertain. It's all about raising money, and it's about sentiment, and about making sure this thing can even produce one day.
Whether or not the platinum price changes today makes zero difference, actually, to the cash flows of an exploration company, because it's not selling any platinum. But it is out there telling its story, and hoping to either get acquired by a big name or to actually raise capital to go and hit those milestones (because junior mining is all about hitting milestones).
Southern Palladium (JSE: SDL), for example, up 267% over the past year. Now, that is obviously a really strong return (it was, by the way, more like 350% until literally a few days ago).
So that's a good example where you're buying this risky, not necessarily ‘obscure’ name, but just ‘pre-production’ kind of name, because you like platinum. If you wanted to say, "Well, I like platinum and I'm going to go and have a, “ you've got to pick where you are on the risk curve.
Do you want to go and buy the established names – Impala Platinum (JSE: IMP), Northam (JSE: NPH), whatever the case may be? You're still taking a lot of risk because it's platinum, but you're not taking super risk on top of that.
Or do you want to say, "Well, I'm prepared to speculate with 5% of my portfolio or 3% of my portfolio. I'm going to own five stocks inside the 5%, 1% each.” Whatever, this is just an idea of how people tend to do these things. And you go and pop 1% of your portfolio in Southern Palladium.
Can it go to zero? Technically, it can. Can it drop really hard from where you bought in? I mean, if you buy in at the wrong time, yes, it definitely can. You might have to sit for a very, very long time.
But it could also give you 3x, 4x, 5x returns, and that's genuine alpha in your portfolio. That's not inside the index. That thing is way too small and weird and obscure; it's not in the index.
So, that's just one really good example. Another one that's been a popular choice this year is copper. You've got some names on the JSE where you can go and actually have a punt at some copper assets.
I'll give you an idea. Year-to-date, just to make us all feel sick unless you were one of the ones who bought it, Orion Minerals (JSE: ORN) – up 91%. One month. Jubilee (JSE: JBL) – up 24%. One month.
So, if you just said, "Well, I like copper; I'm going to go and have a punt here…"
And the way this works is you've got to be prepared to suffer some big losses. You've almost got to behave like a venture capitalist. You've got to say to yourself, "I'm going to have a basket of these things, and a couple of them are not going to work out in an ugly way. I might lose 30% or 40% or whatever, but some of them need to do 2x, 3x, 4x, 5x money,” just like venture capitalists think, “or more, the elusive ten-bagger.”
And then you come out with a really cool return in your risk basket, effectively. That's just an interesting way that people play the market. And I think in this case, you can safely call it ‘playing the market’, because that's what it is.
It's how they add risk to a portfolio to try to juice up their returns, and the rest of the portfolio then sits in the safe stuff.
It's almost like taking one day a year where you go out on an absolute bender and you hope that no one takes a video of you and no one ever remembers it because you've had such a fun time and you've gone bananas. It's a little bit like that.
The rest of the year, you're this very steady, stable accounting type working in finance, and one day a year, you go absolutely bonkers, and you just don't tell all your friends where you went. It's that kind of strategy for running a portfolio.
Mohammed Nalla: Ghost, I'm chuckling because it's like almost contextualising how you place speculative risk within your overall portfolio risk framework. That's really what it boils down to.
And I think your point is valid because a lot of people I've spoken to who actually operate in this kind of space (and like you say, it's a portion of the portfolio), they go and add, let's say, ten names into it.
They are willing to write off the capital on nine of those names in pursuit of, like you say, a five- or ten-bagger. And as a whole, that kind of comes through in the mix.
In fact, we had a show a while ago around meme stocks, and (you'll remember this, right?) I had gone long on a stock in the US called OpenDoor (NASDAQ: OPEN). Lots of internet chatter around it.
I bought the stock at around $1, there and thereabouts. That was the elusive… not ten-bagger, but it was an eight-bagger because I kind of hopped off around $8. I think it went a little further than that.
Do I regret it? No. Again, it was money I was willing to write off. It was buying that upside optionality, and it worked out well for that small segment of the portfolio.
But where I want to go with this, just again in the thinking of contextualising this within your overall risk, is a couple of shows ago, we discussed my view on commodities and buying the underlying physical commodity versus buying the miner.
That was because the miner embedded financial and operational risk, as well as operational leverage, in a movement in the share price. This takes it almost one step further.
If you're, let's call it, going up that risk metric framework, then you go with the commodities at the bottom, maybe the miner slightly higher on that, with a much higher payoff profile.
Some asymmetry coming through there, possibly, if you're in a bull market like we're seeing. In fact, you're going to see that asymmetry to the downside as well, when you get these massive corrections come through.
Last week wasn't a very nice time, I think, for the resources index on the JSE, just given the correction we've seen come through in PGMs and some of the names there. I don't know if that's actually been reflected in some of the share prices. I would assume it would.
And then if you go even further up that risk spectrum, that's where some of these smaller names come through. For me, it's really saying, "This is a product of looking at companies with arguably high operating leverage."
And if you're looking at a junior miner, they're kind of in the speculative space there, but if they actually hit on an ore body and become production, that's high operating leverage. So, that kind of ticks that box.
You've also got to get companies that have some flex on their balance sheet. Maybe some of these companies are very heavily geared, and so your kicker (if they actually start producing returns on the equity portions) is a lot higher, but it comes at significantly higher risk upfront.
So, that's how I'm kind of contextualising it. Do you think that's fair and accurate?
And again, maybe I should have paid more attention to some of those stock competitions, right? You're always looking for ideas for some of these asymmetries.
We've seen some of the commodity ones you've just mentioned, but what's actually popped onto your radar, looking ahead? What are the ten names I could add to my black or red betting portfolio in South Africa?
The Finance Ghost: Look at you looking for some hot tips here, Moe, hey? Looking for the big dreamers here?
Mohammed Nalla: I'm not going to look a gift horse in the mouth, right? It's interesting. I'm not going to bet the farm on this, but it's interesting just to see what's in the newsflow.
Also, here's a direct question. I'm not looking for hot tips here; this is a direct question.
The Finance Ghost: Disclaimer, disclaimer…
Mohammed Nalla Disclaimer, disclaimer. By the time it shows up on the news, by the time it's hit the kind of ‘public narrative’, is that too late? Or do you actually look for that newsflow to drive some of the upside catalyst?
Because that was the story on OpenDoor that I kind of covered years ago. I got in early. It had already hit the newsflow. I missed the first (it went from 50 cents to $1, I missed that), but then I got the rest of the move.
So, where are you in that cycle? And, if it hits the news cycle, is that too late to hop on the bus?
The Finance Ghost: Look, I think if it's a company-specific name in the news, it's too late to get the asymmetric returns, in all likelihood. Let's face it, it's the old joke of, “if your Uber driver recommends it to you, it's too late.”
But I'll tell you, the one that I got last year, as a great example, is Accelerate Property Fund (JSE: APF). We're not even in two-bagger land yet, but it's done well.
I'm not doing crazy mining stuff because, unfortunately, the value of Fourways Mall doesn't behave quite like gold or PGMs – but it also doesn't drop like gold or PGMs. So, for me, that's a ‘good enough’ on my risk tolerance.
But that's an asymmetrical upside, because it was just trading at this vast discount to net asset value (NAV). And the market was just ignoring it. It was selling assets at good prices close to NAV.
And yes, there are absolutely some problems with Fourways Mall. There are a lot of legacy issues there. There's enough noise around it that you can see why the market goes, "Oh, that's too hard," which is always a nice tick in the box, if you're looking for asymmetrical stuff.
If it's too easy and it's too obvious and it's all those things, then it's not asymmetric, I promise you that. You've got to go and find something that the market doesn't want to own for whatever reason.
If it's junior mining, it's because the market is scared of junior mining, full stop. If it's outside of that, then you need to go look in that sector and say, "Well, why do people not want to hold these things? What’s actually going on here? What’s the story?"
And then you’ve got to go do the work. Or you’ve got to do it thematically, like people did with these copper assets, where they haven't – with the greatest respect – ‘done the work’.
Because how many people know how to actually dig into Orion Minerals (JSE: ORN), for example, or any of these names, and go and say, "Okay, well, what were your cash flows worked out on and what would that look like now and how is this all changed?"
Lots and lots of sentiment that goes on in those share prices, especially when they move quickly like that. So, that's just a theme filtering down into, as you said earlier, ‘maximum leverage’.
Whereas with a name like Accelerate Property Fund (JSE: APF), you’ve actually got to go and do the work. You’ve got to go and see what's going on in this thing and then figure out if you want to own it.
So, I'm actually looking up the share price now of another name that I thought I'd mention. At one point, ArcelorMittal (JSE: ACL), you might have looked at it and said, "Oh, well, there's lots of leverage in this thing. It’s literally either going to zero, or it's going somewhere."
Based on the headline loss per share I saw the other day, it's still looking very, very dicey. But there, the share price has actually just kind of gone sideways for a year, surprisingly, despite all the risk.
That hasn't really behaved like your typical kind of option value stock that people go and buy into. So, it's a very, very interesting one.
One that did work out a couple of years ago was PPC (JSE: PPC). They had a balance sheet that was really struggling and, through a big turnaround effort, they managed to get it done. That share price, in the past few years (since the end of 2022), is well on its way to having tripled.
So, these are the sort of asymmetrical payoffs that you can actually find. I will say that what we've seen in copper in the past month, for example, and some of those names, is unusual.
A lot of it is the macro, right? At the end of the day, it's macro filtering down into commodities. And then, because of the way junior mining works, mining is one of the very few sectors where you have what are essentially startups on the market.
You don't get them in any other sector, actually, on the JSE, that I can think of. You don't get an equivalent to junior mining. So, when commodities go crazy, junior mining stocks are going to give you returns that I actually don't think you can find anywhere else.
Mohammed Nalla: I've got to go and look at that in so much more detail, right? I've always been, “For the responsible portfolio, you ignore the junior miners,” because again, lots of risk in there.
Speaking of asymmetry, you're mentioning ArcelorMittal trades at like R1 and some change. Man, I remember ArcelorMittal trading in the R100 to mid-R150-odd range a share.
So, why I raise that is because a) giving some of my age away, but b) if you're trading at R1 when the company once upon a time was like R150, that's priced like an option. They're priced like warrants.
Yes, okay, obviously the company's gone through a lot of difficult times and so forth. I'm not going out there buying ArcelorMittal, just for the record. But it goes all the way back to (just trying to square the circle here, as we are talking about optionality) asymmetric payoffs.
Some of these stocks trade at really low ticket prices. I think that kind of also gets that meme-stock theme that we discussed a while ago coming into some of them.
And arguably, a lot of people, when you're trading a stock that trades at R1 and so forth, they almost contextualise it. It's like black or red (I made the joke earlier), like going to the casino. You're putting a couple of chips on the table. If it works out, well and good. If not? Tough luck.
Ghost, I think that's probably where we’ve got to wrap the show this week. It's been fun. I haven't quite landed on those key stock tips – I know you're not going to give those to me, so I'm not going to hold my breath.
The Finance Ghost: I won't give you the stock tips, but I'm going to give you two more things to chew on, then we'll call it a day.
One, ArcelorMittal in 2008 was trading at over R260 a share, and it's now R1.30. I hope I'm getting the decimal points here right. It looks like a Dubai skyscraper on the chart; it’s actually quite remarkable.
Mohammed Nalla: That sounds absolutely right.
The Finance Ghost: One of the asymmetrical payoffs this year that people are talking about is something like Mr Price, which, after they announced that hideous deal in Europe, the share price absolutely tanked and took off basically all of the value of that deal.
Look, I think the South African consumer story still has a long way to go, and it's looking pretty rough. But there are people who bought the dip recently in Mr Price who are sitting nicely up.
It was one of the names that came up a lot. When I canvassed Ghost Mail readers earlier this year to say, "Well, what are you buying?" Mr Price was something that came up on the radar, interestingly.
And based on our research last week, I'm doing a…not really a fully asymmetric payoff, but buying a silly market response, in my opinion.
We did Netflix last week in Magic Markets Premium. The Netflix share price has sold off way more than the value of their Warner Bros. deal. The market has basically written off that entire transaction as dead and then taken some more value off Netflix.
Works for me. Happy to buy it at the 52-week low and finally get some exposure to Netflix. So, let's see if that works out. We do eat our own cooking in Magic Markets Premium, and of course, we always invite people to join us there - to come and see what we do and come and form your own views.
Moe, I think that's a good place for us to leave it this week. We did Microsoft this week in Magic Markets Premium and that was also super interesting. So, to our premium subscribers, we hope you enjoy that show as well.
Mohammed Nalla: Yeah, Ghost, thanks so much. This has been a fun show. We hope you've enjoyed it.
As our listeners, hit us up on social media, let us know what you think. Give us some of your interesting ideas as well.
It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X. Or you can find us on LinkedIn. Pop us a note on there.
Until next week – same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
