“In 2021, oil and gas exploration and production companies had their best annual performance in thirty years,” said Tavi Costa, a portfolio manager at Crescat Capital. “We’re seeing this shift out of technology and out of treasuries into natural resource businesses, and into some other assets, too. But, the majority of that is coming into tangible assets and natural resource businesses that are linked to those underlying securities.”
This is a big change in the markets, says Costa. “We’ve seen this a few times in the past. We’ve seen this in 2000. We’ve seen this back in the seventies. Why do we see that? Because we saw the equity to commodities ratio reaching historical lows, and we’ve seen this happen recently. Now we’re seeing commodities, outperforming the overall equity market. This is a trend that will continue.”
Costa says that disinflationary forces over the past thirty years allowed companies to not focus on profitability. Top-line growth, the increase in revenue or gross sales by a company over a defined period, has kept pace with executive salaries, but this has created business that would never survive in a rising cost of capital environment.
“We’ve had long duration assets leading up to the market,” said Tavi. “If we think about where large capital allocators are today, when it comes to their portfolio positioning, most of them have been doing a risk parity idea, where they pair both ideas of being long equities and being the long Treasury markets, and fixed income in general and treasures.”
What we have, according to Costa, is that the majority of the equity positioning came from technology—specifically, software companies—and drove the valuations of those companies to extreme levels.
“Most technology companies are trading at 50,60, and even more times sales, and they are still trading at very hefty multiples of 20 or 30 times sales,” said Costa. “But, some of those companies are down 50%.”
The majority of that is part of the Ark ETF, which has been declining since February of 2021. “That is what I refer to when there is a change of leadership,” said Costa, referring to the markets. “That is a major change.” He expects the market changes current underway will be permanent.
Costa says a main difference will be a shift away from buying the dip on the equity markets to buying the dip on commodities, buying the dip on tangible assets. “Any day that you see oil markets declining significantly or silver or copper, you want to be taking advantage of those days, because there is a chronic issue in the markets of major under investments in natural resource industries. And so, it’s something you cannot fix over a short period of time. It’s something that needs to be fixed in five to 10 years from now. And, unfortunately, most of the policy making right now is not addressing those issues and are actually moving away from that.”
The geopolitical issues—namely the Ukraine-Russia war—has been exacerbated by the amount of debt in the system. “Debt leads to wars, wars leads to debt,” notes Costa. “They’re always together.”
Costa says we’re in a repositioning environment coming out of long duration assets and risk parity strategies, whilst gold is becoming relevant again. “It’s going to become a hedge,” said Costa. “A very critical part of anyone’s portfolio. Not enough institutions have gold, not enough institutions have natural resources.”
Commodities are not up 200% and, in some cases, more. “This is basically bankrupting people and bankrupting companies.” Costa notes that such a move is not so far out there companies should be going under.
“There’s a lot of people levered on the other side of this that still need to unwind those trades,” says Costa. “It’s going to create a lot of movements here. But that’s all positive for tangible assets.”