Banking

Michael Gayed is growing famous on Wall Street for his views on the power of lumber prices. He told us why they might still have much further to fall — and why it’s a warning sign for much more than the housing market

  • Michael Gayed of Toroso Investments is gaining fame for touting lumber as a powerful indicator.
  • Gayed says cratering lumber prices are one of many warnings about the threat of deflation today.
  • Other troubling signs, in his view, include sinking Treasury yields and strength in gold prices. 
  • See more stories on Insider’s business page.

If walls could talk, lumber would have a story to tell.

Lumber prices doubled in a few short months and reached record highs this spring as the economy roared out of

recession
while demand for housing and materials boomed. Then prices nosedived, with futures losing two-thirds value in a little more than two months and turning steeply negative for the year.

And the losses might not be over yet.

“If it is mean reversion, you can’t stop at these levels,” fund manager Michael Gayed of Toroso Investments told Insider during an exclusive interview. “The prior average was somewhere between $300 to $400 on the front month continuous contract, and you’re at $536 as we speak, which means you can still drop quite a bit.”

In recent years Gayed, a portfolio manager and author of “The Lead-Lag Report,” has become an evangelist for the predictive power of lumber. He says that the combination of lumber and gold can give big hints about the performance of the economy.

He also says his research shows that when lumber is doing well compared to gold, it’s a sign of economic strength and coming inflation, while weak performance from lumber is a sign of potential economic weakness and deflation.

That’s very different from the prevailing theory that lumber prices have simply normalized and that some post-pandemic supply constraints are easing. He says the drop in lumber futures is consistent with troubling message from other parts of the market, and they amount to a warning about a period of deflation.

Other evidence, in his view, includes the decline in Treasury yields since March, weak performance for small-cap and emerging markets stocks, a slumping dollar, and plunging Bitcoin prices. Those are indications of economic shakiness or doubt, and he says they challenge the wisdom of the pro-cyclical, pro-inflation “reflation” trade.

“All the areas which are most sensitive to that reflation, to that money printing, are spitting in the face of that narrative,” he said. “Despite all these trillions of dollars of stimulus, Powell may be right that this inflation is transitory. And that’s actually really scary, because if you can’t get secular inflation with all of this stimulus, all these trillions of dollars, then what’s it going to take?”

Gayed’s best-known fund is the ATAC Rotation Fund, a hedging strategy that evaluates the relationship between Treasury bonds and utilities stocks for risk-on or risk-off signals. If conditions are risk-on, it buys S&P 500 ETFs, and if they’re risk-off, it buys Treasuries.

That strategy returned 72% to investors last year, according to Morningstar data. He’s also launched an exchange-traded fund version that’s up 10% this year.

With another debt ceiling challenge looming, Gayed says today’s stock and bond markets look a lot like the markets of mid-2011, when the Standard & Poor’s downgraded the credit of the US government. With trillions of dollars spent in the last few years, he says another downgrade is possible.

“What helped the portfolio during that juncture? It was the dollar, it was Treasuries, it was gold,” he said. “The other way to play with a portfolio is potentially to significantly overweight consumer staples and utilities … if you’re on the verge of a risk-off juncture, those areas should really benefit in a big way.”

Those stocks, he adds, are notable and unusual underperformers in today’s market. In normal times, high-dividend stocks like utilities and consumer staples makers thrive when Treasury yields are falling. That’s not happening now, perhaps because investors remain optimistic about the state of the stock market.

It remains to be seen if lumber’s recent warning will change their minds.

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