HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hello, everybody and welcome to HardAssetsInvestor.com. I'm Mike Norman, your host. My guest today is Philip Silverman, who is managing director at Kingsview Management. Philip, thanks very much for coming on the show.

Philip Silverman, managing director, Kingsview Management (Silverman): Thanks for having me.

Norman: So, a little bit of a choppy, rough outlook now. We have weakness in equity markets pretty much across the globe, commodity markets following, equity markets down. There's pressure definitely there with the exception of some areas: grains recently, weather related, the intense heat wave that we've been having here in the U.S. What's your outlook?

Silverman: My outlook is for the slow growth to continue and as investors recognize that growth is slowing, earnings are going to be weaker, I would foresee the stock market to be coming down.

Norman: How far down?

Silverman: Tough to say. I definitely think we could get to a point where we give back all the gains for the year and be down a few percent. We could see the S&P down in the 1000 area. I don’t necessarily put a target on it. I'm looking more for the direction. So we're seeing the economy slowing. ISM’s dipped below 50, the PMI is weak. Unemployment is staying high, can't really seem to get that down. So, all of these things, and the bond market is obviously pricing in basically a recession.

And the only bull case I can see is more central bank action, as we discussed earlier: They do something and it has less and less effect. The European move  from a couple of weeks ago has already been given all the way back. So, I think the push and pull between slow growth and central bank stimulus is what we're seeing now, and I think slow growth is going to win out.

Norman: All right, so I'm going to try to play the devil’s advocate a little bit here. We've seen high unemployment now for three years. And we've seen growth well below trend for three years. A 2 percent GDP growth rate or even a 1.8 percent, 1.5 percent GDP growth rate wasn’t necessarily bad for stocks. Inflation still remains tame, labor costs are way down for the very reason: We have such a large pool of unemployed. And firms are able to still manage to eke out a profit in this environment.

So, to look and say that the market is going lower—in fact, we've been dealing with these conditions for a while now and the market has doubled off its 2009 bottom. We have some hesitation now, but low interest rates are also starting to help. I think we're seeing some improvement, actually, in the housing market, of all places. For the first time in three years, we're starting to see some stability in home prices; home inventories have come down significantly, and housing is a very important sector to most people because that's where their net worth is. So that would be my devil’s advocate opposite argument to that.

And in the case where, let’s say, we stay at around 2 percent growth, doesn’t that mean commodities bottom somewhere down here?

Silverman: If we stay at 2 percent growth, then my thesis would definitely be wrong. I think commodities are getting more reactive given that scenario. However, you look back at this rally we've seen since 2009: The markets have doubled, so that's a big move. I think that 2 percent growth down there means a lot more than 2 percent growth up here.

Now, we've been seeing revisions in GDP down into the 1's recently, and I think there's a good chance that in the next couple of quarters, if we're not in a recession now, that we will be in one. We've had an expansion for the last three years. If you were to take away the rallies of the ’80s and ’90s, fueled by high asset prices by the Fed, and you were to say, maybe a bull market lasts for three, four years and a bear market’s going to come in for a year, year and a half, I think that's a pattern we're going to be seeing probably for the rest of the decade. And that would coincide with my idea that you're on a super-cycle for commodities and you're on the reverse for equities. The ’80s through the ’90s was equities, now we're commodities.