The World According to Leeb

Stephen Leeb, PhD is the chief investment strategist of The Complete Investor and Real World Investing. I first started working with Steve in 1990. It was a different world back then, when American troops were fighting in Iraq, the top-rated show on television was “Cheers,” and a guy named Donald Trump was buying casinos in Atlantic City.

Over the past three decades, through peace and war and bull and bear markets, Dr. Leeb has proven uncannily prescient in his predictions about investments.

Dr. Leeb’s ninth and newest book, due out in March 2020, is China’s Rise and the New Age of Gold: How Investors Can Profit from a Changing World (McGraw-Hill). His book analyzes China’s activities to explain why the country will propel a massive bull market in gold that will take the metal to unprecedented levels.

Dr. Leeb [pictured] received his bachelor’s degree in Economics from the University of Pennsylvania’s Wharton School of Business.

He then earned his master’s degree in Mathematics and PhD in Psychology from the University of Illinois in just three years, an academic record that stands to date. He is a regular guest on Fox News, Bloomberg, CNN and Neil Cavuto.

Let’s examine the significant trends that Dr. Leeb sees unfolding and what they mean for your portfolio.

The Sino-American trade war makes little sense, and even though there’s a phase one deal signed, there’s likely to be more confrontations ahead. Who’s winning, if you can use that word?

You are right that the trade war makes little sense. It’s not an effective approach to dealing with China or to improving America’s economy or trade position. Quite the opposite.

Even if you accept that narrowing the trade deficit is a meaningful goal, and it’s not, tariffs haven’t accomplished that. In the first nine months of this year, the trade deficit, counting both goods and services, rose by 5.4% compared to the same period in 2018.

That’s not surprising, since the tariffs do nothing to alter an underlying cause of the trade deficit: the fact that the dollar, as the world’s chief reserve currency, is chronically overvalued, making our exports more expensive.

The tit-for-tat tariffs have hurt Americans and U.S. companies by raising prices on many imported goods and denying markets to U.S. manufacturers and producers, including farmers.

In addition, the uncertainty about the duration and outcome of the trade conflict has made U.S. companies hold back from new investments. There really has been nothing positive about the trade war, and I doubt whether China ultimately will make the kinds of concessions that might conceivably have made it worthwhile.

I think the impact on China’s economy has been less than on ours and that China’s society is better suited to weathering the pain. While China’s economy has slowed, the Chinese government’s deliberate effort to reduce debt in various economic sectors accounts for that at least as much as the impact of tariffs.

Among the sectors you closely watch is energy. What’s your view of the health of the fracking industry right now?

It’s a myth that fracking is a great thing and the solution to all our energy problems. Nothing could be further from reality. It’s true that on the surface fracking appears to be a great success, boosting oil and gas production here and making the U.S. the world’s biggest oil producer. But this will be a short-lived triumph.

Read This Story: Sunset in the Energy Patch?

One revealing sign that fracking isn’t all it’s cracked up to be is that almost without exception, frackers haven’t made money, even from the prolific Permian Basin. While they are taking money in from selling the oil they produce, they constantly need to borrow more just to keep the party going. Or as economists would say, they are free cash flow-negative. Several frackers have declared bankruptcy.

A particularly startling statistic is that, according to the advisory firm Evercore ISI as cited in a December 2017 article in The Wall Street Journal, over the preceding decade energy companies spent $280 billion more on fracking than they made from it. The frackers since 2011-2012, when fracking started in earnest, are more than a quarter of a trillion dollars in the hole.

Their problems reflect limits that are inherent in the nature of fracking. Among other challenges, fracked wells get depleted far more rapidly than conventional wells. It’s not uncommon for fracked oil wells to experience 60% depletion within the first year of operation. Conventional wells and oilfields often continue to produce for decades.

Another knock against fracking is that it has let us take our eye off the ball when it comes to the critical task of making a concerted nationwide push to develop renewable energies.

Where does China pose the biggest risk to America?

I would frame the risks related to China in a broad context, one that has as much to do with the U.S. as with China itself. It starts with the fact that the developing world has become the engine of global growth, and it’s avid to raise its living standards.

Now realize that for average per-capita income in the developing world to rise merely to what’s considered poverty level in the U.S., a low bar, it would require the world to use three times the amount of resources we currently use. There’s no evidence the world’s endowment of resources can support that need. I believe the ascent of the world’s emerging economies will leverage commodity gains.

Read This Story: Why You Should Not Ignore Commodities

It’s not hyperbole to say that poses an existential challenge and the risk of rising unrest on a global scale. I think the world’s only chance of finding solutions will be if the world’s two biggest economies, China and the U.S., work together rather than at cross purposes.

How big an investment opportunity is the global roll-out of 5G wireless technology and which types of companies stand to benefit the most?

The potential from 5G applications is vast. However, the difficulty for investors is that 5G is so new and unproven that betting on what will be the hottest 5G trends is speculative.

I think one smart approach is to bet on companies that provide the infrastructure. No matter which 5G technologies and providers become most popular, they will need infrastructure to function.

I especially like companies that build and rent out cell towers for wireless service carriers. Those that invest in small cell sites are intriguing. Due to the nature of the radio waves used for 5G, antennas must be within a few hundred yards of connected devices, which means essentially on every street corner.

These companies or the REITs that hold them may not have the biggest upside, but I think they’ll enjoy large, growing and recurring revenue streams as 5G proliferates.

5G software and hardware providers also stand to benefit, but they may find it hard to beat Huawei globally, even if Huawei is banned in parts of the West. Huawei is a private Chinese-based company so regular folks can’t invest in it. China is making huge strides in 5G that threaten to leave American behind.

I also see smartphone, laptop and tablet makers as beneficiaries. They will form the control hub of a personalized 5G network of connected devices as part of the Internet of Things and smart cities.

Editor’s Note: In the above interview, my colleague Stephen Leeb provided insights on key issues involving America’s powerful rival, China.

As Steve discussed, a battleground in Sino-American competition is 5G, the fifth generation of wireless technology that will unleash a quantum leap in productivity.

We’ve put together a new presentation on investment opportunities in 5G. Click here for the full report.

John Persinos is the editorial director of Investing Daily.