The New Sector Rotation

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. I'm pleased to welcome back John Hathaway, Managing Partner and Senior Portfolio Manager at Sprott, along with a new guest, Michael Belkin, Market Strategist and Founder of the Belkin Report, a weekly proprietary market forecast research report. John and Michael, thank you for joining me today on Sprott Radio.

John Hathaway: Thanks, Ed. Let's get going. Michael, to get started, why don't you tell us a little about your background, how you got to where you are now, and maybe going back to your days at Salomon Brothers?

Michael Belkin: Hi, everybody. Thanks for having me on the show. I came out of UC Berkeley Business School, and my driving passion there was applying forecasting models in innovative ways. I wasn't happy with what I learned in econometrics. It wasn't very powerful, so I studied time series analysis. Back then, nobody was looking at it. It's now become a thing. If you google time series analysis textbooks, there's a bunch of them. Back then, there were only one or two.

I studied the mathematics behind time series analysis. In terms of forecasting, it's Fourier and Box-Jenkins[1] with the things that I studied. That got me into Salomon Brothers back in 1986, hired by Laszlo Birinyi. I worked in market analysis with him for a number of years, and then I developed this forecasting model based on my studies at Berkeley. I developed it more at Salomon Brothers. People say, “Is it technical analysis?” It might look like technical analysis, but it's based on probability, so it's statistics-related forecasting.

I'm looking at a 12-period forward forecast using weekly and monthly data. A 12-week period is a three-month time horizon. A 12-month period is a one-year time horizon. The model gives direction, position, and intensity. Direction, up, down, or neutral; position, beginning, middle, end; and intensity or confidence interval. Direction, position, intensity. That's always what I'm looking at and looking forward, not looking in the rearview mirror. Whereas if you look at most chart systems, they end today. It doesn't tell you what comes next. You just have to make an educated guess.

I ended up in proprietary trading, had some good calls and worked with the vice chairman, Stanley Shopkorn. I moved out of market analysis into prop trading. I was a quantitative strategist in equity macro trading for the last few years I was there. I left in 1991. In the end, I started the Belkin Report and have been doing it ever since.

Now, just to flesh that out, the models are certainly not 100%. The financial markets are one of the most complex systems out there, and everything is always changing. The model is particularly good on relative trades. It picks up big moves. I've been bullish on gold and gold stocks for the last few months. It's also good at saying the ratio of the GDX to gold or gold stocks relative to the GDX. In terms of outperform ideas, that's where I spend most of my time. That's what the Belkin Gold Stock Report is about. Trying to pick stocks that outperform the XAU (Gold Spot US Dollar Price) index or the GDX (VanEck Gold Miners ETF). That's what I do. Direction, position, intensity, trying to point out outperform ideas and stocks you don't want to be in and stocks you do want to be in.

John Hathaway: You've been doing this for over 40 years. You do more than gold. That's one reason I like you. You don't have to like gold. You can pan it if what you see suggests that's what you have to do. I'd like you to recount for the listeners some of the good calls that you've made since you started this 40 years ago.

Michael Belkin: Remember, it's direction, position, and intensity. The third one is the intensity or confidence interval. The confidence interval is not always there for everything. It just sets up at certain times with different things. Back in March 2000, at the top of the tech bubble, I'd been an independent research provider for a long time, and Instinet picked me up and took me around Europe. I said, "This is the top; this is all over." I had long been semiconductor stocks before that, but I said, "This is the top of the bubble." That was like February or March, and the market topped out. Nasdaq topped out in March 2000 and went down for two years. Nasdaq went down, I think, 88%.

John Hathaway: What pushback did you get when telling the Europeans they were in the wrong stuff?

Michael Belkin: That was funny. I remember giving a speech at the Paris Stock Exchange. There are hundreds of people there. Some French guy came up afterward and said, "Does this mean I'm going to lose my job?" I know it's funny. He probably did. It's not the end of the world. There are cycles. Things go up, things go down. The model was very bullish at the bottom. In 2002, things bottomed out. 2003 ended up being a long-term call to go long again. I'm not permabear or permabull—just whenever the model sets up.

Of course, during The Great Financial Crisis in late 2007 and 2008, everything pointed down; the wheels were going to come off. The models on top of that turned bullish in early 2009. I remember giving a speech at the CFA Society in Seattle about the light at the end of the tunnel. Unfortunately, at that point, all these portfolio managers had been fully invested all the way down, and they were glad to hear that the end might be in sight, but there was nothing they could do about it because they didn't have any cash. They'd just been dragged into the gutter by the bear market.

That's what I try to do: help people anticipate some of these moves. The way it looks now in the long-term forecast, everything's down. We're still seeing this crazy bid from retail in all these tech names every day. You know, at the open, it’s buy, buy, buy, buy, buy. This looks like a major long-term top. I'm glad Trump won the election. A lot of things that he's doing are positive for markets, deregulation, et cetera, but I think he's been handed a poisoned chalice, and everything that's been going wrong for the last four years is coming back to haunt us. Anyway, the forecast looks like a long-term top.

John Hathaway: Would you say it’s similar to what you saw in 2000?

Michael Belkin: Yes, absolutely. Back then, the internet was the big thing. Everybody was using it, and it was, "Oh, the internet is so great," and all these companies came out. All these little piddly companies, their stocks went to the moon, but a vast majority of them disappeared. They were supposed to disrupt things, but we didn't know who would be the winners of the internet at that time. There was Cisco and Microsoft, but these other companies were embryonic. The Mag 7[2] stocks developed over the next few years or decades.

Now we've got these entrenched monopolies, all the Mag 7 stocks, and they're throwing all this money into huge investments into AI infrastructure, hundreds of billions of dollars. Will it pan out for these companies? This is different in one sense from then because everybody's betting that the ones that are quasi-monopolies or oligopolies now are going to be the leaders going forward. I have a feeling there's going to be some kind of a shakeout. I'm not a fan of Mag 7 stocks. I think there's a great rotation going on. A lot of what I do is focused on sector rotation.

Back in 2000, I remember one of my hedge fund clients saying he had one of his best years ever because his shorts went down and his longs went up. Back then, you could buy utilities, financials, healthcare, consumer staples, and other things that had been left behind in the 1999 tech rally. Then those stocks rallied while tech went down. I think we're on the verge of something like that starting to happen.

Healthcare is starting to outperform. Staples look like they're bottoming. Utilities have bottomed a while back in ratio terms. Healthcare, utilities, and don't forget gold. I look at Gold as a sector, even though it's not an official sector, and I have a long-term outperform forecast starting. That's a good place to stop right there.

John Hathaway: Before we move on, please give us a general idea of your client base.

Michael Belkin: I'm low profile. I'm not always on CNBC, Bloomberg, or things like that. Pretty low profile, below the radar. My clients are big hedge funds in New York, big long-only funds in London, private family offices, and private banks that have been around for hundreds of years. In the Middle East, sovereign wealth funds. Hong Kong, I have hedge funds and bond managers. A lot of my clients are fundamental stock pickers. The Belkin Report is an overlay of what you would be doing as a stock picker. It helps explain or predict some of the variations in sector rotation.

John Hathaway: We should talk about sector rotation for a second. I remember you told me that Druckenmiller said that sector rotation was the best economic forecaster out there.

Michael Belkin: Right now, my sell ideas are mostly tech. Semiconductors, computers, software, New York FAANG, Bitcoin stocks, and other things like that. Those are shorts.

John Hathaway: If you see a come-up, it’s for Bitcoin.

Michael Belkin: Bitcoin, I'm not a fan of. I'd be long, gold, and short Bitcoin. I think Bitcoin's over-owned at this point. I'm not a permabear in Bitcoin, but it's just shot to the moon, overdone. It could go down to the 200-week average easily, which is a long way down 40,000 something. That's the short ideas. Then there are a lot of cyclicals in there, too. The model also applies to economic indicators. I don't want to spend a lot of time on that, but it looks like we're at the top of economic cycles. It's been prolonged by excessive government spending, and now the new administration is rapidly pulling the plug on that and laying people off.

That's going to start showing up. The economy, I think, is going to weaken. There are a lot of things, like machinery and building products. These stocks went to the moon; they're rolling over, as well as containers and packaging, construction material, things like restaurants, air freight, and autos. I have a different approach to short ideas. It's an overlay of what they do. Some of these, like EV stocks, look like they're going to zero. Also, solar stocks were very popular. Now, they're not up a lot. They're down, but they're on a Bataan Death March^*…. .

These other stocks are way up, but Bitcoin stocks and construction are not. If that's going to go down and underperform, what's going to go up? I have gold mining at the top of the list. It's been working great for the last seven weeks. Gold is up seven weeks in a row. After that, it's chicken longs. Healthcare, pharmaceuticals, healthcare equipment, these stocks are in the gutter. By the way, these were on the underperforming list back when RFK was rumored to become HHS secretary, which he was just appointed yesterday and approved. They killed the drug stocks and healthcare providers, all these things. They're in the gutter now. One thing I've learned, buy low, sell high. That's what works in the market.

John Hathaway: It's putting into practice, which is the hard part.

Michael Belkin: Yes. The model is always looking to time that so as not to catch the falling knife on the way down. Healthcare looks like it's bottomed. Those are outperformed. Food and drug retailers are taking off. Food products, beverages, and things like that in the gutter are just turning up. If you look at the ratio of utilities to the S&P, it bottomed months ago. Those are chicken longs. By the way, bonds.

John Hathaway: Yes, let's talk about bonds because I went to a conference about a month ago, and the air was so thick with bearishness on bonds. There was only one contrary view there, which was bullish. I think it's important relative to gold just to hear your thoughts on treasuries.

Michael Belkin: Yes. Anyway, direction, position, intensity up. Bonds are a buy. By the way, the chart in this week's Belkin Report was short interest in the TLT. It's just off the map. It's never been this high. It's like two or three times higher than it's ever been. That fits in with what you just said.

John Hathaway: Yes, super crowded trade on the bearish side of bonds.

Michael Belkin: Right. Why would bonds want to rally?

John Hathaway: Yes, good question.

Michael Belkin: It's interesting. The model doesn't give you a reason. The model gives you a cyclical time series analysis prediction of what markets are looking for an excuse to do. I try to overlay my own interpretation on that; I'm an investment strategist; what's going on in the world? How do the pieces of the puzzle fit together? It doesn't make a lot of intuitive sense. We had hot CPI and hot PPI, but it was not looking great on inflation. Why would bonds rally? I think that's the hook that gets people into thinking tariffs are going up, inflation is going up, there got to be short bonds, Trump's bad for bonds, etc.

I'm not seeing it. I think it's a very crowded, short trade. Why would bonds rally? Economic weakness. That's putting on my investment strategist hat, saying, why would bonds want to rally? Partly short covering. We got this retail sales report this morning. It was almost a disaster. Looking down 7.7%, I believe. X Auto is down 0.4, I believe. That's a shock to everybody. It's not a shock to me. I think we've been coasting on these fumes from Biden's excessive stimulus for years but stuffing it into the economy at the end of the year, wanting to get Harris reelected.

All that's running off. I think that the economy faces a reckoning. I think bonds will rally. That's good for gold in a weird way because if the economy really craters, the Fed will be cutting again.

John Hathaway: Right. If the economy softens, the pressure on the Fed will be enormous to cut rates, even if inflation is stubborn.

Michael Belkin: Another piece of the puzzle that fits into this equation is the dollar top. The model was long the dollar for months. It had a big rally, DXY and all these other currencies. The dollar looks very toppy to me. As I said in the report in the last few weeks, I've been waiting to short the dollar. I think it's time. I think it's here. I will have to look closely this weekend. Dollar top, bonds rally, gold rally, economy weaker, reach some cyclical top. It fits into a scenario beneficial for gold and bonds and defensive industry groups and sectors.

John Hathaway: In this cycle, when did you start to warm up to gold? Because I know, again, to reiterate, you're objective. You're not perma one thing or another. When did you start to see inklings of a better environment for gold, the metal? Then we'll talk about the stocks in a second.

Michael Belkin: There was a nice rally in 2004. From about March to October, it peaked. GDX went from 26 to 44. The model was long last year. I liked it. It was negative or standing aside from about October until December. Then everything started turning bullish late last year, early January. Everything's ranked in the Belkin Report. Gold stocks became the top recommendation a couple of months ago. We're probably two months into something. To put that in perspective, if you look at physical gold, it's way above last October's peak. Yes, gold rallied from June to October and sold off a little bit. It's way above that level. The GDX is barely back up to it yet. You and I have often discussed this when gold stocks have been in the outhouse. 

John Hathaway: Relative to the gold price, they've been disappointing.

Michael Belkin: Gold is in the penthouse, and gold stocks are still in the outhouse. Again, the model direction, position, and intensity are looked at in a ratio. I do a ratio of GDX or XAU to gold. It's turning up so strong in both timeframes. Gold stocks are forecast to start outperforming physical gold.

John Hathaway: That's definitely a shift.

Michael Belkin: Silver is also below last October's peak. The model likes silver stocks, and there's such a shortage. I know you guys have just started a silver stock ETF. I think it's great timing, and I applaud you for it. There are so few plays—maybe 40 or 50 stocks. None of them are pure plays, but they're all variations in how much silver exposure they have. They've been, again, in the doghouse, in the outhouse. I'm not dancing on the table, saying buy everything in sight.

Gold has been up seven weeks in a row (as of 2/14/2025), which is a lot. If you look at weeks in a row, usually, it doesn't go up more than maybe 10 at the most. That's few and far between. I wouldn't be surprised to see a pullback. Remember, the idea is to buy low and sell high. You don't want to chase things when they're up a lot. Rather, you want to buy pullbacks because this looks like an extended move. It's got the fundamentals behind it: economy weakening, bonds potentially rallying, pressure on the Fed to ease, not right away, but later this year, dollar topping. Yes, we can have a pullback, but it looks positive. The Belkin forecast is up.

John Hathaway: Gold could be taking a rest or might take a rest because of its strong performance over the last several weeks. Normally, we who follow the mining sector always look at metal prices and think there's a correlation and that if gold goes up, the stock should go up. That hasn't happened. Could we be in a period where gold marks time, maybe has a garden variety pullback, but gold stocks start to behave better than they have?

Michael Belkin: I think so. They could pull back a little bit, too.

Michael Belkin: What does that say? It just says the big guys, most of the time, couldn't care less about gold stocks. They might dabble in gold as a macro asset, but suddenly, I see a potential hedge fund asset manager's interest in large-cap gold stocks. That's the kind of thing that could power an extended rally.

John Hathaway: In your interaction with your large hedge fund clients, are you getting incoming on this space?

Michael Belkin: I have one client, a private family office, a European billionaire guy, and they know the gold market well. I don't talk to them often, but I know they are active traders. When a big move happens in the gold stocks, they're all over it. That's one example. Other than that, no.

John Hathaway: The one you just mentioned is an outlier. That interest from large-cap funds that need large-cap positions in the mining space is still on the horizon.

Michael Belkin: Absolutely. It looks like hedge fund and asset manager positioning is still ultra-long in these large-cap tech stocks, Mag 7-type names.

John Hathaway: Yes, they haven't gotten killed yet.

Michael Belkin: No. This rotation is supposed to happen out of that kind of stuff; everybody's talking about it. If you look at CNBC and Bloomberg, everybody is talking. They're not calling it Mag 7 anymore. They're calling it Mag 1 or Mag 2. They haven't collapsed yet, but they're not going up anymore. They're losing umph. I think that inevitably leads, as the signs of economic weakness show up, to what's going to work in a weakening economic environment. That would be bonds, defensive sectors, and gold stocks.

I think we're on the path to progress. The flows could go out of that overrun stuff into something else. That something else remains to be determined, but the model forecast says it's defensive stuff and gold stocks.

Ed Coyne: John, do you have anything to add about how you see gold equities?

John Hathaway: Yes. I'm sympathetic to the idea of contrary opinion. First, the average investor would look at gold and say, "Whoa, I've missed it." You can see a lack of flows into the gold-backed ETF GLD (SPDR Gold Trust). Maybe that's turned around recently. I don't look at it every day, but it's been over five years, basically net liquidation. Here we are knocking on the door of 3,000. I guess that most people, especially investment professionals, will say, "That's nice," but it's late in the game, isn't it?

My point of view is that maybe we should go sideways for a bit, as Michael said earlier. I think the ingredients are there for a substantial further upside, perhaps even a double from here, which I think will make me sound like a raving lunatic. I've been called that. We're in a different world for a lot of things macro. We're no longer a unipolar world, as Marco Rubio just said. It's a multipolar world, which is more normal. Maybe there's a need for gold to be reintegrated into the monetary system, and then the question is, at what price? It's probably going to be higher if they do that. That's gold.

Let's say gold takes a rest. These stocks are so out of favor —I wouldn't even say out of favor. Nobody cares. There really isn't a lot of liquidity for generalist flows to get invested. I recently heard something I love that says, where there's liquidity, there's no value, and where there's value, there's no liquidity.

There's no liquidity in gold stocks for big money, but that tells me there's real value. In a scenario where gold has already way outperformed the stocks and may correct for a while, but then maybe take off again, there's tremendous upside in the equities. That's my point of view. Again, Michael, he could go either way. I'm glad to have his input. I have to be less credible in a way because I'm talking about my book. Here's a guy who's got a long history of making great calls at market tops and bottoms. I'm glad, frankly, that he is looking favorably on our space.

Ed Coyne: I'd like to hear from both of you. From an investor's point of view, how should they start looking at gold then? Maybe for an investor that hasn't invested in it in the past, how should they look at both physical gold and gold equities? John, perhaps we can start with you. I'd love to hear Michael's point of view on that as well, but what should you think about it?

John Hathaway: I would come at it differently than Michael. Gold doesn't have counterparty risk[3]. For a lot of people, it's a speculation on the decline of paper currency, which has been going on for all of history. I don't think a lot of people know that gold has outperformed the S&P 500 and the bond market for the last 25 years. I think the better reason to position gold is that it's a diversifier in an overall portfolio. It has uncorrelated performance returns to financial assets. I think that's the big reason.

Then beyond that, I think if you want octane to that point of view, if you do agree, for example, that we could be in a world where there's a monetary reset, maybe a reintegration of gold into the international trading regime, then there's a lot of upside for gold. Then look at these poor gold socks. They give you tremendous octane, outperformance alpha, or whatever you want to call it, from that point of view. That would be coming from me, what I see. It's a longer-term view, I think, that Michael has-- It's certainly not day trading. I'll let him speak for himself, but it isn't as long-term necessarily as I have. Michael, why don't you wind up with your input on that?

Michael Belkin: Back to the idea of what an investor should do, I was happy to see that you guys came out with a silver stock ETF. That'd be a good start. The market is such a weird place. Today, silver is up almost 2% and the silver stocks are down. I don't know this crazy hall of mirrors that we're in. The machines and the algorithms that knock things around are just crazy.

Beyond that, there are a lot of opportunities within the gold space. If it keeps going the way the model forecast is supposed to, this bull market will attract attention to a lot of these more intermediate and smaller stocks. I'm not saying go buy everything on the Vancouver Exchange. I'm cautious about a lot of Vancouver names that don't have any fundamentals. Moose pasture, as they're known.

I'm not saying to buy moose pasture stocks, but I think there's the intermediate. That's what I try to focus on in the Belkin Gold Stock Forecast: stocks that can outperform and things you want to be in for the next two to three months. I trade them, but not quick flips, but positioning.

Ed Coyne: To that point, how could a listener who wants to follow your work, what you're doing, potentially other interviews you do, potentially subscribe to your newsletter find you?

Michael Belkin: I'm a one-man band here. I have somebody who markets my research, Marc Mishkin, Hyperpyron, H-Y-P-E-R-P-Y-R-O-N. Hyperpyron. If you go there, you'll see the Belkin Gold Stock Forecast. They also have an abbreviated version of the Belkin Report. The full Belkin Report is expensive; it's for institutional investors. It covers everything. There's a carve-out of that, just the first few pages. You can also find that on Hyperpyron. If you're initially interested in finding out about Belkin Forecasts, look at hyperpyron.com.

Ed Coyne: Wonderful. Thank you. Before we sign off, do you have any final words of wisdom from either of you?

John Hathaway: We could ask Michael about his days as a musician in a rock band. Maybe his clients don't want to know this, but he rides mountain bikes, breakneck, downhill in British Columbia.

Michael Belkin: Yes, those two are intertwined. The rock background instrumental tracks were done. I spent about a quarter or maybe 30% of my summer in Whistler Bike Park, going down Alpine Peaks at higher rates of speed, trying not to break my neck. Anyway, I'm so grateful that you guys have me. I appreciate it. It's been a delight being here.

Ed Coyne: Gentlemen, thank you both for joining us. Once again, I'm your host, Ed Coyne. Thank you for listening to Sprott Radio.

1. Fourier analysis is a mathematical technique that decomposes complex time series data into components that are simpler trigonometric functions. The Box-Jenkins Model is a forecasting methodology using regression studies on time series data, a methodology predicated on the assumption that past occurrences influence future ones (Investopedia).

2. The "magnificent seven" stocks are 7 technology stocks that drove a large portion of the market's returns in 2023 and 2024. The list includes Apple, Microsoft, Amazon, Alphabet (Google), Tesla, Nvidia and Meta Platforms.

3. Physical gold, such as gold bars and coins, generally does not have counterparty risk because you directly own the asset. This means its value does not depend on another party's ability to fulfill obligations.

*Bataan Death March