Batten Down The Hatches

When I was student in the Stagflation 70’s, the only two budget items about which I cared were beer and gasoline. My hockey scholarship paid for everything else so I was largely insulated from the ravages of inflation, unlike many of my contemporaries that would resort to stealing steaks from the local Schnuck’s or frequenting the All-You-Can-Eat buffets with iced-down cooler bags so they could abscond with a few dozen pounds of cold meats and bread to deal with the “midnight munchies” after an evening out. Whatever the rate of inflation, you learn how to adapt to conditions with whatever means available but one interesting aspect of human behaviour is how extreme we behave when conditions are extreme. One look at the chart of commodities in 2022…and one is immediately struck by the price movements which, in case you have yet to notice, have moved from “remarkable” to “EXTREME”.

Now, what we learned from those geriatric Jesuits that taught us economics back in the 1970’s was that there are two types of inflation: “cost-push” and “demand-pull”. Looking back to 2008, it was the U.S. banks that fired up the sub-prime fiasco only to have a mammoth credit creation orgy bail them out of a certain self-immolation and in doing so, the Fed championed the cause of fighting any and all economic stresses with the printing press. What resulted was moderate consumer price inflation, but acrid financial price escalation which allowed the elite classes to enjoy serial enrichment while the deplorables were content to leave their torches and pitchforks in their garages because maintaining obesity was not costing them more money.

That was all fine and dandy until 2020 when the geniuses at the helm saw the money-dropping helicopters heading back to base camp so they decided that a good old flu bug could be spun into a global pandemic which they did with masterful precision and total coordination between government, the media, and Big Pharma. The result was an immediate cessation of supply chain efficiencies accompanied with a torrent of new, wet-ink, currency creation such that the combination of reduced supply (pushing costs up) and exaggerated stimulus (pushing demand up) gave the world an astonishing one-two, Iron Mike Tyson assault of cost-push PLUS demand-pull inflationary pressures, the result of which we are now experiencing thanks to the lag effect of these disastrous but very much intended policy errors.

With the S&P 500 now closing out the week officially in “correction” territory (- 10% or more), there is little doubt that the world has entered a prolonged period of sub-par returns. The only uncertainty for me is whether or not the cessation of hostilities in both the Ukraine and the cyber, media, and financial battlefields will result in the “final melt-up rally” that everyone and their least-favourite in-law think is coming. From my perspective, markets appear to be bifurcated with commodity (particularly oil & gas) investors partying like 1979 while everyone else is wearing black arm bands. Where I stand apart from the “Melt-Up” missionaries is that the severity and velocity of these price increases virtually guarantee that a recession is either here in its early stages or on its way. Secondly, with the withdrawal of the credit-creation punch bowl and the hawklike warnings of the Fed and its other central bank brethren, they have reversed the Tyson-esque left-right combo of dual inflationary punches by threatening to raise rates into a rapidly-decelerating global GDP. Without me getting overly political, do not think for a NY moment that these anti-Russia sanctions are inflationary; they are massively deflationary because the creation of clogs in the intra-bank plumbing lines is never conducive to the generation of global growth. If intra-bank lending is the blood that flows through the global economic body, sanctions are like tourniquets on all limbs the windpipe. The victim usually succumbs to lack of blood flow to the brain and loses consciousness before the lights go out completely and forever. In fact, I suspect that the tourniquets to which I refer have already been administered to the politicians behind the sanctions, since their policy decisions are mired in a distinct lack of forethought and absence of cause-effect logistics.

During the past week, I elected to close out the GDXJ May call options along with SLV calls and my tax-loss favourite Fortuna Silver for YTD returns exceeding 65% for the calls and 20% for FSM. All junior and senior gold miners were seriously overbought with RSI readings in the mid-high 70’s. Even my darling copper moved for a very brief period into overbought status but the subsequent near-10% reversal the very next day (after surpassed USD $5.00/lb. for the first time in history) has since given me cause for concern. In fact, copper’s refusal to join the oil & gas lovefest during the latter part of the weak is an omen of sorts that all is not exactly a no-brainer in the world of “to-da-moon” commodities.

On a positive note, the last time uranium traded at $60/lb. it was February, 2011. It was not a happy time; the price had reached nearly $140/lb. four years earlier (2007) and was declining from the $75 level which was the peak of a classic bear market rally reached in December 2010. Accordingly, from a technical perspective, this type of move sets up a re-test of that fateful death trap level of USD $75/lb. and if that 2010 highs are taken out, uranium stocks are going to go on a complete tear. I have owned only one uranium/vanadium developer since 2017 and that is Western Uranium & Vanadium Corp. (WUC:CSE / WSTRF:US) (CAD $2.88 / USD $2.26) whose historical resource (56 million pounds of U3O8) priced at a tad above USD $1 billion five years ago, today carries an in-situ resource value of over $3 billion and yet with 38 million shares issued, it carries a paltry USD $111 million market cap. Subscribers bought the January unit offering at CAD $1.60 and are now well-positioned for rewards in what has been described as “the most asymmetric trade of the last two decades”. The uranium story is totally insulated from central bank policy errors and global economic trends – utilities need uranium that is now in shortage condition which will only get worse in the coming months.

As you all know full well, I am a gold investor and a gold bull but what I am not is a gold “bug”. I do not think that gold has to represent 100% of my net worth statement at all times nor do I believe that the world is returning to a gold standard any time soon. What I do believe is that conditions favouring gold ownership have never been better than in the past decade with particular emphasis on the period after the emergence of the insane policy responses to the Wuhan leak in 2020.

Now, that said, gold’s response to these optimal conditions has been less than inspiring because of the sheer magnitude of the policy responses to first the GFC (2008) and then COVID (2020) where literally trillions upon trillions of dollars were manufactured out of thin air to keep the asymmetrical wealth effect in play. In fact, the amount of global currency units conjured up after gold reached its peak in 2011 above USD $1,900 has been so monumental that on a basis relative to the degree of currency debasement globally, gold in U.S. dollars should be triple that price point – and it is NOT. Without descending down the rabbit hole of conspiracy theory head-banging, someone or something has it as their mission statement – their raison d’etre - to suppress gold prices, plain and simple. This is not the case for oil, for gas, for copper, or for wheat, corn, and soybeans. The idiocy of suppressing precious metals to mask this insidious debasement of a person’s paycheque through sanctioned monetary counterfeiting is beyond all rational explanation – and yet, it happens.

This is precisely why I have created the diagram shown here. Created in early January, all of these assets have been invaluable cornerstones for the defensive portfolio. Volatility (VIX) is ahead 75% YTD while cash has been preferable to the Dow or the S&P by a wide margin. As we approach the spring of 2022, I would probably move uranium to the top position with cash right behind it. Since these were prioritized before the Ukraine was invaded and sanctions imposed, none of the commodity spikes had yet occurred so that must be adjusted for now.

As the week draws to a close, I am reminded of the famous line from The Wizard of Oz (1939) in which the heroine looks at her little dog and says “Toto, I’ve a feeling we’re not in Kansas anymore.” To those of you anchored in the transitory assumption that a basket of commodity-producers alone will set you solidly apart from the performance-craving throng, I would suggest you do a YouTube search for anything recent from Dr. Lacy Hunt, whose convincing array of charts and data sets calls for a deflationary reaction to stimulus withdrawal and Fed tightening. I am not necessarily saying that I am completely sold on the prospect of copper with a 3-handle or oil back in the $60’s but it is an argument that we all should hear. With the mid-term elections coming up this November, the vast majority of votes are going to be cast by individuals adversely affected by a 7.9% CPI reported earlier in the week and if there is one notion totally bankable with your granddaughter’s tuition money, it is that politicians will do anything and everything, including blowing up the economy, for votes. On that basis, expecting them to protect the economy while saving the stock market at the expense of working-class votes is like thinking you are in Kansas as some old hag on a broom writes your name in the sky.

Disclaimer: This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

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