Global Markets: “Trench Warfare 2022”

My grandfather was a WWI veteran serving with the Canadian division of the British Army in most of the major battles in WWI in Europe, including Vimy Ridge and Passchendaele while fathering six children in the Toronto neighbourhood of Parkdale. I never had the pleasure of meeting “Roland” Ballanger because after being exposed to the infamous German “mustard gas” first introduced at Vimy, his ravaged lungs were too weak to fight a particularly virulent pneumonia he contracted in late 1928, leaving my grandmother to rely on my father (William Roland Ballanger) the eldest of her children, to leave Northern Tech in grade ten to earn a living selling day-old bread during the 1930’s. The stories of Roland are many and brightly coloured as are the tales of Canadian bravery during that most-horrific of conflicts but luckily for the citizens of the day, the news that came back to Canada was at once both very late and often dated but what it was not, was tainted. For that very reason, I somehow long for the days of 1914-1918 knowing full well that it was not an especially kind period for most.

For most of the past thirteen years since the U.S. Congress elected to bail out the global banking industry, investors have been forced to accept “official” reports from the government pegging inflation “ex-food & energy” as either “benign” or “transitory”. While literally the entire universe of stock investors accepted these doctored reports as positive, they quietly moved money from savings accounts to trading or investment accounts knowing full well that “stuff” was appreciating a great deal more rapidly than the figures suggested in these media-hyped proclamations. It further exemplified the political symbiosis that has been present between the U.S. Commerce department and the U.S. Federal Reserve Board because the Fed sets their policy mandate from the figures provided by Commerce. As long as inflation ran “below target”, they could focus upon maximum full employment by providing accommodation for stocks in a ridiculously “lower-for-longer” interest rate environment.

However, we are now well into 2022 with Spring just around the corner with the rules of engagement now inexorably altered to target inflation as opposed to employment. Only since the creation of the “Creature from Jekyll Island” in 1913 has such a shift had such a dynamic and deleterious effect upon investor sentiment to the extent that Wall Street is once again screaming for Fed assistance because of an S&P that has not yet fallen enough to satisfy the definition of it being in a “correction”. Down a mere 9% and we have social media types including crypto cheerleaders and meme stock advocates calling this a “Markets in Turmoil” event because they are losing money for the first time in thirteen years.

The mainstream media continues to customize the news reporting function to attract the Millennial and Generation X followers in a manner that has seen the persona of Vladimir Putin go from hero to villain inside of five years. Shell Oil has been operating in Russia for years and has received support from the Putin government and while this relationship was being hailed as a “new era of peace and progress” between Russia and the West, the media is now painting him as a “Hitler-esque madman”, hell bent upon conquering the entire European continent. Just as we are now discovering that the side-effects of the various vaccines are enormously dangerous to various segments of the population, the MSM was shoving them down our throats under government edict in total violation of the Charter of Rights (Canada) or the Constitution (U.S.).

There was a time not so long ago when one could read a newspaper or watch a news report and whether it was Peter Mansbridge (CBC) or Walter Cronkite (CBS), you had the sense that you were being given factual accounts of domestic or international events, completely bias-free as to politics or money. That is not to suggest that a certain degree of taint was not present in those newsrooms but compared to what we get thrown at us today, especially through the internet and social media, Mansbridge and Cronkite were Sunday School teachers by comparison to the carnival barkers reading from teleprompters whose content has either Wall Street or Washington, Bay Street or Ottawa, as its progenitor.

In the 2022 Forecast Issue, I provided this inverted pyramid to illustrate which of the asset classes that I considered key to performance for the balance of the year. Not knowing that I would be contending with a disruption in oil from one of the world’s premier exporters (Russia), I omitted oil from the pyramid but, to the extent that $115 oil can only be seen as a stimulant to the pricing of uranium through eventual substitution, I see the current vertical ascent in crude prices as a powerfully-bullish force in favour of nuclear power.

Copper broke out to an all-time high weekly close of USD $4.94/lb. this week which most certainly validates my forecast relative to gold and silver. All of the base metals are currently marching toward (if not already at) ATH’s which is at once both satisfying (from the perspective of reputational accuracy) but also worrisome (from the perspective of the “crowded trade syndrome”). I can make the case for copper and uranium from a historical viewpoint but am at a loss to find a similar fundamental case for lead as an example, currency debasement notwithstanding.

The problem I have lies in one very simple reality concerning the price of oil and unleaded fuel, heating oil, propane, and natural gas. They are pricing in a guaranteed economic recession and as the pundits are so eager to tweet out these days, oil above $100 and the collapse of the 2-10-year yield curve have never failed to forecast recession. If they are accurate this time, the “supply shock” narrative will get harpooned by the “demand destruction” narrative and all of these popping champagne corks will be replaced by wails of anguish.

Further adding to my concern is a great discussion I had late week with colleague David Chapman (newsletter) whose call on oil has been scarily correct forcing me to hide in the basement under a loose floorboard. David points to the possibility of a financial “Black Swan” moment brought on by the ejection of the Russian banks from the Swift system. If the Russians decide to default on their global debt position, it will set off a contagion not seen since 1998 when the term “counterparty risk” nearly vapourized the global financial system. Whether the rocket scientists in Washington and Brussels realize it, Russian banks are counterparty to millions of transactions around the world putting the entire global banking system in a precarious position. An even greater implication is the trustworthiness of the system of central banking where everyone carries U.S. dollars as their reserve currency on the assumption that the question of ownership is unassailable. This past ten days have obliterated any notion of that because any dollars held in reserve by the Russian central bank have in effect been confiscated.

How can the PBOC any longer carry dollars in reserve with the knowledge that they really do not own anything? It sets into question the role of the U.S. dollar as the globe’s reserve currency and further questions the invincibility of the banking system which may be what recent upward probes in gold and silver are flagging.

One of my largest positions has been in the Junior Gold Miner ETF (GDXJ:US) by way of an overweight position in the May $43 calls. I have avoided disaster with this position since last summer by legging out to May thanks to a fortuitous advance in late October that allowed a dollar-for-dollar switch from the November expiry to May. Now that these calls are up 46%, I am looking at an RSI in the very high 60’s against a massive shift in sentiment to the bullish camp from what was for most of 2021 best described as “black bearish”. While the Junior Gold Miner ETF could stay overbought for weeks, as it did in the summer 2020 advance, I have to be concerned about similar overbought conditions for gold and silver as well as the overhead resistance right here at $1,975. With silver still over $4 off the 52-week high, it represents a negative divergence to the entire PM complex so while I remain bullish looking out to the second quarter of 2022, the spectre of a quick-but-nasty correction brought on by either a black swan event or a cessation of hostilities in Eastern Europe has to be weighed.

This week I have initiated coverage of a company whose attributes are nothing short of compelling. Max Resource Corp. (MXR:TSXV / MXROF:US) (CAD$.35 / MXROF:US) I had a call from a colleague this week with whom I have conversed numerous times and since he is a professional money manager, I shall keep his name in the background. Suffice it to say, this is a very competent and qualified mining investor (and a geologist by training) who has been extremely successful during his tenure as fund manager. His description of Max’s Cesar copper-silver project in a mining-friendly region in northern Columbia had me scrambling to get up to speed on world-class copper projects such as the Kupferschiefer copper-silver orebody in Poland. There are several distinct similarities between that deposit and Cesar but one important major difference is that Kupferschiefer runs at 500 metres below surface while Cesar outcrops at surface. I am in the process of completing a report on what I consider a world-class, district-scale-potential exploration play that should commence drilling by early May. (If interested, email me at [email protected].)

As for the junior precious metals developers and explorers as a group, I think that the groundswell of investment capital descending upon these names is going to be absolutely epic once the old highs of USD $2,089 (gold) and USD $29.755 (silver) are breached. In the interim, I am sticking with my #1 metal pick – copper – as the #1 must-own metal for 2022. My coverage list has four out of six junior explorer-developer names with either a copper exploration or development asset on their front burners. I see 2022 as a watershed year in which copper sees a print at $7/lb. with even high prices later in this decade.

If there is one truism that continues to thrust itself in front of me more and more each day, it is that we are in a global financial conflict that has cyberspace and money as the 2022 version of “trench warfare”. With nuclear holocaust as “no-win” consequence of engagement, computer system firewalls are now the protective trenches from 1914-1918 but the 2022 version of that insidious and highly-lethal mustard gas that killed so many allied soldiers is today symbolized by the insane levels of leverage and debt that threatens everything with little warning and zero defense.

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.

********