The Bear Market Continues

It’s been a crazy week for everyone I’d imagine. My high-risk portfolio is down 12.2% on the week, as everything got absolutely crushed. Being a stubborn retail trader who buys falling knives, I couldn’t resist reacting a bit – so I bought back all of the Jan 2023 covered calls on my Uranium stocks and then added more to Uranium miners UUUU and DNN, Gold miner EQX, and Silver Jr miner BKRRF. Now I’m ready for some upside.

One thing about retail traders most people don’t think about is that their risk tolerance tends to be quite a bit higher, as they often feel like they need bigger gains to move the needle and they have less to lose. Can retail traders end up selling near the lows, sure: https://johnonstocks.wordpress.com/2020/03/18/why-i-decided-to-sell/

Back in March 2020 I didn’t expect at all that Europe and the US would actually resort to lockdowns as a strategy to fight Covid. I reasoned that this would be bad for the economy and thus bad for stocks. I diversified into a few strategies including using put options in key companies like airlines and cruise lines before they rallied, but scored some decent wins on the long side and didn’t blow out my account. I certainly learned a lot about both the power of a fed-driven narrative, and the fact that connections between stocks and the economy are often tenuous at best.

Anyway, most selling at the bottom is actually forced selling, often by large accounts and institutions that hit various triggers like stop losses and margin calls. That’s why the moves look so crazy, because forced sales literally don’t care about the price received for the shares. Another interesting set of forced sales was one I saw back around August 2008, which some of the motley fool groups I was interacting with called a “mutual fund puking,” where enough clients decided to move their accounts into money markets that they were forced to sell in order to fund this, and they focused on selling utilities. I was following OTTR at the time, and boy did it get hammered.

Why sell utilities? Simple, because these funds that are forced to sell will try to minimize their losses in an illiquid market by selling whatever fell the least. At the time, I figured it was a great buy and picked up some. Of course it kept going down, then bounced around the lows through the end of 2012, and never recovered its 2008 high until 2017.

What’s are the lessons here? I’d say:

  1. Everything will get hammered before a bear market ends. The end is not driven by panicky retail investors, but by institutions who are forced to raise cash and are looking to minimize losses by selling whatever fell the least.
  2. Don’t chase companies that have recently fallen from their peaks. AAPL may seem like a great buy when it first starts to fall, but it can fall much further and it can take a decade or more before these prices are reached again.
  3. Markets tend to rotate. What works in one bull market cycle likely won’t work in the next. This is a theme I’ve been pushing a lot over the last year, the whole idea that 90’s = tech, 00’s = commodites, 10’s = tech, 20’s = commodities. For the tech fans, realize that amazing technology gains were made between 2000 and 2010, but the sector still did terrible during that resource-constrained timeframe.

Let’s see how different sectors have been moving:

Well, there you have it for now. I realize that I haven’t mentioned the biggest news stories here – the federal reserve hiking, Putin mobilizing troops with an all-out draft, Europeans angry over leaders shutting off more nuclear plants amid an energy crisis that’s crippling their economies, a record reduction in fertilizer production which means a major food crisis after next year’s fall harvest falls short, and increasing drought conditions which we can’t do anything about because our leaders refuse to permit new desalination plants. What can I say, it’s a 4th Turning crisis.

It’s probably wise to avoid the market entirely right now. You can get great yields on I-bonds, 2-year treasuries, investment grade corporate bonds, or money market funds. I’m not really interested in that. Right now we are seeing an enormous amount of money changing hands in the great stock market casino, and I want a chance to win some real financial independence. We are on the precipice of a major financial shock. When those happen, it’s tough to win with too much in short positions because the rules will change against you.

I prefer to bet on mining stocks which have seen underinvestment and consolidation for a decade and are now in a position to halt any economic progress without significant investment (Uranium and Copper). I like to hedge by betting on the government reaction to crisis rather than the stock losses preceding that crisis (Precious metals and TLT calls). My other sectors are more about diversifying moonshots than anything else, and I don’t think about them as much.

Here’s where my portfolio landed:

  • HEDGES (11.6%)
    • TLT Calls (11.6%)
  • PRECIOUS METALS (36.0%)
    • AG (4.5%)
    • EQX (3.8%)
    • MTA (3.6%)
    • SILV (3.7%)
    • SLVRF (3.0%)
    • SAND (2.8%)
    • LGDTF (2.2%)
    • MMNGF (2.0%)
    • MGMLF (2.0%)
    • SSVFF (1.8%)
    • RSNVF (2.0%)
    • BKRRF (1.9%)
    • HAMRF (1.4%)
    • DSVSF (1.2%)
  • URANIUM (27.1%)
    • CCJ (2.1%)
    • DNN (4.7%)
    • UEC (4.1%)
    • UUUU (4.2%)
    • BQSSF (4.5%)
    • UROY (3.3%)
    • ENCUD (2.0%)
    • LTBR (2.1%)
  • CANNABIS (13.9%)
    • AYRWF (1.1%)
    • CCHWF (1.7%)
    • CRLBF (1.6%)
    • CURLF (2.6%)
    • GTBIF (2.1%)
    • TCNNF (1.9%)
    • TRSSF (0.8%)
    • VRNOF (2.1%)
  • BATTERY METALS (12.2%)
    • NOVRF (5.6%)
    • SBSW (4.8%)
    • PGEZF (1.8%)
    • EMX (1.4%)
  • OTHER TRADES (2.9%)
    • DOCN (2.9%)
  • CRYPTO (4.1%)
    • XRP (4.1%)
  • CASH (-9.2%)

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Inflation is not what you think it is

The chart above shows the US dollar rising nearly 12% from 111 to 124 as the CPI rises from 1.4% to 8.3%. There are many arguments for why that is, such as the USD being the “cleanest dirty shirt” among major foreign currencies, but we have also seen the values of semi-monetary Gold, Silver, and Bitcoin come down during this time. So what’s going on?

I’ll start with one of the most misunderstood quotes from Milton Friedman “Inflation is always and everywhere a monetary phenomenon.” Many interpret this as meaning that a rising CPI is always caused by currency devaluation, when it is clearly affected by other factors such as the price of oil. When everyone uses the term “inflation,” they are often actually talking about 3 very different things:

  1. Monetary inflation, or the devaluation of the currency itself. This is typically what economists mean.
  2. The Consumer Price Index, which is a measure of a broad basked of prices that attempts to measure monetary inflation.
  3. The Cost of Living, which often has little to do with the CPI at all.

The CPI was built and modified over time by the Federal Reserve in order to try to determine the monetary component of inflation as a tool to conduct monetary policy. Internally they prefer the similar PCE, but the headline number is always CPI so that will be my focus here. The idea is to try to measure a broad basket of economic spending while eliminating people actually buy and spend, then adjust it to reduce volatility (by eliminating volatile food and energy components) and account for non-cash improvements by subtracting them out (they call this hedonic adjustments).

This is not easy to do and it has political ramifications, so the resulting sausage isn’t so pretty on the inside. One common critique for example is that their housing component both understates rent and housing price increases and lags this data by 18-24 months. In other words, part of the high CPI we see today represents the roaring housing market of early 2021, where home prices went up by nearly 20% nationwide.

So hopefully now you can see my point that the CPI is not all it’s cracked up to be, and there are important considerations for this. Let’s start with the cost of living.

COST OF LIVING vs CPI

For most people, the biggest portions of the cost of living are the basics needed for work and survival: Food, Shelter, and Gasoline. Gasoline, and energy in general is excluded from the CPI because it is considered too volatile. Have a look at this chart:

Gasoline has crazy spikes, such as the -40% year-on-year price in 2009 to the 60% year-on-year price in 2010. Much of this is considered to be embedded in other costs, so they exclude it. But how does cost of living really compare to CPI?

The chart above shows the CPI along side average cost of food at home, rent of shelter, and gasoline prices. As you can see, the CPI in red has gone up less than all of these measures.

Have incomes kept up with it? Unfortunately, I couldn’t find good charts to show on that as they tend to show incomes “in current dollars” whereas the other measures are in nominal US dollar terms. However, I can tell you that between the early 1990’s and today we have destroyed most of our private sector unions, opened up to free trade with the world beginning with NAFTA under Clinton and expanding to much of the rest of the world including China under Bush. All of a sudden, US employees – burdened with high tax rates and employer-paid benefits such as healthcare and retirement plans – had to compete with subsidized labor from all over the world. As a result, manufacturing wages were capped and production was routed elsewhere. At the same time, immigration grew in massive numbers forcing US workers to compete with desperate migrants for rock-bottom wages. Thus the middle class hollowed out, slums developed, homelessness soared, and people are getting more and more angry.

How does this description of the workforce pan out on charts of “real” median income adjusted for inflation?

No problems here, real incomes look totally fine. No problems on the surface, so much of society particularly in leadership sees no problems and people are ever more divided.

A few other interesting things to note, as CPI has lagged cost of living, is what has lagged CPI? Autos for one – most Americans used to be able to afford new cars and now only buy used, yet the price of cars hasn’t changed at all after you use hedonic adjustments for better mileage, airbags, navigation, rear cameras, emissions equipment, and so on. Anything technology related registers deflationary because the same money spent on a TV today gets you a much bigger one than before. Clothing and apparel also lags considerably, both because of fierce price competition in emerging Asian markets and because incomes have been diverted to spend more on basics like food, housing, and fuel and less on discretionary items like autos and clothing – which are necessary but the length of use can be greatly extended.

Anyway, the point is that CPI is not cost of living. It’s not just that it vastly understates cost of living, which it does, but it also tends to respond differently because it tends to weigh discretionary purchases more than necessary ones.

MONETARY INFLATION vs CPI

I’ll start by saying that there is no good measure of monetary inflation. CPI and PCE are attempts at measuring the loss of purchasing power of the US Dollar, but they are deeply flawed. Other suggestions such as pinning the value to a basket of other currencies or to physical gold and/or silver are also flawed as each has supply and demand dynamics of its own which can mask the moves in the dollar itself. Instead, I will start to list things that can cause an increase in the CPI and how they should play out in the data.

Primary factors that increase CPI and other effects that should follow:

  1. Increased money supply, as money is being created and spent into the system. Government checks sent to people and businesses are an example of this.
    • Demand increases greater than supply can handle. You should see shipping volumes and production increasing rapidly to try to keep up. Costs rise but these are easily passed on to consumers.
    • Monetary commodities such as Gold and Silver should soar.
      • Crypto should soar as well, but much of the price gains have been from institutional investors entering a tiny asset class for the first time; a tiny niche asset class becoming more mainstream.
    • Other physical commodities such as oil, copper, and real estate should soar and see increased investment to keep up with high physical demand.
    • Wages should rise to keep up with the above, as employers are growing to meet this new demand and they need more workers.
    • Consumer debt should drop as lower end workers have more money to pay down expensive credit card debt.
  2. Demand Shocks, as a sudden economic shift causes spending patterns to change. Lockdowns and work from home are an example as they shift spending away from services, travel, restauraunts and into durable goods to improve your house and set up a home office.
    • Bullwhip effect results here, with transitory inflation in a 2-step effect:
      • A. Producers and retailers scramble to fill all of the new orders. Shelves empty out and inventories need to be replaced. Supply chains bottleneck as they can only ship so much at once. Earnings and prices rise dramatically in affected sectors similar to monetary inflation.
      • B. The trend reverts back to normal as everyone who was setting up for work-from-home has already done so. Orders for home improvements and home offices fall precipitously as inventories build. First factory production drops as retailers stop ordering more and cancel what they can. Then shipping rates drop as factories send out their last secured orders. Then prices are reduced to try to reduce inventory as the orders in transit keep coming in.
    • Note that demand shocks divert money from one sector to another, so they do not cause surges in monetary metals or non-related assets.
  3. Supply Shocks, as a sudden economic shift causes the prices of key commodities to shoot higher.
    • Money is diverted from other sectors of the economy into the sectors with the bottlenecks. Prices of the key commodities soar and improved earnings are mainly focused there.
    • GDP will slow or even shrink as these commodities can’t be increased quickly and are balanced through demand destruction. This is a common late-cycle force just like we saw in 2008 because it does tend to force the economy into recession.
    • Higher prices should incentivize future production, which will allow the economy to recover and grow further. Future growth and CPI very much depend on the ability to either increase production of the key commodities or to grow around the restriction through more efficient use of the commodity. The 1970’s oil shocks saw a huge increase in fuel efficiency for cars and nuclear power generation to reduce oil consumption as well as a huge increase in oil investment including the Alaska pipeline. 2008 saw a boom in the development of offshore oil rigs. The solutions often take many years.
  4. Monopoly power, as small businesses are shut down and have difficulty accessing capital while big corporations buy up their competition without restraint.
    • Corporate earnings can increase dramatically as profit margins grow.
    • Small businesses decrease and die out as they are either purchased by bigger companies or are forced out of business.
    • Demand shrinks along with economic growth, as more money is diverted to pad high profit margins.
    • Innovation slows as big companies increase their control of larger entities through expanded beaurocracy and focus on keeping the status quo while reducing costs. Any competition that arises can be purchased or destroyed, so R&D spending can decrease dramatically. Advertising also becomes less important as companies are keeping customers rather than finding them. Wages are pressured lower as there are fewer alternatives for employees.
  5. Investment bubble, as powerful narratives drive investors to borrow money against their assets to buy even more.
    • Asset values skyrocket, margin debt expands, mortgage volumes increase.
    • GDP and economic growth modestly increase. Employment and wages can grow as a construction boom in things like housing require more workers.
    • Debt expands considerably, particularly in anything related to investable assets such as housing.
    • CPI increases tend to be moderate as most of the increased money supply from new debt flows into asset prices rather than wages or consumption.
    • This can last years into a significant bull market cycle, but the debt overhang eventually catches up, potentially causing a cascade of defaults and/or margin calls. If this happens it can become a powerful deflationary force as large amounts of money are erased from the balance sheets of people, corporations, banks, and governments in a combination of reduced asset valuations and outright defaults.

The CPI can also be affected by measurement biases, such as the amount of hedonic adjustments and the heavily lagged measurements taken in areas such as housing costs. However, the Federal Reserve does tend to adjust their data throughout the charts to try to account for this in their trends, and they often stop old measurements entirely or start new ones when they are unable to do so. Ultimately I don’t think these affects are enough to be listed as a primary factor of CPI increase.

There is an enormous amount of debate about which of these primary drivers of increased CPI above are driving us today and what to expect going forward. In our dynamic and complex world, the primary drivers all operate at once to varying degrees and it is up to you to decide which one most fits your macroeconomic view. If you have read this far, you should at least be able to understand why there is such intensive debate on this subject despite the many soundbites which try do make it sound obvious.

MY VIEWS ON INFLATION

I tend to think the following, with quite strong conviction actually:

  1. Increased money supply – negligible.
    • The most common view, CPI is from increased money supply, is dead wrong. This is why we can see the decreases in the values of gold, silver, and foreign currencies as the dollar strengthens.
  2. Demand Shocks – currently deflationary.
    • The bullwhip effect is in the later stages, as we saw with the huge disappointment from FedEx yesterday. We also see retail giant Amazon cancelling expansions, closing warehouses, and laying off workers.
  3. Supply Shocks – Inflationary for prices, deflationary for growth.
    • It is normal to neglect investment in mining, materials, and energy due to cheap prices following the previous growth cycle which ended in 2011 with oversupply, commodity price crashes, and highly indebted struggling producers. That cycle culminated with a huge plummet in demand during the lockdowns of 2020. As the re-opening commenced, supply could not ramp up fast enough and is still quite short of where it needs to be. The supply shocks were there a full year before the Russian war & sanctions, but these made the supply shocks much worse. Even with much of China still in lockdown, falling industrial/factory production, and falling housing construction in China and elsewhere, prices remain somewhat elevated.
    • This will be a bottleneck on economic growth which cannot resolve without significant capital investment in the sector, which will involve significantly higher prices for the mining stocks, which is why I am so bullish on those. I tend to like gold and silver miners because of a decade of physical underinvestment, lousy sentiment, and the somewhat risk-off nature of those commodities which will allow them to increase in value earlier in the recovery. I believe that base metal miners, like copper, will take longer to recover than gold and silver miners but will ultimately shoot much higher in value. Anything can happen so I balance between them.
    • Uranium is a unique story which is quite bullish but extremely volatile with extremely bullish sentiment making rough pullbacks common. Overall though, its moving higher.
    • Oil and gas work a bit differently from the miners. Some projects like oil rigs can take many years to build just like a new mine, but now we have fracking which can get considerable oil and gas production in a much shorter timeframe. Its demand is also more economically sensitive and there is a lot of bullish sentiment in the sector. In short – great sector but not my thing.
  4. Monopoly Power – inflationary for prices, deflationary for growth
    • I’m not sure how to play this one. Years of increased passive index investing has pushed extreme crowding into big names like Microsoft, Apple, Google, Amazon, etc. I don’t like to be in crowded sectors though, and their lofty P/E’s can fall precipitously, and overall demand destruction can still reduce their earnings. We’ve seen increased monopoly power in pretty much every other sector as well, and a complete lack of political interest in tackling the problem, so it will have significant opportunities for investors. Like oil and gas though, I’ll just say this isn’t my space and I’m not sure how to position for it.
  5. Asset Bubble – currently deflationary.
    • Many of you have heard about asset bubbles and the current “everything bubble” that we’re in. This will play out in a significant bear market which will culminate into some kind of major “something breaks” financial event that involves forced selling and plummeting interest rates. In 2008 we saw a more orderly decline in the stock market until Lehman fell, then forced selling caused it to drop precipitously. It took significant accounting changes removing mark-to-market requirements to get things stabilized in 2009. In 2020 we saw forced selling as the stock market plunged for weeks before massive fiscal and monetary programs were announced to stabilize things. They undershot badly on stimulus in 2008, so they overshot just as badly following March 2020. We are now clearly in late cycle territory and we have not yet seen the major crash event, but I’m more convinced than ever that it’ll come.

The only trading I did last week was buying a couple more TLT calls. Some of my options expired, such as my covered calls on CCJ, so you can see that has increased as some of it was called and some of the options expired worthless. If the Uranium sector remains hot next week I’ll sell a covered call on CCJ again, if not then I might consider adding but I likely won’t because my cash balance is still too negative for my liking. Here’s where my allocations ended up:

  • HEDGES (10.3%)
    • TLT Calls (10.3%)
  • PRECIOUS METALS (35.0%)
    • AG (4.6%)
    • MTA (3.4%)
    • SILV (3.8%)
    • SLVRF (3.0%)
    • EQX (3.0%)
    • SAND (2.7%)
    • LGDTF (2.2%)
    • MMNGF (2.3%)
    • MGMLF (1.9%)
    • SSVFF (1.9%)
    • RSNVF (2.0%)
    • BKRRF (1.6%)
    • HAMRF (1.5%)
    • DSVSF (1.1%)
  • URANIUM (26.8%)
    • CCJ (2.1%)
    • DNN (4.7%)
    • UEC (3.8%)
    • UUUU (3.7%)
    • BQSSF (4.6%)
    • UROY (3.5%)
    • ENCUF (2.3%)
    • LTBR (2.1%)
  • CANNABIS (14.7%)
    • AYRWF (1.3%)
    • CCHWF (1.8%)
    • CRLBF (1.8%)
    • CURLF (2.7%)
    • GTBIF (2.1%)
    • TCNNF (2.1%)
    • TRSSF (0.8%)
    • VRNOF (2.1%)
  • BATTERY METALS (12.0%)
    • NOVRF (5.4%)
    • SBSW (4.6%)
    • PGEZF (2.0%)
    • EMX (1.4%)
  • OTHER TRADES (2.9%)
    • DOCN (2.9%)
  • CRYPTO (2.8%)
    • XRP (2.8%)
  • CASH (-5.9%)
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Bear markets, frustrating times

A significant financial crisis event is becoming more likely as time rolls on. I actually bought more Jan 2024 TLT calls as I still believe treasury rates will fall fast once something major breaks, the only question is when. My allocation to TLT calls actually went down anyway though, as the price fell in response to hawkish noises from the Fed meeting at Jackson Hole, Wyoming. In a little less than 2 weeks, they’re expected to hike another 75 bps.

Reasons to expect a financial crisis to hit:

  1. Markets are more globalized than ever today.
  2. Housing crash is starting. The enormous real-estate sector started falling apart in China first, then spreading elsewhere following central bank rate hikes. Sales volumes have plummeted and prices are now declining across many US metros as well as in Canada, Australia, Europe, etc. Large entities from home-builders like Chinese Evergrande and mortgage lenders like US First Guaranty are facing bankruptcy.
  3. Strained commodities markets. Many commodities markets have become extremely volatile, such as that spike in Nickel in March. Many other commodities have had wilder swings than such as Oil’s plunge to -$40 then climb up to $120 then fall down to $87 in a couple years. Wood, copper, semiconductors, and many agricultural products have seen wild swings as well. This strains both the commodity producers and the commercial speculators.
  4. Wild European electricity markets. In Europe, they introduced electricity commodity trading a decade or so ago, in such a way as to heavily incentivize wind and solar while discouraging nuclear and fossil fuels. Right now, this exchange is as volatile as ever as crazy high electricity prices put a strain on many businesses and force factories to halt production. In addition to the financial strains that could blow up a number of electricity producers and commercial speculators, the production of comsumer products like cars and glassware as well as energy-intensive commodities like Aluminum and Fertilizer has been greatly reduced.
  5. US Dollar wrecking ball. A strong US dollar puts an enormous strain on the rest of the world, particularly emerging markets. Many emerging markets are falling apart with food and energy shortages, price spikes, riots, debt defaults, etc. Larger economies feel the strain as well, as we haven’t seen this big of a spike since the 1997 Asian Financial Crisis. The simple reason is that the Eurodollar system is worldwide. It is a true world currency, much bigger than the US, and a strengthening US dollar inadvertently tightens financial conditions throughout the entire global financial system.

I mention frustrating times for a few reasons. As for trading, TLT calls trade has been one of my biggest losers so far, as I’m down over $30k since I started going long in early 2021 and I keep reminding myself it’s only a hedge for my long mining portfolio, of which many positions are also down more than 50%, and my long US Cannabis portfolio which is also down more than 50%. My account value is literally flat since I started recording it in October 2019 despite all of the money I’ve been putting in from paychecks since then. Still, I have high hopes, low expenses, family, friends, and beer.

The bigger reason these times are frustrating is that all of our major problems seem to be so self-inflicted by a ruling class of extremely inept politicians with an extreme moralistic fervor that prevents any of the major problems from being acknowledged or addressed. I realize the problem is bigger elsewhere, as the French went from being the shining example of clean energy to a struggling energy importer with a nuclear fleet starved of cash and set for decline, and the rest of the world has been following the same footsteps to a lesser extent.

All of Europe, the US, Japan, etc have seen a devastating phaseout from nuclear power into fake “green” technologies such as wind and solar. These technologies are great for some things, such as supplementing the power grid during peak air-conditioning use, but they have limited lifespans and involve intensive mining of toxic metals which are difficult to detect and spread around. On the grid, they have to be supplemented by idle power plants which can ramp up to take the load when the sun doesnt shine and the wind doesn’t blow. Grid-wide power storage like batteries is not a viable solution – you can’t store all of Europe’s heating demand in a grid of batteries filled by solar plants in the summer. The batteries are enormous, they have limited lifespans (EV batteries last only 10-20 years), recycling facilities nowhere near ready, and the amount of raw mined materials is simply disgusting. Compare that with a nuclear plant where all of the waste from over 50 years of use is small enough to be contained on site, much of it can already be recycled like the French have been doing, and it is very easy to detect with a simple Geiger counter.

The absolute thick-headedness of our energy policies are downright scary as they translate into real food shortages, in a world where the human population simply cannot survive with 19th century energy technologies and agricultural methods. While the coming SMR’s (small modular reactors) seem to be an amazing answer to the problem, they are still decades away. Many are being approved and that’s exciting, but the first one is slated to be completed in 2028 and even then it’ll take a decade to fully build out the factory-style production to ramp out these things. We need to survive until then, which means continued investment in oil, gas, and coal and restarting of as many nuclear plants as possible. Many conventional nuclear plants that have been shut down, such as San Onofre near me, still have the concrete domes and electrical grid connections – all you need is to install a nuclear reactor in there and fuel it, and much of the equipment is still good. Refurbishing these things can be done much faster than new builds which can take 5-6 years in a highly mechanized buildout and regulatory system like they have in China, a few more years with the tighter regulations in Europe, and double that with the moving-target regulations in the United States.

Anyway, I’ll move on.

Uranium miners have been the shining star of my portfolio so far, though the sentiment is so hot I’ve got covered calls sold on half of them. In a couple weeks my cash balance should be much closer to zero as my Cameco shares are called away, which will also give me more room to buy future dips.

Precious metals miners have been an enormous disappointment these last 2 years. Its been a full year since I was able to sell covered calls on them as sentiment is so lousy that they just don’t pay enough to be worthwhile. While gold has been performing like a semi-strong currency being outpaced by the US dollar, the miners are dirt cheap. I fully plan to wait this one out though, as we had nothing like the capex buildout we saw in the 2000’s so supply is not increasing and the mining companies have been a lot more conservative following the crash-level prices of the 2010’s.

Copper and nickel, in both my battery metals and mixed with my precious metals miners, have also faced crash-level prices and underinvestment for a decade, so the same thing applies with them.

US Cannabis is still a potential winner, but the big institutions can’t touch it until laws like the “safe banking” that were being discussed are passed by Congress. That means it’s basically a bunch of retail traders who crowded in like crazy a couple years ago and are slowly losing patience and selling out. I gave up on adding to this sector, and I don’t have the capital to do so anyway. Most of these positions were built up when my Uranium miners sold off after all my out-of-the-money covered calls hit in November 2021, but I stopped adding after a number of drops early this year as they seemed to stabilize around 12-15% of my portfolio. I’m content to wait for now, though I won’t add here and it could easily fall further. Here’s a chart.

That’s all for now, time to relax and enjoy the weekend. Remember the famous quote “life is too important to be taken seriously.”

Current allocations:

  • HEDGES (9.2%)
    • TLT (9.2%)
  • PRECIOUS METALS (34.0%)
    • AG (4.4%)
    • MTA (3.5%)
    • SILV (3.7%)
    • SLVRF (3.1%)
    • EQX (3.0%)
    • SAND (2.5%)
    • LGDTF (2.3%)
    • MMNGF (2.3%)
    • MGMLF (1.9%)
    • SSVFF (1.6%)
    • RSNVF (1.8%)
    • BKRRF (1.5%)
    • HAMRF (1.3%)
    • DSVSF (1.2%)
  • URANIUM (30.9%)
    • CCJ (5.3%)
    • DNN (4.9%)
    • UEC (3.8%)
    • UUUU (3.8%)
    • BQSSF (4.8%)
    • UROY (3.9%)
    • ENCUF (2.3%)
    • LTBR (2.1%)
  • CANNABIS (15.3%)
    • AYRWF (1.4%)
    • CCHWF (2.0%)
    • CRLBF (1.8%)
    • CURLF (2.5%)
    • GTBIF (2.2%)
    • TCNNF (2.3%)
    • TRSSF (0.9%)
    • VRNOF (2.2%)
  • BATTERY METALS (11.8%)
    • NOVRF (5.2%)
    • SBSW (4.6%)
    • PGEZF (2.0%)
    • EMX (1.3%)
  • OTHER TRADES (2.7%)
    • DOCN (2.7%)
  • CRYPTO (2.5%)
    • XRP (2.5%)
  • CASH (-7.7%)
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SILJ is bottoming, perhaps for another year

Above you can see 1-year charts of the S&P 500 along with all of the sectors I’m invested in. Right now we’re in a period of liquidity drain, and the most liquid index above is SPY, which is why it’s only down 10% on the year and 15% from the peak.

Gold, Silver, and the precious metals miners all look like they ran up to a blow-off top in March and then completely broke down. We’re already at the point where sentiment in the sector is downright lousy and most people have no reason to look at the sector. The main questions here are where will they carve out a bottom, and how long will it take? My guess is that these miners will consolidate for another year or two and will likely bottom about 20% lower. I’m holding through this anyway, as the prices seem to spike out of nowhere in this sector.

I actually bought more gold and silver juniors this week and last. Just keep in mind this isn’t a safe and sane bet, it’s just an underpriced cyclical sector which tends to spike.

TLT is another one that tends to spike. I actually bought 6 more Jan 2024 TLT calls this last week as it dropped below 110. It’s crazy to think how much I lost betting on that one, but I still think the odds of a major financial crisis are quite elevated right now, and that such an event will cause TLT to spike.

Uranium is the one sector that’s been a big winner for me. On the candleglance chart above you can see that Uranium miners have been flat and volatile on the year, but my strategy of selling covered calls into rips has worked fairly well. Not only do I get decent premiums while keeping significant upside, but I end up mechanically reducing my portfolio on spikes. Looking back at my posts during the April spike for example:

  • 22.0% Uranium allocation April 9th
  • 11.4% Uranium allocation April 17th
  • 9.7% Uranium allocation April 23rd
  • 10.6% Uranium allocation April 30th
  • 18% Uranium allocation May 7th
  • 20.3% Uranium allocation May 13th

Right now I have 30% exposure to Uranium, and covered calls are sold on half of that. In a couple weeks my CCJ shares should be called, which will reduce my negative cash balance significantly. The other covered calls – on UEC, UUUU, LTBR – still have a couple more months to run and they are still out of the money. There’s no doubt in my mind that the trend and news for this sector is extremely bullish, but it is also a small sector and sentiment often runs too far ahead causing sharp swings.

Copper miners honestly don’t look much different from precious metals miners at the moment, so what I said about those applies to copper as well. As an essential industrial metal, it is facing that epic battle between significant under-supply from chronic underinvestment in mining over the last decade and the demand destruction from a world-wide recession which everyone sees heading worse. Fed Chair Powell keeps bringing up Volcker and speaking of “pain” ahead as he tries to fight CPI inflation by crushing demand. However it ends up in the short term, we’ll need a lot more copper in the future so I can wait.

US Cannabis has certainly been a disappointing sector. So far it’s had an 80% drop from the Feb 2021 peak to the June 2022 bottom, and many of the names I hold are down more than half from my purchase price. I haven’t added to this sector for a long time – I’ve really been more or less going with the common retail investor strategy of just leave it there and don’t look at it much. The legalization wave is still going, and the companies still exist, but it’s an opaque sector of the junior canadian stock exchange that is illiquid and driven by sentiment – which is lousy. Ultimately I still believe that the federal government will want to fully legalize the sector and tax it, and that formal NYSE listings and institutional investment will eventually follow. Will the companies I hold still be in business by then? Hopefully, but who knows? There are advantages to trading your own money, in that you aren’t really accountable for your returns and you don’t have to justify a position like US Cannabis to anyone, you can just sit and wait and hope for an eventual moonshot.

On the market in general, we are clearly in the early stages of a significant bear market that I believe will play out somewhat similarly to the 2000 dot-com bust. Just like then, some sectors bottom much earlier than others, and the big tech giants were the last to fall. I really don’t see a problem with accumulating the sectors I have over time and waiting this out. To me, these sectors are crazy cheap, mining companies have learned to be a lot more risk averse after a decade of low prices, and we will need a lot more mined materials in the future.

I’ll end it here. Happy trading everyone, and enjoy a nice long labor day weekend.

  • HEDGES (10.4%)
    • TLT (10.4%)
  • PRECIOUS METALS (33.0%)
    • AG (4.2%)
    • MTA (3.5%)
    • SILV (3.5%)
    • SLVRF (3.1%)
    • EQX (3.0%)
    • SAND (2.4%)
    • LGDTF (2.3%)
    • MMNGF (1.9%)
    • MGMLF (1.9%)
    • SSVFF (1.7%)
    • RSNVF (1.6%)
    • BKRRF (1.4%)
    • HAMRF (1.3%)
    • DSVSF (1.1%)
  • URANIUM (30.1%)
    • CCJ (5.5%)
    • DNN (4.6%)
    • UEC (3.8%)
    • BQSSF (4.4%)
    • UROY (3.7%)
    • ENCUF (2.3%)
    • LTBR (2.2%)
  • CANNABIS (16.8%)
    • AYRWF (1.5%)
    • CCHWF (2.2%)
    • CRLBF (2.1%)
    • CURLF (2.8%)
    • GTBIF (2.3%)
    • TCNNF (2.6%)
    • TRSSF (0.9%)
    • VRNOF (2.3%)
  • BATTERY METALS (12.0%)
    • NOVRF (5.6%)
    • SBSW (4.4%)
    • PGEZF (2.0%)
    • EMX (1.3%)
  • OTHER TRADES (2.6%)
    • DOCN (2.6%)
  • CRYPTO (2.4%)
    • XRP (2.4%)
  • CASH (-8.5%)
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Commodity Shortages Amid Recession

It’s been an interesting week in the markets. My overall portfolio is up more than 5% on the week, thanks to my allocation to Uranium miners. Of course, it was down more than 9% on the week prior so no celebrations here.

I closed out my SPY puts on Friday. The strong down-thrust in the S&P 500 got me looking at my SPY puts and thinking about taking profits. I ended up selling them off at a small profit, not so much because I’m bullish as because I’m nervous about holding too much money in short-dated options requiring strong moves. The strong downthrust had brought SPY below 410, my strike was at 390, and the price of $7.75 meant that SPY would have to fall below 382.25, or another 7% within 6 weeks, for me to break even at that price. I also think that there is certainly potential for a rally lasting through late September before any big move down, in which case I would be better off taking profits while they exist and re-entering the trade at a better time. Calls and puts are generally always short-term trades, and I’ve certainly lost plenty of money holding long TLT calls over the last 18 months to remind me of this fact.

After selling those puts, I probably should’ve let my cash balance become less negative, but I couldn’t help spending the money on some of my most beaten down miners instead. The thing is, I’m still convinced that we are in a fundamentally different market regime with regards to commodity shortages.

Its funny because I often cringe when I listen to guys like Jared Dillian and Tony Greer talk about labor strength, wage-price spirals, money printing, and high demand – and yet I’m in a lot of the same trades. Don’t get me wrong, I have a lot of respect for these guys which is why I listen to their perspectives, it’s just that I see struggling demand amid severe supply constraints that aren’t getting any better. It’s more than just a nuance, it’s a totally different view of what’s causing the inflation we’re in.

I am a big fan of Jeff Snider and his Eurodollar University, and I share the bearish views shown by Jeff Snider, Nick Gerli, Steven Van Meter, Dave Rosenberg, Stephanie Pomboy, etc. I also believe that we have massive structural supply shortages in many key commodities due to misguided ESG policies and chronic underinvestment in capital-intensive industries that can take the bulk of a decade to build out – and on this side I follow Doomberg, Dillian, Greer, Tavi Costa, and many others. This mix of views may seem nuanced and unique, but Kyle Bass summed them up quite well on Wealthion this week.

Anyway, here are my views on a number of these issues:

The Federal Reserve is over-hyped.

We spend too much time talking about the Federal Reserve. While they certainly influence markets, they are a reactive organization not a proactive one, and they react to the most lagging of indicators – headline unemployment and the CPI. I really don’t think parsing the words of Powell will help you trade. Besides, the Federal Reserve’s effects are mainly psychological.

Quantitative easing does nothing to increase money supply, as the collateral purchased with bank reserves are generally more useful forms of money than bank reserves themselves. T-bills for instance are borrowed and lent out by large institutions in what they call Repo operations, and they are also used to settle accounts and make purchases. Bank reserves on the other hand can only settle accounts between banks that are members of the Federal Reserve. Banks are not limited by reserves in how much they can lend, they merely change the equation to make banks want to reduce cash deposits in order to reduce the cash equivalents needed on their balance sheet to support those – so they pay zero interest and encourage customers to put savings in money market funds. The only positive monetary effects can be in making markets more liquid for the more peripheral cash-equivalents like US mortgage-backed securities or European peripheral government debt.

The Fed Funds rate isn’t really used much and does very little in current markets. The reverse repo rate, where the federal reserve allows big institutions like money-market funds to park money for a given rate of return, is what really moves rates today. When these start pushing rates up for mortgages and corporate debt, it does have a slowing effect on the economy, but with a huge lag.

Why the asset bubble?

The intense asset bubble and CPI seen after the Covid crash were not caused by a flood of dollars in the system. The QE we’ve seen in the US and Japan for well over a decade didn’t suddenly cause this move now. Instead, we saw massive lockdowns and shutdowns, record flash-in-the-pan fiscal stimulus, and a work-from-home revolution causing a surge of demand for affordable homes, house projects, and home office supplies at a time when much of the supply and supply chains had difficulty responding. This caused a surge in prices and orders, then higher profits and profits expectations, exacerbated by a massive inventory buildup at retail stores.

Most of the money that the government handed out went to people and entities who didn’t need it and thus ended up flooding into stock markets, particularly the enormous amount in things like PPP loans. At a time of very low corporate taxes and ever increasing stock buyback programs, this can certainly push the stock market higher. Add in the psychological effects of QE and Powell’s money-printing comments on 60 minutes, and stock market leverage went berserk with margin loans higher than ever. Then you had an SEC showing extreme tolerance for all types of stock manipulation and huge funds like Softbank joined reddit boards and pushed gamma squeezes with impunity. The popularity of passive investing meant that big money could flow into illiquid stocks and obvious frauds because these strategies simply buy what’s there.

The housing bubble was similar – you had a large number of people who could work from home and thus purchase a home for the first time in more affordable locations further out from their jobs. Forebearance programs removed foreclosures and evictions as sources of housing supply. Big investment funds from Blackstone to Zillow began to buy up housing like crazy, chasing momentum higher on the winds of the money-printing narrative. Homebuilders went up in value like crazy and started a record building spree in a number of locations.

Where are we now?

The housing downturn is already happening, and peak prices were hit a couple of months ago. Watch Nick Gerli explain this for more details by looking up his recent podcasts on Reventure Consulting and Wealthion. Historical trends show that housing could take 5 years to bottom out, as it is a slow moving market. We are about to see a wave of supply come online as homebuilders finish out their projects, foreclosures and evictions that were delayed go through, and many of the i-buyers like Zillow liquidate their housing portfolios to shore up cash. Meanwhile, investors will be reluctant to buy until the market shows signs of bottoming and regular home buyers will be slowed first by spiking interest rates, then by job insecurity. Rental units won’t be immune either as the massive number of deferred evictions come through and the massive number of multi-family projects come online. Rents have soared way beyond incomes, and landlords won’t be able to fill these new units without cutting these rents back down.

The stock market peaked in January, and I believe we will see new lows before we see new highs. The current market dynamics are truly bizarre so any number of things can happen. Passive investing is still growing in popularity, corporate buyback programs continue to grow, and the government can get a lot more money flowing into the markets by requiring that all employees be initiated into 401k programs unless they fill out forms to opt out rather than having employees fill out forms to opt in. Fundamental valuations have had little to do with anything for quite some time. That being said, we still do have a federal reserve pushing interest rates higher which makes bonds more attractive relative to stocks, encourages big money to reduce leverage in their stock portfolios, strengthens the US dollar which acts as a wrecking ball to the world economy, and puts downward pressure on the housing market. My 401k will stay in money market funds until the fed is actually easing again.

Why is CPI so sticky (Commodity Supercycle)?

Commodities have long cycles. The last commodity peaked out between 2006-2011, and we saw enormous amounts of money going into oil, gas, and mining stocks of all kinds. Much of this money went into big projects like offshore oil rigs being built by market darlings like CNOOC and PETROBRAS, big fertilizer companies like Mosiac expanded production, new mining projects were constructed for gold, silver, copper, Uranium, and so on. Then fracking began to take off in earnest and the US became a net oil and gas exporter. The decade following 2011 was flooded with oversupply as long term projects came online, and many of them lost tremendous amounts of money. Not only did money for exploration and new projects dry up, but big mining companies were focused on cutting costs and shuttering mines early. In this latest price run-up, they are still extremely reluctant to invest in new capacity, preferring to reduce debt and pay dividends. This is exacerbated by ESG funds unwilling to invest in energy and mining while governments and regulators are seen as hostile. Quite a few large-scale projects were shut down in recent years after considerable capital expense due to both regulatory and financial hurdles.

Fracking wells have shorter cycles. You can drill out a well over a year and cap it, then go back later and tap it for 12-24 months of oil and gas supply. Our oil supply peaked in 2019, then investment stopped due to demand destruction from worldwide lockdowns, then we started going through our drilled but uncompleted wells without drilling more of them. We produce significantly less oil now than we did 3 years ago.

As economies around the world emerge from the heavy covid lockdowns, they are finding supply in many critical materals is much tighter than it used to be. Copper was mostly below $3/oz in 2014-2020, even dipping under $2 at the 2016 low. Now it’s still at $3.70 despite slowdowns in Chinese construction. Oil is stubbornly high despite Chinese air traffic being negligible compared to 2019 levels. Rather than responding with new supply, the strength of the green movements and regulatory pressure in the US and Europe have largely prevented any significant capital investment in new projects. The aftermath of the Russian invasion and sanctions has certainly made things worse, though they hit a full year after the shortages started.

Simply put, there is no sign that we are responding to the supply shortages in a number of key commodities, and in many cases we’re making the situation worse. Most of the resources plowed into wind and solar use an extraordinary amount of metals like copper, as well as rare-earth metals which are quite toxic, and they are very energy-intensive to produce. I shudder to think how many of these will end up in landfills after their 20-year lifespans. Meanwhile, traditional energy sources need continuous capital expenditure just to keep production level and it isn’t happening.

In short, I believe we are already in a position where key commodities are a major economic bottleneck, and that price pressures will stay high even as the overall economy shrinks until these shortages are addressed. Many of these items like food, electricity, gasoline, diesel, and so on push price pressures up the chain and are difficult to reduce. Europe is reducing them by shutting down industrial production, which causes other problems. Emerging markets like Pakistan are reducing them with system-wide blackouts. Using the Federal Reserve to induce a heavy recession can help ease demand for a time, as emerging markets are priced out of food and energy while indusrtrial supply shuts down even more, but this does not solve the problem.

Conclusions

Essentially, the world economy is in a very difficult position which only looks to be getting worse. This is not an environment normally conducive to high stock valuations. Food and energy riots in emerging markets often lead to severe unrest, revolutions, and wars. These tend to cause supply problems while demand is desperately increased to build out war materiel. I really believe that we’re in a period where all investments will struggle. Investments that target critical material and energy shortages can soar considerably, but will also have higher political risk from cash-strapped governments.

I don’t want to sound too gloomy here, as these problems we find ourselves in can be solved. However, building out critical infrastructure takes time, and our governments are barely starting to acknowledge the problem. Even acknowledging parts of the problem isn’t leading to viable solutions as many politicians simply react by pushing for more of the same.

Heavier buildouts of wind and solar will make our near-term needs of energy and mined materials much greater, while producing intermittent power in levels above what our power grids can handle. As a result, coal demand skyrockets to compensate as old coal plants fire back up, diesel demand skyrockets which is necessary in both farming and mining, and supply capacities for all of these are further strained.

I’d like to say that reason will eventually prevail, but that’s not how these things work. Instead, these supply constraints will continue to get worse until we finally see a new flood of investment which will turn into a mania. These stocks will skyrocket along with capital investment and we’ll sow the seeds for the next big commodity bear cycle. The #1 lesson of long-term commodity investors is once the party starts, don’t overstay your welcome.

Here’s a copper chart to sum things up:

This is where my portfolio balances landed:

  • HEDGES (10.2%)
    • 10.2% TLT Calls
  • PRECIOUS METALS (33.1%)
    • 4.2% AG
    • 3.4% MTA
    • 3.7% SILV
    • 2.4% LGDTF
    • 2.6% EQX
    • 3.2% SLVRF
    • 2.5% SAND
    • 2.0% MGMLF
    • 2.0% MMNGF
    • 1.8% SSVFF
    • 1.7% RSNVF
    • 1.4% BKRRF
    • 1.3% HAMRF
    • 1.1% DSVSF
  • URANIUM (27.7%)
    • 5.1% CCJ (covered calls)
    • 3.9% DNN shares & calls
    • 3.5% UEC (covered calls)
    • 3.6% UUUU (covered calls)
    • 4.0% BQSSF
    • 3.5% UROY
    • 2.1% ENCUF
    • 2.0% LTBR (covered calls)
  • US CANNABIS (16.1%)
    • 1.5% AYRWF
    • 2.1% CCHWF
    • 1.9% CRLBF
    • 2.6% CURLF
    • 2.3% GTBIF
    • 2.5% TCNNF
    • 0.9% TRSSF
    • 2.4% VRNOF
  • BATTERY METALS (12.7%)
    • 5.8% NOVRF
    • 4.8% SBSW
    • 2.1% PGEZF
    • 1.3% EMX
  • CRYPTO (2.3%)
    • 2.5% XRP
  • OTHER (2.7%)
    • 2.7% DOCN (covered calls)
  • CASH (-6.1%)
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My market expectations going forward

It’s difficult to come out with the best template to invest in today, so here’s roughly what I’m thinking.

Just like after the dot-com bust, the mighty will fall (in price). Industry stalwarts set to benefit greatly from prevailing trends with big business moats will see both earnings expectations and earnings growth expectations plummet, followed by their P/E ratios, and this will be the result. Think of MSFT, AAPL, and AMZN as some of the stalwarts of today.

At the same time, a big rotation will happen into natural resources sectors. However, this will take time and it will be very difficult to play. Here are some examples from after the dot-com:

  • MOS (Potash/Fertilizer): After 2000, it just kept going down until 2007-2008 when it quickly shot up 10x then collapsed 5x in a spectacular blow-off top.
  • XOM (Oil & gas): Volatile and flat 200-2002, then a 25% crash, then up to a 2008 top.
  • FCX (Oil, gas, copper): Lost 65% from 2000-2001, shot up 350% 2002-2004, went up another 300% by the 2008 peak
  • GOLD (large gold miner): It’s 1999 peak wasn’t revisited until 2004. Max drawdown ~50% and extremely volatile in between. Ultimately doubled from the 1999 high, mainly in a fierce rally from July 2007 to Jan 2008.
  • AA (aluminum & base metals miner): Crashed nearly 50% in 2000 then hit a bigger peak in 2001 and crashed again down ~55% in 2003 and continued in this violent fashion revisiting the peak a number of times until late 2008 when it plunged again.
  • CCJ (uranium): Crashed 50% from 1999-2000 followed by a rough ride of new highs and steep retracements until 2003, then explosive moves higher thru the 2007 peak taking you a whopping 20x above the lows. Then it crashed again and hasn’t revisited that 2007 peak yet.

There’s a good reason why seasoned investors often avoid the mining sector in general, and often energy as well, and I don’t blame them. However, extreme volatility does lead to opportunity. I’m chock full of these mining stocks because I’m hoping for a moonshot here, and I have no intentions of holding them forever.

I simply see a situation where we have massive economic problems – lockdowns in China, negative growth in the US, big industry shutting down in Europe from high energy prices, and yet the prices of the underlying commodities are stubbornly high compared to the trends of the last decade. The mining industry is volatile for a reason – it is notoriously cyclical as new capacity takes years to come online, and our financialized economy responds by flooding investment when its expensive and then devaluing en masse when that new production comes online.

Here’s the rub … our politicians have been hostile towards investment in natural resources “for environmental reasons” as prices soar, the ESG investing movement is effectively an “anything but natural resource expansion” movement, and other investors are wary of the sector given frequent crashes throughout the decade of the 2010’s. In short, CAPEX has been seriously curtailed in a sector that needs constant physical investment in order to simply maintain current levels of production.

The result is like a bottleneck on the economy where nothing can grow until we get more of these resources, and prices have to rise considerably to get this investment going. Basically, this says to me that its time to strap into this rollercoaster of a sector as it’s bound to hit new highs, but to expect some nasty drops along the way.

I think chances of a significant market drop this fall are pretty high, and I’ve been easing into SPY puts. At the same time, my TLT calls have been disastrous so far and a few of them expired at zero today. I haven’t added to these since mid June and I probably won’t for a while, though I’m not selling them either. During this market drop, I hope to pick up some stocks like FCX and MOS if they pull back enough.

I probably won’t add to my precious metals for a while despite the compelling valuations simply because I lost so much money in them already. I’ll hold what I have though. Same with US Cannabis.

Uranium has been doing fantastic for me, but I expect an extremely volatile ride. Simply put, I expect these stocks to struggle through year end because sentiment was simply too high during a time of declining market liquidity – that’s why I sold multi-month covered calls on so many of them.

More than anything, I need to reduce my leverage here. I’ve gone the wrong way in my negative cash balance below as I bought those SPY puts and paid down my credit card a bunch. The backstory on the card btw is just that I had to get a new transmission a couple months back, but stocks were down a ton in mid June so I put money into my trading account to reduce leverage instead of paying that down.

I should tell you that “investing” is a very frustrating process. I’ve lost a lot of money these past few years – mainly on index puts and TLT calls. My account value is down nearly 10% this last week and the total account value is less than it was when I started tracking my balances in October 2019 despite all of the paychecks I’ve plowed into it. The vast majority of us retail investors lose money, so don’t feel like you’re the only one, but I’ve been learning a lot and I don’t plan to give up.

It’s funny, but despite all the losses I still rely on my moonshot investments to keep my hopes high for the future. We are in an era where a middle-class lifestyle and solid retirement have to be won through speculation; any wage gains over the last 22 years have been far less than the costs of living, and my personal peak nominal income is still way back in 2006. Anyway, it’s best to try to think positive and enjoy life. While I’ve been losing by the traditional monopoly rules, I’ve been winning in gathering experiences like the new “monopoly for millenials” game. I’ve travelled to many countries and many states, and I’ve really done some amazing things. So I’ll leave it off here with my current allocations. Good luck and happy trading!

  • HEDGES (12.2%)
    • 10.7% TLT Calls
    • 1.5% SPY Puts
  • PRECIOUS METALS (35.0%)
    • 4.3% AG
    • 3.7% MTA
    • 3.9% SILV
    • 2.4% LGDTF
    • 2.8% EQX
    • 3.9% SLVRF
    • 2.5% SAND
    • 2.1% MGMLF
    • 1.7% SSVFF
    • 1.8% RSNVF
    • 1.2% BKRRF
    • 1.7% HAMRF
    • 1.8% MMNGF
    • 1.1% DSVSF
  • URANIUM (26.5%)
    • 4.9% CCJ (covered calls)
    • 3.4% DNN shares & calls
    • 3.2% UEC (covered calls)
    • 3.3% UUUU (covered calls)
    • 4.3% BQSSF
    • 3.2% UROY
    • 2.0% ENCUF
    • 2.3% LTBR (covered calls)
  • US CANNABIS (15.5%)
    • 1.5% AYRWF
    • 2.1% CCHWF
    • 1.9% CRLBF
    • 2.6% CURLF
    • 2.0% GTBIF
    • 2.3% TCNNF
    • 0.9% TRSSF
    • 2.2% VRNOF
  • BATTERY METALS (11.9%)
    • 5.3% NOVRF
    • 4.7% SBSW
    • 1.9% PGEZF
    • 0.7% EMX
  • CRYPTO (2.5%)
    • 2.5% XRP
  • OTHER (2.8%)
    • 2.8% DOCN (covered calls)
  • CASH (-7.0%)
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Back from vacation, here are some quick charts

I didn’t trade much this last week, basically only adding a couple more SPY puts as the rally continues. I’m still convinced we’re in a bear rally, and my views of the charts above all reflect that. I actually did try a couple of times to sell out-of-the-money covered calls on some of my gold and silver mining stocks, but my prices never hit. I’d rather keep the upside in case we see a significant rally here than sell covered calls too cheap. Uranium doesn’t have that problem because a lot of the investors in the sector are crazy bullish, and for good reason, but there’s simply a lot more fear than excitement when it comes to precious metals at the moment.

Anyway, that’s all for now. I had a great time exploring Minneapolis and Duluth with some family – a solid group of 7 – so I didn’t follow much finance stuff this week. It’s good to take a break from time to time, and usually you don’t miss much; investing is a patience game the majority of the time.

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Basic technical analysis and where we are today

The very basics of technical analysis is trend-following, with the idea of holding during the bulk of an up-trend and getting out for the bulk of the down-trend. Here’s where we are for the S&P 500:

Many investors like to use this perspective within different market sectors, adding exposure to sectors in upward trends and reducing exposure to sectors in downward trends. In general, money tends to flow from one sector to another. Here are the basic sectors that a lot of investors look at:

Some people like to use relative rotation graphs, but I could never figure out how to get anything out of those so I prefer simple 6-month candleglance charts. I put the best looking 6-month trends in the top row – which is energy, health care, utilities, and consumer staples. Below that, everything looks terrible. I put financials at the bottom left because they looked the weakest, and then I put technology right next to the overall S&P 500 index so that you can see how similar they look. The top 5 names in the S&P 500 are all considered tech (AAPL, MSFT, AMZN, FB, GOOG) and they comprise 21.82% of the value when you add them together!

Its amazing how top-heavy our stocks really are, but that is the modern world of popularized “passive” index funds. When the bulk of new money is allocated purely by current market cap weighting, the more expensive it is the more money is allocated there, you can get some crazy results. Who would’ve thought that Tesla would be the same weighting as Berkshire Hathaway, lol.

Regardless of what you think of the popular methods of asset allocation though, these large passive money flows greatly strengthens prevailing trends within stocks and sectors simply by investing more in larger weightings and less in smaller weightings, making trend-following and basic technical analysis more important than ever.

If I actually ran a fund, I would certainly do it very differently than I run my personal portfolio. I’m loaded up in cheap moonshots with hopes that it will launch me into financial independence someday. Rather than straight trend following, I’m crammed into tiny sectors that I think have intermediate-term favorable catalysts to grow.

US Cannabis: The coming federal legalization which will enable big investment firms to buy into the sector. I still believe that both Republicans and Democrats want to legalize, regulate, and tax this sector and that their current approach of turning a blind eye while states do their own thing can’t last forever. This has been a falling knife since I started investing, and I’m just holding at this point; I haven’t added here in probably over 6 months. The story isn’t dead, I just think its best to sit and wait for now.

Precious metals miners: I see an extremely unloved sector that has had very little investment and expansion. The metals themselves tend to be defensive in nature, and I believe they’ll do better in coming years as more countries centralize around a Chinese & Russian trade sphere where they trust bullion as backing more than each other’s currencies. For now, I see the downtrend as a side effect of an extremely strong US dollar, and I believe this will be an early sector to recover once the Fed switches from tightening to easing again.

Battery metals miners, particularly copper and nickel: I see a lot of temporary pressure as the demand destruction from the recession we’re in filters through the system. Meanwhile, the under-supply of these critical materials will have to be fixed in coming years, and this can only happen through massive investment which will have a side effect of shooting these mining stocks higher.

Uranium miners: This sector is the most bullish right now. It is a tiny sector which can shoot much higher, ESG funds can now allocate to this sector, and governments around the world are once again looking here as a means of energy security. This is the only sector I’m selling covered calls on right now, because the bullish sentiment is strong enough to get me some great prices on them while leaving me significant room for near-term price gains. I don’t think we’ll see the moonshot everyone is hoping for while the Fed is tightening, the world is in recession, and liquidity is draining from the markets. We’ll see some wild swings though, and prices will be much higher in coming years after this recession works through.

So what do I use basic technical analysis for right now? A couple things. I finally bought some SPY puts this week as it looks to me like we’re fairly close to topping before another down-leg. I also used it in the past to expand or contract leverage in certain sectors – like my gold miners – by buying long calls when I feel a significant short-term rise is coming, selling them off for shares to reduce risk as momentum seems to be shifting, and selling covered calls on those shares to reduce risk further if I want to stay long but I’m concerned about possible downside.

Anyway, I hope this leaves you with some food for thought – I’m betting many of you are sick of the debates on recession along with the federal reserve’s thought process and possible action going forward. There’s really only so much you can say about that. Here’s where my portfolio left off. Good luck and happy trading!

  • HEDGES (13.7%)
    • 12.6% TLT Calls
    • 1.1% SPY Puts
  • PRECIOUS METALS (34.1%)
    • 4.2% AG
    • 3.9% MTA
    • 4.0% SILV
    • 2.3% LGDTF
    • 2.6% EQX
    • 3.3% SLVRF
    • 2.3% SAND
    • 2.1% MGMLF
    • 2.0% SSVFF
    • 1.8% RSNVF
    • 1.3% BKRRF
    • 1.4% HAMRF
    • 1.7% MMNGF
    • 1.2% DSVSF
  • URANIUM (26.3%)
    • 4.7% CCJ (covered calls)
    • 3.5% DNN shares & calls
    • 3.3% UEC (covered calls)
    • 3.4% UUUU (covered calls)
    • 3.7% BQSSF
    • 3.4% UROY
    • 2.2% ENCUF
    • 2.2% LTBR (covered calls)
  • US CANNABIS (13.8%)
    • 1.7% AYRWF
    • 1.7% CCHWF
    • 1.6% CRLBF
    • 2.2% CURLF
    • 1.6% GTBIF
    • 2.2% TCNNF
    • 1.1% TRSSF
    • 1.7% VRNOF
  • BATTERY METALS (11.2%)
    • 4.9% NOVRF
    • 4.7% SBSW
    • 1.6% PGEZF
    • 0.6% EMX
  • CRYPTO (2.5%)
    • 2.5% XRP
  • OTHER (2.5%)
    • 2.5% DOCN (covered calls)
    • 0.0% OGZPY (my account finally marked this to zero)
    • 0.0% ATCO calls (will expire worthless soon)
  • CASH (-4.8%)
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Recession becomes more mainstream

As the official data plugged in a 2nd quarter of negative real GDP growth, recession calls are becoming more mainstream. Note that the NBER uses a number of metrics, particularly with layoffs and such, to confirm a recession before they date it. Layoffs happen very late in a typical recession cycle, so this usually means we’re already into the next recovery cycle by the time they call it and date it.

Fed chair Powell knows that we’re in recession, but he is not allowed to give any negative economic news because the prevailing theory is that psychology plays a big role so you have to make everything sound better than it is. It sounds dumb, but I’m not kidding at all here – important metrics like inflation and GDP growth are believed to be heavily influenced by psychological effects, and big part of the job of the Federal Reserve is to spin these positive.

In my opinion this does much more harm than good because a lot of people and politicians believe this garbage and they come up with explanations like “Americans don’t want these jobs anymore” or “people are too lazy to work nowadays” to explain away real problems without addressing them. The first step to solving a problem is to recognize it, and we are more divided than ever on whether there are any economic problems and if so what they are, which traps us in this fake polarization where most people feel none of the politicians understand their concerns.

Anyway, Powell tries to be somewhat honest about what’s coming which is why he continually brings up Paul Volcker who was known for tightening policy into a recession in order to bring down CPI inflation by crushing demand. Real Vision had a great interview with Rauol Pal and Dave Rosenberg, where they mention the requirement for mainstream economists to always paint a rosy picture of the economy if they want to stay employed.

Here are a few things I gleaned from Dave Rosenberg’s view:

  1. The recession will likely last about 2 years, beginning early this year or late last year.
  2. Recessions need a catalyst to end, which usually involves stimulus from the government and/or the federal reserve. With divided government after the midterm elections and a federal reserve focused on beating inflation Volcker-style, this will take longer than normal to play out and it will be deeper than normal. CPI is a lagging indicator and rate hikes have a lagging effect, so we will be tighening policy much longer than necessary.
  3. We’re in the early stages where the unemployment hasn’t quite ratcheted up yet.
  4. The stock market multiple is receding but earnings calls haven’t been revised downward yet.
  5. If the June lows were the bottom for the SPY, that would be consistent with a regular 20% market correction if there is no recession involved. A recession call means there’s at least another 20% down to go.
  6. Dave says that the stock market will likely bottom a few months before the recession is over, likely around fall of 2023.
  7. Dave and Rauol are both bullish long-dated bonds, saying that these rates have never failed to come down in a recession.

I certainly agree with the bulk of the above, and I wish Rosenberg’s work was more accessible to retail investors because he has an interesting perspective. I’m still betting that the NBER waits until next summer – well after the midterm elections – to make it’s recession call, and that they date it back from October 2021 where GDP tops out in the chart here:

This last week has been a fantastic rally for all of my mining stocks, particularly in Uranium. There have been a number of bullish developments in the Uranium front. Here’s a quick summary:

  1. There is the big shift from underfeeding to overfeeding which will require a lot more mined Uranium. For years after the Fukishima disaster followed by massive numbers of reactors coming offline due to negative political sentiment, big Uranium enrichers would underfeed, meaning they would increase the time in the centrifuge to pull more of the fissile U-235 uranium out of the mix. This takes a lot more time to get the enrichment needed to fuel conventional plants, but would use far less mined Uranium. Much of this enrichment capacity is in Russia, which is becoming more and more cut off from the west, while sentiment has been changing rapidly with the LNG spikes of recent years. This puts a lot of demand on the enrichment facilities, which have to produce a lot more reactor fuel in less time, and they do that by overfeeding, or pulling a lot less enriched Uranium from the mined stock. This switch is huge, as in many cases they need to go through around 3 times as much mined Uranium to get the same amount of fuel.
  2. Governments are getting much more supportive of nuclear power. The EU and US have finally started to identify nuclear energy as green energy and qualifying as ESG. The Japanese government is putting more pressure on local governments and regulators to get more of their nuclear plants back online, many European countries are extending the lives of very old reactors, and even the anti-nuclear Germany is under fast-growing pressure to keep their last 3 reactors running (current plans are to shut them down in December) and even try to restart some of the reactors they shut down last year. Both France and the UK have aggressive plans to build new nuclear capacity, and the US has been discussing buying up Uranium for a stragetic reserve to incentivize more mining.

This type of news is very bullish, but in absolutely the wrong time of the investing cycle. The federal reserve is determined to tighten financial conditions, and market rallies like we saw this last week only encourage them to do more. This will put pressure down on prices of all assets, and I expect to see some serious drops in the normally weaker periods of the market such as September/October and March. As such, I really need to get my cash balance back to positive – but I don’t want to do it by selling stuff way too cheap.

So how did I play this?

Basically, what I did is sell a lot of out-of-the-money calls on my Uranium miners – focusing on that sector mainly because those calls have some pricing power whereas my precious metals and battery metals miners don’t pay enough to get me interested in selling calls. As I wanted both decent money for selling the calls and enough upside left to enjoy a spike, I pushed out the timeframe a bit so some of my covered calls expire as late as January 2023.

An example here is UEC – a US-based Uranium miner that can swiftly ramp up production and is well set to benefit from this bull story. I had an average buy-in around $3.50/share the price spiked to around $4.10 last week, and I got paid $0.70/share for Jan 2023 calls at a $5 strike price. At the $4.10 price this is a payment of 17% to cap my potential 5-month gains at an additional 22%. If it spikes big time and expires in the money, I’ll sit on a gain of 39% from the $4.10 price at the time I sold those calls, or a 63% gain from my $3.50 average buy-in. You can’t be disappointed with those types of gains in the midst of a raging bear market.

Anyway, now is not the time to swing for the fences – that will come after the market bottoms and the federal reserve is set on easing like crazy again. Until then, its best to play somewhat defensive.

Here’s where my portfolio ended up this week. It booked a solid 6.6% gain after a 5.7% gain the prior week, which always feels good even though I’m down a lot on the year like pretty much everyone else. Good luck and happy trading, and make sure in your own way to take something off the table in on each of these steep bear market rallies.

  • HEDGES (13.4%)
    • 13.4% TLT Calls
  • PRECIOUS METALS (34.0%)
    • 3.9% AG
    • 3.7% MTA
    • 3.9% SILV
    • 2.4% LGDTF
    • 2.9% EQX
    • 3.1% SLVRF
    • 2.3% SAND
    • 1.8% MGMLF
    • 1.9% SSVFF
    • 2.1% RSNVF
    • 1.4% BKRRF
    • 1.4% HAMRF
    • 1.8% MMNGF
    • 1.2% DSVSF
  • URANIUM (25.6%)
    • 4.6% CCJ (covered calls)
    • 3.5% DNN shares & calls
    • 3.1% UEC (covered calls)
    • 3.2% UUUU (covered calls)
    • 3.6% BQSSF
    • 3.4% UROY
    • 2.0% ENCUF
    • 2.2% LTBR (covered calls)
  • US CANNABIS (13.5%)
    • 1.7% AYRWF
    • 1.7% CCHWF
    • 1.5% CRLBF
    • 2.1% CURLF
    • 1.5% GTBIF
    • 2.1% TCNNF
    • 1.1% TRSSF
    • 1.9% VRNOF
  • BATTERY METALS (10.9%)
    • 4.8% NOVRF
    • 4.5% SBSW
    • 1.6% PGEZF
    • 0.6% EMX
  • CRYPTO (2.4%)
    • 2.4% XRP
  • OTHER (3.0%)
    • 2.3% DOCN (covered calls)
    • 0.6% OGZPY
    • 0.1% TWTR call
    • 0.0% ATCO calls
  • CASH (-3.4%)
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Too early for mining? Not for me.

We saw a decent rally in uranium miners this week. I sold some out of the money covered calls on a couple of my positions and used the proceeds to buy more SBSW.

The big Fed meeting is coming next week and everyone expects a 75bps hike with an outside shot at 100. Expectations are for a big market drop, as institutional investors have unusually big short positions in place. While that could easily happen, I don’t like bets that seem crowded.

I’m still absolutely amazed at how cheap mining shares have become. I have no illusions that they won’t get cheaper, but I’m not selling into weakness here. With out of the money covered calls though, you can take some money off the table while still booking a gain if the shares run up and get called. It seems too early for a sustainable rally so I like selling these if the price is right.

One thing I’m still confident on is that we need a lot more investment in natural resources in order to sustain any real economic growth, and that the relatively small mining sector is set to soar when this investment starts coming in. Without this investment, the CPI will shoot up and destroy any attempt at economic recovery, so I really think it’s the best sector to be in and I don’t mind being early here.

That’s all for now, good luck and happy trading. Here’s where my positions ended up.

  • HEDGES (16.2%)
    • 16.2% TLT Calls
  • PRECIOUS METALS (32.9%)
    • 3.7% AG
    • 3.8% MTA
    • 3.7% SILV
    • 2.7% LGDTF
    • 2.8% EQX
    • 2.7% SLVRF
    • 2.3% SAND
    • 1.8% MGMLF
    • 1.8% SSVFF
    • 1.7% RSNVF
    • 1.7% BKRRF
    • 1.3% HAMRF
    • 1.9% MMNGF
    • 1.1% DSVSF
  • URANIUM (23.9%)
    • 4.5% CCJ (covered calls)
    • 3.4% DNN shares & calls
    • 3.2% UEC
    • 3.0% UUUU
    • 3.2% BQSSF
    • 2.8% UROY
    • 1.8% ENCUF
    • 2.1% LTBR (covered calls)
  • US CANNABIS (15.8%)
    • 2.0% AYRWF
    • 1.8% CCHWF
    • 1.7% CRLBF
    • 2.6% CURLF
    • 1.8% GTBIF
    • 2.3% TCNNF
    • 1.3% TRSSF
    • 2.3% VRNOF
  • BATTERY METALS (10.7%)
    • 4.5% NOVRF
    • 4.5% SBSW
    • 1.7% PGEZF
  • CRYPTO (2.5%)
    • 2.5% XRP
  • OTHER (3.1%)
    • 2.4% DOCN (w/ covered calls)
    • 0.6% OGZPY
    • 0.1% TWTR call
    • 0.0% ATCO calls
  • CASH (-5.1%)
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