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%)

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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