Month: August 2022

By Felicity Bradstock of Oilprice.com

The world is preparing for a lithium boom, mainly due to the anticipated increase in EV production and uptake over the coming decades. Several celebrities and tech billionaires are backing lithium mining in a bid to support a green transition. In addition, many countries are rapidly developing their mining capabilities to establish their place in the global minerals and metals market, which is expected to expand significantly over the next decade. 

However, environmentalists are concerned with the damage the rapid expansion that mining operations could cause to the environment. In addition, a spate of viral social media posts has brought negative attention to a mineral that the public knows little about, beyond hearing it in the context of lithium-ion batteries. If we are to expect substantial development in the lithium industry in the coming years, greater awareness must be raised around the minerals industry so producers and manufacturers can gain public support and encourage consumer market expansion. Furthermore, mining and energy companies must address environmental concerns to ensure their operations are in line with the aims of a green transition, as countries and companies around the world strive for net-zero and to do less environmental harm.

In 2021, Australia was the biggest miner of lithium, producing 55,000 metric tonnes, with reserves totaling around 5.7 million metric tonnes. It was followed by Chile, which produced 26,000 metric tonnes, China, Argentina, Brazil, Zimbabwe, and Portugal. Although these figures could shift significantly as Chile, Argentina, and Bolivia invest heavily in the development of a lithium triangle in South America. 

Argentina accounts for around 21 percent of the world’s lithium reserves, and while it’s relatively new on the scene compared to Chile, which already has a well-established lithium mining industry, it is now investing heavily in the sector. Greater demand for electric vehicles (EVs) and lithium-ion batteries for electronic products is expected to lead to a lithium boom, with international pressure for a boost in mining activities already mounting. At present, Argentina has two lithium mines in operation, but a further 13 are planned with dozens more under consideration, making it the world’s largest lithium pipeline. 

The International Energy Agency (IEA) anticipates a 40-fold increase in lithium demand by 2040. Traditionally, lithium mines require a two-year-long evaporation process, where lithium is separated from salty brines. At present, the production of one metric tonne of lithium requires 500,000 gallons of water, with Chile’s lithium mining consuming around 65 percent of the region’s water. However, several mining firms are investing in the development of alternative methods that require less time and water to be used in the extraction process, through direct lithium extraction (DLE), to make it more profitable and less harmful to the environment.  

As mining firms and governments around the world invest in expanding their lithium operations, many question whether there is enough of the mineral to produce the number of batteries required to achieve net zero. Estimates suggest that around 2 billion EVs need to be produced to reach this goal. Lithium production totaled around 90.7 million kg worldwide last year, and one EV battery holds around 8kg of lithium. Meanwhile, global reserves are thought to total around 22 million tonnes (20 billion kg). Approximately enough lithium to manufacture 11.4 million EV batteries was produced in 2021. If all of the world’s lithium were used for EVs, it could contribute to the production of around 2.5 billion batteries. However, it will also be used for several other lithium-ion battery-powered devices, from laptops to mobile phones. This presents a huge challenge to the development of the number of batteries required in the coming decades. 

While several prominent public figures are backing lithium mining, such as Tesla CEO Elon Musk, environmentalists around the globe are concerned about what impact the rapid development of the lithium industry may have on the environment. The huge amount of water required in lithium production is concerning for areas without an abundant water supply. Produced on salt flats of Chile, campaigners worry that mining may take vital water resources away from local communities, flora, and fauna. In addition, the artificial ponds used in production leach lithium, which could potentially contaminate community water supplies.

Further, a recent viral social media post showing the bright colors of artificial lithium ponds came with the statement: “This is what your Electric Car batteries are made of. It is so neuro-toxic that a bird landing on this stuff dies in minutes. Take a guess what it does to your nervous system? Pat yourself on the back for saving the environment.” While viral posts criticizing energy operations are no new thing, it is a concern when the public has little knowledge of the energy source, meaning their judgment can be easily swayed. At a time when governments should be educating the public on the importance of a green transition and the types of energy and mineral resources that will be used in that transition, instead, we are seeing an increasing level of misinformation. With the rollout of EVs requiring consumer interest in investing in battery-powered cars instead of ICE vehicles, this is worrying. 

The lithium boom is nigh, and yet there is still a long way to go to make it a reality. Not only is a major investment required to mine the levels of lithium needed to support a major green revolution, but greater public education campaigns must be carried out to increase consumer understanding of the new commodities entering the market. Further, mining and energy firms will have to fund greater research and development to improve environmental practices, while addressing concerns to gain greater project approval worldwide. 

Hollywood is the wokest place on earth regarding social responsibility, but when they try to lecture law-abiding Americans on firearms, it’s an absolute joke. 

During a recent episode of the “Joe Rogan Experience” with guest comedian Tim Dillon, Joe Rogan pointed out Hollywood’s hypocritical stance on firearms. 

“Isn’t it f–king wild that Hollywood, in general, is very anti-gun, but they promote guns more than any other media on the planet? All their best movies, whether it’s ‘The Gray Man,’ or whether you’re watching ‘The Terminal List’ or ‘Mission Impossible. 

“It’s all ‘Guns save the day.’ Guns kill aliens, guns kill werewolves, guns kill everyone. Everyone bad gets killed by guns … but guns are bad and you shouldn’t have guns.’ It’s crazy,” Rogan said. 

Virtue-signaling celebs have no trouble profiting off movies featuring violence and guns. However, they love to criticize gun advocacy groups such as the National Rifle Association for making communities less safe. 

Comedian Bill Maher on his show “Real Time with Bill Maher” on HBO, recently pointed out that children “see 200,000 acts of violence on screens before the age of 18.” 

Maher cited the FBI, who said the common denominator with signs of a school shooter is “fascination with violence-filled entertainment.”

Maher concluded: “It’s funny, Hollywood is the wokest place on earth in every other area of social responsibility… but when it comes to the unbridled romanticization of gun violence — crickets.” 

Authored by Matthew Piepenburg via GoldSwitzerland.com,

With the USD losing influence, it would be the understatement of the year to say that we live in interesting times, for we certainly do.

But despite the inevitable attacks of appearing sensational, un-American or just plain cynical, I feel a more appropriate phrase boils down to this:

“We live in dishonest times.”

Below, I bluntly address the “Fed pivot debate,” the “inflation debate” and the USD’s slow global decline in the setting of a now multi-FX new normal in which gold’s historical bull market has yet to even begin.

These views are not based on biased politics, but honest economics, which for some odd reason, ought to still matter.

Let’s dig in.

The New Normal: Open Dishonesty

I recently authored a report showcasing a string cite of empirically open lies which now pass for reality on everything from the CPI inflation scale to the Cleveland Fed’s +1 real interest rate myth, or from official unemployment data to the now comical (revised) definition of a recession.

But a more recent lie from on high comes directly from the highest of all, U.S. President Joe Biden.

Earlier this month, Biden waddled to his podium and prompt-read to the world that the US just saw 0% inflation for the month of July.

Oh dear…

It’s sad when our national leadership lacks basic economic, math or even ethical skills, but then again, and in all fairness to a President in open (and in fact sad) cognitive decline, Biden is by no means the first President, red or blue, to just plain fib for a living.

A History of Fibbing

We all remember Clinton’s promise that allowing China into the WTO would be good for working class Americans, despite millions of them seeing their jobs off-shored to Asia seconds thereafter.

And let us not forget that little war in Iraq and those invisible weapons of mass destruction.

Nor should we ignore both Bush and Obama’s (as well as Geithner’s, Bernanke’s and Paulson’s) assurance that a multi-billion-dollar bailout (quasi-nationalization) of the TBTF banks and years of printing inflationary money (Wall St. socialism) out of thin air was, “a sacrifice of free market principles” needed to “save the free market economy.”

In reality, however, we haven’t seen a single minute of free market price discovery since QE1.

Thus, Biden’s announcement that there was NO inflation for July is just another clear and optically (i.e., politically) clever lie among a long history of lies.

That is, he failed to clarify that although there may have been LESS inflation in July, this hardly means “no” inflation, as any American who has a bill to pay already knows.

Setting the Stage (Narrative) for a Fed Pivot

What the July CPI decline does achieve, however, is yet another headline myth to justify an inevitable Fed pivot to more easy money by year-end (i.e., mid-term elections) or early 2023.

As we see below, the fiction writers, data-gatherers and fork-tongued policy makers in DC have already been gathering more official “data” to justify a Fed pivot toward more dovish money printing and hence more currency debasement ahead.

In addition to a decelerating CPI report for July, DC has also been checking the following, pre-pivot boxes to allow the Fed to get back to doing what it was truly designed to do, which is print debased money out of thin air to save the US Treasury market rather than working class citizens.

Specifically, DC is pushing hard on the following “data points” and narrative:

• Decelerating inflation expectations

• Declining online pricing

• Declining PPI (Producer prices)

• Declining oil prices (from their highs)

So, has inflation peaked? Are the above declines proof that inflation creates deflation by crushing consumer strength and hence price demand? Is the Fed’s work nearly done in defeating inflation?

My short answer is no, and my longer answer is that when it comes to market, currency and economic conditions, there’s…

…More Pain Ahead

One clear sign that there’s more pain ahead, and hence more reasons for the Fed to pivot from temporary hawk to permanent dove, is the credit tightening now taking place in the US.

As I’ve said too many times to recall, the credit—and bond—market is the most important market and economic indicator of all.

Earlier this month, the Fed’s quarterly Loan Officer Survey came out with some scary and telling news, namely that the credit markets are tightening.

It’s important to know that in the last 30 years, a tightening of credit has always preceded a recession, even if DC wants to pretend that we are not in a recession.

The hawks may argue, of course, that during the inflationary 1970’s, tightening bank credit did NOT stop Volcker’s Fed from a hawkish rate hike policy.

But let me remind again that 2022 USA (with a 125% debt to GDP ratio) isn’t the Volcker era, which had a 30% ratio.

So, I’ll say it once more: The US can’t afford a sustained (Volcker-like) hawkish (rate-rising) policy–unless you believe the Fed is under direct orders from Davos to destroy America, which, I suppose is a fair belief, but one I’m not ready to embrace (yet)…

Despite Powell’s fear of becoming another Arthur F. Burns who let inflation run too hot, and despite his failed attempts throughout 2018, and again now, to be the tough-guy at the Fed, I still feel the Fed, for all the narrative points/reasons set forth above (including falling US tax receipts in July), is waiting for more weak economic data to justify a dovish pivot toward more QE rather than less inflation.

Why?

Because the Fed’s Only Job is to Keep Uncle Sam’s IOUs from Drowning

The only way to keep US Treasuries from tanking (and hence bond yields and interest rates from fatally spiking), is for the Fed to print more money to buy Uncle Sam’s otherwise unloved debt.

And this can only be done with more, not less, QE down the road.

Of course, money created with a mouse-click is inherently inflationary and inherently fatal to the purchasing power of the USD, which is why gold is inherently poised to out-perform every fiat currency in play today, including the world reserve currency.

But as for gold’s rise, in addition to the dis-inflationary recessionary forces (which require a weaker dollar and lower rates to fight), there’s a lot going on outside the US which further points to gold’s pending rise.

Little Trouble in Big China?

Investors may have noticed that money is fleeing China in droves. Capital outflows are reaching levels not seen since 2015, which sent the Yuan to the basement by 2016.

Does this mean the FX jocks should start shorting the heck out of the Chinese Yuan (CNY)?

I think not.

In fact, the CNY is holding its own despite massive capital outflows.

But how?

China: Openly Mocking the U.S. Dollar and the Back-Firing Putin Sanctions

The openly back-firing, financially-inept and politically-arrogant Western sanctions against Putin’s war amounted to the biggest game-changer in the global currency system since Nixon closed the gold window in 71.

More to the point, and despite massive capital outflows, the CNY is remaining strong because its FX reserves (i.e., its national savings account denominated in foreign assets) are actually rising not falling.

Huh? Why? Where’s the money coming from?

Answer: Just about everywhere except for the dollar-led West.

That is, nations like China and Russia, who have been chomping at the bit for the last decade to de-dollarize, are now doing precisely that in the wake of recent moves by the West to weaponize the USD by freezing Russia’s FX reserves.

Myopic sanction chest-puffing by the West has given the East the perfect pretext to fight back financially and monetarily, and they are fighting to win a heating currency war.

No Dollars, Thank You

Specifically, countries wishing to purchase Chinese imports (i.e., commodities) now have to pre-convert and/or settle those purchases from local currencies into CNY rather than the once SWIFT-and-world-dominated USD.

In short, the USD is no longer the toughest guy in the room nor prettiest girl at the dance.

This is becoming more evident as headlines confirm Indian companies swapping USDs for Asian currencies, China and Saudi Arabia concluding energy deals outside the slowly dying (and forewarned) petrodollar, and the Russian Central Bank considering buying the currencies of friendly nations like Turkey, India and China.

As commodities like oil (priced-up 30% since 2018) leave places like China and Russia, they can now be purchased with local national currencies (Indian, Brazilian, Turkish) which are then converted into CNY.

This procedure adds massively to China’s FX reserves (especially when oil prices have been rising), thereby allowing its currency to stay strong despite massive capital outflows.

From Mono-Currency to Multi-Currency

In short, and despite Western attempts to flex its currency muscle via USD-driven sanctions, nations like Russia and China are now leading the charge from a one-currency world to a multi-currency world of import payments.

With its FX reserves frozen by the West, Russia, for example, can take its energy profits and Rubbles to purchase the currencies of friendly countries like China, India and Turkey to rebuild its reserves outside of the USD.

In this manner, and as I’ve repeatedly warned (in articles and interviews) since February of 2022, the West has shot itself and the world reserve currency in the foot.

The old world is slowly but surely turning irreversibly away from a USD-dominated currency system toward a multi-currency and multi-FX pricing model.

And as we head into winter, nations like the UK, Japan, Austria and Germany, who blindly towed the US line, will be feeling the cold pinch of backing the wrong policy as other nations stay warm/heated with oil and gas that can be bought outside of the old, USD-led system.

As energy prices continue to cripple the West, especially here in the EU, will such nations like the UK, Austria or Germany bend or stay firm?

Either way, the USD is the open loser over time, and will never be trusted as neutral currency again.

But agree or disagree, you may still be asking: What does any of this have to do with gold?

It Has Everything to do with Gold

As more nations turn away from the West (and the USD) and closer to the East (i.e., Russia) to meet their energy needs, how will they find the Rubles or Yuan to buy their oil, gas and other commodities?

After all, in the new, post-sanction, multi-FX importing model described above, Turkey can’t just buy Russian oil in Lira; it needs to first settle the trade in Rubles.

So, again, what currency will Turkey use?

From Petro-Dollar to Petro-Gold

John Brimelow, a consistently brilliant gold analyst, has given us a pretty obvious hint/answer: YTD Turkish gold imports are up 44% to nearly 70 tonnes, and can easily reach prior levels of 300 tonnes per annum.

In other words, Turkey could be dumping US dollars to buy gold at what we all know is a deliberately rigged (i.e., low) COMEX/LBMA price.

Turkey can then sell that gold to Russia’s central bank in exchange for Rubles “at a negotiated price” otherwise needed to purchase Putin’s oil.

Given that the physical oil market is nearly 15X the physical gold market, one can only imagine what further oil-for-gold transactions as per above will do for the rising price of a scarce asset like gold.

See the Sea of Change?

See how the USD is slowly losing its shine?

See why gold is slowly gaining in shine?

See how the US-led sanctions were the biggest political and financial policy gaffe since Kamala Harris tried to locate the Ukraine on a map?

See why the BIS/COMEX/OTC price fixing of gold earlier this year was the perfect (and artificial, legalized fraud) timing needed to keep gold cheap for other nations to buy?

Rhetorical Questions

Perhaps all this interest in gold rather than the USD explains Saudi Arabia’s recent push to refine gold within its own borders?

Perhaps this also explains why less-favored nations to the US (i.e., Nigeria and India) are launching a bullion exchange and opening gold trading?

Perhaps gold’s new roles are why the BIS, the biggest player (legalized scammer) in the paper price fixing of gold, has unwound nearly 90% of its gold swaps over the course of a year (from 502 to 56 tonnes)?

And perhaps gold’s stubborn significance further explains why the two biggest US gold price manipulators in the futures pits, JP Morgan and Citi, have been grotesquely expanding their gold derivative book (they own 90% of all US derivative bank gold) at the same time the BIS was unwinding their swaps?

Why?

Simple: To keep a boot to the neck of the natural gold price just a bit longer as they accumulate more of the same before the very currency system they helped ruin finally implodes?

Honest not Sensational: Gold’s Bull Market Has Yet to Even Begin

Given the dishonest times in which we live, and given all the mechanizations sited above, it would not be sensational to remind conventional investors what most gold investors already know: Gold is most honest and loyal when dishonest and disloyal markets implode.

Hedge fund managers and other candid analysts are collectively and already foreseeing massive market pain ahead, as Egon and I have been warning for years.

The big boys are now net-short US Equity futures:

Whether re-valued by oil, or simply re-valued by fiat currencies which have increasingly no value, gold can easily reach levels which current investors can’t imagine.

After Nixon’s debacle in 1971, gold surged 400% in just one year between 1973-74.

Watch the Foxes, not the Hen House

The TBTF banks have no morality in my mind. I’ve written of their open fraud for years.

Ever since folks like Larry Summers repealed Glass Steagall and turned banks into casinos and bankers into speculators (with depositor money), nothing the big banks do is either fair or fiduciary.

Ironically, however, it is fair to say that even these banks will be hoarding more physical gold (at currently repressed/rigged prices) as the world they created implodes under its own systemic sins.

And if JP Morgan or Citi is getting prepared, shouldn’t you?

After all, better a fox than a hen, no?

The Ukrainian operator over Zaporizhzhia nuclear power plant, which is Europe’s largest, is warning Saturday of the risk of a radioactive leak at the site, which since March has been occupied by some 500 Russian troops.

“As a result of periodic shelling, the infrastructure of the station has been damaged, there are risks of hydrogen leakage and sputtering of radioactive substances, and the fire hazard is high,” Energoatom said on Telegram.

After Thursday the plant was cut off from the electrical grid for the first time it its history, which was subsequently restored hours later, there’s been growing international alarm over the potential for a Chernobyl-style disaster. 

Energoatom further claimed that Russian troops “repeatedly shelled” key infrastructure at the plant – a charge rejected by Moscow. Instead Russia’s defense ministry countered that it was the Ukrainian side that  “shelled the territory of the station three times” in the past day, saying “a total of 17 shells were fired.”

The agency further warned the plant “operates with the risk of violating radiation and fire safety standards” – in the statement which came midday Saturday (local time).

Ukrainian authorities are calling for international intervention due to the continued instability of the situation. “Due to the presence of the Russian military, their weapons, equipment and explosives at the power plant, there are serious risks for the safe operation of the ZNPP,” Energoatom said.

“Ukraine calls on the world community to take immediate measures to force Russia to liberate the ZNPP and transfer the power plant to the control of our country for the sake of the security of the whole world,” it added.

Ukraine is further alleging that plant personnel have been tortured by Russian forces, at a moment that an IAEA team is said to be en route to inspect the safety of the nuclear plant. Kiev is saying that a ‘cover-up’ is being orchestrated by the Russians. As Fox News reports of the Ukraine energy operator’s statement: 

The nuclear agency said Russian forces have “increased the pressure” on Ukrainian staff operating the site “to prevent them from disclosing evidence about the crimes of the occupiers at the plant and its use as a military base.”

Even China is now calling for a swift and safe resolution to the standoff at the nuclear plant. China’s representatives to the UN agreed for the need of an independent monitoring team to ensure safety, calling for “maximum restraint” among both sides to prevent accidents:

A senior Chinese official told the UN on Friday that just one incident might cause a serious nuclear accident “with irreversible consequences for the ecosystem and public health of Ukraine and its neighboring countries”.

Geng Shuang, China’s deputy permanent representative at the UN, pointedly called on all parties involved “to exercise maximum restraint strictly abide by international law and minimize the risk of accidents”, adding: “We must not allow the tragedies of the Chernobyl and Fukushima nuclear accidents to be repeated.”

China calls on Putin to end Russian roulette at Zaporizhzhia nuclear plant in Ukraine after disaster near-miss. When China is speaking up, you know it’s serious. They barely have peeped a word about Ukraine until now. https://t.co/b6Kmv49ALA

— Bill Browder (@Billbrowder) August 27, 2022

As for the torture allegations, the Kremlin rejected this narrative as propaganda, and it remains that days ago Russian President Vladimir Putin gave the greenlight to invite in an IAEA team, after European leaders have demanded accurate data on the status and functioning of Zaporizhzhia in terms of its day-to-day technical data.

Authored by Tavi Costa and Kevin Smith via Crescat Capital,

Today’s restrictive Fed policies in a rapidly deteriorating economy are the preconditions for a steep recession. Contrary to the unprecedented monetary and fiscal support we had following the last economic downturn, we are currently experiencing a major withdrawal of liquidity at a time when corporate fundamentals are starting to contract. Despite the deepest yield curve inversion in decades, the Fed is raising rates at its fastest pace since 1984 as it prepares to shrink its balance sheet by $90 billion per month, starting next month. Already, in the last three months, M2 money supply also contracted by its largest amount in 63 years!

In the meantime, inflation remains deeply entrenched in the economy. These are arguably the most challenging set of circumstances the Fed has confronted in many decades. Central banks can sacrifice economic growth as long as unemployment rates stay low, which we believe to be highly unlikely.

Looking back at the Great Inflation period from the late 1960s to the early 1980s, the rise in consumer prices preceded substantial increases in unemployment rates. On average, after two years of the initial appreciation in inflation rates, labor markets started to falter. Today, it has been exactly two years and three months since CPI rates began to trend higher. With such a level of monetary tightening with already eroding economic conditions, we strongly believe unemployment rates are poised to rise significantly from their current levels.

Inflationary Recession

In 1973-4, it took a decline of 48% in stocks for inflation to start trending lower for the next couple of years. The persistent increase in consumer prices at the time forced the Fed which had to radically tighten financial conditions. As a result, a brutal inflationary recession followed and, outside of precious metals, overall equities and Treasuries collapsed together. A similar macro setup is unfolding today.

In our view, the US and most other developed economies have decisively entered an inflationary regime. Consequently, the role of monetary policy will be much more directed towards price stability which inhibits the backdrop of excessive central bank liquidity that drove overall market prices to today’s unsustainable levels.

We believe January 3rd marked the peak for US stocks and this is just the beginning of a bear market from truly historical overvaluations.

Opportunities Abound

Decades of reckless Fed actions have created one of the most frenzied investment environments in stock market history. Outside of natural resource industries, we are seeing a profusion of unsustainably high valuations across most of the equity market.

Unsurprisingly, today’s consumer discretionary sector is now worth 2.6 times the size of the energy sector, while the latter generates over 5 times more in free cash flow. We believe these price imbalances are true opportunities. In our global macro and long/short hedge funds, we are long undervalued stocks in scarce commodity industries today, including precious and base metal miners, oil and gas E&Ps, and fertilizer producers while we are short a variety of overvalued stocks in a variety of sectors with deliberate over-weighting of short positions in consumer discretionary and information technology, in particular mega-cap tech.

The Fundamental Setup for Mining Stocks

In a similar concept to how historically undervalued energy companies continue to be, other commodity businesses may offer an even stronger value proposition. Mining stocks, for instance, are currently trading at multiples not seen since their historically most depressed levels. This is a function of falling stock prices coupled with strong fundamentals. The P/E ratio for metals and mining stocks in the S&P 500 are now retesting the lows of the 2008 bottom.

Greatest Dividend Yield in Almost a Decade

Gold miners also have the highest dividend yield in almost ten years. While this seems compelling, it is just a supplementary part of our bullish thesis on gold and silver mining stocks. These companies are almost paying more dividends than utility stocks for the first time in the history of the data.

Similarly, energy stocks are paying more dividends than any other sector in the S&P 500 today.

Energy Stocks-to-Oil Ratio on the Rise

Energy stocks have underperformed oil prices for almost six years. Even after most energy commodities reached a bottom in April 2020, exploration and production companies have not kept up with the level of appreciation. It is interesting, however, that in this recent pullback in WTI and Brent oil prices, energy stocks behaved significantly better. We think this is a very bullish sign for the overall industry. It is always important to see the risker parts of a sector leading the way. We believe the energy stocks-to-oil ratio will break out from this key resistance and continue to move higher.

The Resurgence of the Inflation Narrative

None of the structural issues causing inflation have been resolved. Overall CAPEX for commodity producers has gone nowhere and monetary tightening has only reduced capital available for new investments. We believe that the Fed still runs a major risk of prematurely shifting its hawkish stance and re-igniting the inflation narrative. The softer tone we have seen from policy makers recently is likely to drive commodity prices higher again. That has already begun. Look no further than natural gas prices making new highs recently.

Natural Gas Sends Strong Message

The surge in natural gas prices to recent highs is perhaps one of the most important developments unfolding in the macro environment today. It is happening right at a time when the inflation narrative has dissipated due to recession fears. The appreciation of natural gas reminds us that commodity markets are fundamentally linked. Rising energy prices often drive rising agricultural and materials prices.

Natural Gas and Ammonia Prices Are Strongly Correlated

Note the historical correlation between natural gas and ammonia prices. In the past, one has led the other. Higher ammonia prices mean higher fertilizer prices which trigger agricultural commodities to rise leading to higher food prices.

Most Erratic Energy Policy in History

In case one thinks that the selling pressure in oil has been solely driven by recession fears, the US government just sold another 27 million barrels last month. At this pace, the strategic petroleum reserves (SPR) will be zero in 18 months.

Nonetheless, with recent recession fears, the demand deterioration in the Chinese economy, and the US government selling its SPRs, one would think oil would not be trading anywhere close to as high as $90 per barrel. Such strength in the price speaks to the overall supply tightness in the energy market. We believe oil is headed substantially higher.

The Early Innings of a Bear Market

Equity markets are not priced for the vicious stagflationary environment that we envision. Overall, stocks are behaving as if we were still in a secular disinflationary environment which allows the Fed to loosen monetary conditions without causing inflationary pressure. As prices for goods and services continue to increase at historically elevated levels, so will the cost of capital. That is not a positive scenario for growth stocks, particularly relative to value companies. The Russell Growth vs. Value index spread still is near the peak levels reached in the Tech Bubble of 2000. This further supports our view that the decline in the overall equity markets is just the beginning.

Value vs. Growth

The long-term double bottom in the energy-to-tech stocks ratio illustrates how early we are in this upward trend for oil and gas stocks. For over a decade, capital flows have solely focused on growth-related companies and have completely forgotten about businesses that are crucial to the basic functioning of the global economy. We are excited to be able to invest in historically undervalued energy companies at what we believe to be only the beginning of an inflationary era.

Job Openings Collapsing

Maybe it is just a coincidence, but 774 CEOs have left their roles this year in the US alone. That is the highest number in 20 years!

What do these high-profile executives know that investors don’t?

There have been significant changes in labor market indicators recently. Job opening just had their largest 3-month decline in the history of the data, excluding the initial shock of the pandemic. This is probably just the beginning. Fed tightening with PMIs already at levels only seen in the Global Financial Crisis is just one more nail in the coffin for the economy.

Tech Bubble on Steroids

At the height of the Tech Bubble in 2000, the top-10 US market cap tech stocks collectively reached an enterprise value of 30% of GDP. The problem then was the same as it is today. Growth expectations were too high for these companies. Their valuations had simply become too rich relative to the size of the overall economy to justify the growth assumptions.

Furthermore, the spending boom to address the Y2K computer problem made the fundamentals truly unsustainable. Investors were extrapolating high short-term growth rather than realizing that it was a top in both growth and profitability for the business cycle. Over the next two and a half years, the enterprise value of these companies would plunge to just 5% of GDP as the combined revenue, earnings, free cash flow, and stock prices for these companies plummeted and led the entire economy into recession.

Fast forward to year-end 2021, the height of today’s mega-cap-tech-led stock market bubble. The top-10 US market cap tech stocks collectively reached an even higher 56% EV to GDP, 87% higher than it was at the peak of the 2000 tech bubble. The record-breaking fiscal and monetary stimulus during Covid accelerated the move to the cloud and the corresponding IT spending boom, just like Y2K. Once again, investors have extrapolated unsustainable growth and profitability to justify high valuations.

Remarkably, even as the fundamentals are already deteriorating, the further downside risk for these mega-caps remains totally incomprehensible to most market participants today. The common investment narrative remains that these companies have reasonable P/E ratios. Not only is the E coming off unsustainably inflated levels, but the P/E multiple is also too high compared to likely future growth.

The chart below shows the potential further downside risk for the top-10 mega-cap tech stocks today, on an EV-to-GDP basis, if they were to approach the same cyclical low valuation levels that they did in 2002 of 5 times EV to GDP. We are not necessarily calling for a full retest of those multiples, but we believe the market will continue to head in that direction. We are indeed looking for substantially lower stock prices for many of these companies along with continued downward revisions to earnings and free cash flow projections and contracting multiples, all of which should coincide with an economic recession over the next several quarters.

Investors have been buying the dip and continue to get sucked into what we believe has been a mere bear market rally over the last two months, one that is starting to roll over again. The technical analysis of this macro/fundamental chart looks like a monster head-and-shoulders pattern.

Payrolls: Still Partying Like It’s 1999

Nonfarm payrolls recently surprised the markets with a surge of 528,000. Despite what seems to be very positive news, here is a reminder that nonfarm payrolls also surged by almost 500,000 right at the peak of the tech bubble in March 2000. It is important to understand that most labor market gauges are lagging indicators. An extremely low unemployment rate is often a contrarian indicator.

Hardly Even Growth Stocks Anymore

In contrast to what most investors believe, the “FAANG” stocks are starting to show serious signs of weakness in their fundamentals. The median real revenue growth for these companies has officially turned negative for the first time in almost two decades. Interestingly, investors still consider them “growth” stocks despite their meaningful exposure to a cyclical downturn in the economy at large. We think mega-cap tech companies pose a significant risk to the overall equity market. After years of attracting investment flows from capital markets on the back of incredibly successful business models, these stocks are deteriorating fundamentally, and most investors are not even paying attention.

More Buybacks Than Capex

S&P 500 companies are spending more money on share buybacks than they are investing in their businesses. They are doing this at the highest ratio in the history of the data which goes back 25 years. Aggregate annual buybacks are 134% of CAPEX. This trend is likely to crimp productivity growth and innovation for years to come.

Financial Engineering Failure

While many investors believe share buyback programs have been widely successful, the data shows otherwise. Stocks with the highest buyback ratios have underperformed the overall market in the last three years. It gets worse. If we look at the members of the S&P 500 Buyback index, 89% of their cash flow generated in the last 12 months was used to buy back their shares. Managers have been making poor capital allocation decisions, buying back expensive shares, and under-investing in future growth.

Contracting Fundamentals

While we have seen most stocks in the technology sector being re-rated at lower price levels, fundamentals for these businesses continue to weaken, particularly for the smaller players. Aggregate profit margins for the Russell 2000 Technology index members are now at their lowest level since the Global Financial Crisis.

Yield Curve Inversions During Tightening Cycles

In the last 30+ years, every time the yield curve inverted, the Fed was forced to end its tightening cycle as the economy was heading into a recession. Over time, the sharp reversal of these policies, i.e., subsequent easing cycles, are what have fueled the excesses we see in financial asset valuations today.

For every economic downturn we have had since the late 1980s, government and Fed support became progressively larger. Such policy behavior is only achievable in a macroeconomic environment where inflation is not a long-term problem.

In the inflationary late 1960s to early 1980s, in contrast, central banks were much more limited in their ability to deploy liquidity measures during recessions. We think we are entering a similar macro setting today. This potential lack of liquidity is yet to be reflected in the prices of risky assets, which remain near historic high levels. Nonetheless, despite the steep inversion in the US yield curve, we think the Fed will be forced to remain hawkish for longer. In our strong view, the tightening of financial conditions in a fragile economy should be detrimental to equity markets.

Unsustainable Inversion

The 1-year Eurodollar curve is now as inverted as it was at the beginning of the Global Financial Crisis. That just means markets believe the Fed will be forced to cut interest rates in the next 12 months. For us, this inversion reflects how investors continue to bet on the potential for a deflationary outcome.

We believe it is unlikely that the Fed will be able to loosen financial conditions given that long-term inflation expectations are likely to remain well above the 2% target. In this sense, today’s setup reminds us of the 1970s when policy makers will be forced to maintain a hawkish stance for longer. As a result, market liquidity will remain challenged.

China’s Balance Sheet Recession

China is currently facing a full-blown balance sheet recession due to an over-levered banking system and real estate market. The unwinding of its severe macro imbalances has forced the PBOC to loosen monetary conditions not only in an inflationary environment but also with a significantly more restrictive Fed policy. In our strong view, a devaluation of the Chinese yuan is the next wrecking ball that very few investors are positioned for.

Note how China’s imports of steel products are now at the lowest level in 24 years.

The Fed is Tightening While the PBOC is Easing

The PBOC-to-Fed’s interest rate policy spread has consistently led the changes in USDCNY by 6 months.

Such divergence in central banks’ stance is likely to add major pressure on the yuan to depreciate relative to the dollar.

The disconnect between the Chinese yuan and the required deposit reserve ratio for major banks remains one of the most important charts in the current macro environment.

The European Union’s border agency Frontex issued updated numbers Thursday on how many Russians it had tracked entering EU borders during the six months since the invasion of Ukraine began. It said nearly 1 million Russian citizens entered the EU since that time, or more precisely a total of 998,085 Russian passport holders had entered since Feb. 24. 

This huge number for the half-year time frame comes as the debate rages in Europe over an EU-wide ban on Russian travel, with Bulgaria being the latest among a slowly expanding list of EU member states to say it won’t support a complete ban, even if it has slowed visa issuances for Russians.

Germany has been among the most important EU nations to say such a travel ban would unfairly impact dissidents, or journalists and activists who are firmly on record as condemning Russia’s war in Ukraine. Some officials and pundits have pointed out it smacks of xenophobia, unfairly targeting a single ethnicity or nationality. 

“What is important for us is that we understand there are a lot of people fleeing from Russia because they disagree with the Russian regime,” German Chancellor Olaf Scholz said earlier this month. “All the decisions we take should not make it more complicated to leave the country, for getting away from the leadership and the dictatorship in Russia.”

But Finland’s Sanna Marin, representing the pro-ban faction have said Russian tourists should pay a penalty for their government’s actions. Ukraine’s President’s Zelensky has been lobbying various Western government to impose a full ban as the next step in anti-Moscow sanctions. 

So far, the Czech Republic alongside Estonia, Latvia and Lithuania have been leading the way in implementing sweeping restrictions on Russian nationals obtaining travel and work visas.

A meeting of EU foreign ministers set for Aug.31 in Prague is set to take up the matter. For now, leadership in Brussels appears to be cold toward an EU-wide policy:

EU foreign policy chief Josep Borrell on Monday poured cold water on a proposal to implement a complete ban on Russian travelers into the EU.

Forbidding all Russians from entering the EU “is not a good idea,” Borrell said. “We have to be more selective.”

Speaking during a university conference in Spain, Borrell said the idea pushed by senior politicians in Kyiv and various EU countries was “quite controversial,” adding that it would create division between capitals, as some introduced travel bans without addressing it at EU level.

Borrell stressed that “More than 300,000 Russians have [fled] their country because they don’t want to live under the rule of [Russian President Vladimir] Putin. Are we going to close the door to these Russians? I don’t think it’s a good idea.”

As for Ukrainians who have fled into the EU Frontex said earlier this month that some 7.7 million Ukrainian passport holders had entered, since Feb.24, but among these 4.7 million have already returned to Ukraine – perhaps given the war has been largely limited to the far east and south of the country. 

By Russell Clark, published originally in the Capital Flows and Asset Markets substack

Why is the Euro so weak? The Russian invasion of Ukraine, and the associated squeeze on gas supplies to Europe is the most common reason given. It is true that the implication is that Europe needs to spend more on defence, and has uncompetitive energy costs now. You have also seen a deterioration in the trade balance.

The problem I have with that analysis, is that it is not playing out in cross rates. If energy supply was the big driver, then I would expect the Euro to be collapsing against both the Norwegian Krone or the Great British Pound as their North Sea supply of energy become more strategically important. In both cases the Euro has weakened slightly, but remains much strong than pre GFC days.

Sometime you hear people explaining Euro weakness is due to its unwieldy political structure, and its eventual political implosion (very popular argument of the political right). Again the problem with this argument is that the Euro has been very strong over the last 20 years versus both pound sterling and Norwegian krone. It should also imply Euro weakness against Japan, a single unified nation with none of the political problems of Europe. But when we look at EUR/JPY cross rate, the Euro has strengthened considerably against the Yen this year – or probably more correctly, the Yen has been very weak indeed.

This leads me to ask the question, could Yen weakness be driving Euro weakness?

Certainly Germany and Japan compete head on in many machinery and other related products. Korea which is much more a direct competitor to Japan has also seen its currency quietly tank to post GFC lows.

Looking at the Korean Won explains the Jekyll and Hyde nature of market this year. When the Won was weak in 1997, and in 2008, we were heading for recession and financial crisis. BUT, when we look at the Yen/Won cross rate we see Won is strengthening against Yen, which has been a sign of strong financial growth. . Should I be bearish because Korean Won is weakening? Should I be bullish as Won is strengthening against Yen? Oddly enough, you could do a very similar analysis with Australian dollar and the Euro – typically bad when they are weakening, typically good when they are strengthening against Yen. 

So why is the Yen weak now? Japan has maintained ultra loose policy, while the rest of the world has backed away from much of the QE policies. And a weak Yen is not as deflationary as it used to be, given the rise in China as the dominant exporter and commodity importer. The question then, is when does the Yen rally and the US dollar weaken? There are two possibilities, the Federal Reserve pivots dovishly. Given recent policy announcements out of the Biden Administration, that seems unlikely. The other possibility is when the BOJ comes under political pressure to raise rates. I hear rumblings of complaints against BOJ policy – but I have no strong insight on when change might come. So what do you do if you trade currencies, but uncomfortable holding the USD at these levels? My best idea is to own Swiss Franc. The Swiss Franc has spend ten years at is current level versus the US dollar, despite having a long glorious history of appreciation versus the US dollar. Given inflation in the US, Swiss Franc does not look at expensive as it used to.

The Swiss unlike the Japanese, have begun to tighten monetary policy. This has reduced the holding cost to a comparable level to holding the Euro.

Also unlike Eurozone, Switzerland has maintained a trade surplus.

I see dollar strength being driven by Yen weakness, which has been driven by BOJ’s continued commitment to stimulus. For currency traders looking for a short dollar position, Swiss Francs looks your best bet for the time bein