Lead-Lag Live

David Hay on Navigating Recessions, Bond Market Complexities, and Strategic Investment Shifts

• Michael A. Gayed, CFA

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Can companies truly thrive during economic downturns, and what does that mean for investors? Join us in this engaging episode featuring David Hay as we dissect the intricacies of the current economic landscape. We'll explore how companies that manage to uphold decent earnings during tough times might be worthy of a premium valuation. Hear David's fascinating journey from filmmaking to finance and gain insights into the bond market's complexities, where we distinguish between credit risk and duration. We'll also interpret the mixed signals from commodities and market caps and scrutinize labor market data, focusing on critical job revisions that may indicate a challenging road ahead for the economy.

Discover the implications of the "fourth turning," a period of significant societal upheaval marked by massive government debt and limited liquidity options. We delve into how this era could shape investment strategies, emphasizing the shift from financial assets to scarce, real assets that offer potential high returns in nominal terms. Learn why strategically positioning in scarce resources may be more advantageous than relying on easily created financial instruments like treasuries. This conversation provides essential insights for investors looking to navigate the turbulent economic environment and capitalize on emerging opportunities.

Finally, we explore evolving investment strategies and market trends, questioning the traditional 60-40 stock-bond portfolio mix. Understand the potential value in the mid-range of the yield curve and emerging market debt, and the dynamic performance of digital assets like Bitcoin. We also analyze the global energy market, the potential of small modular reactors, and the intriguing status of regional banks. With a focus on emerging markets, rolling recessions, and actionable investment strategies, this episode is a must-listen for anyone looking to stay ahead in these uncertain economic times.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

You could make the case that if we're going into more difficult economic times which I think is likely that those companies that can still report good earnings, or at least decent earnings, in an economic slowdown or contraction recession deserve a premium multiple. That's possible. I think they've already got it, so maybe it's you know, they kind of go sideways. I think what's more interesting is to take it to the next phase and assume that we're going to have a recession. We don't know when. I think it's sooner rather than later. By the way, jeff Gottlob I heard him the other two or three weeks ago say it's starting like now September, and he's had not a perfect economic forecasting record, but a pretty darn good one. Regardless, when that recession hits, what will the policy response be in the next recession? And I think it's going to be extremely inflationary.

Speaker 2:

My name is Michael Guyatt, publisher of the Lead Lager, for doing me for the rough 50-minute period here with Mr David Hay, the haymaker himself. David, for those who are not familiar with your background, you can choose yourself. Who are you? What's your background? Have you done the right career? What are you doing currently?

Speaker 1:

Well, first of all I just want to say that I'm a subscriber Lead Lag Report. It's one of my favorite reads. Read it almost every business day, so thank you for that. Right before we went on, I had another of an information junkie.

Speaker 1:

I probably read more macro and a lot of micro, a lot of stock-specific, pod-specific research as well, and it could be because I feel kind of deficient in that my educational background was cinema studies and filmmaking. So not too many people in our industry, especially somebody that's been in it for pushing 46 years, has that kind of a background. So I really wanted to be a filmmaker to begin with. I guess I wanted to a different form of the entertainment industry than the financial markets. So anyway, I've been doing that since 1979, many, many presidents ago. When I first came in, jimmy Carter was in the White House putting solar panels on. I think Ronald Reagan took them off.

Speaker 1:

Anyway, I've seen an awful lot of things happen, including the fact that interest rates when I started for the first three years the only thing they did was go up.

Speaker 1:

And fortunately, in like 1982, when we had treasury rates long treasury rates of 14, and we had the prime rate over 20, I actually became a bond bull and I think that's an important part of my career really built my career around kind of disinflation, betting on falling interest rates and kind of this never-ending bond bull market.

Speaker 1:

There were times where we would shorten duration because rates fell too fast. It was kind of late cycle whatever. But whenever bonds went into a bear market or a correction, we would be buyers up until the summer of 2020. And when the 10-year got down to almost a half a percent and we saw inflationary pressures really building, I became not just bearish on bonds but ferociously bearish on bonds and stayed that way for most of the last few years. And then I've kind of got tactically timidly bullish here recently and I think that's a big discussion point because I kind of tend to lean into the hard landing camp and if that's the case you typically want to buy long treasuries. I'm not so sure that's the case this time, but maybe we're getting ahead of the whole discussion. But that's a little bit of an intro to my approach in my career.

Speaker 2:

So I think it's interesting, because I think you can be bullish and bearish on bonds, depending upon what it is you're bullish or bearish on. You can be ferociously bearish on credit risk and timidly bullish on duration, and I think people often think that it's like equities, it's one factor, it's beta. No, there's really two primary things that drive the bond market. Let's first talk about the hard landing scenario. I often joke that every hard landing looks like a soft landing before it actually becomes harder.

Speaker 1:

Okay, Good point. It's a very good point. It actually becomes harder. Okay, good point.

Speaker 2:

The very important people forget that, yeah, and I always go back to. I think one of the things a lot of pilots often say is that every landing is effectively a managed crash right? So where are we on the economy here? Because I think you can make a case very easily for both the large cap or the marketplace seems to think soft landing, I'd argue. The small cap side of the marketplace seems to think soft landing, I'd argue the small cap side of the marketplace seems to think hard landing. I see you have different opinions in terms of market cap and their respective performances, but what are your thoughts there?

Speaker 1:

Well, I would just agree with what you said. I want to add commodities and the way commodities are behaving. Even those that have a very attractive supply demand profile, like uranium and palladium and copper, really come under a lot of pressure here lately. So, yes, I think we're getting mixed messages and maybe that's appropriate because the data has been extremely mixed, but I do think the scales are tipping toward the harder landing scenario or outcome. I mean, obviously, this was something that I shouldn't say, obviously, but something that we've really been harping on in writings, that I've been harping on these various podcasts for gosh over a year is watching the revisions, and what I'm talking about is the labor market, which that's what people consistently the bulls consistently point to is look how strong the jobs market is and you can't have a recession when you have unemployment down at 3.4%. Well, especially after these revisions, it's more like 4.3% and I'm not even sure that's accurate.

Speaker 1:

Jobs revision was so massive. It was 818,000 jobs that were taken away over the period of the year ending in March. In terms of private sector job loss, it was more like a million. That's a huge number and a huge whiff by the government statisticians and it really does cause a call to question it may have even been you that wrote this is that are we trading off the wrong data? I think it was your piece here recently and I think that's a very good question.

Speaker 1:

Are people being misled or investors being misled by this economic data? And I don't know that it's being manipulated for political reasons. So I did see I don't know if you saw this an amazing stat on the Fed 93% of the Fed staff, including their hundreds of PhDs, are registered Democrats. That doesn't really inspire a lot of confidence and political objectivity, but in general, I think that it's really probably more likely the birth-death model that is the real culprit here, which it often is, because it assumes job formation, business formation and then job formation, and if businesses are actually closing when they're assuming they're opening, you get a big error factor, and that's I think we've got to work here.

Speaker 2:

I have not seen that particular news story, but I've had Joseph Wang on Fed, guy 12 on X, who used to work at the Fed, and he's made that point to me multiple times over that the Fed tends to certainly lean left. It is interesting to me, like I don't personally understand why people are surprised by the downward revisions, because all you need to do is look at the performance of small caps. It goes back to that point. I mean, small caps are supposed to be far more sensitive to the domestic economy than multinational large caps. So the fact that as a group, that you have not seen any sustained co-movement or momentum, that they're still largely treating below 2021 eyes, that suggests that the domestic economy actually probably is weak and that, yeah, the jobs information all along was never really the true story.

Speaker 1:

Right, and I think it's also weird or a disconnect, to look at the retail sales numbers, which look fairly robust, the bears would say, but that's because savings is being drawn down to a dangerously low level of credit card debt. It's well over a trillion at over 20% interest rates. But retail sales superficially look strong. Yet you look at the reports coming out and the majority of them are very weak and what I think you're seeing where there is strength, is kind of the trade down factor. So those people that were perhaps shopping at Macy's before or Neiman Marcus or whatever, that are trading down to Walmart or maybe a better example might be Whole Foods go from Whole Foods to Walmart. And yet when you or Costco Costco is another beneficiary of this Costco seems to do well, no matter what. But when you get to the real low end like Dollar Tree and Dollar General, they're reporting terrible numbers and that's shocking. You would think that they'd be a beneficiary, but I guess you could say that the low end is basically just kind of dropping out totally. They're trying to cut every expense they can, even essentials, and yet maybe it hasn't gotten rough enough for the higher income folks to actually drop down to Dollar Tree or Dollar General, because they've never done that, so they just kind of bought them out at Walmart. So, like so many things in the economy, I think you get this tale of two, you know, tale of two consumers, those that are making money off of stocks and we're just collecting higher interest.

Speaker 1:

I mean, the high interest rate situation is one of the things we're going to talk about is, you know, are rates too high, which a lot of people think they are? They think the Fed has made the mistake of overtightening and staying tight too long, or are they too low? And I think the answer is both. I think for the main street America they're too high and for, I think, the small caps you mentioned that how poorly they've been doing on a relative basis, which is true, and a lot of those companies have weaker balance sheets. They don't sit on tons of cash, no-transcript, that's disastrous. So it's a very mixed impact from these higher interest rates.

Speaker 1:

Now, are they going to last? Probably not a lot longer. No question, the Fed's, I should say. There's always some question, but very little question. The Fed cuts this month and is it going to kick off a multi-meeting cycle of interest rate reductions? I think so. I think it's going to be more aggressive than the Fed is expecting, maybe not more aggressive than the markets expect. As you know, there's about 100 basis points difference between the two right now, over the next year.

Speaker 2:

Is there any Fed policy tool that could level the playing field in terms of the effective interest rates on middle main street America and everyone else? I mean, it's true it's like the arms of the K keep getting wider right and interest rates are not impacting large caps because of the large caps being driven by the tech, which is cash rich. Everything else is languishing, for the most part on a relative basis. Is there anything the Fed can do to kind of just level the playing field somewhere out there?

Speaker 1:

Well, I don't know if the Fed will do it, but I mean, historically, what's been a leveler has been a crash in asset prices. I mean it happened in the 1930s. I mean there was a tremendous wealth disparity at the end of the roaring 20s and by the end of the 30s it had converged drastically. I think you could argue that about the 1970s as well. So it's probably not the way the not monetary action. I think the penalty for an extremely tight Fed kind of a woke arrest type of thing that really creates a vicious bear market and stocks similar to what we've seen, say, in commercial real estate. I just don't think that's going to happen and I think the political tolerance for that is quite low. And, as you probably have seen, there's a fairly high correlation between tax collections, us federal government tax receipts and the S&P 500. In other words, when the S&P 500 gets clobbered, tax receipts go down and it can go down fairly drastically. And that's not what you need when you've got a deficit that's running 6% to 7% of GDP right now and, of course, that's completely unprecedented during a late stage expansion. So there's this tremendous dilemma that the government is in and you know lots about that. I have some very good opinions and that's what I would call. The great disconnect is that I know that's one of the things we're going to talk about is this tremendous divergence between the way financial markets are priced mostly and this societal fracturing that I see is going through.

Speaker 1:

And, as you know, I'm a big believer in the fourth turning and ironically, I just listened to him. He recorded a podcast just a few days ago and I said he I mean Neil Howe, who is the author of the fourth turning, and the fourth turning is here. So the fourth turning was the original book in the 90s. The fourth turning is here. Is the current book saying this is basically the fourth turning is here? So the fourth turning was the original book in the 90s. The fourth turning is here.

Speaker 1:

Is the current book saying this is basically the fourth mega crisis that we've had in America. It's about every 80 years. I think the first one was actually in the 1600s of Glorious Revolution, which was more of a British-American crisis, but then after that it was pretty much all American crises and it does make sense and you can go all the way back to antiquity with that kind of a pattern. So, frankly, I think Neil Howe is the signal, and pretty much everything else is noise, and that's why I have such a hard time at least on a long-term basis getting caught up in all the euphoria about NVIDIA's or that this is. The AI is creating a new boom cycle, and I think there are unbelievably vexing problems that we are not addressing.

Speaker 2:

I would like to level set for the audience what the whole fourth turning thing is. I mean, a lot of people reference it. It sounds scary just by the nature of the phrase. But let's do a little deep dive here as far as what exactly the fourth turning is.

Speaker 1:

Well, I read the book. Here's the book and you can see my copy of it has a lot of yellow notes, because that's all the pages, you don't mess around. I love it Pretty good, yeah. So I mean, one of the scariest things is that he thinks that we could be looking at actual violence, whether it's against an outside party, outside entity, or internally, and, frankly, either one of those scenarios is possible, but neither one of them is positive.

Speaker 1:

The other thing that he is very adamant about is fourth turnings are consistently characterized by high inflation, and we had that, and now we've got a cooling phase. I think it's kind of a cyclical disinflation. But I think the structural forces to higher inflation are very much in place and he's very adamant about that for a host of reasons. But we could definitely come out of it stronger. I mean, we came out of the 1930s, early 1940s, which was the last fourth turning we faced to dominating the world, and we rode that momentum for decades.

Speaker 1:

But now we have, of course, a very different situation, and one of the points he makes, which is a great one, is that typically, when you go into fourth turnings, government's relatively small, government debt's relatively low. What's different about this one is we have such a massive government apparatus and then this tremendous debt, which gives the federal government much less ability to create liquidity and create stimulus to deal with the next crisis. It is. I mean Keynes frankly gets a bad rap because what he was saying back in the 30s was, during an economic crisis like that, when there was so little private demand, the government needed to step up and create demand and create liquidity and run big deficits and borrow money. But federal government balance sheet in 1930 was pristine Obviously not the case today.

Speaker 1:

Same thing, I mean this was kind of a mini crisis in the late 70s where we had the high inflation and Volcker was in a position where he could push the rates to 20% because the federal debt to GDP was about 30%. Now we have a one in front of 130%. So we've really limited our abilities and, as a result of those limited abilities to respond to crisis conditions, we have to result to truly extreme measures. Are those going to have a beneficial outcome on asset prices? Well, maybe, maybe, in nominal terms. I mean, it could be that we make a lot of money US dollars over the next five or eight years during what is probably the terminal phase of the fourth turning. He thinks it's going to last about another decade, or at least through the end of this decade. So I think if you position yourself properly, investors can do very well. But what I worry about is most investors are positioned exactly wrong for this era.

Speaker 2:

So I've noted that it looks like July was a turning point for a lot of things. That's when the yen bottoms, when value started outperforming growth. Talk about positioning to when small caps bottomed relative to large caps right, still weak, but you're not at that ratio low from July. So it seems like and I always go back to it it's usually one big trade, right. So when these things kind of all coincide in a certain time period, it makes you think maybe there's a whole new set of probabilities going forward. Are we going to be re-entering a period where fundamentals matter, where value matters? Because one of the key characteristics of this bull market has been and by this bull market I mean more than just the last year and a half, I'm talking really since 2010 or so it's been US large cap tech, which is growth.

Speaker 1:

Yeah, is that changing? Is that paradigm ending? I would think so. You could make the case that if we're going into more difficult economic times, which I think is likely that those companies that can still report good earnings, or at least decent earnings, in an economic slowdown or a contraction recession deserve a premium multiple. That's possible. I think they've already got it, so maybe it's you know, they kind of go sideways. I think what's more interesting is to take it to the next phase and assume that we're going to have a recession. We don't know when. I think it's sooner rather than later. By the way, jeff Gottlob I heard in the other, well, two or three weeks ago say ago, starting like now September, and he's had not a perfect economic forecasting record, but a pretty darn good one.

Speaker 1:

Regardless, when that recession hits, what will the policy response be in the next recession? And I think it's going to be extremely inflationary. So that's why I think that if you forget about what's going to happen over the next few weeks or a few months, even, even and focus on really what the true big picture is, and I think that big picture is that you're going to have a shift from financial assets to real assets that can't be inflated away, can't be printed by the Fed or any other central bank, can't be created by the Treasury and issuing trillions and trillions of dollars of new treasury debt. So I've said this many times I think what you want to do and I think this time is probably the most graphic example of that is be in things that are scarce, and treasuries and US dollars are not scarce. They are created at will. They are being created at will in fantastic quantities. And what my point earlier was that most people still rely on kind of a traditional 60-40, 60% stocks, 40% bonds, 50-50, whatever, some variation on those ratios, and the problem is what they look at as a safe asset may not be a safe asset, meaning the treasury component, the bond component.

Speaker 1:

Now I'm not saying that we're negative on all bonds by any means. I think at a time like this, the belly of the yield curve, that five to seven-year maturity range, looks pretty good because the Fed is likely to cut pretty aggressively and very aggressively if things are deteriorating and we get a really scary jobs number at some point, and I think that's fairly probable. So I'm not trying to say all bonds are unattractive. I actually think emerging market debt, which has been behaving very well through this bond bear market, particularly in the last two years, is a good place to be. Some of these countries where the real interest rates are 6% or 7% and where they've actually used more disciplined fiscal and monetary policies than the US and Europe has followed.

Speaker 1:

But you mentioned the yen. I think that's another place where US investors it's pretty easy to buy the yen and we believe the yen is drastically undervalued, which I believe it still is not as undervalued as it was in, say, early July. But it's 146, it used to be 100. I think it's going back to 100, at least against the US dollar, and that's the benchmark we're referring to here. So you can make. There's going to be places where you can make ice profits, even inflation adjusted.

Speaker 2:

When I hear scarce, I think not just commodities, but I think about Bitcoin maxis, Because I'm always reminded by the Bitcoin crowd that there's only a certain number of Bitcoin out there. It's scarce digitally, digital scarcity. Does that thesis apply at all to the digital world? Is it more on the analog side commodity?

Speaker 1:

side? No, I think so. I think Bitcoin and Ethereum probably are the two that deserve that scarce designation, and I have a hard time understanding really what Bitcoin is worth. I'm not sure anybody does, but there's something unique about it, and the reason I say that is I was really bearish on Bitcoin and so it was 2018, something like that when it first went up to its meteoric peak at that point, which I think was 40,000. I can't be remembering, it was somewhere around there.

Speaker 1:

Then it crashed, went down 80%, usually when and it was absolutely a mania in those days we had our clients at Evergreen and I should have mentioned that that I'm the co-CIO, co-chief investment officer of Evergreen, govcal, and we manage almost $5 billion now and our clients are typically pretty low key and they'll get caught up in manias. But man, we were getting just tons of phone calls on Bitcoin back then and that was another reason I thought it was going to get slammed. But it did go down 80% and then it went back up and made a new high I'd never seen that before with the object of a true speculative mania to get nuked and then have that kind of comeback and actually went to a new all-time. It's done it, I don't know three times. Something like that. It's really phenomenal. So I think it's telling us there is intrinsic enduring value in Bitcoin. Yeah, if I was going to play that, I haven't ever bought it, but I am kind of tempted.

Speaker 1:

I think the way to do it is when it gets slammed and it's kind of been semi-slammed lately and you know, maybe a nimble dollar cost average into it and then, when it goes nuts, take a little bit off the table. It's kind of like we do with commodities. I mean, it is highly volatile and it certainly doesn't qualify as an anti-fragile asset, meaning something that would actually go up. You know, risk off period, which I think you could argue that yeah, it is has become an anti-fragile asset. At this point, I think gold is acting very anti-fragile, so that's encouraging for people like us that have a lot of precious metals. But then there's the gold miners, which until lately, have been total dogs. I think that's changing. But to your basic point yes, I think we are going through a phase transition and what's worked so well over the last 10 years is unlikely to work as well over the next 10 years.

Speaker 2:

Is it better to go directly with the thing that's scarce or the miners and producers of the scarce thing? I always personally find it's better to go direct, right? I mean, yes, mining stocks, I myself have argued, are stupid cheap right on the gold end of things, but they never quite had the same sort of persistent momentum and demand.

Speaker 1:

Well, yeah, they've got a fundamental problem and I'm always harping on this that if you compare the blue-chip gold miners the Newmonts and the Barrick and I think Nico Eagle is kind of a special example it's the best of the big ones, but really all these leading gold companies have had very poor earnings over the last 12 years. I mean, most of their earnings are still well below when gold was. I mean most of them. Their earnings are still well below when gold was. I think the peak year from gold back then was 2011, maybe 2012. It averaged 1,573, 1,573 an ounce, so way below where it is today, and yet they had higher profits then than now. So that's not a good situation. And then you look at the oil companies, where oil prices and gas prices are substantially lower than they were back 10, 12 years ago, and gas prices are substantially lower than they were back 10, 12 years ago, and yet oil companies have, for the most part, are reporting today much higher earnings than they did back then. And if you look at 2022, they were reporting absolutely stupendous earnings. They're obviously much better stewards of shareholder capital than are the miners Now.

Speaker 1:

Are the miners getting religion? I think so. I think they're looking at what's happened with the energy industry and realizing that if you play your cards right, that you can actually do very well in a supply-challenged environment. I mean, it's hard to find gold, it's hard to find oil. It's probably harder to find gold than it is oil. We've got the Permian Basin. If we didn't have the Permian Basin, you could take away what I just said. And, by the way, I think the Permian basis, which is in West Texas, for your listeners or viewers that don't know that that it's peaking out and that I think is going to be a very significant development and going to lead to much higher oil prices over time. But I mean we could spend an hour talking about the oil market, how distorted it is, how illogical it is currently.

Speaker 1:

But anyway, wendy, you've actually the gold miners. We've actually done pretty well with them, buying them when they've been down, selling them when they've been up, just playing the volatility. They're extremely volatile. Most people tend to get excited about them when the prices are really running and so they're buying when they should be at least trimming and we are trimming right now. By the way, we have been here for the last month or two, so I don't see anywhere near the value in the miners that I did earlier in the year. We love Newmont, in particular when it was down in the low 40s and going back a couple of years. We love Alamos, agi and Adigo Akel. There's one other one I'm forgetting.

Speaker 2:

That's been a really good performer for us, but at this point I'd be pretty careful. I'm surprised because in your notes I'm surprised by this You're of the mindset that EVs will continue to be a big thing for the future, given the talk about scarcity, because I would think that the scarcity is going to dramatically impact at some point, EVs being in every single household. Lay out your thesis on electric vehicles and electrification in general.

Speaker 1:

I think EVs are going to go the way of the Ford Edsel. I think they're a bust, a very, very expensive bust. Now, on the flip side, where I think you're going to continue to have, you already are. This is not me projecting, this is me observing hybrids. Hybrids which were kind of like forgotten when EVs started to go, can be wrong about. They're certainly one of the biggest EV producers on the planet and their EV sales are still growing, but their growth rate is dramatically decelerating where their hybrid output is exploding.

Speaker 1:

The good thing is hybrids don't tend to explode like the EVs do and they still have lithium batteries. But, as you know, they're both gas and battery powered and it really eliminates the range anxiety which, for people in the developing world, that's a big deal. It's not easy to charge an EV if you're in Jakarta, I mean, if you're living in an apartment building you know may not have, probably don't have access to a charger for one thing, and the range, the mileage you're getting on these things where you can go a thousand miles or more on a tank of gas, I mean it's just a much more rational solution to the idea of trying to decarbonize, which I'm not sure decarbonizing is nearly as important as a lot of people believe, but that's a whole other debate. But, as I said, this isn't a matter of projecting or predicting. It's happening and yet the market seems oblivious to this shift that's going on, but almost every day you'll see an article to this effect.

Speaker 2:

Yeah, I misread the notes. So you're right. You said the markets seem to think that EVs will still happen, not you. I want to go to YouTube comments. I don't know how well versed you might be on this, but I think it's interesting. Since you mentioned the Permian Basin, couldn't the gaps of West Permian be filled by Vaca Muerta in Argentina and Guyana? So I guess the idea that if you land in the Permian it'll be lower, yeah, yeah, it's a good question.

Speaker 1:

I think with Vaca Muerta, which is my Spanish, is right means dead cow, and it's really more of a gas plant. It's meant to be more of the Marcellus, which is our big gas area for Argentina. I think that's a great point to bring up, because one of the many advantages the US energy industry has is this incredible spider web of pipelines and other energy infrastructure assets which are essential to you can't just especially with natural gas, I mean, it isn't the easiest thing to transport you really need to have pipelines. You can't truck it or put it on a rail car like you can with oil. So I don't think that's going to be much of a threat to bring down oil prices Again. It's a much different story. That is definitely oil. Exxon's the big player down there. Apa also has a position that's going to be a major source of new production for sure.

Speaker 1:

You got to look in general. So if you look at the overall oil market, it's about 100 million barrels a day of supply and demand roughly balanced. There's actually more demand than supply right now, but put that aside, roughly 100 million. The problem is that it depletes at about 5 million barrels or declines about 5 million barrels a year and when you look at the shales, like Permian, it used to be 40% decline rate, but as these wells have gotten more mature it's probably more like 25% to 30%. If Permian is producing 6 million barrels a day, which roughly is, you got to replace, let's call it almost 2 million barrels a day, and to do that you have to drill and the drilling rate count continues to fall.

Speaker 1:

We're in about the 11th year of capital spending starvation in the overall industry. So, yes, there are pockets of new supply, for sure. There's new supply coming out of Canada and particularly the Monday formation which is gas in Western Canada. That looks to be a biggie, maybe like 6 billion cubic feet a day, which is again, coincidentally, about 6% of the market. So, yeah, there's going to be a biggie, maybe like 6 billion cubic feet a day, which is again, coincidentally, about 6% of the market. So yeah, there's going to be sources of new supply, absolutely. But you got to look overall what's happening to, especially the big producers, and there's nothing more important to the oil supply demand situation than the US shales and they are flat to declining Huge development which, again, I think the market is not paying attention to.

Speaker 2:

Speaking of supply shrinking, we should talk a little bit about uranium. I am myself quite bullish on uranium and nuclear. From a very long-term perspective, I think it is undeniable that that is the ultimate future. How soon it happens from a prevalence perspective, who knows? But I want to get your thoughts on uranium. You mentioned that there's some big news coming out of Gazatopram, so give us some updates there.

Speaker 1:

So they are, as you know, the biggest producer in the world. It's like roughly 40% I think it's 37% of uranium comes out of Kazakhstan and almost all of it out of Gazatopram if I'm saying that right, gazatompram I think he said it better than I did, and they just said last well, it was 23rd of August they announced that their output increase that they had told the world was going to be so significant was actually going to be about 14% less than projected. That is pretty huge, given the size of talking about how big they are in the market. And I think it was saying that if it was OPEC and OPEC had made the same announcement, it would be the equivalent of losing about 20 million barrels a day of projected output. Now, it's not that it's declining, because it's still increasing, but it's increasing at a much slower pace than what they had projected. And the reason that matters is because you because to your point about the timing of it once again, is it a projection on my part? This is just an observation that you have almost 60 new nuclear facilities and we're talking about the big 1,000 gigawatt or 2,000 gigawatt power plants under construction, the nuclear power plants around the world, of which 27 are in China, and they're opening. They're opening these on a regular basis.

Speaker 1:

The other thing that's happening is even in America we're restarting mothball nuclear plants. So far, I believe, it's only one. There's definitely one in Michigan. Japan is restarting a number of its previously shut down nuclear facilities after the Fukushima disaster of 2011, I believe it was, and of course, it's not just that. India is tripling its nuclear fleet. France, which said it was going to start shutting down its fleet, is now restarting About. The only two countries that seem to be clueless are America and especially Germany, which has now totally shut down all its nuclear plants Just unbelievable. I think they'll be restarting them at some point. Then you've got SMRs, the small modular reactors, which nuclear experts know way more about it than I do believe. That's where you're going to have the future of nuclear, real nuclear growth.

Speaker 1:

It's been tough I mean I think that's more of the long term because they just can't get these things operating. Part of it's the NRC, the Nuclear Regulatory Commission, which is so cautious, even anti-nuclear, but it's going to happen. And I'm actually an investor I guess I'm the second largest investor in a company that called Micronuclear that thinks they've broken the code. They're ready to actually cut metal, go to first vision, and they've got some very interesting allies and very powerful allies. So I'm way more optimistic on that than I was a year or two ago, but it's still a very high risk situation. But somebody's going to break the code. I think they're going to be the ones, but there's a lot of other people throwing big money at it Are there evaluation-wise?

Speaker 2:

when you look at the uranium space, do these companies tend to kind of be all in the same range? I mean, how disparate are some of the valuations?

Speaker 1:

I don't think they're disparate. They're all pretty tough to me to get excited about. Do you include a chemical? Chemical would basically be the excellent of the industry and we owned it in the past. We did very well with it, but we sold it way too early. I think we doubled our money. But it's kept on running. It's just these companies, for the most part, are years away from production, years away from generating cash flow, so it's more of a venture capital type of play, unfortunately. I wish I had a better answer. We basically just buy uranium.

Speaker 2:

You had mentioned in your notes that you think financials look perhaps interesting here, which I think goes back to value versus growth that part of the discussion I don't think most people realize that regional banks have actually had roughly the same performance as the broader tech sector for over a year now, despite all the negative federalized still around regional banks. What are your thoughts on financials? I mean, I think everyone can largely agree that post 08, they've acted more like utility companies Not super exciting, but is there some real good value there?

Speaker 1:

Well, we were talking before we went on air that one of our favorite ways of looking at places to make money, or finding a place to make money, is breakouts, and you said one of your mentors believed in these long bases. And then there's a breakout from that long base and that's absolutely dead on. I think a smart investor should be on the lookout for those kinds of charts and the financials qualify, though. It's not that beautiful long base, but they have been in a trading range, for our minimum time period is three years, so if a stock or a sector or style breaks out of a three-year trading range and this is what Paul Tudor Jones calls range expansions that's a big bicycle for us, and financials did do that recently. It was interesting too when you drill down to the and so you can look at that by XLF, which I guess is the S&P Financial ETF. It's a pretty clear breakout. What's interesting? If you go globally, at least in Asia, us, europe that's pretty much all the counts. It's true, you just see these breakouts of all these companies. Just to throw one out, zurich Insurance, and we don't own it. I'm not saying anybody should buy it, but it's a beautiful breakout. It's got about a 5% yield, low PE. When you find these low multiple situations where there's a breakout underway so that you actually got momentum on your side, that's a pretty easy way to make money.

Speaker 1:

I think mid-cap looks really interesting. That's an area that's been lagging for a while I feel like we were saying about small caps and it's broken out recently, although it's a little bit less decisive breakout. But that's why we like financials combination of undervaluation and the nice price action. I do hope that we're in a situation, rather than 2008, 2009, where it was just everything getting blasted, to a situation more like 2000 or 2002, where the very high price tech stocks went down about 80% and most of the rest of the market actually went up and financial stocks went up. Energy stocks went up, industrial stocks went up. It was the first two years or so of that bear market which shook the S&P down about 50%. Value stocks actually went up. They went up until about the summer of 2002, and then everything got crushed in July of 2002. So I'm open for the great rotation, as it's called, as opposed to the great recession. But I got to say you know, a great recession is not impossible. I just don't think it's the most likely scenario.

Speaker 2:

Which sounds a little bit of an odds with the hard landing point, right. So what we? I mean great recession implies something bigger, but hard landings implies something big. So how do you kind of square that circle? As far as how do you reconcile between a hard landing and yeah, and what you said? You said it was not. You don't think it's a high probability. I don't think they sure do, as far as sort of a deeper great recession repeat.

Speaker 1:

And if you go back to the original great rotation from 2000, 2002, there was a recession in there. It just wasn't a very severe recession. I think you could argue that this time we've actually had a series of rolling recessions. You know, one of the forecasts I made a couple of years ago was I thought we would get both a recession, a broad recession, and a profits recession. But I said all along I thought the profits recession was more likely. Well, we had it and we've had a recovery. So we could have a double dip, if you will. But I do think kind of this rolling recession belief is probably pretty close.

Speaker 1:

So that tends to kind of flush things out. I mean, for example, the home builders, which I think are kind of crazy at their current price because homes are just so affordable and I think the way they're moving their merchandise is with a lot of incentives and they can only do that for so long. But I don't think you're going to have anywhere near the kind of collapse that happened back in 07-08. And that's a big part of it, and with auto sales, that's another big part of the economy. They've been pretty subdued, I mean, for years, and part of that was because of COVID and inability, been pretty subdued, I mean for years, and part of that was because of COVID and inability. To you know, there wasn't enough supply and then finally, once there were new cars and people started pulling back, they were running out of their stymies and so forth.

Speaker 1:

So I think you've got some pent-up demand in large appliances, home improvement, some of these things have kind of I guess my point had been somewhat flushed out. So I don't think that's going to happen. The real economic cliff dive, I wouldn't totally rule it out, I just don't think it's very probable. And the other reason is the government, I think, at the first sign of a recession, will go into hyper-stimulus mode again, to the best of their abilities which, as I said earlier, are somewhat constrained. But if you listen to Neil Howe and some of the other people I really respect, they'll find a way, including forcing the banks to buy treasuries, basically a yield curve control type of situation. You have to hold these bonds. At least a certain amount of your capital has to be in these bonds, even though you know that there are certificates of confiscation.

Speaker 2:

Well, we'll wrap up with a final question Going back to that point about emerging market debt. Youtube question here what are your thoughts on emerging market debt? We already covered that, but Mexico currently is yielding 10% on the 10-year. Let's expand it to a bigger question around how do you determine which emerging markets to actually position into the debt up?

Speaker 1:

Yeah, good question from your viewer there. And yes, we do like Mexico, we like Brazil, we like Indonesia. Actually, we are just in the process of buying in Mexico. Reit it's a pretty interesting name, it's yielding about eight. Mexican REIT it's a pretty interesting name, it's yielding about eight and it's got a lot of the Micheladora. The border factories are their lessors, and so they own these properties that they lease to companies that sell into the US and are basically taking share from the Chinese. So and I think that's true of Mexico in general that it's a beneficiary of this disengagement from China.

Speaker 1:

So, as far as how do you pick? I mean you got to be careful because there are some emerging countries out there that are just chronic basket cases, you know. Obviously Argentina has been one and Turkey's been one. Now there's in both cases there are signs of change underway, but for the most part, I think you want to focus on countries that run usually trade surpluses, relatively low budget deficits, so they don't have to go into monetization, unlike us, and where they have significant real interest rates, because the significant real interest rates tend to attract capital and they're not consistent with, say, zimbabwe or Venezuela, types of situations where the interest rates are way below the inflation rate. That's just kind of your typical tip off.

Speaker 1:

But there's good funds out there. There's all kinds of closed end funds. I know Morgan Stanley's got one First, aberneat's got one. There's a long list and you can just buy the emerging market ETF. But I think it makes more sense to look at some of the managed ones, particularly where you can get them at a discount from net asset value. You get yields in a 7%, 8%, 9% range and that's again. That's an area where I think most US investors have very little exposure. That's another good sign. I think you want to. In general, you want to be going where things aren't crowded. I think you're a believer in avoiding these overcrowded areas, particularly when they've been overcrowded for a long time and their charts look like this they still be on a hockey stick mode.

Speaker 2:

David, for those who want to track more of your thoughts, more of your work, where would you point it to?

Speaker 1:

Well, you always go to the Every Grain website, but if you want to actually get my commentary and my team's commentary and I do crave most of that, although we run guest content, probably, if you would give us your permission, we'd love to run one of yours but that's typically a Friday publication where we run a. We call it the Guest Haymaker. On Mondays we do the Making Hay Monday, or this week because Labor Day Making Hay almost Monday where we put in some pretty specific trade recommendations. I have to be careful because of compliance, for compliance reasons, since I am co-CIO of a pretty large registered investment advisor Haymaker and Substack. You can find it quite easily. Some of the content's free. We do have a paywall. Our newsletter is very modestly priced, so I don't think there's any reason any of your viewers couldn't subscribe if they wanted to, and I think some of the investment guidance we give well, just one good idea more than covers the cost of the newsletter.

Speaker 2:

Everyone. Please show some support to David. Check out that as well as follow David on YouTube, given that it's streaming on his channel as well. Thank you, david, I appreciate it. Thank you, michael, pleasure Cheers everybody.

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Michael A. Gayed, CFA

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