Equities vs alternative assets in polarized times
Technology, oil stocks, uranium stocks... Momentum or value... How should you think? Or you can drop everything and buy things like gold and crypto instead, which are more directly related to the underlying problems of high debt mountains
“It was the very best of times, and it was the very worst. It was the time of wisdom, it was the time of foolishness”. This is how Charles Dickens, the 18th century's number one story writer, described Paris and London at the time of the French Revolution. Even then it was not clear whether the development was good for the world and the people in it or not. It was just like the question of, among other things, 1) the experiment with democracy usually attributed to Greece a few thousand years ago, 2) the Renaissance and the Enlightenment 500 years ago, and 3) the industrial revolution. It is simply too early to say. As with most things in this world, it is both and at the same time. Defensive weapons and offensive weapons go hand in hand. Intoxication and hangover. People's rule and the dictatorship of stupidity. Wealth and boredom. Welfare and welfare diseases such as obesity and depression. Nuclear power and nuclear weapons.
We seem to be living in a Dickensian era in the financial markets, with top ten focused on empty entertainment soaring while the bedrock of our existence, the energy sector, slips ever further. It is the very best of times. And the very worst. We can drown in meaningless advertising and texts written by robots while we die of heat stroke and flood or freeze to death due to lack of energy.
So far, I write all my texts completely without the involvement of AI tools, even though it is sometimes a bit tempting to try. I've actually tried letting ChatGPT write romantic prose, so I know what it can do. But it also means that I know the tool's limitations, not to mention the risk of becoming increasingly lazy myself and, over time, less capable of questioning and improving the text suggestions. Society and the stock market, on the other hand, are increasingly driven by Nvidia's AI chips, as well as ads, phishing advocacy campaigns and books created by the AI tools trained on Nvidia's GPUs. Anything spelled AI or cloud services gets a shot at momentum-chasing index capital. But the companies that will supply the nuclear power plants of the future with fuel are not even worth 5% of Nvidia alone. And by that I mean all the uranium companies together relative to the chip giant.
I actually listened during the midsummer weekend to a commodity expert who thought it might be time for a phase shift in the uranium sector in just about six months. The uranium price also gives some indications that something may be afoot. The price has steadily ticked upwards towards the 60 level again this year after a slump of a couple of years, but uranium mines are still constantly finding new price depths. It was the darkest of times. Those were glorious times.
In any case, the time is getting closer when old and new power plants, which are supposed to fill the depots to normal levels, have to start competing with each other and listed uranium funds for long-term contracts with the mines and enrichment companies. As is well known, the global production of uranium is far below the annual consumption. It has been temporarily compensated by reducing the energy companies' buffer stocks and buying uranium on the spot market instead of on long contracts. In addition, stocks of uranium from the weapons industry have been used. However, the balance between production and use only gets worse with each passing year. Sooner or later the stocks will no longer constitute a buffer but, on the contrary, need to be replenished and normalized. The hope for the future therefore rests mainly with a few junior uranium prospectors of sufficient size who can reach production status within 3-4 years. This surprisingly includes the totally forgotten Canadian company Goviex (GXU). Furthermore, much more efficient utilization of the fuel in new generations of power plants will be required for there to be enough uranium for all the nuclear power plants already planned. China is building nuclear power plants like never before and is happy to continue its process of gradually increasing control over Africa's natural resources, for example through financing and long supply contracts with companies such as GoviEx.
But no matter how great the need for uranium and nuclear power in the future is, it seems like very slow cycles in that industry. Sure, there might be a well-motivated "phase shift" soon if price momentum accelerates the long-term contracts and leads to an early scramble for resources. But in practice, as a private saver, you can probably calmly wait for the signals to become clearer before you venture into junior uranium mines without financing. The risk you take is just to miss a sudden structural deal, or in GoviEx's case that they finally resolve the loan financing they have been talking about for six months. It just means you miss the starting shot, not the whole uranium marathon. If you are a beginner in the sector, you should therefore stick to the broad ETFs and industry giants such as Cameco. Namely, junior uranium mines are notorious "widowmakers" of the same rank as the natural gas market.
The oil market, on the other hand, can swing on a dime. The balance between supply, demand and inventory is much more sensitive to both seasonal and cyclical changes. Or effects of war. Huge amounts of rapidly available energy are needed to run wars as well as artificial intelligence server parks. It is hardly noticeable so far on the price of either oil or oil companies, a little surprisingly. This is partly due to short-term effects of sanctions against Russia's oil industry, favorable winter weather and also the US decision to deplete its strategic oil reserve SPR. Some criticize the United States for this, but the question is what to have SPR for considering that the country is nevertheless one of the world's largest producers and also exporters of oil. In any case, the supply of oil from SPR will decrease relatively soon, which should then reduce the downward pressure on the oil price.
Furthermore, it is likely that Russia's ability to produce and sell extra large quantities of oil at a sub-price via China and India to finance the war against Ukraine will sooner or later decrease. It can happen, for example, because of an extended war that threatens production itself.
In the near term, however, it is rather likely that the weather is the biggest factor. A hot summer requires more energy for, among other things, cooling and irrigation. And a cold winter after a warm summer would use up much more energy for heating than the last mild winter.
Meanwhile, the war between Russia and Ukraine continues unabated, effectively a world war between West and East. The Wagner incident over the weekend put a little extra focus on the fact that war can quickly change character. The outcome could have major consequences not least for the price of oil. Depending on how the war affects the balance between Russia and NATO, the situation between China and Taiwan could also quickly change, with potentially catastrophic consequences at least in the short term for the global computer chip industry.
Technological development is constantly accelerating and promises more automation, increased efficiency, greater prosperity, a cleaner environment, more entertainment, better living, quality healthcare, longer lifespans and more. At the same time, economic gaps are widening and the incidence of mental illness is higher than during the worst pandemic in history.
In the past, taxes and death were the only things you could be sure of. Sweden's number one fairy tale author, Astrid Lindgren, knew that, who on one occasion criticized that in Sweden you could be hit with over 100% in inheritance tax after your death. She actually liked left-wing politics, but she learned that no good comes without some bad. Now it's rather global warming, depression and war that are the only constants, because cryptocurrencies and biotechnology seem to be able to almost round both taxes and death over time.
Bottom line: It's the best of times for the winner stocks, but at the same time the worst of times for their valuation levels, as buying at record high Price/Sales numbers has never proven to be a long-term sustainable strategy. It is the worst of times for oil and uranium stocks, both on the stock market and due to parts of the environmental movement, but at the same time the best of times for buyers of the shares, given the imbalance between supply and demand. The question is how to succeed in riding the winners up, but avoid being hit by an Eiffel Tower graph after the top. It is currently the best of times for momentum and at the same time the worst of times for value. At least in terms of course right now. And around the corner is the recession lurking, which certainly does not bode well for cyclical industries such as industrial raw materials (iron, copper, oil), but with it at the same time more stimuli that can drive the stock market.
Can one perhaps avoid choosing between plague and cholera altogether? In an interview on the Antiloop podcast the other day with author and markets expert Ronnie Stöferle, Ronnie said that both Bitcoin and gold can function as risk-off options and store of value in a world of mountains of debt and increasingly unreliable fiat currencies and politicians. It's the worst of times to try to pick the right track in a list of impossible choices in the stock market, but alongside it are completely different asset classes that can be driven by completely different factors than stock momentum, indexing and business cycles. There are, for example, precious metals and cryptocurrencies. But personally, I'm betting on uranium as well.