Two of the themes I’ve talked about over the last month have been (1) when U.S. stocks are eventually going to become “cheap” thanks to the Fed-rate-hike-induced selloff combined with the geopolitical activity and (2) when are Russian and Chinese stocks going to be worth speculation again?
I’ve already identified one overlooked sector that I believe is poised to continue to rise as a result of the Russia/Ukraine conflict (even after it ends) and recently had an interview with my friend J Mintzmyer, who believes that some shipping stocks could rise 2x to 10x as a result of the conflict. On top of that, I recently added one tech name to my portfolio that I think is finally worth buying, now that it is about 80% off its all time highs, one tech stock I think could get acquired, and one retail stock I think could go up 40% this year.
In addition to these ideas, I’ve also waxed regarding a number of potential undesirable long-term effects the macroeconomy could be undergoing right before our eyes. Specifically, I think China & Russia could start their own economy, backed by gold. Experts (at least the ones that exist in my echo chamber), seem to agree with me.
Metals expert Andy Schectman told me last week that he thinks the “death knell” for the dollar is finally here and that metal markets are “breaking”.
“Countries around the globe are coming to realize that the U.S. cannot be trusted and that anyone can be locked out of the SWIFT system at a whim,” he told me. “China and Russia hold the most gold in the world, after the U.S., but that is if you believe that we still actually have the 8,000+ tonnes at Fort Knox and that our gold is not incumbered – pledged to other countries - and that is a big ‘if’.”
He continued: “We are now facing World War III, but this time the odds are it will be an economic war, not a shooting war.”
Manager of the EMA GARP fund, and friend of mine, Lawrence Lepard, predicted last week that Russia has caused a “monetary earthquake” and that fiat currencies will “fail spectacularly”.
Lawrence Lepard (Photo: Kitco)
“Russia, with the backing and support of China, just told the world that it is no longer going to sell its oil, gas and wheat for Western currencies which are programmed to debase,” Lawrence told me. “The West in its response just said to all countries around the world: ‘If you have foreign exchange reserves, held in our system, they are no longer safe if we disagree with your politics.’
My friend Chris DeMuth of Rangely Capital tells me he is still concerned about China and Taiwan. “The potential outcome I’m most focused on is a spike in geopolitical volatility if this spreads to the Pacific. I am endlessly concerned about Ukraine for the sake of Ukraine, but where this could take the next big jump is if China invades Taiwan,” he told me in an interview this week.
Finally, on March 9, I took the time to re-examine my “wartime” trade (long oil, long gold, short risk) and ask whether or not the worst headlines have already passed us and whether the market can look forward with regard to the Ukraine invasion. Yesterday, news of limited progress on a ceasefire helped push markets higher.
I also wrote on Tuesday of this week (after a mea culpa about buying Chinese stocks last year) that I couldn’t help but dip my foot back into Chinese stocks using call options and defining my risk. I cited positive comments out of China on Tuesday morning that were then echoed on Tuesday night, sending Chinese names ballistic on Wednesday, with the NASDAQ Golden Dragon index rocketing the highest it ever has in one day.
I already took off a ton of the China exposure, via calls, I had already put on earlier in the week. As far as China goes moving forward from here, it appears the noose has loosened on ADRs for the time being, but this past week should go to serve as an example of how quickly shit can hit the fan with ADRs, especially those linked to companies outside the U.S. where you don’t own shares, like you would in purchasing traditional stock.
For example, if Apple fell 70% in a week like many Chinese names did, there would be a bid, because you are actually buying Apple stock - you’re buying a share in the domestic company, you’re entitled to dividends, and you’re an owner. With buying ADRs (defined by the SEC as a “security that represents shares of non-U.S. companies”), you’re subject to currency risk, risk of the certificates simply being cancelled or not tradable (like we’ve seen with Russia), and additional counterparty risk that you don’t have exposure to when buying stock of a domestic company.
Going forward, I still don’t think that U.S. stocks are “cheap”, especially given yesterday’s rally. I think many of us already “forgot” that once the Ukraine invasion slows or ends there will be (1) yearslong ramifications geopolitically to deal with from Putin’s actions and (2) the remaining problem of the Fed not knowing how to get itself out of the inflationary corner it has backed itself into.
This is why I continue to firmly be in the camp that stocks remain overvalued, and still need to revert to a mean that I first pointed out weeks ago when I began peddling my case that stocks need a “limit down” morning at some point.
As I said then, every serious indicator in the book that we can look at - from the Schiller PE (currently still at 35x) to market cap/GDP - suggests that if the Fed is going to continue course without interruption, stocks likely need to fall well further to even consider a notion of reverting to historical means.
I believe stocks will have to fall about 40% from their all time highs, at a minimum, despite the fact that that would still leave many companies with perversely optimistic valuations.
I wanted to ask my readers some questions I asked my expert friends this week about their thoughts on valuations and China — and start the following discussion below in the comments:
Do stocks look “cheap” yet? What are your favorite ways to value equities and what are those methods telling you right now?
What do you see as potential outcomes for the Ukraine/Russia conflict in terms of the actual geopolitical volatility?
Given yesterday’s run-up, where do you see risk relative to reward when it comes to Chinese ADRs on U.S. exchanges?
Will Russian stocks ever trade again on U.S. exchanges?
When the Ukraine invasion news fades, will markets rally and try to “forget” that we have an inflation issue, or will reality of the underlying problem quickly come back into focus?
Is there any chance inflation starts to subside on its own over the next month or two?
My Disclaimer: I own or have recently owned all names mentioned or linked to in this piece. I’m also long tons of gold miners, gold stocks, silver stocks, energy, oil, uranium, marijuana stocks and ETFs running the gamut of most industries. I may add any name mentioned in this article and sell any name mentioned in this piece at any time. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I get shit wrong a lot.
Do stocks look “cheap” yet? What are your favorite ways to value equities and what are those methods telling you right now?
Stocks do not look cheap - looking at book values, earnings. However where else do you put your money? Bond market is going to be a disaster for the next decade. Real Estate is crazy expensive.
What do you see as potential outcomes for the Ukraine/Russia conflict in terms of the actual geopolitical volatility?
In the next week - Russia and Ukraine will agree to a cease fire. Russia is in a stalemate and running out of food / gas. Putin will get some concessions to save face and gracefully exit.
Given yesterday’s run-up, where do you see risk relative to reward when it comes to Chinese ADRs on U.S. exchanges?
Do not trust china. Still feel their are the puppet master behind Putin (the puppet).
Will Russian stocks ever trade again on U.S. exchanges?
Yes - we are still capitalists'.......we will see an opportunity to make money. Also we cannot bury Russia financially like the world did to Germany after WW1. A country of that size that has as many nukes as anyone - you cannot make them desperate.
When the Ukraine invasion news fades, will markets rally and try to “forget” that we have an inflation issue, or will reality of the underlying problem quickly come back into focus?
Inflation will be in the news until November. It is the one thing that is impacting everyone no matter which way you vote.
Is there any chance inflation starts to subside on its own over the next month or two?
No.........there is too much money in circulation and supply chains are still fucked up. Companies still have not fully priced in all the wage increases and commodity increases. Also if Russia really hoards 75% of the worlds fertilizer - what is that going to do to food prices for the next year plus.
China sits top of mind for ongoing observation, but I only invest in things I understand well.
Ukraine looks to be a catalystic pivot point, where all these built-up vectors are playing out. They already told us one outcome - we lose more of everything.
Paper currencies are just starting to reset, inflation is one clear symptom, and this has a long way to go.
Russia's gold may be as elusive as Fort Knox's. Rumours are that it's bare.
"What do you see as potential outcomes for the Ukraine/Russia conflict in terms of the actual geopolitical volatility?"
The West is after Russia again. I guess they're hoping the winters are milder these days. Highly volatile. If NATO goes after Russia is China going to go after Siberia?
I’m not the smartest, but I believe the “be long inflation” thesis. I’ve been long oil since 2020 and went in heavy in physical Au and Ag and a mix of large, mid, and junior miners in late 2021. A little early there, but have held on and am currently enjoying the ride, and plan to be in this trade for years.
1. "Do stocks look cheap yet? What are your favorite ways to value equities and what are those methods telling you right now?"
Some stocks are very cheap (commodity producers, shipping, etc.), some stocks are expensive (tech, social media, etc.).
Favorite way to value equities is their current P/E ratio relative to their historical P/E ratio, and their enterprise value relative to the overall stock market (S&P500).
2. "What do you see as potential outcomes for the Ukraine/Russia conflict in terms of the actual geopolitical volatility?"
Eventually, Ukraine and Russia sign some sort of agreement. Sanctions on Russia however will remain in place. Russia and China move closer together. The West and The East go their separate ways and will increasingly become hostile to each other. Geopolitical volatility will remain high.
3. "Given yesterday’s run-up, where do you see risk relative to reward when it comes to Chinese ADRs on U.S. exchanges?"
Chinese ADRs can be traded, but are un-investable for the long run due to geopolitical risk (sanctions, delisting, etc.). An options strategy is probably the best way to approach this.
4. "Will Russian stocks ever trade again on U.S. exchanges?"
Sure. But probably not in my lifetime.
5. "When the Ukraine invasion news fades, will markets rally and try to “forget” that we have an inflation issue, or will reality of the underlying problem quickly come back into focus?"
Inflation is not necessarily bad for stocks. There was moderate inflation in the 50's and early 60's and the stock market did fine, whereas the bond market tanked/went nowhere. Only very high inflation is bad for stocks (but not resource stocks). Then again, during hyperinflation a stock market typically goes up as well (but purchasing power goes down, regardless).
6. "Is there any chance inflation starts to subside on its own over the next month or two?"
There is always a chance.
If the current oil supply shock is similar to that of the Gulf War period (1990-1991), then the oil price spike will eventually come down (in the current case down to about $70).
Chris I’m a long term investor so these short term swings are not a problem for me. But you ask about inflation. I say this. If I had cash to invest where would I put it? Unfortunately, even as overvalued as the market is, there really are few choices for investors outside of equities. PMs are a good choice--and I mean physical--but then you’re dealing with storage and fees. Physical doesn’t pay dividends, so again I ask where else to go. Bonds? TIPS? The gyration in rates for the average long term investor makes that option riskier than ever. So, in a nutshell, I like your approach. I think you’re spot on on the movement from growth to value. I’ve been rebalancing my portfolio along those lines.
Kind of liked your ZM thesis, wondering if you ever posted or have a link to a trade style you go to. For instance, long dated ITM calls, maybe financed by some OTM puts. More interested than the trade process than ZM specifics, although it would be great as an example
I like all your holdings choices, I would add LMT or some other wartime stock. I think we still have at least a 25% drop in the markets coming this year.
This feels right to me, plus or minus 5-7%. The only problem is I think that's been the case for a long time and yet the markets levitate. If Powell pivots (likely) on a market downturn, does "Do Not Fight the Fed" still work? Or will it finally fail? I think that's the ultimate question. I know I've missed run ups waiting for a real correction, but at age 51 I'm just not in for a 40-60% portfolio haircut that take a decade to rebuild.
Even with a peace deal, Russia-West relations are FUBAR for a very very long time.
By the way, love your podcasts. Only problem is when 15 year old daughter is in the car, she notes "This guy has a mouth on him". I tell her you're from Philly, what can I say? :)
Playbook2022: To get through to the Nov. US midterm election, DEMs/GOPs need one or two more distractions: xClimate, xCovid, xInflation, xRates, xUKR-RUS, xGasprice, ….what’s next? China evil?, 2XCovid?, Curencydeval?, Gasattack?, Foodcrisis?,…
Do stocks look “cheap” yet? What are your favorite ways to value equities and what are those methods telling you right now?
Stocks do not look cheap - looking at book values, earnings. However where else do you put your money? Bond market is going to be a disaster for the next decade. Real Estate is crazy expensive.
What do you see as potential outcomes for the Ukraine/Russia conflict in terms of the actual geopolitical volatility?
In the next week - Russia and Ukraine will agree to a cease fire. Russia is in a stalemate and running out of food / gas. Putin will get some concessions to save face and gracefully exit.
Given yesterday’s run-up, where do you see risk relative to reward when it comes to Chinese ADRs on U.S. exchanges?
Do not trust china. Still feel their are the puppet master behind Putin (the puppet).
Will Russian stocks ever trade again on U.S. exchanges?
Yes - we are still capitalists'.......we will see an opportunity to make money. Also we cannot bury Russia financially like the world did to Germany after WW1. A country of that size that has as many nukes as anyone - you cannot make them desperate.
When the Ukraine invasion news fades, will markets rally and try to “forget” that we have an inflation issue, or will reality of the underlying problem quickly come back into focus?
Inflation will be in the news until November. It is the one thing that is impacting everyone no matter which way you vote.
Is there any chance inflation starts to subside on its own over the next month or two?
No.........there is too much money in circulation and supply chains are still fucked up. Companies still have not fully priced in all the wage increases and commodity increases. Also if Russia really hoards 75% of the worlds fertilizer - what is that going to do to food prices for the next year plus.
China sits top of mind for ongoing observation, but I only invest in things I understand well.
Ukraine looks to be a catalystic pivot point, where all these built-up vectors are playing out. They already told us one outcome - we lose more of everything.
Paper currencies are just starting to reset, inflation is one clear symptom, and this has a long way to go.
Russia's gold may be as elusive as Fort Knox's. Rumours are that it's bare.
"What do you see as potential outcomes for the Ukraine/Russia conflict in terms of the actual geopolitical volatility?"
The West is after Russia again. I guess they're hoping the winters are milder these days. Highly volatile. If NATO goes after Russia is China going to go after Siberia?
I’m not the smartest, but I believe the “be long inflation” thesis. I’ve been long oil since 2020 and went in heavy in physical Au and Ag and a mix of large, mid, and junior miners in late 2021. A little early there, but have held on and am currently enjoying the ride, and plan to be in this trade for years.
1. "Do stocks look cheap yet? What are your favorite ways to value equities and what are those methods telling you right now?"
Some stocks are very cheap (commodity producers, shipping, etc.), some stocks are expensive (tech, social media, etc.).
Favorite way to value equities is their current P/E ratio relative to their historical P/E ratio, and their enterprise value relative to the overall stock market (S&P500).
2. "What do you see as potential outcomes for the Ukraine/Russia conflict in terms of the actual geopolitical volatility?"
Eventually, Ukraine and Russia sign some sort of agreement. Sanctions on Russia however will remain in place. Russia and China move closer together. The West and The East go their separate ways and will increasingly become hostile to each other. Geopolitical volatility will remain high.
3. "Given yesterday’s run-up, where do you see risk relative to reward when it comes to Chinese ADRs on U.S. exchanges?"
Chinese ADRs can be traded, but are un-investable for the long run due to geopolitical risk (sanctions, delisting, etc.). An options strategy is probably the best way to approach this.
4. "Will Russian stocks ever trade again on U.S. exchanges?"
Sure. But probably not in my lifetime.
5. "When the Ukraine invasion news fades, will markets rally and try to “forget” that we have an inflation issue, or will reality of the underlying problem quickly come back into focus?"
Inflation is not necessarily bad for stocks. There was moderate inflation in the 50's and early 60's and the stock market did fine, whereas the bond market tanked/went nowhere. Only very high inflation is bad for stocks (but not resource stocks). Then again, during hyperinflation a stock market typically goes up as well (but purchasing power goes down, regardless).
6. "Is there any chance inflation starts to subside on its own over the next month or two?"
There is always a chance.
If the current oil supply shock is similar to that of the Gulf War period (1990-1991), then the oil price spike will eventually come down (in the current case down to about $70).
Where can I get in touch with you? I've got an idea to speculate on (brainstorming, etc).
Chris I’m a long term investor so these short term swings are not a problem for me. But you ask about inflation. I say this. If I had cash to invest where would I put it? Unfortunately, even as overvalued as the market is, there really are few choices for investors outside of equities. PMs are a good choice--and I mean physical--but then you’re dealing with storage and fees. Physical doesn’t pay dividends, so again I ask where else to go. Bonds? TIPS? The gyration in rates for the average long term investor makes that option riskier than ever. So, in a nutshell, I like your approach. I think you’re spot on on the movement from growth to value. I’ve been rebalancing my portfolio along those lines.
Steph Pomboy has her eyes on the eroding credit markets. I wish I understood this piece of the puzzle better.....
Kind of liked your ZM thesis, wondering if you ever posted or have a link to a trade style you go to. For instance, long dated ITM calls, maybe financed by some OTM puts. More interested than the trade process than ZM specifics, although it would be great as an example
I like all your holdings choices, I would add LMT or some other wartime stock. I think we still have at least a 25% drop in the markets coming this year.
40% from all time highs is:
Dow: 22,200
Nas: 9700
S&P: 2890
This feels right to me, plus or minus 5-7%. The only problem is I think that's been the case for a long time and yet the markets levitate. If Powell pivots (likely) on a market downturn, does "Do Not Fight the Fed" still work? Or will it finally fail? I think that's the ultimate question. I know I've missed run ups waiting for a real correction, but at age 51 I'm just not in for a 40-60% portfolio haircut that take a decade to rebuild.
Even with a peace deal, Russia-West relations are FUBAR for a very very long time.
By the way, love your podcasts. Only problem is when 15 year old daughter is in the car, she notes "This guy has a mouth on him". I tell her you're from Philly, what can I say? :)
Playbook2022: To get through to the Nov. US midterm election, DEMs/GOPs need one or two more distractions: xClimate, xCovid, xInflation, xRates, xUKR-RUS, xGasprice, ….what’s next? China evil?, 2XCovid?, Curencydeval?, Gasattack?, Foodcrisis?,…