Bonner Private Research
Fatal Conceits Podcast
Fatal Conceits Podcast with Dan Denning
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Fatal Conceits Podcast with Dan Denning

BPR's macro analyst on asset allocation strategy, Mr. Powell's reappointment at the Fed and what that means for the dollar, gold, inflation and plenty more...

In this week’s Fatal Conceits Podcast we are joined by Bonner Private Research’s own macro man, Dan Denning...

When we last touched base with Dan, back in late March, markets were enjoying (what hindsight now reveals was) something of a bear market bounce off their mid-month lows.

But Dan was not convinced.

He warned that “The Generals” (mega-cap S&P 500 stocks) were poised to beat a disorderly retreat… dragging the broader markets lower as investors “re-evaluated and repriced the future.”

Fast-forward to this week and we see the Dow down 9%… the S&P off 13%… and the Nasdaq lower by almost 20%… just since that powwow.

No surprise then that we were keen to get Dan’s insights on the state of play today… from Mr. Powell’s reappointment at the Fed to the greenback’s relative strength against foreign fiat currencies over the past month… to his outlook on gold and the Bonner Private Research asset allocation strategy in general.

We’ve got all that and more to get to today, in Episode #65 of your Fatal Conceits Podcast. Please enjoy…

Cheers,

Joel Bowman

P.S. If you’re not already receiving all of Dan’s premium research - including his weekly Friday market notes, plus research reports like the BPR Asset Allocation Strategy and the upcoming Dollar Report - make sure you get access to it all here. Good for what ails ya.


Thank you for listening to this episode of the Fatal Conceits Podcast - A show about money, markets mobs and manias. This one is public, so please feel free to share it, with market leaders and followers alike…

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TRANSCRIPT:

Joel Bowman:
Welcome to the Fatal Conceits Podcast, dear listeners, a show about money markets, mobs, and manias... not necessarily in that order. My name is Joel Bowman. I'm coming to you from the literal and geographical end of the world down here in Argentina. If this is your first time listening, please head over to our Substack page. That's at bonnerprivateresearch.substack.com where you can check out 100s of articles on everything from high finance to lowly politics, and also plenty of research reports and market notes many of which are penned by my guest today, Mr. Dan Denning. Dan, welcome from the high plains of Laramie. How are you doing?

Dan Denning:
Good. Thank you. It's nice to see you again.

Joel Bowman:
Well, I don't know if you know this, Dan, but just in preparation for our discussion today, the last time that you and I recorded a conversation for this show was at the very end of March, which now in retrospect looks a bit like a bear market trap for those of us who are following the money off the March lows. And I just went back and did the math since our last recorded discussion. The Dow is down 9%. The S&P is down 13%. The Nasdaq, almost 20%. And during that conversation, you were warning that "the generals" may be beating a disorderly retreat. That turns out to have been a very prescient call. What did you know then that others were not predicting... And where do we lay now?

Dan Denning:
Yeah. I remember that conversation. And I guess to be fair-minded, I probably didn't say anything different then than I haven't been saying for the last three to five years. So, I don't want to be one of those guys that say, See, I told you so, and people say, Yeah, but it's the whole stop clock thing. But I would say that the overall thesis for Bill and I, and Tom Dyson had bought in Bonner Private Research and it has been now for well for a while, is that if you looked at all the traditional metrics for valuation in the stock market, not at the company level, but at the market level, they all were historically massively overvalued.

So, the price of sales ratio on the S&P500 was over three. The market cap to GDP ratio for US stocks was over, it may have been over 200 at one point on the Nasdaq, but it was certainly well over the historic average of 80 and was closer to 150. And on an earning basis, too, if you looked at Robert Schiller's specifically adjusted price, earnings ratio, stocks were expensive.

And then, there were other indicators that we used and have used over the years like margin debt, that show that when liquidity is available and interest rates are low, stock prices are very high and risk or growth assets become, as they say on Wall Street, elevated. So, we've been saying that for a long time and they just kept going up. So, that didn't make them less risky though.

So, I think what happened and what's happened since you and I last talked is, one, there's been a discussion of higher interest rates, which definitely affects the pricing of growth assets, but more broadly, people have been thinking about the future and saying, "Well, maybe the next 10 years are not going to be as great as the last 10." And that shift in sentiment has been coupled with changes in liquidity.

And that's probably the big thing for investors to realize is that when liquidity starts to thin out or dry up in financial markets, then it generally means lower prices for everything. And that means not just growth stocks, but most stocks and also government bonds, and also, to some degree, gold. Oil seems to be the exception, which we can talk about later if you want. But yeah, I think at the top end, the generals were the best performing highest flying growth stocks of the last 10 years.

Especially since, you could go all the way back to 2009, but really since March of 2020 when the S&P doubled and the fed got extremely accommodative. We said, those stocks, and by those generals, I mean Apple, Microsoft, Amazon, Google, Facebook had already fallen, Meta. Netflix had already fallen. Peloton. These other outlier stocks. They weren't very large, but they were the most overvalued.

So, we think there's still more to go, but it doesn't go in a straight line, and our central bankers aren't powerless, so it's going to be an interesting summer for sure.

Joel Bowman:
Well, let's talk about our dear leaders in the central bank, Dan. Mr. Powell has been recently reappointed as fed head in chief. Is this just exercise in that old definition of insanity, just repeating the same thing and expecting a different result, or is there something more sinister at work here? It's a little bit of a toss-up it seems between some manufactured breakdown in the old monetary system if you want to get conspiratorial.

Or is these just people who really down to their core belief that what they're doing is competent handling of the economy and that they can turn dials and pull levers and get it going in the way that they think that they can?

Dan Denning:
Yeah. It's funny you ask that question because I was just reviewing Tom Dyson's weekly update, which he publishes on Wednesdays. And he sends his draft to me and I just give him my reaction and some thoughts and observations. And it reminds me of an old, when I used to go to the barbershop in Estes Park, Colorado, it was run by an old friend, family friend. And I got to know him over many years, because I first went there when I was like five, and I kept going all the way through my adult life until he passed away. But he was a member of the John Birch Society. He carried a copy of the constitution in his front pocket, and we always talked about politics.

And the one point I always made with him, which wasn't original to me was, it's hard to imagine a conspiracy of 3000 people being effective and efficient when it comes from the same organization that can't deliver the mail. How's the government capable of masterminding or faking a moon landing or doing this or that, or killing Kennedy, and at the same time, they're just ruthlessly incompetent at other stuff?

But with respect to monetary policy, I think there's three different constituencies that Federal Reserve works for. One is political. One is financial, and one is institutional. So, if you look at all three, the institutional constituency are the 400 PhDs or economists that have only ever worked for the fed and whose livelihoods depend on providing research that justifies the government's policies or the central bank's policies.

So, in this case, I think there's a group of people that actually believe they know what they're doing and that it's their job to provide the intellectual justification for zero interest rate policy for quantitative easing or for the latest moniker, which is the reverse wealth effect that if we engineer stock prices lower in a controlled, organized demolition, then people will feel less wealthy and that will moderate inflation. Sounds absurd.


And I haven't read a lot of the research that purportedly justifies that policy. But I think in that case, they probably genuinely believe that lower stock prices will in some indirect way lower inflation in the United States, which is course, one of the mandates of the Federal Reserve is price stability. They're wrong. And probably, they're not stupid people but they just have existed in a bubble for a long time.

They're completely divorced from the real world and they have no idea as Jim Cramer famously said in 2009 in his meltdown on CNBC, "They have no idea. These people have no idea." So, that's the one constituency.

Joel Bowman:
Quotable moment.

Dan Denning:
It was one of the great moments of all time.

Joel Bowman:
Teachable moment.

Dan Denning:
Actually, that's the second constituency, is the Fed's second constituency is the financial markets. It's bankers. Remember, it's a private institution that was given the license by Congress or the authority by Congress to manage the nation's money, and it's run and owned by banks. So, to that extent, their job is to run, manage the dollar, and manage financial markets so that banks don't blow up. And we could talk all day about what's been going on in the last 10 years.

But that's part of what Powell's doing is saying, Look, unless there's a huge problem in the credit markets where a hedge fund blows up or a systemically important bank is in trouble because of assets that it holds, then we don't mind lower stock prices and high inflation because we don't work for the American people. We don't care about inflation. We work for the bankers. So, that's the second constituency. So, the second is Wall Street.

The third is Washington DC. It's the elected officials. And I think that was interesting this week that President Biden in one of his press conferences mentioned that it was the fed's job to control inflation, and inflation makes all of the people running for reelection in Washington very nervous right now. Because in the real world where people are paying $4. 50 a gallon for gas, and that's just the national average. It's higher in California and other places.


And where their food costs are going up, and where rent is expensive, and where the 30-year mortgage rate is now back over 5%, and house prices look like they've peaked. And a pocketbook issue is traditionally a much more motivating force for voter turnout than a social issue or even a foreign conflict.

So, I think the political constituency that the fed serves endorsed J Powell overwhelmingly and said, "Please stay in charge because what we want you to do is we want you to hold interest rates below the rate of inflation so that we can continue to run these massive deficits without a real penalty on the dollar or without a sell-off in the US bond market."

So, Powell answers to those people in the sense that the Fed is the central bank of the United States government, and the United States government has $30 trillion in debt, is supporting a war overseas, and everything but a declaration. And now realizes that from a demographic point of view, they're going to have to spend trillions more in the coming years on an older population that hasn't gotten back to work and that has learned to expect money from the federal government.

So, that's a long-winded answer of saying, he serves three masters. He serves Wall Street, he serves Washington, and to a lesser extent, serves the people who have drunk the Kool-Aid at the fed and believe that you can turn the dials and pump the levers and manage the economy like a machine. And it's a giant mess for all of us, unfortunately.

Joel Bowman:
Well, just on that giant mess, anecdotally, and I know this is not a hard science measurement here, but I've been reading a lot of old essays from back in the '70s, Joan Didion, and just re-steeping myself in the zeitgeist of the '70s, which seems to be enjoying some dubious recrudescence right now, much to the chagrin of voters around America, many of whom don't want to relive those days, which we can get to in a little bit…

But I'm wondering, just what appetite, maximum appetite, your average voter, who is suffering at the pump, at the grocery store, how much more can those people can be squeezed. How much more do you think the American people can take before they vote the bums out as they're constantly promising to do, but there never seems to be a shortage of bums in Washington on either side of the aisle, but before we see this massive revolt to the other side?

Dan Denning:
Yeah. I think it's a good question. If you look back, and also, I don't think it's so much that people are wondering if they can stand an era that's a lot like the 1970s because a lot of people just don't remember that. There's a whole generation of investors for sure that haven't lived in a period where interest rates rose, the dollar fell, golden oil rose at the same time, and there was persistent inflation in consumer prices. So, for a lot of Americans, this is an entirely new experience.

And it connects in a visceral way that it's not inflation as an economic concept. It's a quality of life and a cost of living concept that my buck doesn't go as far as it used to. And therefore, my kids aren't eating as well, or we're not eating as often, or we're having to change our behavior because of things we don't entirely understand. So, that will translate into some political dissatisfaction, which I'll go through this really quick because I think it's interesting and it's also my job to think these things through.

And ultimately, I don't think it'll matter, but what will happen is unless abortion becomes a massive issue in the midterm elections because of the Supreme Court ruling. And unless there's an escalation in the war in Ukraine, and unless China suddenly relaxes its lockdowns in these vaunted supply chain issues resolve themselves and you see lower inflation, then you should see a change in the control of both houses of Congress in November.

So, the Republicans will take the Senate and they'll take the house, but you'll have a democratic president. So, you'll have two more years of Biden. So, typically that would immediately mean a lame duck presidency that you wouldn't expect to see any major legislative initiatives in that time. But then, you also see historically this brinksmanship between both parties about who's willing to do the least before the next presidential election so they can blame the other party for not doing anything?

So, do they want to run the economy into a ditch and say, "Look what happened, the Republicans took over Congress and we had a recession, which it looks like we will have this year." So, those are all interesting speculations. And you can go back and look at the presidential cycles and the history of the stock market. And there's some interesting data which doesn't really yield any conclusive results.

But I would say that's the main point for individual investors is going to the voting booth in November is not going to solve the problem with the dollar because whoever's in control, whether there's an R at the end of their name or a D at the end of their name, there's almost no willingness by anyone in Washington to be realistic about the fiscal mismanagement of the country and the long-term problem they've created with the value of the dollar.

I'm working on a report right now for paid subscribers that we're just calling the dollar report, which says, "Well, where do we go from here?" The dollar's been actually quite strong against other paper currencies this year. Gold has held its own more or less. Okay, the Russian roubles done very well, which is in a whole another story. But we're trying to focus on the long-term, big picture of where we're at historically, and historically to bring it back to the '70s.

This is the end of what we think monetary regime that began in the 1970s, which is a global dollar standard backed by nothing. People expected the United States government to be a good custodian of the value of the dollar. And therefore, people were willing to hold it as a central bank asset, or as a reserve, as an emergency safe-haven money for a crisis. Now we have a crisis and we learn that the US government is happy to tell people that money is no good.

And they've told that to foreigners and especially the Russians. And we think that, that money is no good for anyone. But the trouble is, this is just a classic asset allocation problem. You'd rather own cash in a liquidity crisis, but when there's 8.5 % inflation and the central bank is willing to actively destabilize or devalue the currency, then cash is a difficult position to hold long term. So, that's a big problem that we're working on right now.

But I think like you said, it's a once in a generation problem. And what we want people to realize is that problem is now. You need to be thinking about that stuff now.

Joel Bowman:
And it really is. This is a once in a half century problem. We're talking about the beginning of the '70s, and there are obviously so many transpositions that you could make, whether a change or at least a shock to the global monetary system as we saw with Bretton Woods and arguably are seeing some potential bifurcation of the international monetary system at present with banning the Russians from SWIFT, and there being all geopolitical murmurings between China, India, Russia. There's a whole lot on the table there that might go beyond the purview of this particular discussion.

But what do you make of, and you alluded to this in your remarks, what do you make of the fact that the dollar, the greenback has over, probably since we've last spoken, certainly over the last month, has performed extremely well against not only paper currencies, foreign paper currencies, but in particular foreign paper, commodity backed currencies?

I'm just planning a trip at the moment with my family where we're going to be in the eurozone. So, I'm looking at the exchange rates of Norwegian kroners, and euros, and British pounds, which have all, historically, performed pretty well against the US dollar. And I'm happy to report that my holiday is getting cheaper every week as the US dollar seems to hold up very well against those currencies.

So, how do we make sense of that seeming disconnect? How do you purposefully inflate a currency away or devalue it, let's say by 8.5% a year, and still have it stack up strongly against these other fiat promissory notes?

Dan Denning:
Yeah, that's a great question. And because it seems counterintuitive when people look at it and say, "How could the dollar be getting stronger when all these horrible things are going at the ground level?" So, I think there are two answers. The first and obvious answer is interest rates or expectations for interest rates differential in those expectations. And that's a little bit, curious as well because the market, the future's market thinks that based on what the fed has said from its meeting notes and its public statements, that it will raise its benchmark interest rate to 2.5%, 3% by the end of the year.

It hasn't done anything yet. It hasn't reduced the balance sheet. It hasn't begun running it off. It's just said that it's intending to combat inflation, and therefore monetary policy will be tighter and interest rates will be higher. So, that's part of the move in the currency markets is anticipating that there's going to be a yield on the dollar again and on a relative basis, it's more attractive.

I guess there's three elements, but the second is less interesting to me because I don't think it's true, but it's a safe-haven bid that when people don't quite know what's going on. They run home to mama and the dollar is still mama for now. So, there's that element of behavior. I think the other, which probably is the most interesting and to me the most explanatory and predictive is it's a liquidity issue.

So, one of the things people can look at if they haven't had a chance to is go back and look at this theory by a former federal bank, a Federal Reserve governor named John Exter called Exter's Pyramid. I like it because I'm a visual learner, and it reduces financial markets and asset class decisions to a triangle. It's an inverted triangle. And the idea is just liquidity pyramid is it's at the top end of the liquidity pyramid and financial markets.

You have very large asset classes in terms of their nominal size but they're far removed from real value. So, their value is based on lots of variables. So, for example, in today's markets at the top of his pyramid would be the derivatives markets, interest rate, derivatives, currency, derivatives, those things. So, there's a huge liquid market in financial transactions, but the underlying value of those securities or instruments is related to something else that's far away.

So, we saw that, for example, back in 2007 and '08 with the residential mortgage-backed securities, and that whole bundling of mortgages was an example of a derivative.

Joel Bowman:
It seems to be a good shape when talking about this.

Dan Denning:
It's a pyramid scheme. So, as you move down the pyramid, the type of asset becomes harder, maybe a little bit more liquid but it's smaller in size. So, you would get corporate, the corporate bond market, the government bond market, the equity market. And at the narrow end of the pyramid, you get cash, which actually in terms of the amount of cash that physically exists and circulates a small relative to the size of bank accounts and savings. And then, at the bottom of his pyramid, which is the whole point I'm going through all this is gold.

So, it's the least liquid. It has the least utility in terms of its economic use, but it's the most stable and it's the hardest asset. Now, other people might claim that today, if you were redoing that pyramid, you'd have to add digital assets in there somewhere. But in terms of size, they're very small. They were 1.5 trillion or maybe 3 trillion at the peak. Maybe they're half that now. So, they're interesting but I wouldn't say material to this discussion unless we were going to just talk about money.

So, the whole point is that in a liquidity crisis. So, we started with valuation crisis where valuations got reset from very high to somewhat more realistic. But the whole context of the thing is that as interest rates go up, the availability of credit and cash goes down, liquidity drains from the entire pyramid and money moves from the top to the bottom, and it gets destroyed at the top and it finds safety at the bottom. It doesn't mean it goes up.

Like for example, gold and dollar terms is not going up right now, but my view is that gold isn't going anywhere. It's the dollar that's moving relative to gold. So, I think that the dollars apparent strength is only apparent if you understand it in that context, that there's a liquidity preference for US dollars for lots of reasons. And compared to other currencies on an interest rate basis, it looks like it might be more attractive, but we're not focused on any of that in the long term.

We're trying to focus on how people can de-hedge or hedge their dollar risk, because I think ultimately anyway, that what you said is what's going on is that our financial authorities realize that one of two things has to happen. They can either allow inflation to go out of control to deflate the value of all this government debt and they have to pay a political price with high consumer price inflation, or they can allow the bond market to collapse. So, it's either the currency or the bond market.

And our view is that it's probably going to be the currency. And so, for people who save in that currency, who invest in that currency, who are going to retire in that currency, then that becomes the number one issue to try and solve. So, that's why we're working right now on the dollar report, which is a big job, but that's our understanding.

Joel Bowman:
A big undertaking. Yeah. So, you mentioned gold there. And of course, in addition to the dollar report, which you're working on, Tom has his Dow-Gold report up on our Substack, which again, if you haven't visited is bonnnerprivateresearch.substack.com. So, head on over there for all the research that Dan's underscoring here. A lot of people have thought that in times of great uncertainty, and it would be difficult to imagine, I guess, a time of more uncertainty coming out of a global pandemic and in particular, various governmental responses to that pandemic.


And now we have the threat, maybe again, a once in a generation threat where people are talking about nukes and something that may have seemed unimaginable just a few years ago. It's hard to imagine more uncertainty. Most people think that when that happens, okay, there may be a flight to mama dollar as you've described, or many people think daddy gold is the other parental safety instrument.

Obviously, as we speak here, gold has underperformed relative to the dollar in the past month or two. Are you looking for there to be some point at which dollars start cycling into gold as the safe-haven asset?

Dan Denning:
Yeah, I think so. I think that discussion is whether investors, a lot of investors, including retail investors will again see gold as an investment rather than as a method of saving or a vehicle of saving or capital preservation. Obviously, that has and does happen in precious metals bull markets is that the price action in the underlying commodity, gold or silver in this case, attracts retail investors who then bid up prices of mining stocks and you see the cash for gold phenomena on TV, where people are encouraged to bring in their grandmother's jewelry and trade it in for cash. Excuse me.

I think there's an interesting analog with this, with what's happened in the crypto space, which I am not an expert on and I should qualify my statement, but I have noticed that there are two types of people that I've noticed. There's the people who expect to get rich in crypto by buying low and selling high. So, they were never really enthusiasts or even understood or cared about the idea that this was different money or a different saving or a different asset.

They just wanted to get rich in dollar terms so they could buy Lamborghini or a new house or leverage a house, any of that stuff. So, this was just a speculative vehicle for them.

Joel Bowman:
When it was going out, they wanted to get on board. As simple as that. That's the whole funny thing.

Dan Denning:
Yeah. And I think that is the case typically in bubbles, which we may get again in mining stocks related to gold and silvers. You'll get a huge attraction of people who are not interested in the monetary discussion. They just want to get rich, or they need to get rich because they're retiring soon or they lost a bunch of money in the stock market. So, that'll be really interesting, and it's a good thing that we have a lot of friends who focus on mining stocks, companies that are currently generating great cash flow. They're returning it to shareholders.

And if the price goes higher for gold or silver, they'll do really well. But that's really not our focus at Bonner Private Research right now. So, Tom and I probably have slightly different view on this, but I would say I don't know when I would sell my gold, but I wouldn't really care about the dollar price on a short-term basis. In fact, I don't care about the dollar price. I view it as a form of saving, as a way of getting money out of one type of financial asset and into another

Tom's view is slightly different in the sense that he thinks, and I think history shows that there are these major rotations out of asset classes. So, out of gold and into stocks, into stocks, out of gold. So, that's the whole point of the Dow gold ratio is to save in gold until stocks are cheap. And then, when stocks are cheap, to move out of gold and back into stocks. And I think as an investment strategy, that'll work because it has in the past. So, that's one of the major research reports that we publish.

But for me, I think at some level, I don't think the retail investors, I think they disappear in bear markets because they're by definition the marginal investor. They end up getting wiped out because they buy high and they sell low. They didn't have a lot of money, to begin with. The transaction costs eat them up, and the lack of quality information tends to blow them up really quickly as well. And that's what's happening right now.

So, that money's not going to be left. It's not going to be around to drive precious metals prices higher. So, that's not the reason for owning gold bullion. The reason is on a long-term basis, the dollar is being systematically devalued by the central bank. And we think gold, whether coins are bullion is the best store of value during a transition like that. So, there's a couple of different angles on it, but I think that's where we're at right now with it.

Joel Bowman:
Right. You mentioned energy before, just to flip between the commodity sectors and just by way of segueing into your trade of the decade, which you, Bill, and Tom have concocted, essentially long energy without giving too much away. And I guess the de facto, even though it's not strictly a pair-trade, it would necessarily in some way, I guess be short the dollar just because of the fact that you got out of the dollar and into energy.

But do you want to give us a quick update on how that's going and speaking about these cycles you mentioned a chart depicting energy, having recently overtaken tech as a sector in the market, has now just started to outperform as oil has risen and the big tech generals have beat a disorderly retreat.

Where are we in that cycle? I know we're only a couple of years into it, but it seems like it's been a roaring trade even at this early read?

Dan Denning:
Yeah. And I guess I'm obeying the rule of three today or some Trinitarian principle because everything has three aspects to it. But when we first researched that and published it in January of last year, it was really a cyclical argument that said that the energy sector, especially on the S&P500 had underperformed for 10 years, and the technology sector was the best performing sector for 10 years. So, just mean reversion and market cycles would show that was unlikely to be the case for the next 10 years.

So, if you drilled down to it into a little bit deeper, you saw there was other evidence of that. One example was that I think in the early '80s, when the oil price peaked or when the oil price was high, energy sector companies, percentage of the S&P market cap were much larger. I don't think they were 30%, but they were somewhere between 13 and 23 if I recall correctly. But the point was, they were a bigger part of the real economy and they were a bigger part of the stock market because oil was a bigger part of the world.

A lot changed over the next 30 years. So, by the end of 2020, tech companies, I think there were just five of them that made up 25% of the market cap of the S&P500. And, of course, at the peak in March, or it was really earlier in January, Apple became a $3 trillion company briefly. You had the race to 2 trillion with Amazon and Microsoft, and then you had, before it fell, you had Meta or Facebook knocking on the door.

Just on that basis, we just said, "Wow, energy is way under invested in and technology is way over invested in." And that actually translated into capital investment. And by that, I mean the energy companies after the oil price peaked in 2014 and then crashed for 2011 in that whole period, they were just starved of capital. They didn't invest in new projects. They didn't invest in new supply. And there was a lot of reasons for that.

One was, there was a lot of oil. The oil price was going down. The amount of regulation to explore for and bring new oil and gas into production was going up. So, it was discouraged from a political point of view, a regulatory point of view. And then, you had clowns like Larry Fink and Michael Bloomberg who were saying, and even Jim Cramer in 2020 saying, "These things are uninvestable, for moral reasons, for climate reasons, and for economic reasons that we should just stop investing in oil and gas companies."

And some public pensions have done that too. They said, "Well, they're not carbon-friendly, so we're not going to give these industries capital." So, all that meant is that these industries, the supply of oil is not growing and the demand for it reached pre-pandemic levels and then went past it. So, look at the oil price right now, despite the prospect of a recession in the United States, and despite a lockdown in China's biggest cities and despite a war from one of the world's largest oil exporters, I say despite, I mean, that contributes to it. Its price action has stood out.

So, that confirmed our thesis that this whole idea that the world was going to suddenly run on electric cars and that we weren't going to use oil, gas, and coal anymore was a marketing slogan. It was a political idea. There were other objectives going on. So, there was a lot of reasons that we thought that trade was going to be a good one. The question right now is, as you pointed out, we think that easy money has been made that they were really, really undervalued or mispriced last year

They're less mispriced than they are now, but we think that because it's a long-term trend, in other words, it's going to take years to reallocate capital to the sector, to go out and find more oil and gas, to build pipelines, to build refineries. We think there's more money to be made. It just means you have to do more research and find out where. So, is it upstream? Is it downstream? Is it pipeline companies? Is it refineries? That's something Tom's been looking at quite closely.

And so, we're going to continue to look at it, but the trade itself is really simple and just based on that basis that… and maybe that's probably the broader point is that we think something changed in the last year to where this idea of soft power or growth being the most valuable thing in the market has changed that real assets like coal, oil, gas, and gold. Those are more valuable now. And they're the source of both political power and real earnings for companies.

So, that's a change in leadership in the market from the companies that produce real assets are in the ascendant and the companies that produce future revenue growth like Amazon, Apple, Microsoft are in the decline.

Joel Bowman:
Yeah. And it seems that, that delineation between the real world delivering real assets to real customers with real companies that produce real profits, as opposed to companies with just unimaginable, and as it turns out, very unprofitable growth projections, yield the opportunities that Tom's looking for with his tactical trades, special niche situations in the market, in particular pockets of the market, where people haven't been looking for a little while.

And he sent around just an update on the performance of the stocks that are on the watch list. And they're doing handsomely, especially given the fact that the broader market has been more or less bleeding red for the year. So, that's all good stuff.

Dan, I'm going to be up in the US in June. We've definitely got to get together, or rather July, actually, I’ll be in Europe in June, spending my very powerful green backs while they've still got some staying power. And then, in July in the US. So, we'll have to get together up your way to record another one of these in person if we can.

Dan Denning:
Yeah, that would be great. And I would just close by saying, I think for us right now, Tom's getting ready to publish his next monthly issue. He does one a month, which is a fuller investigation of where we're at. And we discussed those things. And we think two things, these recent evaluations has further to go. So, things will get cheaper on evaluation basis. But now based on the recent earnings reports of companies like Walmart and Amazon, what people have to factor in is the prospect that companies are just going to be earning less money in a recession. They have higher energy costs.

They have higher transportation costs, and they have a consumer who's facing these higher costs at the retail level, who has some disposable income but is spending more money through their credit card. And so, we think there's that factor of has the market priced in a recession. And in that case, when you have deflation in financial assets and a recession at the same time, it does change a little bit your tactical strategy of where the money's going to be made.

So, it's a month-to-month thing. We have a long-term focus, but in some ways, it's a really fascinating environment to be trying to connect the dots, which is what we do, and then try to avoid the big loss, which we think we're in the middle of, and then try to get to the other side of the crisis, which we think is a long-term crisis. So, very busy times, but we'll have time for lunch and a bottle of wine, for sure.

Joel Bowman:
All right, Dan. As you say, we're early on, potentially in this cycle. There's a lot more work to do. So, finally do head over to our Substack. This is my third repetition of this, sticking with your rule of three today, Dan. It's bonnerprivateresearch.substack.com. Check out all of Dan and Tom's excellent research, and of course, Bill Bonner's daily missives. And we hope to see you there, Dan. We'll catch up again soon. Thanks for taking the time, I really appreciate it.

Dan Denning:
Thanks, Joel.

Joel Bowman:
Cheers.

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Bonner Private Research
Fatal Conceits Podcast
A podcast about mobs, markets and manias.
Each week, Joel Bowman sits down with a member of Bill Bonner's private research team to discuss the pressing issues of the day. From high finance to lowly politics, irrational markets and international real estate, great wine and classical books, nothing is off the table in these freewheeling discussions. New episodes every Sunday.