A lonely corner of the market

Thursday, 12 August 2021 — Wollongong, Australia

[7 min read]

Dear Reader,

Do you remember at the start of the year, after the market had a big post-lockdown rally, many were thinking a correction was imminent?

It was a reasonable assumption. Small-caps were flying, as were the big miners and the banks.

There was very little value on offer.

I remember thinking about this at the time. Value (as in attractively priced companies) is usually found where no one is looking.

And by not looking, I don’t mean ignoring or just passed over as uninteresting. I mean actively rejecting a stock or a sector because of X, Y, or Z reason.

When you see this happen, it’s a red flag…or possibly a green flag. What I mean is, it’s your signal to look more deeply. You should interrogate the consensus thinking and see whether it stacks up.

At the start of the year, this was the case with coal, especially thermal coal producers.

The initial global shutdown in 2020 caused coal prices to plummet. On top of this, the green movement was in full swing, pushing the narrative that coal was finished. While coal-fired generators are certainly in trouble in Australia, the developing world likes their energy cheap and reliable.

So as their economies recovered from the shutdowns, so has the demand for thermal coal.

The price is now around decade highs. From The Australian:

‘Chinese demand for thermal coal over its summer months has also been boosted by a severe drought earlier this year in the south of the country, which knocked some hydro-electric generators out of the system, increasing its reliance on coal-fired power plants.

‘CBA analysts put the price of high-grade Australian energy coal at $US167.05 a tonne on Monday, up from $US160.95 at the close of last week, with the market for the commodity running hot despite dire predictions of accelerated global warming from the UN’s Intergovernmental Panel on Climate Change this week.

‘Thermal coal prices in Europe have also soared over the last month as electricity demand returns after the pandemic, and thermal coal prices in South Africa are also around decade long highs.

‘With export capacity from Australia’s biggest coal port at Newcastle returning to normal levels in August, as a shiploader damaged in storms last year returns to action, Australian producers are poised for a strong second half of the year.’

This is a 180-degree turn on sentiment from just six months ago. At the time, I recommended Whitehaven Coal Ltd [ASX:WHC]; it was only just recovering from an 85% decline in the last bear cycle. When a stock falls by that much, you can bet that not many investors want to touch it.

While my subscribers are up nicely from that original entry point (nearly 60% in about six months), it wasn’t all smooth sailing. The company had some geological issues at its Narrabri underground mine. That caused the share price to tank momentarily.

It raises the question though, where is the value to be found today?

The market in general is now much more bullish than it was at the start of the year. There is very little ‘value’ to be found.

I ask you then, what is the most overlooked and ‘I wouldn’t touch this sector because of X, Y, and Z reasons’ sector on the market?

I think it’s gold.

Gold ‘should’ be rising. You know, inflation and all that.

But it’s not. Bitcoin [BTC], the new kid in town, is now the inflation hedge. Or so the narrative goes.

The thing is, gold is not an inflation hedge. This is a myth borne out of the 1970s bull market. Yes, the US had high inflation in the 1970s. But that was the result of the monetary chaos trigged by Nixon’s closing of the gold window.

The 50th anniversary of that day is on Sunday, by the way. Do you think 50 years is a long enough time span to judge the wisdom, or otherwise, of that move?

You only have to look around…

Anyway, the immediate result of that was monetary disorder. That’s why gold soared in the 1970s. The inflation was just a symptom of that.

Central bankers got the system under control in the ‘80s and ‘90s, which is why gold went into a deep slumber. There was no need for monetary insurance in those generally prosperous decades.

But the new millennium began with the bursting of the first tech bubble. This brought central bankers and monetary policy back into the picture. Gold stirred. A secular bull market began.

And with monetary chaos continuing, gold remains in a secular bull market. Although it’s a strange bull market, that’s for sure.

I mean, it’s trading below where it was 10 years ago.

And early this week, it had another one of those weirdly timed price plunges that, on interrogation, make no sense at all. You can read about that here.

Despite claims of a rigged market, despite the fact that gold has gone nowhere for 10 years, it continues to intrigue.

I think most people instinctively know that gold is insurance against monetary disorder.

Right now, the market is eyeing a possible recovery and the Fed is tapering its asset purchases because of this. Bond yields are creeping higher again. That’s not a great environment for gold.

But you’ve seen this movie before. Just because the market wants to believe in impossible things, doesn’t mean that’s how it will play out. The Fed cannot raise rates. It is in a debt trap. That will become apparent.

When it does, gold will once gain be popular with the cool kids. It’s already been correcting lower for just over a year. Patient gold bugs might not have much longer to wait for the next leg up.

Regards,

Greg Canavan,
Editor, The Rum Rebellion

‘It’s probably the greatest fiscal con job that’s ever been perpetrated on the U.S. public,’ said Johns Hopkins economist Steve Hanke on Monday.

He was talking about the ‘infrastructure’ bill. Headlines report it variously at US$550 billion, US$1 trillion, and US$1.2 trillion.

We could Google it to find out for sure exactly how much money is being frittered away, but we’re not going to bother. What’s a few billion more or less?

Besides, as Mr Hanke points out, it is just the snout of a ‘$5 trillion monster’ that the feds are now stitching together. Up next is the US$3.5 trillion ‘human infrastructure’ budget.

And then, in ‘reconciliation’ — where the House bills and Senate versions are reconciled — there comes another opportunity to sew on more ears and noses.

We’ll leave that story for another day. Today, we will continue telling you about our home in France.

Different sounds

But let’s back up…a quarter of a century. The sounds then were very different.

‘Time to get up…we have work to do!’

Every Saturday morning, we rattled the children’s bedroom doors.

‘Do we have to?’ came the little voices from within.

‘Yes.’

A groan inevitably followed. Oh yes…there were unhappy sounds as well as joyful ones. The walls remember them all.

Then, one by one, the children staggered down the stairs to breakfast in front of an open fire (our only source of heat).

The children were obliged to help their father on Saturdays. On Sundays, they had the day to themselves…for catching up on schoolwork or doing whatever they wanted.

The house was built centuries ago; no one knows exactly when. It fell into the hands of the Ducellier family during the French Revolution. They bought it at a ‘candle auction’ (the top bid when the candle goes out is the winner), after the previous owners fled to England to escape the Terror.

The Ducelliers lived here for the next 200 or so years — making substantial modifications and embellishments in 1910.

And there it was when we came on the scene…naïve pilgrims from the New World, with stars in their eyes so bright, they hardly noticed that the house was a wreck, neglected for decades…with a roof leaking like a sieve…wiring from the 1950s…skeletal plumbing…and a furnace that was a fire hazard.

What a great project! We had years of fix-up ahead of us, working together with the family…

Damp and cold

We brought the family to the house in the dead of winter. ‘The heat works fine,’ the previous owners had told us.

But the antique wood furnace in the basement was hardly up to the job. If we chucked in oak logs, about a yard long, all day long, we could get the temperature in the house above 45 degrees…

But by then, the furnace was red hot and the house was ready to catch fire.

After about a month, we had run into stiff opposition.

The house was so damp…and so full of mould and mildew…we were getting sick. The children’s tutor, who had eagerly followed her students to France, had to be hospitalised.

‘Maybe we should go home,’ was the proposed strategy for a retreat.

‘But this is our new home,’ we answered. ‘She needs us.’

We moved to a small, abandoned farmhouse. There, we opened the windows…swept…mopped…and made a giant fire in the kitchen fireplace. It was primitive, but it seemed dry enough to survive in.

We camped out in the farmhouse for a few months — until the long days of summer had dried out the main house.

New sounds

Meanwhile, the work continued. The old walls — undisturbed for so many years — heard new sounds…

…scrapers on the old plaster walls, as we removed the old, musty wallpaper (hot, soapy water helped, we discovered)…

…hammers, screwdrivers, and saws, as we rehung the doors and corrected the wooden trim…

…shovels, trowels, and cement mixers, as we laid up stone walls and patched plaster…

…and the sound of glass breaking, as we replaced hundreds of cracked or broken window panes.

The walls surely recorded the happy sounds — birthday parties in the dining room…sing-alongs on the veranda…jokes and laughter in the kitchen…

…and the bitter sounds, too — the family crises…moments of sadness and despair…falls…chipped teeth…kicks from horses…the rush to the emergency room.

The complaints and the cries — whimpers and whoops — the walls heard them all.

Our aunt died here; she is buried in the local cemetery.

Fitting in

Yes, a house forgets. But a home remembers.

A home is where you bury the dead, but keep the family alive.

It remembers who you are and where you came from. It is where you keep the family albums…the heirlooms, souvenirs, and mementos…Uncle Charlie’s shotguns…Aunt Louisa’s dresser.

It is where the piano sits, waiting for a gentle caress…alongside an old guitar, its strings eager for fingers.

We were as many as 12 people in our little tribe. Children, parents, grandmother, aunt, tutor… and a friendly carpenter from America, who lived with us.

The locals worried that we were a cult. And at first, not knowing the language very well, we must have seemed weird…like the Branch Dravidians or the Children of God.

But gradually — through school, church, and farm connections — we took our place in local society — unusual but not at all a threat to the community.

Au contraire, we fit right in. The stability of the farming area appealed to us; it recalled the pleasant, family-oriented life on the banks of the Chesapeake back in the 1950s and 1960s.

That life was lost forever, as the Washington suburbs grew…

But here, we found something similar. Something that seemed even more stable. These were homes, not just houses. Old houses were rarely sold. New ones were rarely built.

Dangerous work

And they had workshops. Ours was like a museum, with belt-driven tools…including a bandsaw that would take your whole hand off in a second.

One day, we entered the workshop to find our youngest son — then about seven years old — playing with his friend from across the road. They were using the bandsaw to make swords!

Oh la la! We dismantled the saw…it was just too dangerous.

Almost every window had at least one broken pane of glass to replace. These were French windows. The work could be done from the inside. But the outside frame could be tricky…especially if it had to be replaced.

And the windows on the third floor and in the fourth-floor attic were much too high to be reached by ladder. We devised a system.

We pushed a long board out the window, resting on the sill…the children (and sometimes their mother and grandmother) would sit on the board inside the house, while their father ventured out on the other end of the teeter-totter to do the work.

‘Whatever you do, don’t get up,’ he warned them, tying a rope around his waist, just in case.

‘Don’t tempt us, Dad,’ they replied, giggling.

Embedded memories

Yes, the house must recall that. And the time we scrambled up on top of the chimney in order to lower a bag of nails to clean out a bird’s nest…

…and when we held a party on the lawn and sang Johnny Cash and Grateful Dead songs until after midnight…

…and when the chimney caught fire and spewed sparks so high, neighbours called the fire department.

But that was then. Those things are embedded in the walls. And in the ground.

We were lucky. A local entrepreneur — Mr Brule — took charge of the heating and plumbing. His business was drilling wells. But he was the sort of fellow you need on a job like that — confident and able to take command and make things happen.

That was 25 years ago. The old house still stands. But poor Mr Brule cannot stand at all. He has Multiple Sclerosis. What a curse it must be to a man so active…so accustomed to being in charge. He cannot walk…and can barely see.

Last two standing

And now, it is a quarter-century later for us, too. The old house needs more work. But now, the children are all grown up. They have families of their own. Jobs in Paris, California, and Florida. Their own projects. Their own walls. Their own shouts and tears.

Now, the tutor…the carpenter…and the children — all have left. Mother and aunt are both in their graves. Only two of us remain…father and mother…son and daughter-in-law…

We reorganise the books and photos…fix the furniture…paint the shutters…

And we listen to the walls.

Growing older, the memories grow faint…we often can’t recall: ‘Who was that?’ ‘What year was that?’ ‘How old was he then?’

But the home remembers everything.

Regards,

Bill Bonner,
For The Rum Rebellion