A Refreshing Reminder of Capitalism

Over the weekend, the world was smacked with the horrific news that Hamas jihadists had viciously attacked Israel. The reports quickly turned into an orgy of ghastly murder, rape, mayhem, decapitations and the kidnapping of hundreds of Israelis. Then, there was the retaliation by the Israeli Defense Force, a retaliation that showed the technological prowess possessed by the nation and the willingness to destroy the enemies of civilization.

The details of this conflict, along with its historical context, can be found in numerous sources, so there is no need for me to delve into the details here. Moreover, this is The Deep Woods, which means we look at things beyond just historical events and dig much deeper to unveil their philosophic core.

In doing so, we discover that the conflict between the Arab world and Israel is really just a conflict between the forces of mysticism, medieval tribalism, dictatorship and terror (the Arab world) and the forces of reason, individualism, capitalism and civilization (Israel and the Western world). And with those diametrically opposed views in place, can there ever be “peace”?

The answer is, sadly, no.

Speaking of capitalism and civilization; it is in times of global tumult and ugly headlines that we all can use a reminder of the true nature of good, and the true nature and kindness of capitalism and its role in creating a flourishing and rational civilization.

A few years ago, I wrote about this in my article “Try to Be More Kind.”

Today, as an antidote to the chaos of global events, I present this article to you in the spirit of reason, reality and optimism. Because amidst the irrationality of religious violence, there also exists the beauty and kindness of rational actors being good.

Try to Be More Kind

We live, then we die.

That’s a reality we all must grapple with each minute. And the fact that life is finite has implications for everything we do. And no matter what your beliefs are about the existence of an afterlife, there is no doubt that life on earth as we experience it is going to come to an end for us all.

This admittedly morbid, yet eminently liberating, realization is at the spine of nearly all of our decisions, even though many times we fail to realize it. Think about the actions you take each day.

You wake after a night of sleep because your body requires sleep. You consume food because your body requires energy. Then, for most of us, we engage in some form of productive activity that nets us financial compensation so that we can attain the capital required to fund our existence.

If we’re lucky, we have family and friends who we love that we can share our lives with, and that allows us both to provide and to receive mutual support.

The requirements of a finite life also have a profound effect on your decisions about what to do with your money, how to spend that money, how to invest it and how to plan for a time when you may not be able to, or may no longer want to, work. Then there’s your family, and the work involved in making the right decisions to provide for them when you’re no longer here to do so.

Now, much of my newsletter advisory services are aimed at the nuts and bolts of how to put your money to work in the financial markets so that you can maximize this critical aspect of your life. Yet as you likely know, in The Deep Woods I like to peel back the layers of the onion skin so that we can access the principles at the root of the issue.

And when you think about it, what is at the essence of our quest to make sure we are financially secure enough to take care of ourselves and the ones we love?

To me, the answer is simple: It’s a desire to be kind.

Indeed, the desire to be kind, i.e., the quality of being caring, attentive, considerate and otherwise thoughtful of others, is something that we all should strive to be motivated by. I know for me, the action I take out of kindness not only feels good, but it’s always in my rational self-interest to do so.

Acting kind doesn’t mean self-sacrifice. Rather, it means acting and interacting with others so that both parties receive maximum benefit from the interaction.

Extended out to the political realm, the desire for kindness is why I am a passionate advocate for laissez-faire capitalism. You see, capitalism is the only social system where men are free to interact with each other based on the principle of exchanged values.

For example, this morning, I went to my local Starbucks and paid $4.95 for a latte. I wanted the latte more than I wanted the $4.95, and Starbucks wanted the $4.95 more than they wanted the latte. I didn’t exercise physical force to extort the latte from my barista, and she didn’t wrestle me into the store from the street to confiscate my money.

Instead, we engaged in a mutually kind exchange of values that also was mutually beneficial. This kindness is the essence of capitalism, and it’s the opposite of the Marxist idea that capitalism exploits the proletariat.

In my view, a prescription for increasing societal happiness is to increase kindness. Not only in terms of our daily human interactions, but also in the wider sense of people interacting with each other via the kindest of all principles: free exchange.

Finally, I’ll leave you with a powerful quote from philosopher and neuroscientist Sam Harris regarding kindness. As Sam writes: “Consider it: every person you have ever met, every person will suffer the loss of his friends and family. All are going to lose everything they love in this world. Why would one want to be anything but kind to them in the meantime?”

If you want to make yourself and the world a better place, try to be more kind.

For a special audio essay of this article, I invite you to listen here.

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ETF Talk: ‘U’ Can’t Beat Uranium

Climate change, limitations placed on solar and wind energy and storage technology and ever-increasing costs of hydrogen energy are three reasons why nuclear energy has become far more compelling to investors in recent years.

Clean energy is not only better for our environment, but for most, better for our conscience. Now, as all my readers know — I not only research my recommendations thoroughly, I like to make sure that we are all on the same information page.

So, let’s start with a simple breakdown of the nuclear energy opportunity. Nuclear energy is a form of energy released from the nucleus — the core of two atoms. This energy can be produced in two ways: nuclear fission — when the nuclei of atoms split into several parts, and nuclear fusion — when the nuclei fuse together.

Today’s production of nuclear energy focuses mostly on nuclear fission, which, once started, creates a chain reaction, if there is fuel.

Said fuel is the reason I believe “U” can’t beat uranium. For all my science lovers out there, I hope my elemental joke will amuse, since “U” is the chemical symbol for uranium.

Uranium-235 is the fuel used for almost all nuclear fission and it is the isotope that can produce a fission chain reaction. Now, mining uranium is not an everyday mining task — as it is a radioactive material. Therefore, the mining companies that deal with this material are specialized. Exploration, mining, development and production of uranium are all lucrative ventures given the specialized nature of the radioactive substance.

So, let’s profit from those companies’ profits and take a look at an exchange-traded fund (ETF) that may be a breath of clean air: Sprott Uranium Miners ETF (URNM).

URNM offers investors access to a plethora of global companies involved in all the processes above, as well as companies that hold physical uranium, uranium royalties and other non-mining assets.

The companies within URNM’s portfolio must devote 50% of their assets to business operations related to uranium. URNM’S selections are based on industry publication reviews, sell side research, fundamental research and meetings with management. Once selected, these qualified companies are split into two categories that make up the holdings within the portfolio: Miners (82.5%) and Holders (17.5%).

URNM has net assets of $1.35 billion and is currently trading at $43.76, which is at the higher end of its 52-week range, $28.22-49.53.

The chart below tells a compelling tale, one of strength and a desire for uranium. While there was a dip in the early months of the year, it is obvious that the ETF was not phased as it has currently rebounded to stellar highs.

Courtesy of stockcharts.com.

URNM’s top holdings include National Atomic Co. Kazatomprom JSC ADR (KAP), 17.08%; Cameco Corp. (CCO.TO), 13.85%; Sprott Physical Uranium Trust Units (U-UN.TO), 12.29%; CGN Mining Co. Ltd. (1164.HK), 5.60%; Paladin Energy Ltd. (PDN.AX), 5.00%; Boss Energy Ltd. (BOE.AX), 4.52%; Denison Mines Corp. (DML.TO), 4.41%; Energy Fuels Inc. (EFR.TO), 4.31%; NexGen Energy Ltd. (NXE.TO), 4.23% and Uranium Energy Corp. (UEC), 4.22%.

According to a report published early this month, by Jacob White, the ETF product manager of Sprott Asset Management LP, uranium and uranium mining stocks posted their best monthly results in two years, as the price of U308 reached a 12-year high.

The report also highlighted that long-term uranium contracting is on the rise, with 2023 on track to surpass 2022, coinciding with a decade of underinvestment.

Moreover, the World Nuclear Association (WNA) estimates that uranium demand will double by 2040.

In summation, “U” can’t beat uranium.

As always, investors should conduct their own due diligence before adding any stock or ETF to their portfolio holdings.

I will leave you with this gem from well-known theoretical physicist, Albert Einstein: “Nuclear power is one hell of a way to boil water.”

I am always happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You may just see your question answered in a future ETF Talk.

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In case you missed it…

What’s the Deal with Bond Yields?

What’s the reason for the big decline in stocks of late?

While a lot of pundits have offered explanations such as the rising dollar, recession fears, high oil prices and “higher-for-longer” monetary policy, the real reason is simple… rising Treasury bond yields.

And here, I am not just talking about a modest rise. Rather, bond yields are now at their highest levels in 16 years, and we could soon be approaching a benchmark 10-year Treasury note yield with a “5” handle — ouch!

Yet, a critical question here remains, and that is… Why are bond yields still rising?

The answer is neither simple nor obvious, which is why a thoughtful treatment of this issue is something required at this juncture. And to provide just such as treatment, I am going to show you what we wrote today in the daily market briefing, Eagle Eye Opener.

The Eagle Eye Opener is a collaboration between myself and my “secret market insider,” a man who provides actionable intelligence to the biggest Wall Street brokerage firms at a very high cost — intelligence of the sort you are about to read here, with my compliments.

So, again, why are yields rising? Here’s what we wrote on Oct. 4…

The rise in Treasury yields once again hit stocks as the 10-year yield rose through 4.70% for the first time since April 2007, and that continued move higher weighed on stocks. For reference, the 10-year yield was 4.18% just one month ago, and the rise in yields has gained steam lately and that is pressuring stocks.

But as always in markets, the key question to ask is: Why are yields rising?

There are three typical causes of higher yields: Rising inflation expectations, surging growth expectations and fears of a hawkish Fed. I want to investigate each of these to see if they are behind this acceleration higher in yields.

Potential Cause 1: Rising inflation expectations. Inflation expectations can drive long-term Treasury yields. When inflation expectations are rising sharply, that can push yields on longer-dated Treasuries higher as investors demand more long-term interest to offset potentially longer-term inflation. Inflation expectations rising sharply? No, they are not.

The five-year TIPS/Treasuries inflation breakevens have moved up over the past month, but barely so as they’ve risen from 2.17% on Sept. 1 to 2.22% as of Sept. 29. The recent high was 2.30% a few weeks ago, but these breakevens are well off the 3.57% peak in March 2022. Is inflation responsible for surging yields? No. Inflation expectations have not materially changed and are not fueling this rise in yields.

Potential Cause 2: Surging economic growth. Growth is the other factor that can influence longer-term Treasury yields, as higher growth can mean more inflation and investors demand higher longer-term yields to offset that risk. Point being, higher growth = higher yields. Are growth expectations accelerating? No, not meaningfully.

Looking at the Atlanta Fed’s GDP now, they are anticipating a sharp increase in gross domestic product (GDP) from 2.10% in Q2 to the current estimate of 4.9% for Q3. That’s a definite increase. But that growth expectation has been steadily declining from a high of just under 6% quarterly growth, so it’s not like growth expectations have spiked higher recently. Meanwhile, Wall Street analysts’ GDP estimates have risen to just under 3% recently, but that’s not the type of growth that would justify a 70-bps increase in the 10-year yield. Is growth responsible for surging yields? No. Growth expectations have risen from Q2, but that hasn’t happened recently and growth isn’t strong enough to justify this type of move higher in yields.

Source: StockCharts.com.

Potential Cause 3: Hawkish Fed expectations. If the market truly believes the Fed will be “higher for longer,” that could push both short- and long-term yields higher. So, are Fed expectations getting materially more hawkish? No, not substantially so.

According to fed fund futures, there is currently a 53.6% probability the Fed does not hike rates between now and year-end. A month ago, the probability was 51.9% (so no change). Looking towards 2024, there has been a shift in market expectations. Currently, the market expects between 50-75 basis points of rate cuts from the Fed in 2024. A month ago, the market expected between 100-125 basis points of cuts in 2024. That’s a 50-basis-point change in expectations. Are Fed expectations responsible for rising yields? Partially. The market starting to believe the Fed will stay higher for longer has likely contributed to the yield rally, but it can’t account for the recent acceleration or size.

If the “usual suspects” aren’t doing it, what is? First, sentiment and speculation. CBOT U.S. Treasury short positions are just off the spike highs of the year, and we can tell by the reaction in bonds to “second tier” economic data and Fed/important financial people speak. Point being, JPMorgan CEO Jamie Dimon said it’s possible that Fed funds goes to 7% (a lot is possible) while some Fed officials have called for multiple additional Fed rate hikes (but the median dots still show just one between now and year-end, and that’s barely so). Point being, there’s clear downward momentum in Treasuries, and just like momentum can push stocks higher or lower than fundamentals justify, so too can it happen in bonds, and sentiment and momentum are major contributors to this past month’s drop in bonds.

Second, U.S. governmental dysfunction matters. For those of a certain age, this will ring a bell: It looks like the “bond vigilantes” have returned (at least in part). Bond vigilantes was a classic Wall Street term for bond investors who would sell Treasuries and send yields higher to voice disapproval over U.S. fiscal policy. They were popular and prevalent in the 1970s, ’80s and early ’90s, but were considered “extinct” by some on Wall Street after they failed to appear over the past 20 years. Well, they’re back!

Dysfunction in Congress is starting to matter, because markets want the government to address the long-term fiscal path of the country. To be clear, this isn’t a big enough reason to push Treasuries lower/yields higher by itself, but combine it with hawkish Fed fears and momentum, and we’ve got ourselves a solid drop in Treasuries, and that is why we are seeing bonds drop and yields spike.

What makes it stop? Disappointing economic data that reminds investors a growth slowdown is still possible. As we’ve covered, none of the long-term drivers of yields have changed much. Neither growth nor inflation are surging. That’s an important positive, and it strongly implies this spike in yields will be temporary because growth and inflation determine longer-term yields, regardless of what we’re seeing now.

That means for this spike in yields to stop, we need to see economic data that underwhelms and makes investors think a slowdown could occur. And given how oversold the 10-year Treasury is right now, any sort of disappointing economic data could easily cause a 20-basis-points decline in yields, if not more. Until then, momentum and general anxiety about the Fed and U.S. fiscal policy will push yields higher, and until they stop rising, we can expect continued volatile stock prices.

If you would like to get this kind of deep analysis on the economy, stocks, bonds and anything that makes the market move, each trading day 8 a.m. Eastern time, then I invite you to check out my Eagle Eye Opener, right now. I suspect it will be the best decision you make today!

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On Bad Ideas

“Nothing dies harder than a bad idea.”

–Julia Cameron

Bad ideas seem to be everywhere and at all times. Today, we are seeing the fruit of bad ideas turn into mayhem in the actions in the Middle East. Perhaps one day we can shed the vestiges of our lowly tribal origins and ascend to a world where ancient mystical thought doesn’t manifest into violence. But until that day, the rational and reasonable need to keep advocating for a better world — and so I will continue to do just that.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods