Postcards: Take Advantage of These Two Ignored Stories
I have a good feeling that we're winning...
Dear Fellow Expat:
Two things are happening right now that investors need to know about…
The problem is that most financial journalists don’t understand either…
Most economists ignore these stories…
And most of the financial geniuses I know don’t want to tell anyone because they want to exploit them.
Let’s dive in…
America V. China
First… the United States is engaged in a massive capital (or currency) war against China.
This is World War III. It already started while you were in bed. It’s been going on for a while now, and there hasn’t even been a shot fired yet.
But surgically… this capital war is well underway.
How do we know this?
Look at the Yen.
The U.S., using Japan as a stalking horse, is weaponizing the Japanese Yen against China. We’ve discussed this a few times. The Yen is usually - and historically - resilient to big declines against the dollar.
But this time… it’s been different. I’ve talked about the book Capital Wars by Michael Howell for some time, but now we seem to be entering a more perilous stage of this journey.
This time it’s intentional.
I’m writing a report I’ll release in July, but I want to offer a preview…
One important tool is the currency swap agreement between the BOJ and the Federal Reserve. This arrangement allows the BOJ to access U.S. dollars in exchange for yen, providing liquidity to Japanese banks during periods of financial stress. For instance, if there is a sudden need for dollars in the Japanese banking system, the BOJ can tap into these swap lines, ensuring that Japanese banks can obtain the necessary dollar funding without disrupting global markets.
For over 30 years, Japan has struggled with low inflation and stagnant economic growth, leading the BOJ to implement extremely loose monetary policies, including aggressive yen printing. The ability to print yen at will provides Japanese banks with significant flexibility but also comes with the risk of currency devaluation and global inflation.
Japan's strategy aims to make its products more competitive in global markets versus regional rivals like China by maintaining a weaker yen to boost exports. By leveraging the U.S. debt situation, a massive carrot for nations looking to make an easy buck, Japan ensures its products remain competitively priced while helping provide much-needed capital to a coalition of nations looking to contain Chinese growth.
Originally… I wouldn’t have noticed this, except that several Japanese stocks have gotten so cheap right now that they’ve hit my reversion screen. I’ll dig deeper into this situation… but it’s happening in broad daylight… and goes ignored.
This is a race to hell financially.
Liquidity will increase as this war goes on…
Therefore, real asset prices should benefit.
I’ll talk about what else to do in a moment.
America Against OPEC
Second… and this is important…
OPEC appears to be capitulating to the United States.
The global oil cartel announced intentions to return about 2 million barrels daily to the markets by 2025. That’s a big jump in supply at a time when crude is already under pressure due to global economic concerns.
Now… It’s easy for armchair analysts to suggest that prices are falling because of concerns about the global economy.
That’s a lazy explanation.
What’s really happening?
U.S. production costs continue to decline, and margins for Permian Basin producers are getting stronger and stronger. (Surprise, Buffett is there, too.) But there’s also the element of millions of EVs being bought… and their generally positive impact on oil prices moving lower.
Geopolitics aren’t hurting oil prices. This feels odd… but sellers are shrugging this off.
No one seems to care that North Korea is firing missiles. Russia’s probably producing more oil than they claim (they need the money at any cost)… Israel and Iran aren’t having a profound impact. COVID doesn’t matter anymore. China’s economy is a basket case, but it’s not a geopolitical risk.
There’s ample supply… and elevated storage levels persist, which correlates with price.
Thing is… America’s about to hit 14 million barrels per day next year in production. That’d be a new record. Despite all the chatter about progressives trying to ban crude, this is the largest amount of output ever… and it’s only growing.
And it’s getting faster and more efficient.
We’re not relying on diesel pumps anymore. We’re onto electric, and it’s drastically increasing efficiency in the shale patch. It’s also lowering costs and improving production. Trimul-frac technology is about 70% faster than traditional zipper-frac technology. I’m not asking you to understand the terminology.
I’m just asking you to understand the math.
Two years ago, I told everyone the Permian mattered because of margins.
It’s getting cheaper and cheaper to produce there… and that threatens OPEC.
Think about this…
Do you want to produce crude for $60 a barrel and sell it for $90…
Or produce for $25… and sell for $55?
The answer - even if the margin is smaller - is the lower production cost. Not only is $30 the same… but every dollar spent on production is an opportunity cost.
I listen to people at Goldman Sachs (GS) predict $120 a barrel and ask how.
They’re never right and they’re usually betting against their public stance.
Regardless, it’s a different world now. And we haven’t even really employed AI in the sector.
Remember - don’t worry about oil prices.
Worry about the margins. That’s where the gains will be made.
That’s how we make money.
Now What?
Of course, the question is what we do. Well, as I’ll explain in July, the monetization battle involving China, Japan, and the United States is a race to hell.
So, we want to tap into S&P 500 stocks, reversion stocks, gold, and Bitcoin.
On the energy side, I think that producers will see a bit of a reset soon - with a focus on oil down in the $70 range. I’ve long argued - invest in oil as if the cash flow is based on $70 to $75 per barrel. But I can see crude falling to as little as $60 due to all this broader chatter about the economy and manufacturing. It won’t likely stay there very long… and we’ll see some level of equilibrium and balance in 2025.
And then, ensure that you’re investing in producers improving their production costs. When it's all said and done, Occidental (OXY) will get down to $15 per barrel. That’s the promise of the new fracking tech and their long-term goals. If OXY somehow falls to the low $50s… it’s a screaming Buy, and Buffett will likely purchase much more.
Meanwhile, I remind you that there is always money in the midstream.
It doesn’t matter if oil is at $50 or $70… what matters is that it’s moving through pipelines, and there’s ample potential for us to make money by riding our favorite names like Energy Transfer (ET), Plains All American (PAGP), and Enterprise Product Partners (EPD).
I know two of these names have K-1 and are a pain during tax season.
But honestly… you’re just going to have to get better at paperwork.
Make that your 2025 New Year’s Resolution.
Stay positive,
Garrett Baldwin
Good contrarian stuff!!
That was a complement. In my book being contrarian is way cool!
It’s often lonely at the bottom. Sho nuff!