For reference, see the 2022 pieces “The Perse-istant Empire” part 1 and part 2; as well as “Iran news - the Eurasian connection - Return of an empire?“, 2023 “Israel - Iran Update“ and 2024 “The Coming War With Iran“.

Make no mistake, this is part of what will be categorized by historians as WW3, a topic I discussed here.

And a war that will coalesce with the Ukrainian front by involving Turkey, potentially with Erdogan pushed out of the way if he resists.

Now let’s dwell on the specifics of two topics:

• Prediction for the upcoming long war with Iran.

• The direct investing consequences of the closing of the Strait of Hormuz and destruction of the Middle East hydrocarbon facilities.

Iran At War

The War So Far

Iran has surprised most observers by performing as I predicted years ago.

The country had 2 decades to prepare exactly for THIS war, focused on negating the two superpowers of the USA and Israel: air power and soft power / infiltration / subversion.

For the rest of the article, I will refer to it mostly as Isramerica, as it is clear to anyone honestly looking at it that the two nations are now entirely merged in their objective and leadership.

The first part about air power is now obvious. If you put your air defense and missiles + drone stockpiles in bunkers under 100+ meters of rock, you can handle a lot of bombing with little military effect.

You can even poke out the launcher, fire, and go back to safety.

Hence why Isramerica is already bombing softer targets, hoping to break the 90-million people nation resolve: schools, hospitals, oil storage around Tehran, high-ranking officials’ homes, etc.

The second part about infiltration was seemingly Iran’s greatest weakness, and the pager episode in Lebanon, or deep infiltration in the previous episode of that war, had made me wonder if Iran would collapse suddenly from infiltration inside the state capacity and an intelligence failure.

However, a few poorly timed actions depleted this weapon, likely to never be seen again in signficant importance in this conflict:

• Repeated assassination of diplomats and leaders for months and years, again and again, showing the pointlessness of negotiations and the risks of any security vulnerability.

• The reinforcement of hardliners’ positions by assassinating Khomeini (who was opposed to nuclear weapons), backing out of military crippling deals (JCPOA), and relentless hostility. Any leader advocating for compromise was sidelined by the pointlessness of this position.

• A tentative color revolution WEEKS AHEAD of the bombing, a truly puzzling timing choice, with too little popular support, too late into the Gaza genocide, that allowed the Iranian internal security to identify and remove most infiltrators, including many clandestine suicide drone factories.

  • This also used Starlink, which Russia has learned to locate and turn into a target-rich beacon, a tech I am sure Iran benefited from.

After these first weeks, any destabilization will fail, because the Iranian people are understandably outraged at the targeting of schools and hospitals, or poisoning of millions of civilians with toxic oil fumes blotting Tehran’s skies.

So even the people who disliked the mullahs intensely will not betray their country and look to become the next ISIS-led Syria instead.

Iran might not be able to bomb NY or submarines in repair in Virginia, but it can force the US out of Iran’s vicinity, although at a steep price for itself.

Iran’s win conditions is to win locally, while the US can lose by just failing to project power close to Iran and in the Hormuz Strait.

As such, this leaves Iran with the strategic initiative.

Let’s resume the situation briefly:

• The Strait of Hormuz is closed for everyone BUT Iranian oil, which has to be paid for in Yuan, a big win against the petrodollar (protection versus boost in dollar demand).

• $5,000-$10,000 drones are being intercepted by $1M missiles produced AT BEST in the 200-300 units PER YEAR. Probably that many are used PER WEEK.

• The US still does not have air dominance over Iran, and that’s without Russia replenishing the country’s air defense yet. Or China.

• Almost none of the underground bases East of Iran, nor its most advanced missiles, have yet been used, nor any of its thousands of suicide speed boats and underwater drones.

• Every US military base is a target; many have already been turned to rubble.

• As US air bases are getting hammered, long-range strikes with Stratotankers following the bombers for refueling mid-air are needed, with one Stratotanker downed over Iraq, another hit, and 5 destroyed on the tarmac (although the US has 300-400 of these).

• The Gulf states’ reputation as a fun and rich luxury destination, or a safe financial and airport hub, is forever destroyed.

• Many oil facilities in the Gulf have been bombed, with severe damages and the rest at the mercy of Iran, which, for now, has chosen restraint as IT can still export oil, so is happy to see production stay intact for everyone.

• 15-20 million barrels per day are missing in global markets, with oil & gas fields closing, guaranteeing massive economic pain for months if not years, even with no further damage.

• Israel is getting hammered, and the Iron Dome is gone, even if the damages are hard to evaluate due to heavy censorship.

Many expect Trump to “TACO” (Trump Always Chickens Out) out of complacency and a misreading of the situation.

This will not happen because Iran might not have started the war, but has stated its own war goals very clearly:

• full compensation for all damages.

• + removal of all US bases from the region.

As a “fun” alternative, short of full compensation, Iran has stated it will actively look to inflict as much damage as it received as “compensation”.

A situation that memes resume far better than a longer discussion:

The reason for this relatively maximalist position is that Iran already tried appeasement after the 12-day war: mostly fake mutual strikes for everyone to save face, a pretense of a deal, and continuous negotiations.

The negotiations ended with the religiously-motivated martyrdom of a 90+ year old Khamenei in a sneak surprise attack WHILE NEGOCIATING (a tactic now used TWICE), a man sick with prostate cancer and likely to die soon, and seemingly welcoming his death to galvanize the country against its enemies.

But many of his relatives were also killed (including a toddler), so the newly elected leader, a new Khamenei (one of old Khamenei’s sons and an Iraq war veteran), will likely not be very peace inclined and want vengence for his family, at the very least until true deterrence and impossibility for the US to launch a similar strike ever again.

Iran’s Winning

Because of the hapless execution of the military action, ignoring the actual generals or admirals who saw it coming for the likes of Jared Kushner + the rather flawless assessment of the military possibilities by the Iranian military, the trajectory is clear.

Isramerica’s interceptors are depleted and cannot be restocked in significant numbers due to production constraints.

The only alternative is a land war, but so far, the Israeli invasion of Lebanon is already stalling, and attacking 90 million people in a mountainous desert region is a logistical nightmare, especially when the only supply line runs through vulnerable waters or hostile & full of Shia militias Iraq.

The border with Turkey is just not long enough, and Kurds are unwilling to help after being betrayed merely a few weeks ago, and left to the mercy of ISIS in Syria.

As a reminder, Iran is HUGE on top of a very hostile terrain. It will make the flat, hard soils of Iraq, perfect for the overweight Abrams tanks, look like a promenade in the park.

We are also talking of an old and capable civilization that has domestic production of advanced gas turbines, a domestic independent automotive industry, its own medical equipment manufacturing, the most advanced space program of the Middle East, massive mineral resources, a fully domestic military industrial complex, etc.

All this despite (or maybe thanks to?) decades of sanctions that crippled the country’s economy.

So primitive and divided Afghanistan will also be a walk in the park for any invader compared to Iran.

There is a reason Iran has only ever been conquered by a one-of-a-kind general, namely Alexander the Great, or ultra-mobile, brutal, & hardened forces (Caliphate Arabs, Mongols).

Actually, considering the historical precedent, the defeat of an invading force in Iran is the norm, not the exception. Not the Roman Empire, nor the Byzantine Empire, nor Russia have ever managed.

Only periods of extremely poor leadership (Darius III) or uniquely skilled nomadic armies have broken this rule.

In that respect, Iran is very much like Russia. A force you might defeat abroad with relative ease, with poor soft power and power projection abilities, but almost unbeatable at home.

And this is BEFORE Iran receives any help from Russia, which now manufactures at least 5,000 upgraded Shahed drones (“Geran”) PER MONTH.

What happens if Iran receives 1,000 of these per month? That’s a lot of Dubai luxury hotels, Saudi military bases and Israeli critical infrastructure to hit every month…

Surely, Russia will see to it that Iran “have a right to defend itself from illegal aggression” as an ironic payback to NATO after 5 years of SMO in Ukraine.

Or what happens if China decides to further help with parts, machine tools, chemicals, and electronics in a repeat of the US support of the UK in WW2? I doubt Iran will struggle to source rare earths, tungsten, or advanced parts, which is more than the US military industrial complex can say…

At this point, the USA has 2 options:

1. Admit defeat and find an acceptable deal, likely retreating out of the Middle East, which would be the best outcome for America as a nation and the American people.

2. Double down and plan a land invasion, with no Hormuz Strait opening before AT LEAST 2 years, in the unlikely case of a US victory (likely involving nuclear bombs).

This would be the options for the USA, with one vastly superior albeit unpleasant.

But Isramerica has no choice but to fight, as Israel cannot survive a dominant Iran that subdues the Gulf states and kicks America out.

So the fight will go to its military conclusion, escalating MUCH FURTHER than 99% of analysts realize. If the Saudi and Emirati oil fields are not burning in 6-12 months, I will be genuinely pleasantly surprised.

(note: before I managed to finish writing this, it seems that it already started…)

Investing Takeways

The Macro Context: 1970s Redux On Steroids

The obvious investing takeaway is that we will all be reliving the 1970s, with less hippies or classic rock and more stagflation, stagnant or declining stock markets, and brutal energy shocks.

In this environment, the only things that worked were, in order of profits: gold & silver, oil stocks, commodities, real assets like land, forest, and, to some extent, real estate (although not commercial).

Frankly, just moving into these for the next 10 years is probably the best strategy, and not much would need to be said from there.

HOWEVER, the endpoint of the 1970s 2.0 will be different. At the time, the West and the US were thriving, an engineer-rich society with low debt levels.

France built so many nuclear power plants that it made its today 70% of electricity from nuclear power from this era.

The US embraced new technology, boosted domestic oil output, and overall rebounded. It was also the most powerful military on Earth, very far from a nation struggling to subdue Iran, even if it did fail in Vietnam.

By the way, the USA never controlled more than half of Vietnam, and needed 500,000 troops to do so… Let’s just compare both countries’ maps:

The 1970s stagflation was stopped by MASSIVE interest rate hikes that stabilized the currency and established the petrodollar as an alternative to gold.

The US's main rival was a decaying, increasingly dysfunctional communist regime unable to feed its own people.

Today Western nations are divided by immigration and politics, all above 100% of debt-to-GDP ratio, and with barely any industrial output left, they are not the same.

It is simply impossible to pull a Volker and raise the interest rates to kill inflation to reboot the system. High debt levels cannot authorize it. So the endgame is necessarily some form of currency destruction, which makes gold or productive land (farmland, forest) even more attractive.

Oil, But From Where?

Of course, if we lose 20 mmpd of oil, and 20-30% of LNG production suddenly, oil & gas producers should do well.

However, I am skeptical of any US oil companies. Trump will simply not let domestic prices run wild, and his blatant disrepect to US allies will not encourage him to provide them the energy they need at the expanse of what’s left of his political capital. Instead, pillaging the collapsing industries and human capital of Europe, Japan, and Taiwan will be “good deal” for America.

This leaves us with South America, but probably not Colombia, which might be caught in imagined or real “war on cartels” spreading from Venezuela and Mexico.

Probably the best option is the somewhat dull but still remarkably cheap Petrobras. Expect plenty of windfall taxes and forced low local fuel prices, but any export will be fully priced and EXTREMELY profitable which will compensate.

And this is a company that booked a lot of ultra-deep drilling when it was abundant and cheap, so it will be able to grow production throughout the years-long coming energy crisis.

Transocean, now merging with Valaris, might also see its time to shine, although I have had no time yet to check how many of Valaris jack-up are stuck in the Persian Gulf, a quick AI search telling me “too many”.

Chemicals

Any country short on feedstock (gas, naphta, etc.) will have to curtail production of key chemicals.

The chemical products most affected will be the energy intensive, relatively cheap products straight from hydrocarbons: PVC, pipes, paint, roofing material, solvants, plastic for packaging or isolation, etc.

On the flip side, petrochemical plants WITH feedstock will be able to make crazy margins in what is normally a boring low margin cyclical sector. The sector was close to a bottom, so valuations are rather still cheap, even after the recent pre-war rebound.

So we are looking at big opportunities for companies making chemicals from coal or locally cheap gas.

Companies I have seen discussed on this topic, but did not research yet are Sasol, Braskem, and LyondellBasell.

Fertilizers, Food

Another category is nitrogen fertilizers, as they are essentially transformed natural gas. You can technically do it with other energy sources, but with ALL energy going crazy, shortages are coming.

And already, China is blocking ALL export of fertilizers (and refined fuel products), with Russia reducing exports as well.

Here too it is tricky, as US nitrogen producers should be great (cheap shale gas), but will likely be hammered by Trump. This would exclude obvious play like Nutrien.

Yara International in Norway is maybe an option?

Another is Adecoagro, with a very surprising and to my opinion very shady 70% ownership by stablecoin provider Tether, worth its own dedicated article whenever possible.

In any case, food prices will go up, and only producers that are somehow secure in their nitrogen input will do well. Grass fed cattle can be a great deal here.

Metals

Industrial metals might suffer from contracting demand and high energy costs, but here too it will depend.

African producers will get wrecked by shortage of sulfuric acid, especially to mine copper and gold, before even factoring in food riots and general instability from food prices.

Gold and silver producers will do well if they can maintain production (again, massive sulfur shortage), as the incoming crazy money printing will definitely keep up with energy price, even without counting the already massive 100% profit of AISC costs at current gold prices.

Short?

Helium shortage is an interesting case, as most of global production came from Qatar. This is an essential product for MRI, niche applications, and more importantly semiconductor production.

China has in advance redirected 50% of its helium supply so that it comes from Russia.

However, Taiwan and therefore TSMC seems to be in a VERY bad spot, squeezed by low energy supply, potentially less stable grid (very damaging to semiconductor foundries) and no helium.

So far, TSMC seems the most obvious short to me, as well as any luxury gas guzzling toys like RVs or cruise ships.

So I interrupt the planned program for a dedicated report on the topic.

It creates a massive set of problems for Big Tech and especially Nvidia, as well as now for-profit OpenAI.

The time could also not have been worse, as it came the day after Trump announced Project Stargate, a plan to spend burn $500B in building massive AI data centers in the US, under the guidance and financing of Oracle, OpenAI and Softbank.

So Many Problems

Too Efficient

Problem #1 for AI, is that DeepSeek requires MUCH less computing power. So little in fact that people are reporting managing to run this AI from high-end desktop computers.

Other research claims to be able to retrain the AI for much less than the already very low $6M DeepSeek claim to have spent. Maybe as low as … $30 (no zero forgotten).

So this creates the #1 first order consequence for all of Big Tech, which have burned HUNDREDS of billions in building computing power that might not be needed after all.

Already, the mere normal depreciation of these assets was going to hurt the profit of these companies. But if they need to write it off entirely, it will REALLY hurt.

Open Source

Now the dastardly Chinese did something even worse than improving AIs. They released the code for FREE, open source. That is problem #2.

This means that despite tentatives to scream it is an evil CCP operation to spy or steal data, it is clear that very soon there will be dozens of “forks” of DeepSeek, retrained to fit specific needs or biases of specific users.

Not only is it now out there for free, but it is also already virtually impossible to destroy or ban efficiently.

This is a death blow to all the closed-source methods used by OpenAI, Google, Meta, as well as Alibaba, ByteDance (TikTok maker), etc.

So Cheap!

Problem #3 is that DeepSeek makes its money by trading, like a good hedge fund. So it is planning to commercialize its AI essentially just at costs, for the sake of demonstrating the superioty of its talent, which will no doubt bring billions in assets to be managed by the hedge fund.

And as these costs are much lower than ANYONE in the industry has managed until now, it utterly destroys the planned business model of all AI companies.

Not Even Sanctioned!

Apparently, DeepSeek trained its AI with older, less performant H100 Nvidia hardware, and not even that many of them.

Some claim that this is not true, and that DeepSeek had access to “illegal” (as in “not approved by the US interferences”) smuggled more advanced chips.

In any case, it already does not matter, because DeepSeek has now tested if they could use Huawei chips instead, and it turns out it is pretty much he same as Nividia chips…

This is a big problem, #4, for Nividia, obviously, as it might lose the entire Chinese market. Which when taking into account “illegal” re-exports and other by-passes (like Chinese companies using data center compute power abroad), might be 30-40% of its sales.

But this is also a massive problem for the American government.

Biden and now Trump have bet the house that hindering China's progress in AI would give the USA the advantage in an upcoming conflict against China, through drone swarms, cyberattacks, broken encryption, etc.

Now it appears that Huawei chips will do the job and that Chinese AI is superior… Oops…

2nd order Consequences

Except if you are a trader that reacted quick enough to grab the -17% in one day on Nvidia stocks, money is usually made from correctly predicting 2nd and 3rd order consequences.

Like betting rightly that remote work will explode due to a pandemic.

So let’s discuss it.

Sanctions Failed? MORE SANCTIONS!

An obvious second-level effect is that the US will panic and triple down on sanctions, in a reflex.

Already, DeepSeek is “banned” in Italy (good luck with that). And many AI big shots are trying to make the case that more needs to be done to break Chinese AI companies.

This will likely fail, and reveal even further the true impotence of the US in blocking China's rise.

AI Generalization

Read more

At times, I realize that investors, and especially value investors, like to make it more complicated than needed. This stems from a few conflating factors:

• If it is complicated, it explains why the market has “missed” it.

• It makes us feel smart to have figured it out.

• By definition, value investing is a contrarian game.

This goes double for investment writers. People in my position may not only be driven by the thrill of chasing interesting ideas, but they also feel like they need to give their readers something truly unique, that no one else has ever covered.

On average, this has paid off for my readers, including with rather obscure ideas like Georgia Capital, for example, up more than 50% since publication.

But this also means sometimes not covering rather simple and boring options, with nothing hard to understand about the business.

Sometimes, a good price and no special event is all you need.

This will make for a slightly shorter report than usual, but hopefully an equally good stock pick.

Read more

A few days ago, the CEO of a S/P500 company was assassinated by gunshot in the streets of New York, an event caught on CCTV as well. In itself, this is rather noteworthy.

But 2 elements are worth discussing further, with broader implications for investments in US stocks.

Let’s unpack them and see if there is some warning for a sector which is 13% of the USA’s GDP, and for other sectors as well.

A Controversial Target

The CEO targeted and shot in the street was Brian Thompson, CEO of United Healthcare, the #1 healthcare company in the US, mostly selling healthcare insurance, with a market cap above $500B.

It is maybe no surprise that the large health insurance group in the country would be less than popular, with the US spending more than any OECD country in healthcare, for much poorer results.

In fact, life expectancy has started for a decade to decline in the USA, a unique situation among developed nations.

And maybe no other company than UHC has been more at the center of healthcare denial that can more often than not bankrupt an entire family or represent a death sentence.

And doctors themselves are not too happy with United Health, either.

A Less Than Empathetic Public Reaction

For an overview of the public reaction to what is a shocking turn of events, let’s look at the public post of the company announcing the news.

Around 15x more laughing emojis on Facebook than tears.

This of course was not the only reaction, with many shocked by such a display of public hate, especially among financial analysts:

A comment that itself would get hammered by counterpoints largely dominating the responses.

Not only does it get ugly, but it quite really gets bloodthirsty at times:

Today, we mourn the death of United Healthcare CEO Brian Thompson, gunned down.... wait, I'm sorry - today we mourn the deaths of the 68,000 Americans who needlessly die each year so that insurance company execs like Brian Thompson can become multimillionaires.

Innocent in the same way that George Bush is innocent regarding the Iraq War…

It was his leadership decision to use AI to deny medical claims and having the highest denial percentage rate of all insurers. He valued money over lives. That’s why no one cares about his

Despite paying expensive premiums I routinely have to pay out of pocket for any kind of imaging for a lifelong ailment that I need imaging for every year. I’m not sad about what happened.

Bad things happening to bad people is a good thing.

He wasn’t innocent, he is responsible for the deaths of thousands of people.

Nah man, people like you need the reality check. This is real pain and anger coming out that is a direct result of UHC’s unethical practices. This wouldn’t have happened at all if UHC didn’t operate like the mafia. Get a grip.

"Innocent" is doing a lot of heavy lifting there. Maybe they shouldn't have been denying so many claims? Sympathy has been declined because it is out of network.

It's gotta be tough on his family to see that he is being publicly declared to be just as disposable as all the rest of us have been treated by insurance companies.

Overall, social media were flooded with comments comparing the assassination of the CEO to US healthcare and insurance denial of medical care.

Assassination Of Company Policies

ABC News reports that the shooter of UnitedHealthcare chief executive Brian Thompson wrote “deny”, “defend”, “depose” on the shell casings left at the scene.

This echoes the title of a book that details how US insurance companies have made a business of giving people life-saving medical treatments.

So while hard to fully confirm, it is likely that this might be not so much a professional hitman than a very, very angry person over a health insurance claim denied.

The personal wealth the victim derived from his position might have been a trigger for the assassin as well:

First Order Analysis

The first level of takeaway for investors is that UHC policies are going to be in the spotlight, and for all the wrong reasons.

Expect it to become a major topic, especially with the upcoming Trump presidency, Elon’s DOGE department, and overall fewer distractions from the elections.

This will be true not only for UHC but also for all of its competitors.

If your portfolio contains these stocks, it might be the best time to just take a break for a few weeks at least.

As a European, I will mention I have no dog in this fight, and no strong opinion on what needs to be reformed in US healthcare.

Personally, I think healthcare should never bankrupt someone in a moral/Christian position, as you do not choose to get cancer or a heart attack (although some actions like those leading to obesity blur the line).

At the same time, public socialized healthcare European style can be as poor and as deadly as greedy private US healthcare. No system is perfect and Europeans are often too smug about it, while Americans have likely been too passive about it.

Elon might be onto something, too many bureaucrats per doctor.

Second Order Impact

Overall, the highly profitable business of charging Americans 2-10x more than the rest of the world for healthcare and drugs might be not as sustainable as thought.

This goes way beyond just health insurance, but the entire US healthcare system, with insurance the most in-your-face part for the majority of people:

• Pharmaceutical companies charge 6-7 digits for cancer treatments.

• Generic drugs selling at 20x than the price in neighboring Canada, creating absurd smuggling operations.

• Surgery and medical care costs so much that it can be worth traveling to the other side of the world to get better care in private clinics in places like Spain and get months of recovery/holidays for cheaper.

This has always been a looming issue with all the Big Pharma, ambitious biotech startups, and other hospital and care stocks.

All at hoping to get this juicy American tax and insurance payers to subsidize R&D costs, keep dividends flowing, and execs compensation sky high.

Third Order Impact

A secondary impact is to analyze how angry the people truly are. And interestingly, it seems to transcend the political faction line. Essentially everyone who is not rich and had to deal with healthcare insurance in the USA seems to hate it.

The thing is that when the rich and powerful get murdered by the plebes and the plebes cheer in unison, the elite should listen.

It is maybe not a coincidence that the movie Joker, depicting exactly similar sentiments from a society at the edge of social implosion had been such a surprise box office hit and instant media & meme sensation.

As a French citizen, I had to study extensively the “glorious” murderous French Revolution and the times that led to it.

I can positively say that the public sentiment on most of the US elite feels very similar.

This is true for CEOs and execs of most industries that have taken a definitively parasitic behavior in the last decades, through a toxic mix of corruption lobbyism, monopoly/oligopoly, regulatory capture, opaque pricing, offshoring, and media collusion:

• Healthcare

• Pharma

• Defense

• Tech

• Etc.

If you thought the socialist woke mobs and Trump deplorables were a problem, wait until they find a common cause.

Currently, a few political issues are crystalizing such potential common causes crossing factions to fight against “them”; especially among the 16-35 year olds, the demographic that matters when it comes to mob violence:

• Endless overseas wars.

• Unconditional support to Israel.

• Out of control profiteering on healthcare.

• Unaffordable housing.

• Crippling student debt.

• Untouchable banks and financial institutions.

• Upcoming collapse in federal spending, public employment, and de facto bankruptcy of Social Insurance and public healthcare programs.

For now, such opinions are completely without serious political representation.

• Trump's “peace through strength” or support to Israel will not stop any war, it might even start a few small ones or a big one, and we saw the Democrats’ program over the last 4 years.

• No politician can target the “donor class”, a telling fact being that such a word exists in the first place.

The danger is not that those opinions are growing, at least this is not the ONLY danger.

The issue is that they are becoming so prevalent that only 2 options appear on the horizon:

1. A clever and daring politician seizes this unexplored segment of the political market and breaks the 2 party system.

   1. If successful, this can create radical change.

   2. If failing, move to option 2.

2. No politician responds or manages to enact change. Anger keeps building up until a Bastille moment emerges from a random riot, likely in New York, DC, or LA.

A Useful Warning?

This could be wake-up call for the US elite to disarm the ticking bomb in social relations.

At its core are the 3 components of Revolutions:

1. Ever-mounting inequality.

2. Immunity from repercussions of parasitic actions and incompetence.

3. Arrogant, hypocritical elites who stopped performing any social role.

It should noted that it is not so much deprivation than “unfair” inequality that drives popular revolt. People do not revolt solely from hunger, but from seeing others doing far better than them.

Removing any of ONE of these 3 would be enough.

1. If inequality shrinks, it will remove the main cause of resentment.

2. If top-level executives, from health insurance CEOs to defense CEOs or judges and politicians and such face consequences for pillaging the public treasury, lawlessness in the streets, insider trading, etc. the feeling that only violence can work will fade away.

3. If the elites are seen as sacrificing something, like for example the way medieval nobility performed its grueling military duty, the feeling of unfairness will disappear, even with crushing economic inequality.

(A key reason why people like Elon Musk more than other oligarchs is that he has an image of not actually caring much about his wealth besides going to a few parties. It is well known the man has a poor family/personal life and still works massive hours).

Conclusion

The point I am trying to make is not a general comment on the US soon turning into Mad Max, although some days it feels like this is a possibility.

More that the past few decades of Buffett's style of investing is coming to an end. The strategy of focusing on oligopoly/monopoly and parasitic industries or addictive products is being met with an increasing amount of backlash.

When an industry can forever increase its margins because of regulatory capture, lobbyism, shady practices, exploitation of its consumers, and oligopolies, it works until it does not.

It is a perfect business model until the mark/peon starts to kick back. The same way that Victorian-era abuse of workers led to massive strikes, powerful unions, and the rise of Communism.

This kind of backlash usually comes with a bit of collateral damage as well.

So this is a warning call to avoid some of the worst offenders of the healthcare sector, very likely to become an easy target for populists like Trump:

• Overpriced cancer drugs soon targeted by Elon.

• Massively bureaucratic hospital corporations.

• Abusive insurance companies.

And overall, this might even extend to other sectors if no pressure valve starts activating.

Rather vulnerable are the tech giants, especially Meta and Google, but also Apple, for their obvious monopolistic practices, as well as having to some extent been anti-Trump for years. Make no mistake, Zuckerberg and Jeff Bezos claiming neutrality toward the end of the election cycle was not an accident. And everybody hates Big Tech by this point, so it would be popular.

I expect the all-powerful defense sector to be least affected, but as said before, companies like General Dynamics (ships and Abrams tanks) are a lot less vulnerable than let’s say, Lockheed Martin and its over-expensive/under-delivering weapons (F-35).

We are talking 4-5 standard deviations above the “normal” level that had only been breached in the last 2 major bubbles in the last SIXTY YEARS.

The Financial Times itself commented and called it the mother of all bubbles, written by Ruchir Sharma, a chair of Rockefeller International:

So of course, the answer would be to avoid US equities.

But this is not so simple, even if I am somewhat of an advocate of this idea.

For example:

• Russian and Central Asian equities are off-limits for 99% of Western investors.

• The Middle East is on fire and it will likely get a lot worse.

• European and Japanese industries are suffering greatly from terrible energy policies and lagging in innovation compared to China, the EU even more than Japan.

  • Both have also terrible demographics and social issues, the EU even more so if you don’t count the recently arrived and economically net negative non-European population.

• China is grossly undervalued (see that topic on next article), but is also likely to stay so with Trump tariffs and the risk of WW3.

• Africa is a perpetual mess, and only specific opportunities like SBSW I covered in the last report are good enough to make sense.

• India’s IT service economy is likely to be hammered by the arrival of AI, and so are the low-value industries where automation and robotics are replacing cheap manual labor.

So this leaves only a limited geography, which I have been covering relatively extensively: South America & neutral-enough SE-Asia countries like Indonesia.

But maybe this is not the answer at all.

After all, look at this curve. This time it IS truly different. So what is going on?

Financialization

The obvious trend is the terminal financialization of the economy.

This graph with equities and financial assets going parabolic is the other side of the coin of why the USA can no longer make icebreakers, frigates, electric transformers, drones, batteries, shells, etc.

If your business is mostly to get everything done somewhere else and give pieces of paper in exchange, you can as a collective become very, very profitable.

Libertarians will tell you that there will be hell to pay for this imbalance.

They are likely right, but they are also expecting it to happen any time, you’ll see, very soon, for … a few decades now?

The right thesis wrong on timing is the same as being wrong in investing.

Nowhere To Go

Another factor at play here is that international capital has very little place to go.
I have discussed the geography issue but there is an even bigger factor at play here: the bloodbath in bonds.

I mean … look at the hundreds of billions in unrealized losses:

Talking about investing and stock, we often forget that the bulk of the world money is actually NOT in equities.

It is in bonds, real state and cash.

Now, with inflation and rising rate hammering cash holds and bonds, this is a stockpile of 420T that might be considering flowing into equities.

However, this is very, very, dumb and easily scared money. This the liquid assets of pension funds, insurance companies, utilities companies, retired baby boomers, etc.

So they will flow were the consensus is.

And after a decade of easy money, the consensus is S&P 500, and especially tech stocks of the Magnificient 7.

How To Play It (Safe)?

Frankly, I am still mostly looking for myself at South American oil stock, Indonesia coal mines, defense companies, and such.

This is because I have a high volatility tolerance, I invest without having to justify it to anyone, like returns above 15% and above would not do well with my nerves if my money was on the Mag7 stocks.

At the same time, other people will have other constraints:

• Investment funds with geographical or market cap size mandate.

• Family office with very conservative clients.

• etc.

In these cases, I think it might make sense to bet on the recent winners, at least for now, and here’s why:

The USD Dies Last

There is a definitively non-zero chance that we are entering the end game of currency devaluation.

For sure, gold seems to be trying to tell us just that the last few months:

So are the US interest payments, having jumped above a trillion and larger than the already massive and wasteful defense spendings:

And can you notice how ineffective the Fed cutting interest rates has been:

The problem with the “imminent demise of the dollar” is that by all metrics, at least 2 other major currencies are in way worse shape: the Euro and the Yen.

As long as these die QUICKER than the USD, this is the capital of economies as large as the US flowing into the dollar and out of these currencies. This will be reflected in US equity pricing positively.

So yeah, the USD might die soon-ish.

But as long as the Euro and Yen die quicker, it will actually stay afloat.

Yen

Our squirrel-level collective attention span has already forgotten, distracted by the US election and the Ukraine war, but it was in August THIS YEAR that the yen carry trade almost crashed the global market.

Since then, Japan has not been doing better. At all. Just look at Japanese car exports in Asia:

How will that do for the yen do you think?

Euro

Meanwhile, the main economy in the Eurozone, Germany, is having every major industrial company in the country cutting jobs by the tens of thousands: Bosch, Volkswagen, BASF, Deutsche Bahn, Ford, etc.

This is a mix of manufacturing dying from too high energy prices and a general malaise in the continent that just keeps getting worse.

The perspective of a hot war with Russia, unspeakable openly, is nevertheless slowly making its way into the collective subconscious as well.

The Eurozone is HUGE. This is a lot of capital looking for refuge in Nvidia and Meta. Of for that matter, in Exxon and Chevron for the bad climate unbelievers heretics that still live in the EU.

The Trump Effect

Talking with people with large businesses, and seeing sales in e-commerce personally, I can say that the whole world was holding its breath before the US election of this year.

Now that there seems to be a Trump presidency with no assassination, massive voter frauds, riots, or even a hint of civil war, the USA looks a lot more appealing.

Meanwhile, even if it turns out to be just a show without proper actions, Musk’s DOGE initiative will give the hope of reforming the US bureaucracy.

This too will alleviate the fear of an imminent currency crisis.

Expect the EU to be in parallel busy shooting itself in both feet for good contrast.

How To Trade The Mother Of All Bubbles

On one hand, we reasonably know that one day the music will stop for a bubble fed by the breaking down of the American Hegemony.

On the other hand, the looting of its European and Japanese satellites, as well as money flowing out of bonds and cash will keep propping up equities for the foreseeable future.

So what I see emerging is a strategy where you want exposure to not only US risk assets, but the most OUTRAGEOUS ones.

Here a short list of such uber-speculative assets that might added to a portfolio:

• Bitcoin and other cryptos.

• Microstrategy, which is basically a Ponzi inside a Ponzi at this point, a sort of ultra-leverage call on Bitcoin.

• Nvidia, as the AI spending might just keep going in the mania.

• Tesla, as the Musk-Effect will now be in overdrive after his victory alongside Trump. Expect Tesla and SpaceX to become the reshoring/remanufacturing savior of America, as Musk will likely not be below a little bit of self-serving push for his own company when he heads DOGE.

• All the uranium and SMR companies in the nuclear space. Something will need to power as these Tesla factories and AI datacenters and it will not be solar panels.

• Anything quantum computing related. Quantum is easy to hype and utterly esoteric, perfect for mindless speculation.

• Space-related companies, like Rocket Labs will work as a proxy for SpaceX, despite much worse economics. The stock price is likely to not care and go to the Moon much before NASA figures how to do it again.

• Intel, which I explained previously.

• Palantir, as it is as much Peter Thiel as Trump & Musk who won the elections, with Vance deeply tied to Thiel.

• Defense industries, especially General Dynamics, are less likely to be Musk’s target compared to white elephants like Lockheed’s F-35 already bashed by the DOGEmaster.

How to do it: here the step-by-step approach:

1. Put a double-digit percentage of the portfolio in these ideas. Exact level should be how you can sleep at night doing it as a max threshold and how much your clients need to see to be reassured as a minimum threshold.

   1. The more speculative, the higher the P/E, the better. Enjoy the 50-100% returns on this ultra-volatile part of the portfolio before the music stops. These will either go up or down, but never stay put.

2. Monitor CLOSELY the emergence of a real crash. Anything that might indicate that something in the US financial system is breaking or that the mania is losing steam.

   1. Ignore completely any crash originating from the EU or Japan, these will only create volatility, but ultimately accelerate the flow of capital toward US equities.

   2. US bond-related crashes are a little more tricky, but you can assume a repeat of the Silicon Valley Bank salvage. Nothing too bad will happen here, not with the Fed printing at will when needed. The USD will die before its bond market unrealized losses are acknowledged.

   3. Inflation going fully out of control should be a warning sign. I am not talking of 8-10%. More like 20%+ and accelerating. This is when to start taking your chips off the casino table.

   4. On the other hand, a major NATO/US military disaster, like a crushing defeat in Europe or the upcoming removal of Israel from the map, both likely possibilities at this point, should be the warning signs of the Wall Street rats getting ready to leave the ship. Follow them and try to outrun them.

An Upside Down World

The funny thing is that I personally would consider putting money in the Magnificient 7 a very risky and speculative move, considering their valuation.

And Colombian oil stocks for example a flight to safety.

But for most money managers, their clients will have nothing to say seeing at least part of the portfolio in Mag7.

The positive thing is also that by waiting for a more visible crisis, it will be easier to sell at the right time, instead of suffering years of “underperformance to the benchmark” that can be a career killer.

Electric Vehicles (EVs) were supposed to progressively take over the automotive industry as soon as us peasants realized a Tesla costing 50k is actually cheap when taking into account lower fuel costs and maintenance.

Together with the inexorable march of technological progress and the pressure of global warming, this made EV domination all but a certainty.

Except it did not happen like that.

Don’t get it wrong, EVs WILL one day dominate the auto industry. This is because from an engineering standpoint, electric motors are superior in many ways (yes really):

• Convert almost 90% of its “fuel” into motion, compared to 20% in Internal Combustion Engine (ICE) (the rest is waste heat).

• Accelerate better from 0, giving every electric car great acceleration performance, especially where it matters the most.

• Can use regenerative braking to collect back energy when using the brake, improving performance in traffic and town driving.

• Almost no moving part and almost no maintenance required, while very small and light

  • ICE engines are instead incredibly complex, having to synchronize what is essentially constant mini-explosions.

• Electric motors are ultra-durable, opening the possibility of cars lasting 20-25 years if the rest of the material is of high enough quality.

The problem with EVs is with the power source: the battery.

Lithium-ion batteries have gone a long way but are still found lacking when compared to oil:

• Much lower energy density, leading to a lot of extra weight of EVs, reducing performance (fuel efficiency, acceleration, etc. )

• Slow to charge, leading to problems for long-distance travel and waiting time at charging stations.

• Loss of power in cold temperatures, which can decrease the EV range by 3x in winter.

  • This is compounded by the absence of ICE “waste heat”, so the battery gets drained to keep the passengers from freezing.

• Low lifespan of the battery, with severe capacity loss at 10 years.

• High price, often 40-60% of the EV total price.

The combination of higher price (due to batteries) and less practicality (charging time, low range) makes for a poor-selling argument beyond the green activists and tech enthusiasts.

Changing Auto Market

Vindicating this position are a few recent data points:

Mobility Consumer Pulse for 2024 conducted by McKinsey & Co., the survey found that 46% of EV owners were likely to switch back to owning a gas-powered vehicle.

In another study, it is “only“ 29% wanting to switch back.

Interestingly, the strongest factors are the ones that are hardest to mitigate are the main reasons why people want their ICE car back:

Most people in cities live in flats and do not have their own chargers. It means the inadequate public charging stations, either too slow, to crowded, or too spare/far are a hassle. This combines well with the “cannot charge at home” and “needing to worry about charging is stressful“.

The charging stations problem makes most urban dwellers (out of suburbs) actually unlikely to buy an EV anytime soon.

For the rural population, other issues block EV adoption: too high prices + driving over long distances is unpractical.

The 16% of “Changing mobility requirements“ is interesting. Maybe getting kids or different jobs now need more reliable batteries for daily commutes?

So overall, EVs will not see mass adoption as long as BOTH battery technology progresses AND charging stations are ubiquitous and as easy to access as fuel stations.

Remember, this is about the people WITH an EV. If they are not convinced anymore, it is unlikely that the mass of ICE users will switch any time soon. And in many countries, improper electricity infrastructure will anyway limit adoption for a long time.

This means that we are likely to see EV mass adoption only in countries that are VERY good at infrastructure. This includes China, likely Japan, and a handful of Northern European countries.

It most likely does not include most of the world, including the South of Europe, the USA, South America, MENA, and South Asia.

Still, battery tech and EV tech progress has made viable an alternative to ICE: hybrid cars.

Why Hybrid Sales Are Exploding

Sales of hybrid vehicles have increased by 44% year-over-year last October in the US. The demand has also risen for vehicles priced between $20,000 and $30,000 in new cars and $15,000 to $20,000 in used cars.

The story is of course the combination of rising interest rates making living more expensive, through growing mortgage payments and more expensive car loans.

And an over-cost of living crisis due to real inflation higher than reported and economic stagnation in the midst of an energy crisis.

This is a segment where EVs are struggling, with only Chinese EVs able to compete, and only with their cheapest model like the Seagull from BYD at $10,000 in China and $20,000 in the EU.

Chinese EVs

Chinese EVs are definitely competitive in some contexts and are going to upend the auto markets in:

• Developing countries, where total costs (purchase + maintenance + fuel) is everything and cheap EVs’ technical limitations will be tolerated.

  • Most have good relations with China and no domestic auto industry, meaning no tariffs.

• Among Western militant EV buyers looking to reduce purchase costs, at least in the EU tariffs are low enough to keep Chinese EVs competitive + many will be built locally in Hungary, Serbia, and other friendly EU countries.

• As a secondary cheap electric car for small local commute.

Because this is actually a lot of use cases globally, it seems to me rather unwise to bet on any legacy auto manufacturer. Competition from China will be brutal. Add an ever-looming recession risk, and you do NOT want to bet on a cyclical industry like automakers.

Some will make it, like Toyota & Hyundai, both hybrid leaders, and probably Volkswagen, but many will not (Stellantis makes for a sort of a good stock to short) and become absorbed by Chinese companies or go bankrupt.

Best Of Both Worlds

Why are hybrids suddenly popular? Blame EVs!

First, hybrids have acquired the image of a “compromise EV”. It can run partially on electric, cost less to operate, and all the other EVs’ advantages.

But it ALSO has an ICE engine with 600km+ autonomy, can be refueled at any station in 5 minutes, and runs well in winter.

Compare that to the only 350 km average range for EVs.

Meanwhile, the 50-70km hybrid’s electric range is enough for most commute travels, just not the occasional but important for drivers long-distance trips.

Source: Statista

Many drivers have been convinced by EV enthusiasts of the cheap fuel costs of running electricity in traffic jams and short commutes. If they can not sacrifice range or practicality the better.

Another reason is that the tech in EVs also makes hybrid better.

• Mass production has created giants like CATL that benefit from massive economies of scale. This provides cheap batteries to EVs, but also hybrids.

  • In the same way, an elaborate supply chain for lithium, cobalt, nickel, etc at the purity required for EV batteries has been built and itself achieved a massive economy of scale.

• Denser batteries in EVs make for denser batteries in hybrids. You need less total battery volume in a hybrid, so you need very few ultra-dense batteries.

• Mass production of EVs created a whole ecosystem of suppliers for electric motors perfected for the auto industry.

• Software designed to optimize battery usage can be used to optimize how to combine EV & ICE modes.

• The tooling and engineering expertise needed for EVs, like designing and integrating battery packs, wiring, manufacturing, testing, etc. have already been bought and hired by all automakers.

So we have a situation where both legacy automakers and drivers have an interest in switching to mass hybrid adoption.

• Automakers are to make money on EVs as they do not sell well, and are too expensive.

  • But the same automakers are desperate to utilize the billions they poured into electric mobility technology.

• Drivers want the advantage of EVs for daily commutes (low fuel costs) but none of the downsides (low range, high purchase price, impractical charging, and long travels).

How does this look globally:

• In France, hybrid vehicles accounted for 36.7% of registrations in the first two months of 2024.

• In Estonia, it was 53% of total sales.

• More than half of China's car sales were plug-in hybrids, up 51% year-to-year, so even in the EV center of the world, hybrids are making a killing and will soon replace most ICE cars.

In the US, due to cheap fuel prices, it is a bit lagging behind in giving up pure ICE cars but we are getting there as well.

You can notice that where EVs stumble, hybrids keep rising:

Hybrids’ Win Is Platinum’s Salvation

EV rise was to be played with Tesla and BYD when no one believed in them.

A collateral damage to enthusiasm for EVs has been the platinum metal group.

You see, platinum and similar metals of the same chemical family like palladium are mostly used in catalytic converters in ICE cars. The metals have many other applications, but fuel engines and pollution-reducing converters are by far the largest consumers.

Platinum is also very rare, mostly only found in South Africa in concentration commercially viable, even at the current high price. Palladium is a bit more diverse, with important production in Russia.

In both cases, the “imminent EV domination” has depressed these metal prices and even more the price of the associated miners.

Except we know now EV will not dominate the market for at least another decade.

Meanwhile, hybrid ICE engines often start cold and need MORE platinum to stay within the parameters of air pollution.

Every additional million hybrid cars sold creates a demand for roughly 150,000 ounces of PGMs.

And there are plenty of ICE cars waiting to be turned into Hybrids over the upcoming decade of car purchases, with around 60 million sold every year:

Source: Our World In Data

Assuming only half turn to hybrid over the upcoming decade, this will make on average 30 million cars, or 150,000*30=4.5 MILLION ounces extra needed.

Or 140 tons.

For reference, the world’s production in 2022 was 190.

This is a VERY small market, subject to brutal moves due to its concentration and overall small size, as well as the rarity of decent mineral deposits over the world.

Just compare it to other metals:

And in the platinum business, there is really only one name that should excite the value investors.

Read more

This is a funny topic as people feel the need to adhere religiously to one camp or another:

1. The green team, where renewables and fairy dust will power the energy grid tomorrow.

2. The grey team, where oil and gas will forever stay important.

A key driver is that there is plenty of money and careers to be made in either of the teams. It also overlaps nicely with the left/right divide.

When you look at real statistics, both teams feel a little retarded.

It makes for poor analysis, understanding, and investing.

This will likely be a somewhat controversial post, as it will necessarily challenge almost everyone's assumptions.

What The Green Get Right

Let’s start with a few facts the green team got right:

• Electric motors are radically more efficient than combustion engines, which convert only 20% of the energy in fuel into movement, the rest being heat.

• Renewable energy is getting cheaper every day, especially solar.

• Battery density of the newest chemistry is becoming remarkably good.

• EVs are cheaper to maintain and more long-lasting overall.

What The Green Get Wrong

• Green energy so far has only been an addition to the energy mix.

• EVs only last as long as their battery.

• Most people want the reliability of liquid fuels, and it is vital to have them in times of crisis (hurricanes for example).

• Renewables are not so cheap when taking into account intermittency, hence the need for energy storage.

• Even the most politicized projections like from the EIA still show fossil a major energy source in 2050 in ALL scenarios.

• Currently, most renewable energy is still from hydro.

What the Grey Get Right

• Fossil fuels will be needed for the decades to come.

• Stable electricity production is a must, batteries will likely never be enough.

• Most of the energy demand is from goods and industry, not transportation: fertilizer, steel, chemicals, shipping, mining, etc.

  • another big segment is residential (cooling, heating), and it’s getting bigger as the Global South is getting richer.

• Some sectors might forever need liquid fuel, e.g. aviation.

What the Grey Get Wrong

• Much more can be electrified than initially thought: Tesla Semi can drive 700km in tests ran by DHL, green steel is a possibility, etc.

• Most people like EVs if they are reliable, cheap, and long-range.

• We are running out of easy fossil fuel, which is why we need to dig thousands of meters deep to find more. Or in unstable countries (Namibia, really?) or hostile environments (the Arctic).

• Fossil fuels are not really cheap in the long term, as easy deposits are all depleting, including US shale oil.

Green Reality Check

• Renewables are getting cheaper, but not cheap enough due to intermittency.

• EVs are getting better, but only the latest battery chemistries make sense for mass adoption.

• Focusing on EVs hides the forest of total energy demand.

Grey Reality Check

• Fossil fuels are cheap only because of capital misallocation of US shale.

• They are going to be less important as EVs take over transportation, including logistics on land.

• As easy supply dries out, alternatives become more interesting and speed up the replacement of fossil fuel.

Synthesis

Because of the joint failures of green energy to be actually cheap (when taking into account storage) and the growing rarity of fossil fuel, we are heading for an energy crisis.

The obvious solution is to own stocks of energy producers. But only those with resources that are not depleted.

Frontier markets like South American oil is still one of my favourite picks.

Reliable, fuel-less renewable energy, hydropower, is the other one.

Nuclear

Another option SHOULD be nuclear energy.

The problem is that it is very hard to play.

Building more nuclear power plants requires we get our regulatory procedure under control. Good luck in a late stage of decline for the Western/American empire.

In theory, the sudden push for more nuclear by Big Tech should help. But never underestimate the ability of petty leftist bureaucrats to screw things up.

Uranium is also in theory a way to play it. But a stockpile of uranium in a fund is not very attractive to me (no cash flow, holding costs).

And uranium miners are either horribly overvalued or in terrible jurisdiction at the crossfire of Eurasian tensions AND strategic assets (Kazakhstan).

And anyway, if no new nuclear power out of China/Russia, not so big a demand for uranium.

Hybrid Vehicles

Now, there is a way to have vehicles that have today’s high range, but also the efficiency of EVs on most of the travel done by someone in his daily commute of going to work, kids to school, etc.

These are hybrid vehicles, especially plug-in hybrids, which are essentially a normal car + an EV with a very small battery all-in-one.

The small battery means it does not bump up the car price much. But it is enough to cover 50-90% of total mileage on electricity, depending on the user.

A leader of the segment is Toyota, which is also getting ready to finally enter the fray with EVs, but taking its time, having correctly identified that the near future is dominated by hybrids, not EVs, not fossil fuels, to the displeasure of both the green and grey teams.

However, there is another way to play this upcoming energy crisis that is mostly focused on the EVs vs hydrids story, and even has a little bit of a uranium story on the side.

And that will be the topic of the November report.

“Gold is for the mistress

silver for the maid

Copper for the craftsman cunning at his trade

"Good!" said the Baron, sitting in his hall,
"But Iron -- Cold Iron -- is master of them all.”
― Rudyard Kipling

The Allure Of Commodities

When looking at cyclical investing, it is hard to not get automatically drawn to commodities.

The tales of quick fortune and massive disasters are the thing of epics and legends.

And there is also the adventurous vibe of it, a remote location in an undeveloped country, and the ore motherload that can make the daring and lucky miners and mining company (or its shareholders) rich.

There are the usual suspects that draw the attention of the crowd:

Gold, silver, diamond, platinum, and other shiny things.

Then there are the expert and technical ones, whose appeal is secret knowledge missed by the market at large, ideally with some looming shortages due to upcoming explosive demand growth:

Lithium, copper, rare earth, tungsten, titanium, and other exotic materials for a new space age.

If this interests you, I have already covered some of that in a previous report:

Then there is the stuff that powers the world and always seems at the edge of running out as we are always collectively eager for more power, more air conditioning, more cars, MORE!:

Oil, gas, coal, uranium, etc.

And then there is the key commodity-like manufactured products and machines, the raw material needed to keep the world functioning:

Polysilicon, semiconductors, steel, ships, etc.

The Boring Stuff

This leaves some commodities in the “boring” category. The stuff that is displaying some characteristics that are too dull to make a good story of.

• Not rare enough to be worth a fortune or be hard to find.

• No new technology to justify a bull case.

• No true scarcity nor chronic deficit.

And most industrial commodities fall into this category:

Aluminum, sand for concrete, and more than anything, IRON.

Iron is that element that humankind has built its civilization on since at least the Hittite Empire, at the end of the deep Antiquity of the Bronze Age.

From swords, horseshoes & plows to the steam engine & the Eiffel Tower, iron is the literal backbone of every technological leap made by humankind.

Today, it is used not so much in the form of pure iron but also in the shape of steel (most steels are 95-99% iron).

And we need a lot of it. Actually almost an unimaginable amount of it.

In 2023, we consumed 1.6 billion tons of iron, or 1.6 TRILLION kilos. This is 195kg per person in the world.

So we are lucky this is the 4th most common element on Earth's crust, just below aluminum and above calcium or sodium.

It is a somewhat invisible consumption, embedded in our cars, trucks, ships, concrete, pipelines, etc.

Who Does What?

Over time, the leading producer of steel, the most strategically important form of iron consumption, keeps changing along with the mantle of geopolitical influence.

The Swedish empire was a powerhouse in large part thanks to its massive artillery park, and so was Great Britain and later the US thanks to their large steel-made warships. Each peaked around 50-60% of the world’s steel production, plateaued for 50 years, and then declined.

Unsurprisingly, China is the new rising power of the world, and its steel production is moving accordingly.
Note that the graph is not fully up to date, the current China share is 57%.

A chart in relative percentages tells us the relative power story, but not the raw consumption.

China's rise in the percentage of steel production is accompanying a parallel rise in global steel (and iron demand).

Can you spot the rise of the China era?

The production of steel over the last few decades is larger than the CUMULATED production since the birth of civilization!

Where does it go?

It used to be in construction and infrastructure, which is no surprise when entire megapolises emerged from nowhere and the country is covered with tens of thousands of bridges and hundreds of thousands of kilometers of railroad.

But this is less and less true, with most of the production now going into machinery, from industrial robots to tractors, excavators, tools, ships, and even drones (more than half of the world's ships are made in China).

When it comes to future demand, cars & trucks (lump in transport above) will certainly be a growth story, especially as China’s automotive exports look like this:

6x in 4 years!

They’re not selling solely EVs: they’ve taken share in multiple segments and powertrains.

China will ship 6 million cars to 120 global markets this year. That will be almost two million more than second-place Japan, for 30 years the world’s preeminent exporter of automobiles.

Surrender to China - Or Punch Back

You can read more on the excellent Dunne Substack for more info about how China is quickly storming the world of automotive production:

The Dunne Insights Newsletter

The Dunne Insights newsletter gives you high-quality and up-to-date intelligence on the electric car, battery, and charging markets.

By Michael Dunne

We will come back to that topic later.

Where Does It Come From?

While abundant, the world’s iron ore reserves are unequally spread.

Explaining its original lead, tiny Sweden is today among the Top 12 larger iron reserves on Earth.

It is also abundant in the usual suspects of Russia & Ukraine (mostly in the Donbass for that matter), and China.

The largest reserve is in Australia (50 billion tons), which made the core business of mining giant BHP and Rio Tinto, now diversified global miner, even if the core of their business is still iron.

And make no mistake, these are 2 solid companies and I even owned Rio Tinto shares for a while.

Unfortunately, Australian miners are not necessarily cheap, reducing the attractiveness of their stock, even if the business is solid.

Another country, with the 2nd largest reserve, is Brazil, with 34 billion tons of iron ore. And as my regular readers certainly know, it is a country whose stocks are dirt cheap currently.

Brazil is also very much a global player in this field, ranking second in total production. But as you can notice below, it produces barely twice more as India, despite ore reserves 6x larger.

So there could be plenty of room for growth.

And at the core of Brazilian iron production is one company: the iron ore giant Vale

Read more

Much has been said about the market distortions created by a declining and then zero interest rate environment. One is however overlooked.

A common take among value investors and libertarian-leaning commentators is to see them as responsible for the emergence of tech monopoly and overall inefficient capital allocation.

By providing money “for free”, it has kept alive zombie corporations, given unlimited capital to bloated conglomerates and tech giants, and overall financed the casino economy we live in.

Of course, it also allowed for public debt and overall green & DEI madness to go on unpunished.

At the same time, the very same groups are deeply enamored with stocks of “compounders” and “serial acquirers”, due to the outstanding long-term performance of these investments.

But I believe they are very misguided to believe this will be true in the future.

The End Of Buffett’s Playbook?

The rationale behind pushing for buying high-quality compounders is the one pushed by Warren Buffett and the late Charlie Munger is that as long as the ROIC is high (ideally large double digits), your returns will be fine in the long run.

There is a lot of truth in this argument, and it made Berkshire the $1T giant it is today, with purchases like Coca-Cola or American Express decades ago.

Some key elements of the modern “Buffett Doctrine” beyond the general value investing principle are:

• You should bet on America.

• Industries dominated by monopolies or oligopolies are highly profitable (credit cards, tech, banking, processed food, etc.)

• Invest in large corporations (to be fair, in part due to the sheer size of Berkshire Hathaway).

• Buy large insurance corporations to leverage their float into extra cash for investing.

• Moderate leverage usage.

• The importance of moat and brands.

This differs from the strategy of for example Peter Lynch, which prioritized smaller stocks, in unloved industries, with long runaways for growth.

In my opinion, Lynch practiced a more “pure” form of contrarian value investing. He would also sell a lot quicker when the discount was not there anymore.

Buffett instead has been pursuing a strategy that benefited from the progressive hollowing-out of the US economy.

The goal of Berkshire’s investments is actually (far more than admitted by Buffett) to maximize rent-seeking from corporations acting as middle-men and “tollbooth” of the actually productive economy:

• Credit card processors.

• Banks, insurance, etc.

• Broadcasters, media, advertisement. (Sirius)

• Telecom

• Tech giants with rent-seeking monetization methods (Apple once it had a mature app store).

On top of it come a few addictive products, like alcohol and sugary drinks.

Not all these companies are pure rent-seeking activity, but when they are not, they are monopolies/oligopolies able to extract more from the broader economy than they would if exposed to true competition.

Almost all are also active in very tightly regulated industries, where lobbyism, corruption, and collusion with politicians help create and defend the monopolies industry structure.

The goal here is not to target Buffett but to question if the so-called compounded, truly excellent rent-seekers, can keep up this performance in the future.

The Role Of Cheap Money

By now, it is pretty clear to all honest observers that the US (and Western at large) economy is hollowed out by special interest, rent-seeking and corruption.

Why make good weapons or spaceships when you can get DoD contracts anyway (Lockheed, Boeing)?

Why keep innovating when you can squeeze the entire mobile ecosystem (Apple)?

Why invest carefully and intelligently when you can take risky bets and let the taxpayers foot the bill (banks, insurance)?

A key factor in creating this situation, and almost entirely undiscussed, has been too low interest rate. The process goes as such:

1. Larger, more connected corporations get access to lower capital than their competitors.

2. They alone can use this cheaper capital for a few actions:

   1. Acquire smaller competitors with cheap debt.

   2. Break sub-sections of the market with year-long losses, to bankrupt competitors.

3. Rinse and repeat in new segments until most competitors in most sub-sectors are bankrupted, kicked out of the market, or acquired.

4. Rise prices continuously, as consumers/clients have no alternative left.

It is worth noticing that even for smaller, actually innovative companies, the same phenomenon plays out in a low-rate environment:

1. Build an actually good product using raised (cheap) money.

2. Keep raising as much money as possible as fast as possible to outrun the competition.

3. Build a monopoly in your niche through the aggressive growth financed by 1-2 decades of losses, produced by selling below costs.

4. Exploit the built monopoly and rent-seeking to give money back to investors.

The End Of Cheap Money

When you understand the phenomenon above, you get why it was profitable to invest in massive, rent-seeking tollbooth companies.

The cheap money allowed for continuous growth and industry consolidation, leading to higher margins for the rent seekers, and lower productivity for the whole economy.

The problem happens when these corporations meet rising interest rates.

This triggers at once several deadly obstacles:

• No cheap debt means buying profitable smaller competitors becomes expensive.

• Massive accumulation of debt suddenly matters and interest now eats money needed for R&D and capex.

• No additional cheap debt means no ability to finance share repurchase keeping stock prices afloat with artificial bids.

Serial acquirers are also following a similar playbook:

• Buy companies in the same or unrelated industry with cheap debt.

  • Industries keep consolidating, helping rent-seeking behaviors. Better if you are an active actor in the consolidation, like a franchise chain buying all the independent restaurants, garages, plumbers, dentists, etc.

• Built scale so you can save on overhead, branding, etc.

• Larger sizes mean even cheaper money, so keep buying forever with ever more debt, after all, interest only goes down when you need to roll the debt, right...

Internal Rot

Not being able to wrestle out more efficient competitors is a problem, the consequence of easy cruising for decades is another additional problem.

No competition, corruption, and complacency have a deadly effect on complex organizations, as we discussed recently.

For example, Boeing is not even (yet) endangered by scrappy smaller competitors. But simply by dangerous designs, corner cutting, low-quality manufacturing, etc.

The Currency Reserve Role

A lot of these issues were tolerable for the last 3-4 decades because the US owned the dollar, the world’s reserve currency.

As such, it could progressively destroy all its physical productive activities, especially manufacturing, with only subsidized farming and oil&gas surviving today).

They would be replaced by a globalized version of domestic rent-seeking, with employees of tech giants and financial institutions extracting value from the rest of the world. Any refusal to comply would be met with devastating sanctions or outright invasion.

Fake Economy

This also means that a lot of the US economy could tolerate the rent-seeking, as it was financed by a massive trade and fiscal deficit. These deficits would in turn pay people to do economically unproductive activities as :

federal employees/bureaucrats, military (especially high-pay consultants and contractors, more than the “grunts”), bankers, lawyers, marketers, NGO activists, politicians, etc.

The growth of these activities, as well as speculative bubbles, would also finance the blue-collar “servants” of the newly minted “intellectual upper class” with too much money on their end and endlessly pursuing status-seeking spending:

house builders/craftsmen, cleaners, Uber drivers, landscapers, house flippers, wedding planners, luxury hotel workers, drug dealers, prostitutes, etc.

The Western economy has turned into essentially rent seekers living of accumulated capital and money printing. Or people selling the rent seeker services.

The production of actual goods is for the third world, clothes from Bangladesh, minerals from Africa, food from South America, manufacturing from China/SE-Asia, etc.

Moving Forward

Moving forward a few factors will have fundamentally changed.

Each factor will act on damaging the previous winners (rent seekers, compounds, and serail acquirers) so beloved by value investors.

Rising Rates

The rising rate will make most acquisitions not profitable. It will also wreck corporations with too much debt on their balance sheet.

Either the rollover of debt will cripple their finance and ability to reinvest. Or it will bankrupt them outright.

Chinese Competition

Rent-seeking works well only if you can stay protected from real competition. Consumers will happily buy the cheaper, better alternative if they have one.

With the globalized US-centric economy, competition was not an issue.

But now, cheap and high-quality Chinese EVs, drone, semiconductors, software, planes, solar panels, batteries, etc. are “flooding the market with overcapacity”.

What flowing means here ACTUALLY means cutting price in half with superior products.

This is a mortal threat to the likes of GM, Ford, BMW, Boeing, Intel, Amazon, Facebook, Google, which have not innovated in 1-3 decades depending of the company.

No wonder the US Congress got the memo from their owners sponsors and push legislation on its returns like:

• End Chinese Dominance of Electric Vehicles in America Act of 2024

• Protecting American Agriculture from Foreign Adversaries Act

• Protect America’s Innovation and Economic Security from CCP Act

• Countering CCP Drones Act

• No Foreign Election Interference Act - Foreign Grant Reporting Act

• To prohibit the Secretary of Homeland Security from procuring certain foreign-made batteries

• Hong Kong Economic and Trade Office (HKETO) Certification Act

As Arnaud Bertrand explains:

The first bill's name says it all: "End Chinese Dominance of Electric Vehicles in America Act of 2024". Yet all Chinese EV makers combined must have something like less than 0.1% market share in the US... For instance BYD, China's largest EV company, has literally never sold a single passenger vehicle in the country and doesn't plan to: no wonder if Congress already legislates to "end their dominance" when they're not even there

Multipolarity

Moving forward, the abuse of sanctions will make the privilege of getting real manufactured goods in exchange for printed paper fade away. Slowly, but inexorably.

This is how it (the dollar) ends, not in a bang but a whisper.

This will be a good thing, as it will make unproductive activities fade away as well, replaced by domestic manufacturing and less income & wealth inequality.

If the crisis period can be passed successfully, this will do more to defuse US social and political tensions than anything else.

How To Invest In This New World

Atoms Over Bits

An obvious and constantly repeated theme of my analyses is the importance of rebalancing portfolios toward real assets.

This includes commodities (oil, food, metals, etc.) but also manufacturing, or even real estate in areas not in a bubble for whatever local reason.

This is because the fake, financialized economy, born in the 1990-2000s is not dead yet, but is bleeding to death by a thousand cuts:

• Slow de-dollarization.

• Deglobalization.

• Collapsing productivity & internal rot.

• Rising competition from Chinese firms.

• Declining rule of law.

• The social and political consequence of maximizing rent-seeking:

  • Exploding inequality.

  • Drug abuse and deaths of despair.

  • Political polarization.

  • Mass immigration.

  • Activist hysteria disconnected from reality (climate, gender, etc.).

Invest Globally

Another theme is internationalization, as the new productive companies can be located in China, Indonesia, Africa, South America, etc.

Different jurisdictions might be more risky in a period of international tensions and war. But declining domestic jurisdictions are not the answer as well.

The answer is looking for returns so high that the occasional issue is compensated by gains somewhere else.

Get paid for your risk!

No more 1% dividends from Western pharmaceutical or tech companies.

But 10-20% dividends +5-10% buyback from foreign firms instead.

Beware The “Compounder”

Lastly, as you gather, what is currently a heresy for value investors is to avoid the Coca-Cola-style compounders.

The same holds true for MacDonalds, Goldman Sachs, Apple, Google, etc.

It might take generations before we see again such durable expansion of global brands.

This is because, in the short and medium term, we will not see rising a cultural hegemon like the 1950s USA.

China will rise, but not reach the same dominance. Neither will Russia, India, Indonesia, Japan, etc.

Where To Invest?

Each emerging block will consolidate its own ecosystem of local car manufacturing, search engines, social media, messaging apps, marketplace, fintech, energy production, etc.

So what will matter is a cheap enough stock price, good profit distribution habits, and a large enough LOCAL/REGIONAL market.

It is also worth noticing that most of the world will not completely lock itself away Soviet-style, so money will still flow between jurisdictions.

The only ones at risk of complete Sovietization are the USA+ Europe. If you have a lot of money, a trading account in Singapore, Hong Kong, or Dubai is probably worth it.

Along these guidelines, the ideal hunting grounds will combine growing quality /climbing the value chain + large population + cheap energy.

Together, they will form the basics of future profitability for real assets production and investor returns

Where to find it?

• China

• Russia (if accessible to you, like for Asian readers)

• SE-Asia

  • Bonus to Indonesia in particular for its population size.

• South America

  • Bonus to Brazil in particular for its population size.

• Central Asia

Somewhat lacking in quality and real growth (as in “not driven by population growth”), but potentially making it up if prices are cheap enough:

• India

• Africa

To avoid because of too high geopolitical risk is the Middle East (see upcoming report for a detailed explanation).

Commodities’ Exception

This excludes commodities, which are likely to stay globalized because a barrel of oil is just too fungible.

So invest in commodities wherever you like the geology + price + jurisdiction.

As the ultimate cyclical, commodities should be looked on a case-by-case basis.

I made the argument for oil, gas, tungsten, food, and coal before.

You can probably add in order of potential: antimony, titanium, platinum-group metals, iron, rare earths, silver, lithium, and uranium (yes uranium is at the very last, barely making the list, because it is very hard to invest in).

So it is not an accident I write a lot about the fate of empires, nation-states, and entire civilizations.

Each human-built structure goes through a path tracing from obscurity→growth→peak→decay/fracture.

And let’s be honest, the growth and decay parts are the most fascinating ones, as they contain so much more drama and action than the relatively boring peak phase.

Many will fail on the way and never achieve much growth, not achieving any peak.

The same which works for nations is true for businesses.

The world is full of successful but stagnant pizzerias and industrial SMEs with excellent records in one field, but which are stuck in the same spot for decades.

Interestingly enough, such “failure” can last a lot longer than the more accomplished sort. The oldest businesses in the world are of the boring type.

In Estonia, the oldest continuous business is a small pharmacy in the old town, open continuously since …1422. Over the world, you will also find similar small-building companies, hot springs inns, vineyards, or Irish pubs.

What you do not find is large manufacturing or trading companies. Over a certain size, the only path for a company seems to be growth or death.

Let’s study a little how and why it happened through 3 recent examples.

First is Intel, for the obvious reasons of the bloodbath the stock has been in the last few days.

Second is Boeing, for the continuous trainwreck of a technical failure the company has been in the last few years.

And last is GE for its uniquely American way of failing by over-financialization.

Intel’s Chips Are Down

What prompted the idea of this article was Intel's surprise news of firing 15,000 people, despite being touted as the future of US-based chip manufacturing, together with the forever delayed TSMC factories in Arizona.

Suspending the dividend also increased the investors’ exodus from Intel’s stock.

Here the problem seems to be a simple case of complacency.

I have been recommended 2 articles that go deeper into details:

Intel's death spiral took another turn

Intel’s Immiseration

The short version: Intel made so much cash from server CPUs that it never felt the urge to embrace anything else.

There are a lot of more complex details of course, but this is the crux of it.

This cash cow kept bringing revenues, so the company could keep growing its headcount anyway, despite degrading fundamentals.

The historical equivalent would probably be Imperial China. So long at the top, so wealthy and comfortable that it could never imagine that the upstart small nations like France or the UK could ever threaten it from the other side of the globe.

Similarly, Intel managed to fail to grab the chips for the smartphone market, and the GPU market (that turned out to be also a crypto chip and AI chip market).

The dominance of TSMC from using EUV, something Intel contributed to inventing is rather striking.

We are reminded of how China invented gunpowder, only to be forced by European gunboats to open for the devastating opium trade a few centuries later.

Boeing’s Technical Crash

Boeing is in another situation than Intel’s slow erosion of a competitive moat and missing a new market.

Instead, when still dominant in its industry, it started to fail from a technical and safety point of view SO hard that its reputation is falling like a stone.

This includes many high-profile crashes and panels taking off mid-flight, due to faulty design, poor manufacturing.

And for something as fragile & technical as airplanes, so many mistakes are rather unforgivable.

When Intel fails, some other companies make better chips. When Boeing fails, hundreds die.

The latest failure is the less dramatic but maybe even more high-profile, with an 8-day trip to the ISS potentially turned into being stranded for 8 months at least.

As usual, the jokes are the best part of a pretty lame situation. At least this time no one died.

The rest of Boeing’s space program is going as well as Starliner:

NEWS: NASA report says Boeing rockets are 7 years behind schedule, significantly over budget, and are built with an unqualified workforce with an inadequate quality management system.

You can read in detail more about Boeing’s recent failures in “Boeing’s tragedy: The fall of an American icon“.

Cutting Corners To Death

When studying the failures of Boeing, a recurring theme emerges: corner-cutting.

When Boeing, a famously excellent and engineering-focused company, absorbed the MBA-type sharks of McDouglas in 1977 (that had already run McDouglas into the ground) they essentially took over Boeing.

The difference is that for a while, the excellence of Boeing's previous design, in-house engineers and overall accumulated capital allowed for the company to cruise on past achievements from a technical perspective.

At every turn, when safety or technical excellence entered into conflict with short-term profits, the company took the wrong decision:

• Firing or harassing the “asshole” engineers that insisted on costly quality control and redundancy in designs.

• Plenty of share repurchases and sells of assets to maximize financial metrics.

• Distribution of its supply chain all over the world at the lowest cost, instead of preserving vertical integration and in-house manufacturing.

It took a long time for these decisions to really impact the company, but now it is hitting from all angles at once.

The 737 MAX crashes were due to a deadly mix of only 2 sensors for the angle of the plane, leading to the software being confused when one captor malfunctioned (which one should the computer believe?).

This broke a golden rule that any important sensors should be in 3 copies, so when one fails, the computer can assume the 2 functioning are the “right” ones.

In addition to the improper data input, the software also made grave mistakes like forcing the plane to perform the wrong maneuver when the sensor failed.

This led to the 2 deadly crashes costing the lives of hundreds, and Boeing’s reputation.

The software programming was subcontracted to an Indian firm winning the job for $9/h, with the quality we can assume for such a low price.

“Rabin, the former software engineer, recalled one manager saying at an all-hands meeting that Boeing didn’t need senior engineers because its products were mature. “

Bloomberg

Improper fuselage riveting leading to panels flying off mid-flight was also linked to a growing “it’s good enough” attitude in Boeing’s factories.

Overall, there is some touch of the same arrogance as at Intel, the “we will sell anyway” mindset.

But more dramatically, it is clear that financial profits and pleasing shareholders every quarter were more important than not killing passengers or ensuring the company's long-term survival.

It is a classical case of corporate self-cannibalism, where the company is stripped of its assets silently until the damage to the foundation is so great that the collapse is almost inevitable.

Now, remember that Boeing is also one of the largest defense companies in the world, and I let you guess what it means for the quality of NATO equipment.

General Electric's Loss Of Direction

General Electric, or GE, was founded by engineering and business legend Thomas Edison. It would grow into the quintessential American company.

Starting from the lightbulbs, it went on to invent so much more:

GE inventors developed X-ray tubes and radio voice broadcasts. They created an electric car and an electric train. In the ’20s, GE got into home appliances. It built the first U.S. jet engine in the ’40s, and by the ’60s it was making the plastics and silicones used in the moon landing.

A 1950s television commercial declared, “At General Electric, progress is our most important product.”

Later on, GE would get involved in nuclear energy, laser, and CT scans.

By 1999, GE employed 340,000 people worldwide. It was in everything modernity wanted, from trains to electronics to jet engines.

This sort of peak is usually when, would GE be an empire in Antiquity, imperial outreach & corruption start to creep in.

From that point, the structure is just so big that management has only a tenuous connection to the ground-floor operation. The way the Roman Emperor would barely hear about a bad harvest or a revolt in Britain months after it happened.

This is also when complacency can grow without consequences.

The taxes from Britain keep flowing to Rome anyway.

The revenue stream from GE jet engines and patents keeps flowing anyway.

But this was not enough.

It would take a legendary CEO, praised beyond all others, Jack Welsh, to destroy GE's long historical legacy.

Instead of cutting corners (although there was plenty of that), greed and corporate hubris were the fuel that would burn GE to the ground.

In 2024, GE would be broken up into 3 different companies, after almost 2 decades of slow decline.

Greed

Despite solid results, GE activities were all of the heavy industrial type, with plenty of required R&D spending as well as capex to keep at the top.

This resulted in an okay, but not great return on invested capital.

However, the sheer size of GE and its network gave it a great advantage in raising funds. GE Capital, the financing /shadow bank (at the time, the 7th US largest) branch of GE, would bring a lot more “capital” efficiency than clunky, boring, dirty factories.

A new culture of firing anyone not performing enough every quarter would take over the slow and steady rise of excellence in new technologies.

The nickname "Neutron Jack” appeared, after Jack Welsh the neutron bomb, only the building was left, but none of the employees.

Exit the workers and engineers, and enter the bankers and accountants.

Unsurprisingly, the incentive to pamper numbers lead to many accounting frauds and dubious practices.

More importantly, capital started to flow to “investment” instead of R&D.

Hubris

And there was plenty of investment. The pressure for division managers to perform and grow perpetually meant an easy way out for acquiring competitors.

Or unrelated businesses.

Or even better, loan money to your customers, so they can buy more of your products.

As a Reddit user put it:

“My wife worked for GE Capital called GEHFS. They were the golden boys for sure. They were cowboys financing anything to anyone with zero shits given. Broke hospitals with negative books leasing 50 million dollar MRI machines? SURE!

GE Medical would just "buy them back" when the hospital stopped paying which they almost always did. Then a couple of years later they'd turn around and do it again. Too risky? Not for GEHFS!“.

Another user in the same thread discusses interesting accounting practices to pamper the annual report earnings by laying with inventory:

I worked on an account that supplied locomotive components to their train manufacturing division in 2008-2011. The thing I distinctly remember was they did the same thing every year in the last quarter and first month of every year (exact months may vary I can't remember if their fiscal year was differerent) From Feb - Sept they would order a consistent number of components every single month (matching their locomotive production requirements). Oct/Nov/Dec they would stop ordering almost completely unless they ran out and then January they would order 4 months worth of the components.

Why would they do something so ridiculous? So that they could draw down inventory to juice their end of year financial reporting... of course that only worked the first year they did it... and then they were subsequently forced to keep doing it or people would lost their bonuses.

Considering what came out over the years, these accounts, while unconfirmed, feel accurate.

There was nothing GE could not do. It acquired 600 businesses in 20 years, or one every 12 days. It owned the NBC network.

Most acquisitions would later collapse or be resold at a massive loss.

GE Post Mortem

More than just corner-cutting and outright stupid decisions like in Boeing (like saving a few hundred bucks on a third key sensor), there was a true callousness to GE's methods.

Accounting fraud, careless loans, tens of billions in share repurchases to get management’s outrageous bonuses paid, etc.

If Boeing is Imperial Rome in decline, GE was at that stage of decline where the corrupt elites pillaged their own city before leaving it defenseless.

Takeaway

There are really only 3 types of corporate and national crises:

1. An external crisis, brought by an exogenous shock, like a new technology or an invasion.

   1. A healthy corporation or empire can see these coming in time and normally anticipate and reduce its impact.

   2. If it has catastrophic consequences, it is very likely that the real cause is not the external one, but the complacency.

   3. While problematic, this can be solved if the shock induces enough of a change of tactics and the end of complacency.

   4. Intel seems so far a good case of such an issue, with the jury still out to determine if the shock has been enough to change its course.

2. A crisis of competency, where bad decisions are taken as the wrong people are in charge, and they are too stupid and/or shortsighted to take the right ones.

   1. Competent people, either good engineers or good generals, get replaced by incompetent finance and politician types.

   2. The new management can for a while make things seem not only okay but better.

   3. This however hides an ever-deepening rot building into the organization.

   4. This seems to be mostly the case with Boeing, with decisions like removing a cheap sensor or updating poorly the software of Starliner not so much short-sighted than outright stupid. You can be sure there was somewhere in this team an engineer who pointed out that could cause a problem and got told to shut up and stop “being difficult”.

3. And then, there is the last case, outright malice and fraud.

   1. While it can be difficult to distinguish from crisis #2, a key factor is the ruthlessness of it.

   2. Instead of bumbling idiocy that does not even save money, you see the organized and systematic pillaging of the healthy part to feed the parasitic parts.

   3. Welsh clearly knew what he was doing. He also knew that with the right lobbying, he would be perfectly shielded from the fallout of his accounting shenanigans and failed empire-building.

   4. Funnily enough, most of the CEO followers of Jack Welsh, Boeing executive included, seem to have truly believed him a hero and genius, making them commit #2 type of mistakes. Because the smart one would have figured it was all a fraud to fill a few people’s pockets.

An organization tends to have different types of crises at different stages of its life cycle.

Still, dynamic structures will fall for #1 when they get too successful or big.

Past their peak organization will often commit #2 errors. They might or might not survive them.

Type #3 however tends to always be fatal. The way type #2 is an accident you might survive, but type #3 is premeditated murder.

Investing Takeaways

Intel

As it was the Intel stock crash that prompted this article, let’s discuss it briefly.

As far as I can say, Intel's failure is more akin to a series of technological wrong turns than outright stupidity or malice.

So while I would not want to buy the stock yet, there is maybe a point where the company can rebound.

Especially if it keeps getting cheaper.

As the company is now below its 1997 price, and on the way to its $12/share of 2009, it might be one of these trades like buying Apple or Amazon after the dot com bubble imploded.

Boeing

Boeing’s problems are however a lot deeper. Not only did it make bad decisions, but instead of complacency, it is outright incompetence that is killing it.

A dangerous situation for a company producing fragile and mission-critical products like missiles, helicopters, planes, and spaceships.

I am under the impression that the accumulated loss of top talent, bad manufacturing practices, and poor management flowing from the top down to the team leaders is likely incurable.

In any case, the bad news are almost certainly not done coming.

The only case where I would invest in Boeing would be after a massive restructuring, downsizing, and re-establishment of an in-house supply chain.

It could make for a good short I guess, but I don’t short. And most likely, neither should you.

For sure, the stock does not look cheap when it is barely below its recent peaks and still above its 2016 stock price.

Others

Of course, corporate post-mortems are fun, because you can sound smart on something you have enough data to talk about.

But if you had forecasted the downfall of GE in 2005, few would have appreciated your genius.

Looking back, what warning signs can you detect that a corporate collapse is brewing?

Here are a few common features, of all 3 types of crises:

• Too big, with size either the driver of complacency or a good way to hide fraud.

• Technologically sensitive, as a company Coca-Cola would not be so easily disrupted (points to Buffett here).

• Degrading performance with little to no reaction, including declining headcount.

In general I would not recommend shorting any of these, as we are in very bubbly times.

Tesla

Of the #1 crisis I can see forming is Tesla.

• The company is starting to severely lag behind its Chinese competitors of technology.

• The branding that relies on no marketing costs thanks to Musk might suffer badly from Musk's entry into politics.

• A focus on gimmicks and wonder technologies (cybertruck, self-driving software, humanoid robots) instead of fixing the degrading core business.

A Musk-centered company, I am not sure Tesla can survive without a crisis after the de-facto departure of Musk, too distracted by politics/Twitter and SpaceX to deal with it.

NVidia

Of course, Nvidia's price rise is reminiscent of Cisco in 2000, which is a problem in itself.

But I suspect it is getting complacent in the face that most of its main clients (Facebook, Google, Microsoft, etc.) are actively pouring tens of billions into developing their own AI chips.

Almost a decade of growth from crypto and AI has made the company complacent and greedy.

In the long run, if its profit margins are too high, either a competitor (AMD?) or its own clients will create a cheaper alternative.

It also seems that NVidia is starting to do a lot of the “loaning money to your clients so they can buy your products” shenanigans.

So it might be more of type #3 fraud than simply complascence. The most dangerous type.

Visa / Mastercard

Exploiting a duopoly for decades in an unavoidable middleman position will for sure make you complacent.

Crypto enthusiasts claim they will bring down the legacy payment systems and they might for all I know.

What I am a lot more certain about is that the business model of dominating the world finance from New York, simply because your company is American, is over.

It died when the West seized Russia's currency reserves and the US State Department started sanctioning everyone everywhere.

Progressively, national or regional equivalents will be taking over, breaking the steady growth of these companies.

Amazon

Another one that seems obvious to me is Amazon.

The company has evolved from the cheapest retailer destroying everyone's margins and wiping out entire industries to an overpriced reseller of Aliexpress and Temu products.

It is also losing the battle to stay the number one e-commerce site in South America (MercaLibre, see previous report), Eastern Europe (Temu/Alibaba), and SE-Asia (SEA).

The company's future entirely relies on its AWS business, the only real money maker.

But like Visa, do you want all your business and data in the hands (at the mercy) of an American company in 2024 if you are Muslim, Russian, Asian, African, etc.?

Besides, I have the impression Jeff Bezos is sort of distracted for a while…

This would explain how the company can blow up $1B on the Ring of Power. In case you missed it, it managed the feat of being universally loved by critics, hated by viewers, and literally makes people cancel their Prime subscription.

I mean, imagine making a Lord of the Rings series and losing money.

This is a blunder as big as Disney almost killing Star Wars.

When your organization cannot handle such a simple task, the problems are piling up quickly at the horizon.

Disney

Speaking Of Disney, the only branch of the company making money seems to be the amusement parks.

But the parks make money only thanks to Disney’s IP, of which the last successful one was … Frozen … in 2013. ELEVEN YEARS AGO.

Meanwhile, it managed to sink cultural icons like Star Wars, Indiana Jones, and the Marvel movies.

Very much a #2 crisis, utter incompetence, in this case, due to terminal infiltration by political activists.

Not much to say, except a big KEEP OUT sign.

But each of these will be alternating during our lives in a major way, for we are living in a tumultuous period.

These will affect what sector we should be invested in.

Today we will discuss the … eventful … American elections. This is by no means because it is the only thing happening, but that is a good start.

Here are a few of these events:

• The breaking down of American domestic politics. (Today’s report)

• The coming Great War in the Middle East (August report)

• The coming defeat of Ukraine (I guess for the September report, baring change in the news)

• The growing instability and impoverishment of Europe (a strong contender for September, considering the recent UK riots).

• The steady rise of China as a technological power. (mostly already covered, see link below).

In these, I will get my neck on the line and make actual predictions of things to come, as it is becoming clearer (to me) what shape the second half of the 2020s will take.

Over these reports, we will see together what companies and sectors to avoid, a few stock ideas or a specific stock pick, and how they articulate with the other macro ideas.

So this is not just a news commentary, but as much as possible, an actionable report from an investing point of view.

Probably by the year-end, I will also do a dedicated report on how each of these large events will interact with each other.

Read more

NAURA Technology Group Co Ltd (002371.SZ)

Naura is maybe the most interesting one, as it was rumored/announced in 2024 that it is going into the lithography market, entering into direct competition with SMEE.

Naura was in 2023 the semiconductor equipment manufacturer that made the most revenue. On the surface le…

Read more

So this report is a bit late, my apologies.

July will see 2 reports to compensate for the delayed June report)

The Last Missing Industry

As discussed in the previous report, the new strategy for economic growth of the CPC is based on an industrial push into innovation and new technology.

The whole with a focus on the so-called 4th industrial revolution, which relies on the mass adoption of robotics and automation, as well as embraces the (eventual) productivity gain from digitalization, IoT (Internet of Things), and AI.

None of these can happen without a very solid supply of semiconductors. So for decades, the Chinese government has been hard at work to create a semiconductor industry.

As this is a complex topic, it had to fit into a report of its own.

Semiconductors

Creating an entire domestic supply chain for semiconductors is a big deal for China.

Actually, it is probably bigger than all the other sectors, as none of the planes, high-speed trains, renewables, nuclear plants, etc. can be built without a supply of chips and simple semiconductors.

The rest of its industry is equally dependent, both domestic and export, with China consuming half of the world's semiconductors.

Semiconductors can be roughly divided into 2 segments:

• Legacy: the larger type of chips and memory, built with older technology. Think about the type of electronics you had in PCs 5-7 years ago or the ones you will find in appliances, military equipment, low-cost electronic gadgets, etc.

• Edge: the most advanced chip allowed by our current technology. That’s the chips, memory, antennas, etc. found in the latest smartphones, top-of-the-line data centers, AI applications, etc.

Legacy Semiconductors

This is the bulk of semiconductors consumed in the world, going into virtually everything built and assembled today, from washing machines and alarm clocks to printers and most cars.

While a lot less glamorous, this is actually the most strategic segment.

Most missiles, nuclear plants, and other strategic components rely on tried-and-tested designs, with high reliability and relatively low cost.

China seems to target the domination of this segment.

It is also “flooding the market” with older chip types, the ones not useful for AI or smartphones, but everywhere in missiles, cars, washing machines, robots, etc. with pure-play foundries like SMIC at the forefront.

“U.S. nervous about 'flood' of older-generation chips from China” - Nikkei Asia

In the 50- to 180-nm range, China currently controls around 30% and within a decade could control around 46% of global capacity.

"Legacy chips underpin everything from dishwashers to military weapons systems," Hogan wrote. "Just as it did with solar, China could box out foreign competitors through dumping, rendering the United States -- and the rest of the world -- dependent on China for mature chips."

Edge Semiconductors

The most advanced chips are often considered in the 7nm and smaller range. Currently, 5nm is mostly the sole domain of TSMC and 3nm is in the view.

Until recently, this scale of precision seemed out of reach for Chinese manufacturers.

And an endless stream of sanctions was designed to keep it this way.

For a bit more background on the efforts by China to develop its semiconductor industry since the 1960s, I warmly recommend Asianometry’s latest video (Asianometry author is a friend and a true reference when it comes to anything semiconductors related):

Catching The Bleeding Edge Of Semiconductors

At the forefront of the efforts to make domestic 7nm chips have been Huawei (privately owned by its own employees, so no stock recommendation here).

The key partner for Huawei has been SMIC (Semiconductor Manufacturing International Corporation), in a complex saga described in this article from Ars Technica.

To resume it shortly, SMIC managed to use less advanced DUV machines to engrave chips instead of the sanctioned EUV machines from Dutch ASML.

However, this came at the cost of efficiency, with production costs of 7nm chips much higher.

So let’s talk about SMIC first.

Read more

Jinko Solar

JKS

P/E 3.61

Dividend: 5.88%

Jinko’s panels still sell very well in China and Asia and other regions. Its N-Type panel seems to outperform competitors as well, with a record conversion yield of solar power.

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1766.HK

P/E: 9.26

Div. Yield: 5.09%

Here the real gem is partially state-owned, with CRRC, the world's largest rolling stock manufacturer in terms of revenue. As it is a major supplier to Belt and Road projects for example in Kenya or, Argentina, I would not be too concerned that the build-up of railroads is mostly done d…

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However, in the end what will matter most for a portfolio is good stock picks. So now that we got the direction of the Chinese economy out of the way in part 1 and part 2, let’s dive in.

The Technology Drive

Surprisingly, very few people listen to what world leaders are saying when deciding their investing.

For example, when Xi Jinping said “housing is for living, not speculating”, that was your clue to get out of Chinese real estate investment.

Still, countless China experts were baffled when the government started to intentionally deflate the bubble.

What are we being told now? A short repeat from last week's article, with emphasis:

Tech List

In practice, countless data from the Chinese government identify a few technological sectors that are high priority:

• Semiconductors: starting from dominating the low-end chips (16-20nm and larger) toward equivalence to Taiwan/the West in advanced chips (5-3nm) and more importantly, developing a fully Chinese semiconductor PRODUCTION MACHINERY ecosystem (currently Japanese, American and Dutch).

  • Following is also serious competition in quantum computing and seemingly a lead in photonics.

• Renewables: with a focus on solar and a little bit of wind power, China totally dominates the industry and has built in a hard-to-beat competitive advantage from both scale and technology.

• Nuclear: The plan is to build 8-10 nuclear reactors PER YEAR for the foreseeable future, for a $440B total plan to build 150+ plants.

  • China has suddenly become the leader in many 4th generation nuclear designs: the first SMR running, the first thorium reactor, the first high-temperature reactor-pebble, and a strong lead in molten salt as well.

• Batteries: Led by CATL and BYD, China is now the leader in battery tech, and is the first to deploy commercial sodium-ion, as well as solid-state batteries. CATL alone produces more than 50% of the world's battery capacity.

• Auto manufacturing: The lead in battery tech created a lead in EV performances that is equally hard to replicate.

  • Besides BYD, Nio, and such domestic automakers, a new trend here is electronic manufacturers entering the EV market, with Xiaomi's explosive entry and Huawei's lead over Tesla in self-driving cars.

  • Few out of the industry have yet dealt with the whiplash of the last 3 years regarding Chinese cars entering the world’s markets.

• Drones:

  • DJI alone is responsible for making 70%+ of the world’s drones.

  • The military applications are also obvious, very similar to how the GM factories were retooled to make airplane engines in 1940s

• Power: ultracapacitors, room-temperature superconductors, high-power magnets, new conductive materials. If you are like me and cover scientific news about this topic, you find China everywhere.

  • And also a LOT of Chinese scientists in Western institutions. With anti-Chinese sentiment exploding and essentially state-sponsored, you can expect a lot of that talent to head back home.

• Space: The Tiangong space station is still much smaller than the ISS, but considering that the ISS is essentially dying, and will not get Russian participation for a replacement, it is fair to say China is now among the great space powers with the USA, Russia, and the EU.

  • The imitation of SpaceX in both the public and private sectors is ongoing, including achievements like a methane-powered rocket (was slightly ahead of SpaceX Starship's similar effort).

  • The big one is the plan for a Russo-Chinese Moon base, to be built from 2028-2050.

  • The most astonishing are plans for a mass driver/space gun, essentially a massive vacuum train that can shoot a rocket to orbit. This would bring the price to orbit to $60/kg from SpaceX's $3,000/kg and require massive progress in batteries, superconductors, maglev, magnets, etc.

• Transportation: maglev going at 600km/h, vacuum trains, supersonic planes, hypersonic suborbital flights, China is notorious for ambitious land and air transportation projects. Many will not work, but it is hard to dismiss the country that built more than half of the world’s high-speed railroads in less than 2 decades.

  • Besides ultra-advanced transport, older technologies will also continue to be fueled by the Belt and Road projects in the Middle East, South America, SE Asia, and Africa.

Selection Criterions

When picking companies for this report, I decided to find the ones matching a somewhat narrow confluence of criteria:

1. Operate in a tech field favored by the Chinese government (basically unlimited access to capital, both human and financial).

2. Already dominant in its market, no need to try to pick wannabees in a country stock full of massive winners.

3. A technology leader at the global scale, as it demonstrates that commercial success is not only due to scale or subsidies but also successful internal R&D.

4. Cheap enough, but I still don’t want to overpay for it considering the general geopolitical risk associated with any Chinese stock.

5. The ability to resist US sanctions, or even ideally thrive from them.

Not Covered Stocks

Some interesting Chinese stocks will not be covered in this report.

Internet Stocks

The first is the whole category of e-commerce and consumer goods tech companies. For 2 reasons:

First I am not sure how much they might stay in favor of the CPC, as they divert precious brains from “hard tech” into optimizing clicks.

Second, this is such a large topic that it might be an article in itself.

As a disclaimer, I own Alibaba shares and I am interested in Tencent, PDD, JD and other Internet Chinese stocks.

Deep Value, Net-net & Special Situations

A list of such stocks mostly interesting for their sheer undervaluation was generously provided in comments by a reader, Pedro Perrin:

- LU.NYSE - 0.10x p/b after dividends

- YRD.NYSE - 1.3x P/E, 25% ROE

- 6968.HK - RE Company, 0.05x P/B, 0.3x Net Debt/Equity, 1.7x Current Ratio, Still profitable

- 2198.HK - Chemical company at 1.5x normalized p/e

- 1051.HK - Net Cash 6x bigger than marketcap

- 0489.HK - Big car manufactores, 0.14x P/B, net cash > mktcap

Of these, the most interesting in the short term is probably Lufax Holdings (LU), as it seems to intend to distribute a 54% (!!!) dividend yield on a 4th June ex-dividend date.

I will try to urgently find the time to understand what is going on here, with the stock price rising quickly recently.

Geopolitical Risks

Considering the mania of sanctions of the USA, it is an open question if you should own Chinese stock.

I think if you are a US citizen, it might get more difficult sooner than for other nationalities.

You might be able to open an account, but if your government threatens you with jail time for investing in China, there is not much to do beyond dropping your citizenship, a pretty big step for most.

Europeans might be in a similar situation, but drastic sanctions by the US government against its citizens will likely be enacted first, giving you time to move your assets out of EU banks/brokers.

For other people, out of Europe, the largest risk is that your brokers might be unable to hold onto the stocks or be sanctioned.

Ideally, opening an account in China proper would be the best option, but the possibility of doing so varies according to nationality, residence, and net worth.

An account in a Hong Kong or Singapore broker seems the most likely alternative option.

Not Investable

There are also a few companies I would love to invest in, but are private or publicly owned.

Huawei, CNNC (nuclear plants building), the Chinese defense industry, none of these tech leaders are available to us, unfortunately.

Semiconductors

Initially, this report was going to cover semiconductor manufacturers as well, but this would have made it grow beyond a readable size and delayed the publishing of this report even further.

So I will keep it for an upcoming report soon instead.

Chinese Stocks

This out of the way, let’s dive into hard tech Chinese stocks, with a quick reminder of the sectors we are looking at:

• Semiconductors

• Renewables

• Nuclear

• Batteries

• Auto manufacturing

• Drones

• Power

• Space

• Transportation

The stocks are not listed in any particular order, except for the sake of clarity, especially when some sectors are interconnected.

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Now that we have set the facts straight, let's look at what is happening to Japan and why it is not applicable to China.

The Plaza Accord of 1985 was an “agreement” where the USA strong-armed Japan (and Germany) to essentially sabotage their industry through currency manipulation.

Per Investopedia:

Obviously, these countries would have had no interest in doing so.

Equally obviously, when the USA was unable to compete fairly with Japan’s industries, it was far from “unintended” that it was a major cause of Japan's stagnation forever after.

Another factor in Japan's economic disaster was that the US went ahead and simultaneously placed 100% tariffs on Japanese electronics in 1987. Tariffs Japan wasn't even allowed to match or even retaliate to in any way.

If you outmatch the US corporations, you will be punished.

Almost like when China is “overproducing” … Ring a bell?

Of course, not all of this was purely due to international trade. Japan's central bank also boosted the domestic bubble at the worst moment to compensate for the lost exports.

Although considering how every West-centric central banker seems to take his orders from DC, you can wonder how much that was self-inflicted…

It’s as if infestation by Keynesian economists is not a disease spreading from the UK and USA…

Trying for Plaza 2.0

It worked so magnificently to destroy the rising Japanese economy, that it is not a surprise that the same crowd, still alive and in power (most of US decision-makers are 80+ years old) wants to do the same to China today.

The problem is of course that Japan was a demilitarized, occupied country with 1/3rd of the US population.

By contrast, China has a much LARGER industrial capacity and 4x the US population.

The issue for the US leadership is that in the past decades, the alternative to direct control eg. (Japan) has been military destruction (eg Serbia, Lybia, Iraq).

It is very unlikely to work this time.

China’s Strategy

I have recently explained that China is emerging as a new unprecedented model.

Not only a new economic model but also civilizational, breaking the mold of sea vs land power to create a new type of industrial/production-focused civilization lead engineers.

The other part of the story is that the Chinese leadership is acutely aware of Japan’s fate.

What killed Japan's ascension was a combination of:

1. Losing access to the US market, without a credible replacement.

2. Lack of independent policy and strategic autonomy, with major decisions teleguided from DC.

   1. A situation especially empowered by Japan's lack of military might AND its extreme dependence on overseas energy inputs.

3. Inept monetary policy that led to flooding the real estate market with cash, causing an insane bubble (50-year or 80-year mortgages were a thing in late-1980s Japan).

4. Failure to keep innovating due to ossification of the corporate (and social) structure.

So it is really not a surprise that Xi is essentially tackling each of these threats separately.

Replacing The West

Sooner or later, a new panic mimicking the reaction to 1980 Japan was going to target China.

See below the forgotten similar hysteria: “A Group of Congressmen Smashing a Toshiba Radio, 1987“.

This is one of the purposes of the Belt and Road Initiative, as well as other things like the BRICS (payment system via the New Development Bank and multilateral coordination), and the SCO (to keep Asia at peace and provide financing via the AIIB - Asian Infrastructure Investment Bank).

The Global South is where China plans to sell semiconductors, cars, airliners, bridges, nuclear power plants, solar panels, and so on.

And China will even provide loans to afford it, not dissimilar to the US Marshall Plan in post-war Europe.

Independence

Of course, none of these grand plans can work if China cannot defend itself and be bullied into self-destroying as Japan did.

As I discussed in a previous article, when it comes to actual real-world power, industrial capacity is a lot more important than GDP. We see it currently, with Russia’s industrial capacity and large access to resources allowing it to outproduce the entirety of NATO in terms of missiles, artillery shells, etc.

In the report “The Future of Russian Oil” I took notice of this:

When it comes to war and “hard” power, the main factor is industrial capacity. You might have fewer deli shops and fewer concerts, but this matters little on a battlefield. Russia has a similar industrial percentage to Germany (26%), and MUCH higher than Italy (19%) or France (14%), or the USA (15%).

For reference, China is an astonishing (considering its size) 36%.

If you take both PPP and industrial capacity into account, it is likely China has 2-3x more capacity for great power rivalry than the US.

An image is worth a thousand words here:

So movements like having a factory able to churn out 1,000 cruise missiles PER DAY is not necessarily to start a war, but to be sure to win if it comes to that, and to avoid it in the first place if possible.

For reference

Per DAY what the US Navy buy in 10 years? It may be an exaggeration, but the ratio is likely in that direction. Even a reality as low as 1/1000th of China's claim would still leave it 3x more equipped.

And actually, it kind of matches the recent realization that China’s ship-building capacity is more than 200x larger than the US’.

Getting overland supplies of crucial gas, coking coal, oil, minerals, and calories (grains) from Russia and Iran is also a vital part of the plan to deter American aggression, a card 1980s Japan could never play.

I would also point out that struggling through the Great Depression did not stop the USA from winning the “arsenal of democracy” in WW2.

So even in the case of a Chinese crash and “economic collapse”, it would be far from clear that it could allow the US to dictate anything on China’s policies.

Stimulus and Real Estate

The other danger is all the capital flocks to useless sectors. Real estate speculation is a good candidate, and so is software that brings more problems than solutions (*cough cough: social media).

Which is why it was imperative to start deflating the real estate bubble.

I actually think this was rather late and almost too late.

Probably the only thing that buffered the blow was letting some of the losses be swallowed by foreign investors.

This brings us back to the discussion of the uselessness of GDP.

GDP from landscaping, manicure salons, casinos, and hedge funds is not as useful in the long run as steel mills, semiconductor foundries, and car factories.

A chemical engineer is not the same as a Youtuber (or a newsletter writer, I am aware of the irony).

Innovation

And lastly, the key part is to not sleep on your laurels.

It is clear that China is not at the part of its civilizational cycle where it gets fat and complacent.

It certainly was there when the West conquered the world and invented the modern world.

And it hasn’t yet forgotten the lessons of the Century of Humiliation -Chinese: 百年国耻, lit. "hundred years of national disgrace").

From the horse’s mouth (to be precise, the “State Council Information Office“ of the PRC):

Another key part of the strategy is doing that innovation by opening to those who want to join.

Once again, it is the behavior of a young/rejuvenated nation so sure of itself that it does not fear competition but embraces it.

Think of the XIXth century to 1920s America, invented or quickly adopting (aka “stealing technology”) the steam engine, railroads, oil industry, telegram, radio, electricity, etc.

Our era will see the same Chinese-driven impulse around energy (green and nuclear), space tech (not only rockets and Moon bases but also mass drivers, essentially a maglev to the orbit), biotech and gene medicine, AI, computing (photonics, quantum), superconductors, etc.

Conclusion

I think it is clear to anyone who wants to look at it honestly that China is not going anywhere.

It is not collapsing, not isolated, and not at risk of military defeat.

This brings the question of investing in China, especially with many of its stock prices severely depressed.

Considering the new focus on technology and industry, let’s see what we can buy at a discount.

And how to own these shares while staying as safe as possible from US sanctions.

Extra reading

China’s economy is not in a Great Decline but a Great Transition (by ING)

From low trust to high in China

Parallel Tracks: observations from the Jade Empire (Part 1)

Another topic that can hardly be ignored for virtually any portfolio is the persistent fear of a Chinese economic collapse.

Would it happen, it would annihilate the economies of commodity-centered economies like Canada, Australia, and most of South America. It would also likely send the rest of the world in a Depression with a capital “D”.

Would it NOT happen, Chinese stocks as a whole might be an opportunity not seen since at least the bottom after the dot.com bubble popped.

Getting The Right Metrics

The very first thing needed is to understand where the collapse fears come from.

Essentially there are a few elements that are concerning, especially with the historical example of Japan. In order:

1. The Chinese economy was overly reliant on real estate and to some extent speculation.

   1. It made up 25% of the Chinese GDP.

   2. That bubble has popped for good. It even has its own “2020-present” Wikipedia article.

2. Chinese demography is said to be “collapsing”.

3. An isolated China will not manage to keep its exports up and face problems from “overcapacity”.

The first 2 are highly reminiscent of the Japanese bubble popping at the end of the 1980s, leading to 3 decades of stagnation.

Real Estate

What is interesting regarding the real estate bubble “popping” is that contrary to the US’s 2008, it is intentional.

For years, the CPC and Xi in particular had a message for the Chinese banks, speculators, regional authorities, and investors:

This message mostly fell on deaf hears, leading to the need to forcefully deflate the bubble in 2020 through the 3 red lines:

1. Liabilities should not exceed 70 percent of assets (excluding advance proceeds from projects sold on contract)

2. Net debt should not be greater than 100 percent equity.

3. Money reserves must be at least 100 percent of short-term debt.

This instantly forced the largest real estate companies in the country to pull the brake, and for the weakest of them to fill for bankruptcy.

International bondholders were the first to bite the dust, and the focus has been on delivering the already paid-in-advance flats, leaving the investors and speculators to take the loss instead of the population.

If real estate in China had kept rising or even not been deflated, starting families would have been impossible for young people.

A topic that brings us to demography.

Demography

While I explained in detail the argument in this article, I consider that China's shrinking population is mostly a good thing.

The short version:

• A declining population makes automation a positive trend, instead of a destabilizing force.

• With most of its population in the wetter & lower eastern region, China is overpopulated, putting terrible stress on its land, water, and air resources.

• A lower population means less dependency on imports of food & energy to avoid famine.

But to be manageable, the population decline needs to be both going at a slow pace AND stop somewhere, probably around 800 million to 1 billion people.

Both are far from guaranteed. In fact for now we are yet to see a modern country succeeding at fighting demographic decline. And the “solution” of importing masses of foreigners is obviously not a good one.

Here is what China has done so far:

• Cheaper real estate, with the construction bubble unlikely to reflate

• Financial incentives to build large families (“Three child policy”)

• All tutoring companies forcibly turned into non-profit organizations.

• Repression of feminist activists.

• Promotion of traditional gender roles and removal of representations on TV of gay people

Will it be enough?

Maybe not, I honestly do not know.

As far as I can tell, only ONE type of sub-group in modern society reproduces above the replacement rate of 2.1 children/women, and this pattern holds true in societies as different as the USA, France, Finland, Russia, Israel, and Turkey.

Amish, Mennonites, Mormons, Latin-mass Catholics, Laestadian, old believers, Haredi, etc. This seems to be the ONLY social “software” where your culture is self-reproducing, without needing import from other populations.

With the CPC firmly in the camp of communism atheism, I am not sure that purely economic measures will be enough.

However, this will be a slooooooow motion thing, far from the “collapse” lies of people like Peter Zeihan.

The working-age population will fall by … 23% by 2050. Or 700 million people working, MORE than twice the current US population.

Hardly an overnight collapse, and is likely to be just one economic factor among many, including automation, energy systems, geopolitics, etc.

China Is Isolated

The argument that “China is isolated” is pure propaganda and is to be dismissed as such.

You could just guess that by looking at the 2 main China-led international organizations:

The SCO (Shangai Cooperation Organization)

The BRICS (not up to date map, but you get the point)

And maybe the turmoil with Russia has forced “deglobalization/reshoring/friend-shoring/de-risking” or God knows what other newspeak invented in think tanks.

It should show on Chinese exports, right?

Right?

But of course, the funniest propaganda failure is something familiar to astute readers, experienced with Schrödinger’s Russia, which is both AT THE SAME TIME:

• So weak it can be provoked without risks, and at some point dismantled decolonized.

• So strong that it threatens the whole free world.

Similarly, Schrödinger’s China is:

• Already collapsing and will never become a global power like the mighty USA.

• An economic juggernaut that needs to be stopped at all costs.

How isolated is a country whose car exports has recently become the largest in the world? And which is literally producing everything for everyone, with 36% of its GDP from industry?

But of course, the simplest demonstration of neither a collapsing economy nor isolation is that Yellen had to visit Xi and start threatening him rather brazenly:

Yellen Threatens Sanctions for China Banks That Aid Russia War

Yellen says global concerns growing over China's excess industrial capacity

Our priorities include protecting our national security, advancing a healthy economic relationship with a level playing field for American workers and firms, and cooperating on global challenges.

U.S. will push China to change policy that threatens American jobs

about stealing regulating TikToK : “Many U.S. social apps are not allowed to operate in China,” Yellen said. "We would like to find a way forward."

If you need to threaten China to stop producing so much stuff, or at least to be so DAMN EFFICIENT at it, China is not isolated, China is not collapsing, and China is not overproducing.

Overproducing

Why not “overproducing”? Because this word had a definition before Yellen started muddying the water:

This can happen and manifest in poor sales and growing inventories.

So EVs, solar panels, and chips selling like hotcakes and “threatening American jobs” are not overproduced.

They are just more competitive.

Free market, competitive advantage, R&D advantage, economies of scale, industrial ecosystem, yadiyadiyada.

And it is not dumping either, here is the definition of dumping:

When BYD sells an EV (Dolphin) in China for €24,400 and sells it in Germany for €35,990, it just shows how absurdly UN-competitive the Western industries are if it is a serious threat when foreigners can bump up the price by 50% and still outprice your domestic production.

In Part 2

In the next part, we will discuss how the parallel to 1980s Japan does not hold water and why.

And instead, what is going on and what we should expect from the Chinese economy.

P/E: 0.75 (NOT A TYPO!)

Dividend Yield: 18.84%

At first glance, the company has an awful stock chart, an absurdly low P/E, and a great dividend yield. So what is going on here?

Canacol At A Glance

Canacol is a Colombian GAS company, with very little oil production. This is Canacol’s main difference from Ecopetrol and Geopark.

The com…

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Because debt can be where a capex-intensive company lives or dies, it is worth its section.

The company has issued a 2036-due bond, which was oversubscribed 3.2x, and used it to repurchase a 2025-due bond. So debt schedule is now a lot more manageable.

The recent acquisition of ISA Power and the need for capex growth mean that the compan…

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