Erik: Joining me now is Justin Huhn, a regular MacroVoices listener and editor of The Uranium Insider newsletter. Justin, it's great to get you on the show. I want to first congratulate you. You launched your newsletter in August of 2019. I wish I had discovered it then I've only been a subscriber for a couple of months, but I'm absolutely loving it. You are up right now 359% since inception August 19, on the stocks that you've recommended in your newsletter. At one point that was 450%, the market has been down a bit, obviously with the rest of the market down. But congratulations on terrific performance and glad to have you on the show.
Justin: I'm really pleased to be here, Erik, thanks for having me. Like you mentioned, I've been a listener for many years. So I'm really excited about our conversation today.
Erik: I am too and listeners, Justin has provided a slide deck to accompany this interview, you'll find the download link in your research roundup email. If you don't have a research roundup email, just go to our homepage macrovoices.com. Click the red button above Justin's picture that says looking for the downloads. Justin, the topic is going to be investing in all things nuclear and listeners if you missed it last week. We had Mark Nelson on talking about understanding all things nuclear, especially as we get into the advanced nuclear technology investment opportunities. You want to have heard that interview first so be sure to check that out.
I want to jump right in Justin, with what I think is the most important question because let's face it, nuclear power has been a really good idea for decades. But frankly, it's been a horrible investment because for good or for bad. The public perception of nuclear is anything but good. And obviously in the wake of Fukushima, it's only gotten worse. So why would investors want to think that that's changing now? What are the important catalysts that need to happen? And how do we get from where we are today where, you know, even in an energy crisis in Europe, you've got countries like Germany that are famous for their knowledge of engineering and technology, shutting down nuclear plants. So how could this be a sensible investment trend that we want to be long?
Justin: That's a really good question. I think it's involves a pretty in depth and nuanced answer. So I'll do my best here but to your point with Germany. Germany had, I believe it was 17 reactors at the time that the Fukushima Daiichi accident happened. They shut off about half of their fleet within a couple of years, with the plan to phase everything out by the end of this year. They have three remaining reactors online. Those were just extended to April. It's possible that they get extended beyond that, but we're not holding our breath. I guess the bright spot with the Germany situation is that it's an example for all to see of what not to do. So Germany, not only did they phase out nuclear, which they have a fantastic, very highly efficient fleet of nuclear reactors in Germany that have been shut down for purely political reasons. There's absolutely no reason to shut these plants down early. In the doing so they vastly expanded both solar and wind in addition to biomass, which by the way, biomass in Germany which qualifies for quote, unquote, green energy is literally trees being cut, clear cut in the United States and shipped across the sea and burned to boil water. And that's their green energy and biomass.
But their multiple hundreds of billions invested in solar and wind have basically resulted in a net drastic increase in carbon emissions and general air pollutants in the country as the most polluting country with an exception of Poland in the entire EU. Why is that? Well, when you shut down your baseload clean energy, nuclear, and you expand intermittent renewables with insufficient backup, in terms of, let's say, battery supply, for grid scale battery storage. When the sun isn't shining, the wind isn't blowing, the only thing they have left, especially when Russia cuts off gas to Germany is coal that is a baseload power source that can cycle up and down easily, that can make up for the lack of energy that's being contributed to the grid by other intermittent sources. So it's been this the energy vendor program. Over the past decade, they've phased out nuclear. Gone all in on wind and solar, and it's been an abject failure. They're paying the highest rates they've ever paid. GDP is in a downward spiral in the country industry is closing up shop Volkswagen is thinking of moving out of Germany. I mean, it's just been an absolute mess. So the good thing about that is it's a shining example of what not to do. And so, you know, that's just kind of this general theme of this is what will happen as countries, if countries turn away from efficient energy dense source of electricity, such as nuclear with a very, very high EROI or energy return on investment, compared to solar, especially buffered solar, that is solar with some sort of backup, whether that's natural gas or coal or batteries, with an EROI of less than two to one. In society, generally speaking, to maintain the way that we live now. We need energy sources with a minimum EROI of 7 to 10-to-1. At slide number five, there's a there's a graphic that shows the various sources of energy and their corresponding EROI. I think this is a theme that is only going to grow because the countries that will embrace high EROI energy sources are likely to grow, to be richer, to succeed, to prosper, and have lower costs of energy and can therefore attribute those lower costs to a growth in GDP, growth in industry, etc.
To answer the second part of your question, or perhaps it was the first part of your question. Nuclear has been a great idea for a long time. Why now? Well, after the Fukushima Daiichi accident in Japan, shutting down all 54 of their reactors, there was a vast oversupply of uranium, the feedstock for nuclear energy. And this took a very, very long time to work through at the same time that Japan shut down. So that was about 10% of global demand. Shut that off pretty much overnight and Germany phased out about 10 reactors and relatively fast fashion. You had the Kazakhs continuing to ramp supply. You had mines that had locked in higher price, long term contracts continued to produce, and it wasn't until 2016, 2017, 2018 that we have mines actually start to go into care & maintenance. So Cameco is rapid Lake Paladins Langer, Heinrich and Namibia. Cameco’s MacArthur river finally in 2018. And it took another couple of years to work through that abundant above ground mobile inventory, which brings us kind of up to today where this, this vast oversupply has mostly, if not entirely been worked through, yet nuclear continues to grow. So if you look on slide two, nuclear is actually a growth sector, which flies in the face of the sentiment that seems to be relatively prominent around nuclear and that that is that tends to be dissipating right now. There certainly is a real embracing of nuclear as a clean energy, as it should be. There's bipartisan support for nuclear in the United States. Nuclear has been approved for the green EU taxonomy, low cost, quote unquote, green funding opportunities in the EU. And right now, there are 60 reactors currently under construction. That's 58 gigawatts, there's about 360 gigawatts currently globally. 112 reactors are planned, that's another 120 gigawatts. And 324 reactors are proposed, a lot of that is coming from China. 22 reactors in China alone under construction right now. And they're planning you know, China thinks in decades, they're planning to have 200 gigawatts of nuclear by 2035. And currently, they're sitting on around 52 gigawatts. So they're looking to quadruple their nuclear fleet in the next 13 years, which is obviously quite the undertaking. But there's much more nuance to the why now, but I would say, just the broad picture that shows you on slide one, this is the World Nuclear associations fuel report from 2021. They will have they do this every two years, so it'd be an updated one next September. This shows you the upper scenario. Now they put out three scenarios to model out supply and demand. And why did I share the upper scenario? The reason is because there's been a major de risking of nuclear in the United States and in the West, generally, with funding support from the inflation Reduction Act. And so we have not only a de risking of reactors in the West, but we actually have new reactor builds happening in a lot of countries in the West, as well as in the east. Just this last week, India announced they want to build 21 new Reactors by 2031. Just a major major step towards clean baseload energy. And so we have this growth sector. We have a significant disjunct between supply and demand. And we need the commodity price to rise substantially in order to incentivize those projects on the margin. That's kind of the long and short of the of the greater thesis and there's some more short term and long term nuance I can get into as we continue this discussion.
Erik: Joining me now is Mark Nelson. Mark is a nuclear engineer and consultant to the nuclear industry and also something of a pro-nuclear activist. Mark, it's great to get you on the program. I don't normally ask MacroVoices guests about their personal background because they're mostly well known figures in finance, and their bios are available to interested listeners on our website. But your background is quite a bit different from our usual guest. So let's start by setting the way-back machine to 2011. You were a young man in the enviable position of having earned a scholarship to attend graduate school at Cambridge University, and needed only to choose your major. Then you saw the same YouTube video that I saw around the same time, produced by a former NASA engineer named Kirk Sorensen. Tell us what that video was about how it changed your life and where it led you.
Mark: Sure yeah. I needed to study something having to do with engineering, but I just didn't know what I wanted to study. And I came from Oklahoma, which has oil and gas but no nuclear energy. It has wind, but no nuclear. And I came from a family involved in oil and gas on one side, and then on my mom's side, nuclear medicine. And the only thing I knew as a young person is that I had no interest in either. So I'm browsing the internet trying to figure out what to do with my life. And I come across this video where the tone sort of was, people don't want you to know that we have the craziest nuclear technology and the nuclear energy is actually incredible. And if we just chose the right reactor, we could solve all the world's problems. And so I started watching the video, and it started to explain that there's a new fuel we could use. There's a new reactor prototype we could use and that nuclear energy can make enough energy to power the world for a billion years without carbon emissions. Once I heard that opening pitch, I pretty much knew that I was going to do nuclear energy. I was just a very strong feeling where I finally found something where it mattered that I had the technical training of an engineer, because it is technology, it is engineering. And yet at the same time, there was this political side to it. There was the cultural side where we had a great treasure. We weren't using it. And surely there was going to be a hard battle to come up with a future based on nuclear. And I knew in a moment, that's what I wanted to do. I put my application in for the brand new nuclear engineering program overseas at Cambridge and the rest is history.
Erik: Joining me now is Bianco Research founder Jim Bianco. Jim, it's great to get you back on the program. We have quite a bit of news this week, CPI and FOMC. Let's start with CPI. Give us the update, what was the data and what does it mean?
Jim: Data came in weaker than expected and expected is the key word. And on a year over year basis, it was 7.1% is what the growth rate is November to November. And core CPI came in at a 6% growth rate November to November slightly below what was expected. The market I want to say predictably took off on this news. But that understates the reaction that the stock market had. We talked about this a little bit later, but we were up 3% next trade on the S&P off of CPI. We also did that a month ago off the CPI. I think those are the only two examples I could find of the market being up 3% next trade in the last couple of decades. I can find examples of being down, but not necessarily being up like that, just to show you how focused the market is. But turning back to CPI, you could attribute most of the undershoot in expectations to two categories. Used car prices fell and gasoline prices fell. So all in all, it was a report that has everybody thinking inflation has peaked. Now, I've also argued that inflation is peaked. It actually peaked in June and for people to say that see this, is it inflation is peaked correct. But that's not as important as the next question. Is it on its way back to 2% or is it on its way back to four because either one of those is going to produce a vastly different response out of the FOMC and out of the market. 4%, the Fed is only at neutral. The hike that they did, we're recording the day, the FOMC which we'll talk about in a second. The hike only got them back to neutral if we're going back to 4%. CPI. If we go back to 2% CPI, then they are above in tightening category. And they might have some room later this year to ease. I happen to be in the camp that inflation is probably going to stop closer to 4% than it is to two. So yes, it's peaked. Yes, that's been obvious even before the CPI report this week. But again, it's really all about how far down is it going to go? Not? Is it going down?
Erik: Joining me now is Forest for the Trees founder, Luke Gromen. Luke, it's great to get you back on MacroVoices, it's been way too long. Obviously the talk of the town is, is it a bear market rally or is the bottom actually in? We got above the 200-day moving average, stayed there for a couple of days but on Monday, we saw a big correction to the downside. Is this all over or is this just a pause?
Luke: It's great to be back on. Thanks for getting me back on, Erik. I think it is probably a bear market rally still. I think it is probably still a bear market rally. But I don't have high conviction on that.
Erik: And what is the source of that hesitation? When you say you don't have high conviction, it sounds like you think maybe it's not a bear market rally. Is that contingent on Fed policy or what makes you question that?
Luke: Yeah, it really is contingent on Fed policy and Treasury policy, right. So if you look at a couple big things that have grabbed our attention in recent weeks, so back on October 31, Treasury came out and US Treasury came out and doubled essentially, their estimate for the deficit that the United States is going to run in the fourth quarter of 2022 and in the first quarter of 2023. And it's pretty noteworthy in that fourth quarter alone, they took the net borrowing estimate from $400 billion up to $550 billion in just a three-month span. So back on August 1, they thought they would need to borrow $400 billion in 4Q22. And they're actually going to borrow $550 billion in 4Q22 to keep TGA consistent. So, borrowing needs rose 37% in three months. And so all else equal, if you hold everything else equal, and you effectively double the deficit nearly. So, you're taking the US deficit from 1.3 trillion to 2.6 trillion in an annualized bait rate over the next six months. If you don't do more QE, if you don't otherwise inject dollar liquidity into the system, that's going to be positive for the dollar. And I think it'd be negative for everything else. And I think we're going to see, we're going to see sort of a continuation of the market regime, we've had really since call it February of this year. January, February of this year which is dollar up, everything else down, maybe oil up to.
This deficit and the issue is ultimately the sort of the second big thing we noted there, which is had a chart recently for clients where we showed that any time the US deficit was more than I believe it was 20% of the projected global GDP growth in nominal terms over the last 25 years, the Fed every single time that that US deficit was more than 20% of global GDP growth in nominal dollar terms. The Fed did QE basically, to help finance it. The one exception to that rule was 2022, where I believe it was a 32% of global GDP growth based on IMF GDP growth estimates for the world. And you saw what we got, which was dollar up, everything else down, and oil up and really oil flat. And the point here is that with what Treasury just announced on October 31. Right now, assuming that global GDP growth is not taken down further from what the IMF is looking for. For 2023, the US deficit as a percent of global GDP growth is going to be like 68%. So, the point is that this deficit increase, there's no balance sheet, there's not enough balance sheet globally to finance this without either selling other assets, like we've seen this year without driving the dollar up, it's going to continue this dollar squeeze and without probably driving down the price of treasuries, yields up. Which is exactly the regime we've seen. So, if that's the regime we're going to get. That's why I say I think it's a bear market rally is the amount by which the US deficit or the relative size of the US deficit relative to global GDP growth is one of the highest in 25 years and if there was not excess dollar liquidity supply by the Fed from somewhere. I think we're on pace for another pretty ugly year to start the year.
Now when I hesitate, what am I looking for? Well, we were seeing this play out through September. We saw things start to break, you saw increasing stress in the treasury market, you saw rising rates in a recession or in a global slowdown. Recession is too strong a term. But you saw the Treasury market not performing... actually performing worse than equities in a global sell off, which was unprecedented going back 60 years. Great chart that Michael Gayed had a couple of weeks ago. Then all of a sudden, in October, we've seen really what's quietly been a massive injection of dollar liquidity. You saw the reverse repo balances come down. I want to say, I believe that numbers 240 billion. You've seen the TGA, the Treasury General Account come down quite a bit as well. And then more recently, the Fed running operating losses ends up leading to a short term injection of liquidity as well, by virtue of the Fed effectively paying banks. They're paying banks, by virtue of running operating losses.
So, you've had sort of this dollar injection of liquidity that has you've seen in the markets, it's sort of been the opposite of what we had year to date, dollar down, yields down, and treasuries, yields down across the bond market, risk assets up, gold up, Bitcoin has stabilized. But the amount of the deficit is so big and now tax receipts are starting to roll over for the US, which is likely going to get worse in the first half of next year. So, you're just faced with this really big gap between what the deficit is projected to be in the US and what the world's ability to finance that deficit is, which is global GDP growth in dollar terms. And though there will be a big crowding out impact even bigger than what we saw in 2022. Unless you get much more dollar liquidity injected or continue to be injected.
Erik: Joining me now is David Rosenberg, founder of Rosenberg Research and author of the legendary Breakfast With Dave newsletter. Dave, it's great to get you back. Obviously, the question on everybody's mind is the bottom in? Is it just a bear market rally? Where are we headed from here?
David: Well, I think that we've had a few bear market rallies this year. Not unlike the bear market rallies that we had through a good chunk of 2001 and 2002. And back in 2008, we had some of the most powerful bear market rallies. And these are bounces that are fun to trade. If you think you are Paul Tudor Jones, then go right ahead and trade them. Each one of these has actually failed at or close to the 200-day moving average. So if you're watching the technicals, you can trade the market in a bear market. Trade it from the long side for a period of weeks or months and you can do rather well, so long as you have your exit strategy and your hedges in place. But yes, of course, this has been a another bear market rally. And I say that because if we're willing to acknowledge that we were heading into recession. You see, this is a case where your assumptions end up drawing your conclusions. If your conclusion is that we're going to have a soft landing, that we're going to have slower growth but no recession, then the lows have been put in and you want to buy this market on any dip. That's not my view. My view was that we're heading into a recession. It wasn't the first half of this year with the back to back quarters of negative growth. That was the pernicious impact of the shock from food and from energy. But the real enchilada is going to come next year is we get the full brunt of all the lags of what the Fed has already done. And so the one thing I know about history, and I think one of the best quotes of all time came from Warren Buffett, when he famously said that what we know from history is that people don't learn from history. But we know that, although there's not an alarm bell that goes off right at the market low. We do know that there are patterns that constantly reemerge in a recessionary bear market very close to the trough. And I'll just give you two of them to start off. The first is that in a recessionary bear market, the market bottoms 70%. You know, call it the seventh inning of the recession. The market bottoms, as the recession becomes more commonplace, more priced in. And at that point at the lows, what the market is doing is pricing in the ensuing recovery. So I just say good grief to anybody who thinks there's going to be a recession but is buying the market thing that it's hit a trough is a classic case of cognitive dissonance. Because if we have a recession, it's only now just starting, or we'll start in the opening months of next year. And you want to buy the market deep into the recession. We're not there yet.
Second point is tied to the first point, which is that you want to buy the market and I mean, dive in for the next cycle, not a bear market rally, not a tradable rally but a new cyclical bull market. They happen when the Fed has cut interest rates sufficiently to re-steepen the yield curve. The yield curve right now and I'm looking at the 2s-10s curve, but every curve is inverted right now. 2s-10s are inverted by almost 80 basis points. There has never been in history a period where the market bottomed as the Fed was still raising rates into an inverted yield curve. It just doesn't happen. If you want to trade the market or become an investor saying it's going to be different this time. You know, it reminds me of Harry Callaway, you know, in the famous Dirty Howard films from Clint Eastwood saying do you feel lucky punk? The reality is that the market bottoms for good not just 70% into the recession, but 70% into the Fed easing cycle. Well, this Fed is still tightening and raising rates into an inverted yield curve. Historically, when we get those lows in the stock market, again in the context of a recessionary bear market, which I think we are heading into. The 2s-10s curve has steepened to a positive shape of 140 basis points. Now, I'll tell you we will we will get there. It's a matter of, really of when. And it might not be until we're well into the second half of next year because this Fed doesn't look like it's set to turn anytime soon. But you need the yield curve, to shift out of inversion towards a positive slope in the context of a Fed easing cycle. Remember, they say don't fight the Fed. Well, for people that think that the markets bottomed, I asked the question, why are you fighting the Fed? Didn't pay to fight the Fed when they were cutting rates and easing policy through most of 2020 and 2021. But all of a sudden, we're supposed to believe that a bottom in the market is at hand as the Fed is still raising interest rates into an inverted yield curve, it boggles the mind. But it goes to show how desperate everybody is to have this bear market end. But the sad reality, and this is a case again, where my grandmother told me as a young lad, forewarned is forearmed. We have yet to see the lows and we could be down at least another 20 or 30% from where we are today before we get to those lows. And that probably will not happen given the Feds posturing until we're deep into the second half of next year.