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Weekly rollup | March 14-20 2022

Stocks Mentioned: Alexco Resource (AXU), Sprott Physical Uranium Trust (U.UN)

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March 15 2022

Big picture thinking unrelated to trading. Thinking about the current Russia situation makes me wonder if this is going to be as historic a moment for the United States as the failed invasion of Egypt was for the British in 1956. Historians consider the Brits humiliation in that episode to be the time when the sun finally set on the British empire.

In July 1956, Egypt's then dictator nationalized the Suez canal, screwing French and British shareholders and threatening the flow of oil. Israel invaded, France and Britain lent Israel support. The USSR used the distraction to invade Hungary (no surprises if China does the same with Taiwan now). The US, under Eisenhower, sided with Egypt and warned Britain to withdraw. The threat? Not warships, but financial sanctions. The US threatened to force a devaluation of the pound by selling their stash of British govt bonds and imposed oil sanctions. Using its influence with NATO, the US cut off Britain's oil supply from the Arab region (the very same threat Britain was guarding against by attempting to take back the Canal from Egypt). With the UK Treasury about to run dry and anti-war protests growing (the UK people overwhelmingly favored the war when it began, but changed their tune after the USSR invaded Hungary), Britain called off its military activities without even warning France and Israel of its intentions. Deliberately deserting allies - something we just witnessed during the US withdrawal from Afghanistan.

Egypt succeeded in nationalizing the Canal. The world stood by as Egypt rose as the anti-colonial darling of the Arab world.

I think of the Suez incident as a parallel because we are seeing a rift between the positions of Europe and the US over Russian sanctions. Nobody except the US wanted to sanction Nord Stream 2. Nobody except the US wants to sanction Russian oil. Nobody except US payment processors (Visa, Mastercard and Amex) and the idiots over at Coinbase wants to cut off ordinary Russians from accessing the global financial system. The world wants Russian wheat, oil, nickel, palladium, enriched uranium, fertilizers and Beluga vodka. The sanctions are working against Russia now only because cross-border payments are made via US dollars, and settlement is done using the SWIFT system. A little known fact is that SWIFT isn't an American entity but a Brussels based entity. The US has power over swift only insofar as payments are made in USD, with clearing and settlement happening at US banks on US soil. If Russia's trading partners agree to use SWIFT but bypass the dollar, the US would be powerless to stop it. Sure, the Biden administration can threaten to sanction all countries dealing with Russia. When the choice for Europe boils down to either importing Russian nat gas/fertilizer or freezing/starving to death, they'll risk the sanctions. The sanctions on Nord Stream 2 didn't impact the pipeline's completion - the US has set a precedent by showing Europe how powerless their sanctions are when it comes to their allies.

I think US sanctions are no longer going to be as big a threat as they used to be. Like kids in a playground who band together to cut off the schoolyard bully, countries are going to band together to bypass the US financial system and find alternatives to US tech company platforms. I've long held a view that capital flows into the US was a one way street since the GFC, as the US market was the best place to be. I think that's going to reverse, with capital flowing out of the US and back into the emerging and frontier markets. When the US froze Russian assets under the Magintsky Act, the world applauded. When they froze the Taliban's assets, no one cared. When they froze not just the Russian central banks', but also ordinary Russians' access to the US financial system, they went too far. You can bet the Chinese billionaires are thinking long and hard about whether their US assets are safe if China invades Taiwan. The Indians are still in a state of surprise that the Biden administration would contemplate sanctions against India for buying Russian oil, but any moves in this direction is going to explode the myth that the US is a safe haven for capital. I think the mere uncertainty as to how further sanctions will be imposed is enough to get investors to pull capital from the US and into safer regions like UAE/Singapore.

If warships don't follow sanctions, this may be a watershed moment for the end of American financial dominance.

“It’s possible to have more than one reserve currency.”

- Jerome Powell

Always fun listening to Jim Rogers, even if there are no new insights. I respect him a lot. Reading his book Hot Commodities back in 2010 inspired me to get into finance. And his travel diaries Investment Biker and Adventure Capitalist made me look at the world in a whole new way. Worth a listen for big picture thinking, I wouldn't follow his trades.

It's hilarious. It's a contrarian indicator signaling gold has peaked. Depends on how you look at it. Gold could be having its Saylor moment. In August 2020, nobody thought Microstrategy, an obscure dotcom bubble company, buying $250 million worth of bitcoin would pave the way for other Nasdaq listed firms to follow suit and bring in heavy institutional buying. As absurd as it is for AMC to buy into a gold explorer, this could be the start of a new trend, with tech companies putting their cash to work and hoping to stay relevant during a tech bear market.

March 16 2022

Trading briefly restarted at 8 a.m. and nickel futures immediately fell through the 5% daily window before the market was suspended again. The exchange said it halted electronic trading to investigate the problem and will cancel a “small number” of transactions.

Back when hedge funds were caught on the wrong side of the meme stock craze, brokers accommodated them by halting trading and restricting retail access to buying, manipulating GME and AMC lower by cutting off buyers from participating. The brokers did it to avoid liquidating their hedgie clients or worse, having to front client losses. But as bold as their actions were, they were saints in comparison to the LME. Not only did they save the Chinese whale once by taking a billion dollars out of the accounts of nickel longs by cancelling their winning trades, they have the audacity to try the same trick a second time, citing "technical issues". Why bid when they just cancel your trades if you happen to make a buck. The LME is starting to resemble the London Gold Pool of the '60s - whatever price they print, it'll have no connection with the actual market clearing price. There were no technical glitches while Tsingshan was allowed to build a 200,000 ton short position, but 200 contracts (1200 tons) of volume today is grounds to halt trading and cancel trades.

Maybe a LME broker-dealer with enough clout is forcing the exchange to ruin its reputation in order to avoid bankruptcy. Whatever the case, this is going to be a wake up call to the hedge funds to de-lever and reduce counterparty risk. Back in 2011, MF Global went under after first trying to use client funds to cover losses at their UK subsidiary. Several Lehman creditors took a bath during the GFC, including hedge funds which shorted the banks and made a huge pile, only to have all their gains confiscated. I would expect to see a lot more downside volatility in LME traded futures as the hedge funds cut risk or just shun the exchange altogether. If for no other reason - why bother to trade where the clearinghouse gets to pick the winners and losers?

One reason why uranium is tanking today

March 17 2022

Good article on how to spot problems in resource companies by one of the best in the field.

Uranium is extremely news driven. I've sold my U.UN position - (1) because it hit 3 types of stops I look at, the 20 EMA, 3 ATR and PSAR stop, (2) I don't like holding positions which are so news driven since that's not my forte. By the time the it's in the news, the move is mostly done.

Still holding URG because it'll benefit massively from any push to increase US uranium production. I prefer it to UUUU because URG is smaller cap and more of a pure play, and I prefer it to UEC because I dislike the promoter (and his business methods) running the show at UEC. If this bill becomes law, I'll start looking at other US uranium explorers with ISR projects that can be fast tracked to production. It's a small list.

March 18 2022

ETH co-founder on the cover of TIME. Now if ETH tanks, this cover will be touted as a contrarian indicator. If ETH doubles and takes out the old highs, the very same pundits who market 'contrarian' indicators will simply ignore it. That said, there's a well documented bias called The Halo Effect. There's even a book by that name which I'd recommend to everyone. The bias occurs when we judge a person as a whole based on one specific trait, and frequently tends to occur around extremes in sentiment.

Alexco Resource (AXU) will report 2021 results ahead of market open on Monday. The company has been very slow to update on the status of achieving commercial production after re-starting operations in Nov 2020. That much awaited news may arrive, or at least the milestone should be close, when they report on Monday. I don't see the stock falling hard if they delay CP, since the market seems to expect nothing better from this management team. Which means we may be in for a pop if they do manage to surprise the market with some good news. I wrote about this stock in the Jan 1, 2022 Against All Odds issue attached below.

We're sitting on a gain of 12.9% on this position so far so I'm willing to take the binary bet and holding ahead of earnings.

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