This Is One Of The Only Ways They Can Tame Inflation And Save The Dollar

This Is One Of The Only Ways They Can Tame Inflation And Save The Dollar

Notes From the Field By James  Hickman / Simon Black  July 31, 2024

There are only seven countries in the world that have a GDP in excess of $3 trillion: the United States. China. Germany. Japan. India. United Kingdom. And France.

Microsoft’s current market capitalization is also right around $3 trillion… which means that out of the 193 countries in the world that are recognized by the United Nations, 186 of them have an economy that’s smaller than Microsoft. Crazy.

Of course, much of Microsoft’s meteoric growth has taken place over the past three years because of the AI boom. And just like Nvidia is considered the most important hardware company in AI, Microsoft has positioned itself as the most important software company in AI… and they’re pretty much betting the business on it.

According to the company’s earnings release yesterday, Microsoft has generated an unbelievable $118 billion in Operating Cash Flow (OCF) over the past twelve months.

(OCF, if you’re not familiar, is a much more useful metric than ‘net income’ or ‘profit’ because it strips out all the non-cash accounting nonsense like depreciation.)

$118 billion in operating cash flow is a staggering amount of money. But what’s even crazier is that Microsoft spent almost every penny-- more than $113 billion-- making new investments in their business. And most of those were AI-related investments.

In short, Microsoft is a profit machine. But it’s dumping 96% of those profits into AI, in large part to justify having a $3+ trillion valuation.

Time will tell if those investments pan out, and whether Microsoft is able to build viable products that generate a sufficient return.

There’s no guarantee; AI is an extremely competitive industry where budding startups and giant tech companies are both working on the next big thing. And I have to wonder how much upside is left for a business that already has a $3 trillion valuation, relative to the competitive risks against Amazon, Google, Facebook, Apple, etc.

Yesterday the company announced that growth in their cloud ‘Azure’ business (which includes their AI revenue) was 29% year-over-year. That growth rate was slightly lower than last quarter’s 31% growth.

But even a tiny, 2% decline in growth had the market freaking out. And Microsoft stock initially plunged more than 8% in after-hours trading-- roughly $250 billion in market value. That’s larger than the economy of New Zealand.

The stock recovered much of those losses this morning. But the mini meltdown is a clear demonstration of the risk involved: even a hint of a slowdown can trigger punishing losses.

Bottom line, AI is absolutely disruptive technology and a major game changer. But we’re still in very early days; there’s a long way to go, and it’s far too early to declare a winner. Yahoo looked like the dominant Internet titan in the late 1990s, but the landscape changed dramatically.

Maybe Microsoft ends up winning the race. But there’s a lot of uncertainty in drawing that conclusion right now.

One thing that’s NOT uncertain, however, is that AI someday going to be as integral to daily life as mobile phones and the Internet are today.

We also know that AI will continue to consume ridiculous amounts of electricity — electricity, which the US grid does not have right now (and Europe is in even worse shape relative to its electrical grid).

Thanks to horrendous government incentives and propaganda by the inspired idiots and climate fanatics in the media, electrical supply from “renewable sources”, i.e. wind and solar, has skyrocketed over the past few years.

It’s no coincidence that the country is simultaneously facing major capacity shortfalls and power outages… because, you know, sometimes the sun doesn’t shine, and the wind doesn’t blow.

The green fantasy is that wind and solar are going to save the planet. But if you’re honest about the math, they’re really not all that clean.

First, you must mine a lot of really dirty resources (like cobalt) in vast quantities from places in Africa which rely on child labor in extremely dangerous conditions. But you’ll never hear Greta Thunberg utter a word about that.

Then you have to manufacture 2-6x more solar panels and wind turbines… because, again, there are occasions when the sun doesn’t shine (like nighttime!) and the wind doesn’t blow.

In the end, wind and solar end up using a lot more resources per kilowatt-hour of electricity produced than many conventional sources, and a lot of the material used are really bad for the environment.

Nuclear is a far more environmentally friendly, far more efficient way to produce electricity. And hopefully that will make a comeback… though the nuclear renaissance is likely still some years away.

In the meantime, there is an incredibly cheap, abundant, and much cleaner source of fuel that can solve America’s electrical capacity shortages and power the AI revolution: it’s natural gas.

I wrote about this last week, saying that US natural gas is a ‘picks and shovels’ investment in the AI boom.

It won’t be clear for a long time who will win the AI race. In the late 1990s, Yahoo looked to be the dominant tech titan… but the landscape changed dramatically over the next decade.

But again, we do know that AI will consume more power than the US grid has available. And the ONLY viable option to supply that power right now is natural gas.

The US is one of the wealthiest nations in the world when it comes to natural gas reserves. In fact, supply is so vast that US natural gas prices are laughably cheap; relative to the amount of energy contained in a unit of US natural gas, it’s priced at the equivalent of about $15 oil. That’s cheap.

So cheap, in fact, that an electrical grid powered by natural gas can not only deliver the quantity of electricity necessary to power the nation (and AI boom), but it could dramatically reduce energy costs.

This is a big deal. Energy prices influence the price of everything. If electricity is cheap, consumers and families save money. Manufacturing costs less. Services cost less. Transportation costs less. Everything becomes cheaper and more efficient.

To be even more clear, a natural gas renaissance could generate greater US economy growth, potentially even leading to higher tax revenue and lower deficits.

In short, natural gas is one of the only ways that they’ll be able to tame the inflation problem and save the dollar. And with natural gas prices so cheap right now, it seems to me that there’s a lot more upside in the energy of the future, than in companies that are already selling for trillions of dollars.

To your freedom,  James Hickman  Co-Founder, Schiff Sovereign LLC

PS — If you want to go even deeper into this topic, we definitely want to encourage you to check out Schiff Sovereign: Premium. it’s packed with some incredible insights, including Plan B strategies and compelling investment research. The upcoming issue due out in a few weeks will go into far more detail about this trend, as well as some ways to invest.

https://www.schiffsovereign.com/trends/this-is-one-of-the-only-ways-they-can-tame-inflation-and-save-the-dollar-151198/

“Inflationary Forces”? Duh

“Inflationary Forces”? Duh 

Notes From the Field By James Hickman / Simon Black 7-16-24

Jamie Dimon is the CEO of JP Morgan Chase, one of the world’s largest banks. And last week he issued a stern warning on the bank’s quarterly earnings call that “multiple inflationary forces” are still lurking.

File that one away under “duh”. It should be completely obvious to just about anyone paying attention to the world that many of the key drivers that rocketed inflation higher are still with us.

The Federal Reserve, of course, desperately wants to pretend that inflation is in the rear-view mirror, never to return. And they keep insisting that the downward trend of inflation justifies their interest rate cuts.

But as Mr. Dimon points out, “large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world” all create high risk of substantial inflation.

We agree with him.

“Remilitarization of the world”, i.e. conflict, is very expensive. The very nature of war means consuming vast quantities of resources to produce munitions that will destroy your adversaries’ resources.

Most governments don’t have the money to do this. The last time the United States was able to fund a war without going into debt was the Spanish-American War in 1898. Every other war, or even preparation for war, required significant additional debt... which ultimately resulted in printing more money.

So, in the end, warfare means more money in the system, but fewer resources. This is the very definition of inflation.

Dimon mentions trade disputes as well, which are also very expensive.

Free trade creates wealth. It allows countries and producers to specialize in what they do best, and trade for what other countries do best.

Germany is great at high tech manufacturing, pharmaceuticals, and various other industries. But they can’t produce bananas to save their life.

Fortunately, Guatemala exists. Guatemala has no high-tech industry. But they’re great at bananas. It’s a sensible trade.

When nations are in dispute with one another, trade breaks down and they start having to produce goods and services where they have no expertise.

Sometimes it works out; in one of their endless wars with France, Britain boycotted French wine... and in the process, accidentally invented port. But usually, such inefficiencies create a lot of inflation.

Dimon also mentions infrastructure needs. And that’s a massive understatement.

The US highway system is deteriorating. Amtrak is blowing money without any serious improvements. California is tens of billions of dollars over budget, and several years late, for a high-speed rail it promised from San Francisco to Los Angeles.

It doesn’t help that they put $1 trillion in the hands of an incompetent diversity hire like Transportation Secretary Pete Buttigieg.

All of this money will need to be conjured out of thin air by the central bank, which, again, is inflationary.

Lastly, Dimon also references “large fiscal deficits”, which is putting it politely.

We’ve said it many times— the government’s own internal projections expect an extra $22 TRILLION in deficit spending (i.e. new debt) on top of the $35 trillion national debt, over the next decade. Most of that will come within the next five years.

Deficits are inflationary, as we have seen over the past few years.

To be fair, there are some potential deflationary forces as well.

Increases in productivity are very deflationary. Technology, driven by artificial intelligence, could be monumental in improving productivity and keeping prices down.

Yet there are also a lot of people in government (and even within the AI industry), trying to slow down development and hold back AI.

Capitalism— which encourages competition to offer the best quality goods and services at the lowest prices— is also deflationary.

Unfortunately, many people in power despise capitalism and rail against it as racist, misogynist, or bad for the planet.

To Read More:   https://www.schiffsovereign.com/trends/inflationary-forces-duh-151157/

3 Real Assets Primed For Growth In The Coming Inflation Bonanza

3 Real Assets Primed For Growth In The Coming Inflation Bonanza 

Notes From The Field  By James Hickman/Simon Black 7-11-24

After today’s inflation report showing ‘only’ 3% inflation, the Federal Reserve is all but guaranteed to start slashing interest rates.

The Fed Chairman essentially promised as much to Congress earlier this week, and has warned that if they don’t start cutting interest rates soon, “we could undermine the [economic] recovery.”

These guys still don’t get it. At this point it’s not even about 3% inflation (which is still too high) or 2% inflation. It’s about prices going back down to pre-pandemic levels… or just lower in general.

But that’s just never going to happen. The Fed doesn’t care about price reductions; they’re happy with a slower rate of price increases… which is totally out of touch with what people want and need.

They’ve been itching to cut rates for months… almost desperate. And in large part that’s because they’re terrified about the US government’s insolvency.

The national debt is about to pass $35 trillion. And high interest rates mean that the annual interest bill this year will exceed the US military budget-- more than $800 billion-- for the first time in nearly 250 years of American history.

The Fed knows that they have to slash interest rates as quickly as possible. With ultra-low rates (like 1.5%), the interest bill on a $35 trillion national debt is manageable… as long as the federal government can rein in spending and stop the debt from growing further.

Of course there are two key problems with this thinking:

First, there is zero evidence that the government will rein in spending. If anything, they seem primed to spend even more. I’ve mentioned several times before that even the US government’s own budget forecasts project more than $22 trillion in additional debt over the next decade.

Second, slashing interest rates will most likely result in significant inflation-- just like we saw in 2021-2022.

We’ve written before how real assets are a safe haven from inflation, and I wanted to briefly discuss three real assets that look especially promising.

The first is physical gold and silver, which serve as a store of value-- especially during inflationary times.

Higher inflation will likely trigger a surge in demand, making the price of precious metals not only keep up with inflation, but exceed it.

But there is another reason why gold will do especially well the worse inflation gets.

The worse inflation becomes, and the worse the US national debt becomes, the more likely the US dollar will lose its spot as the dominant reserve currency. And central banks all over the world-- India, Poland, Singapore, etc. have been feverishly buying up physical gold over the past few years, most likely to prepare for that potential change.

So if inflation picks up, it’s a good bet that central banks will keep buying up gold-- and driving prices higher.

Gold mining stocks should also do extremely well in that scenario due to their exposure to gold prices.

What’s interesting right now, though, is that despite gold being near an all-time high, share prices of many gold mining companies are incredibly cheap.

That’s because central banks-- which have driven gold prices to record highs-- only buy physical gold bullion. They do not buy gold stocks.

However, while the price of gold has already increased substantially, the stock prices of many great gold miners has not.

This is because most of the current demand for gold is coming from central banks. And central banks only buy physical gold— not gold mining stocks.

This means that gold stocks are currently a bargain-- with a LOT of upside potential.

Last, US natural gas is another compelling real asset primed for huge growth.

Right now, natural gas prices in the US are dramatically lower than they are in Europe… and it’s easy to understand why: the US has some of the biggest natural gas reserves in the world, while Europe has almost nothing by comparison. (This is why Europe is so reliant on Russian gas).

And since Joe Biden has banned new LNG (liquefied natural gas) export terminals from the US, it’s difficult to move that US natural gas to Europe.

This is why prices in the US are less than $3, versus more than $10 in Europe. If US producers were free to export, prices in the US would rise, prices in Europe would fall, and the global natural gas prices would be more or less the same, similar to oil.

In terms of energy equivalence to oil, $3 per million BTU natural gas is the equivalent of paying around $15 - $20 for a barrel of oil. That’s cheap. And it means US natural gas is the most underpriced conventional energy commodity in the world.

But it probably won’t stay that way for long.

First, large tech companies, which are building massive, energy-hungry AI data centers, are also looking at putting in their own power plants… which will most likely be powered by natural gas.

Second, the new export terminal ban probably won’t last. There are lawsuits, legislation, and an upcoming election, any one of which could restart new LNG exports. When this happens, US natural gas prices could quickly rise.

In either case, natural gas producers stand to benefit substantially from higher prices. And it just so happens that shares of many of the best quality producers right now are laughably cheap, with low multiples relative to earnings, book value, and Free Cash Flow.

Looking at the overall investment landscape now, with many conventional stocks and indexes near all time highs, these three sectors strike me as some of the most promising investments for an inflationary environment.

To your freedom,   James Hickman  Co-Founder, Schiff Sovereign LLC

https://www.schiffsovereign.com/investing/3-real-assets-primed-for-growth-in-the-coming-inflation-bonanza-151138/