Monday, 28 February 2022 — Albert Park

[6 min read]

Dear Reader,

1) Today’s Daily Reckoning Australia begins with a hat tip to my fellow editor Brian ‘Goldfinger’ Chu.

He’s our resident gold hound here at Fat Tail Investment Research.

Last week, I got him on the phone to press him for his latest read on the gold market. Gold had rallied to more than US$1,900, and the stocks were beginning to rumble.

You might be surprised to know he urged some caution.

While Ukraine is rattling the gilded cage a bit, we still have a bit of a bogey in the room: the Fed meeting in March.

This is going to be a doozy either way. If they raise too little, the inflation hawks will squark of their cowardice and bubble blowing.

If they tighten too much, they could crunch the outlook for the stock market.

I don’t envy Fed Chairman Jerome Powell right now. He’s spent the last six months or so telling us that inflation is ‘temporary’.

Now, the world’s gone cold on Russia via sanctions and diplomatic isolation.

Russia is a big producer of oil and gas, coal, nickel, iron ore, wheat — in other words, commodities! These are the very markets that push inflation higher because they’re input costs. More inflation could be on the way.

Those appalled at Russia’s aggression naturally call for sanctions to cut off their global markets and foreign income.

There are two problems with this, as far as I can see.

One is that the world’s biggest buyer of raw materials is China.

They are clearly going to keep dealing with Russia in the same way they kept dealing with Iran in earlier years.

No doubt there’s a measure of sticking it to the Westin this as well as their basic need for commodity imports.

The second is that big sanctions on Russian supply will drive up speculation into commodity futures, spiking inflation in the West without the benefit of hurting Russia. They’ll still be selling into China and getting those high prices.

Likely, oil and gas prices already carry a war premium now anyway. It’s possible not putting sanctions on caused them to cool off a bit.

Don’t forget, most Western nations carry substantial oil reserves for this kind of disruption — as long as they’re prepared to use it.

Only time can tell as this situation develops. That brings me back to Brian.

While he urged some temporary caution on gold stocks in general, it is merely a question of timing.

Brian knows the best projects across Australia and the world. All you need is for them to hit the right price.

That’s why I urge you to sign up to Rock Stock Insider here.

Once Brian’s convinced gold is ready to have a crack at a moonshot higher, likely after the Fed meeting, he’ll be there to pull the trigger for you.

Fortune favours the prepared mind. Go here to get started.

2) It’s no easy market on the ASX right now. But there’s always opportunity as long as you keep watching.

One idea, for the moment, is to hunt for dividends rather than obsessing about immediate capital gains.

Another idea might be to explore the use of options to exploit the high volatility and uncertainty we’re currently seeing.

A third is to take the long view. By that, I mean the next five years. That’s how we go about it over at Cycles, Trends & Forecasts. This is where we track the 18-year property cycle.

Our latest issue will go out tomorrow, with a new recommendation from me.

The stock in question is down about 8% since the start of the year — roughly on par with the market (ASX 200).

But its latest market update shows it’s trundling along just fine.

As long as we don’t go into a Third World War, I see it as a perfect time to pick up on the cheap for long-term income and capital gain. It pays out quarterly dividends too.

We also received the most amazing letter last week. One of our subscribers has poor health and therefore income.

She could barely believe us when we said real estate would boom out of the COVID collapse. Then she saw it happening before her and became convinced of our analysis.

She rode the 2020 stock market boom and put the profits into a wonderful home with a low mortgage.

I also had a gent tell me we had changed his life after he converted a decent capital gain into a Fat Tail Alliance membership that’s gone on to lots of great investments.

I urge you: get involved here and see what you can achieve.

All the best,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Don’t be shy! Come check out my podcast on Spotify here. We have some great content…all free. Let me know what you think!

Dear Reader,

‘We’ve been very, very clear that we will not allow inflation to rise above two percent or less.’

Ben Bernanke

We should probably be interested in what happens in Ukraine. In the last 30 days, the country has drawn more worldwide interest than it did in the last 2,000 years. And now everybody who is anybody in the halls of power knows that the capital of the country is Kyiv…not Kiev...and it includes the article ‘the’ as part of its name.

Every major headline implores us to pay attention. Practically every talking head tells us why we should know the difference between the devilish Russian separatists in the Donetsk Basin…and the God-fearing, democracy-lovers in the Dnieper valley.

Beyond that, we know very little…and more than we wanted to know.

Here we have no opinion about foreign policy…except that we are against it. We don’t understand it. But were we to take more of an interest, we would understand it even less. Science, logic, and poetry all agree you can’t be a thing…and watch it at the same time. Strictly as a watcher, we observe that public policy — particularly foreign policy — is almost always best avoided. Whether the authorities claim to be fighting inflation…or sanctioning the Russians…the results will be disappointing.

‘Stupefied by the war and the scale of the catastrophe’, writes Jean-Francois Lecaillon in his handy little book, The French and the War of 1870, ‘contemporaries were so shocked that they couldn’t keep their heads clear enough to learn from it’.

They were in it. They were part of it. They were appalled by it. They mistook everything about it. They were victims of their own foreign policy.

Don’t know much about the War of 1870 — between France and Prussia? Well, neither did the French. Especially not when they were in the middle of it. Its relevance to us is just that our mission is to connect the dots. And in the War of 1870, we see some dots that look familiar.

Glorious stupidity

The war began with a diplomatic incident of no particular importance. But one side took offense. And then so did the other. And then ‘credibility’ was at stake. Before the French knew the what-for or why, they were marching to the sound of bugles.

‘To Berlin’, they yelled. Bands played. People cheered. Soon-to-be widows waved goodbye at the train stations.

It was all very glorious. And remarkably stupid. The French had no more reason to attack the Germans than Americans have getting tangled up in the politics of Eastern Ukraine.

At first, the average Frenchman was puzzled. The newspapers too. What? How come? They couldn’t recall any beef with Wilhelm I.

But after only a few days, all doubts were banished. Fervent patriotism took command. Young Frenchmen mobbed the recruiting stations, eager to get into the war before it was over.

Thus, did they march off to the Rhine…almost gleeful at the thought of the sparkling medals that awaited them. After all, at their head was a Bonaparte, a great nephew of Napoleon himself. And hadn’t his uncle taught them all a lesson — the Prussians…the Hanoverians…the Bavarians…the Lombards…the Spanish…the Italians. And the Russians? Well…never mind.

The problem was the French army was woefully unprepared for war in 1870. Its generals were schooled in the tactics of Napoleonic warfare, from a half century ago. They believed it was ‘fighting spirit’ that determined the outcome of wars…not precision artillery fire.

The Prussians, on the other hand, had sent observers to watch closely as Yankees and Rebels killed each other in the US, 1860–64. They had their men at the Wilderness, Antietam…and Gettysburg. One became so attached to the Confederate cause that he flew the Stars and Bars over his castle in Prussia for the rest of his life.

‘Remember the stone wall’, said Stonewall Jackson, reminding his officers that advances in riflery and artillery had tilted the advantage away from the attacker; he was now the one most likely to die. The stone wall protected the defenders.

A zoological smorgasbord

After the Franco–Prussian war was over…and memories faded…the contest was commemorated in art and literature. A nation needs its myths. The old soldiers told their stories. Top officers defended themselves from charges of ineptitude. Common foot-soldiers recalled how they had done their duty. Battles were painted on huge tableaux, showing the French in their superb uniforms, charging the fearful Hun. We’ve seen the paintings hanging in the Musee d’Orsay or in the Hall of Battles at Versailles. Bayonets gleaming in the sun, the French appear almost invincible.

But it didn’t happen that way. There were almost no Napoleonic bayonet charges. Instead, the French were cut to pieces by German artillery and machine guns before even getting close to the enemy. It was a butchery that almost none were prepared for.

The Prussians had better tactics, better weapons, better training, and better organisation. Within weeks they had captured hundreds of thousands of French troops — including the Emperor, Napoleon III himself. The Army of the Rhine was surrounded and surrendered soon after. Then, the Prussians marched on Paris and laid siege. And once again, the French deluded themselves. The president of the new republic (the Empire was a lost cause at this point), Leon Gambetta, escaped the city in a balloon. He quickly organised another army with which to break the siege. Between French soldiers inside the city and those approaching it from the south, the Prussians were heavily outnumbered.

But you can’t put together a modern army in a few days. The ‘Army of the Loire’ was largely untrained. When the shells began to fall upon it, the young recruits ran away. The ‘relief column’ was quickly repulsed and Paris began to starve. Rats became prime dinner fare. Fancy restaurants served up animals from the zoo, in ‘consommé d’elephant’, or ‘civet de kangaroo’.

Day after day, new hope came — a new ‘breakout’ rumour! And day after day came the disappointment; the ‘breakout’ had failed…or never even tried.

Finally, the city surrendered, and the war was over.

But the fantasies continued. The war had not been lost because of a failure of the army. No, the French told themselves, it was treachery…not incompetence. The army would have been victorious, the revisionist history continued, if they hadn’t been ‘stabbed in the back’ by traitors. (No real evidence of treachery was ever produced.)

This failure to stand back and learn anything proved even more disastrous a few decades later. By 1914, German machine guns and artillery were even better than they had been in 1870. But the French army still believed in its pre-Industrial Revolution doctrines. The army looked good, both on paper and on the field. But it was soon in tatters.

Stay tuned…

Regards,

Bill Bonner,
For The Daily Reckoning Australia