Thursday, 9 November 2023 — Melbourne, Australia

By Greg Canavan Editor, Fat Tail Daily

[1 min read]

Dear Reader,

I’m travelling down to Melbourne today. We’re hosting an inaugural ‘meeting of Fat Tailers’ at the beautiful Windsor Hotel in the city. 160 Fat Tail readers are coming along. I look forward to meeting as many as possible.

All the editors you read in the Fat Tail Daily will be there. We’ve got short and sharp speeches lined up, followed by drinks and canapes.

I’m writing this on the train to the airport. The trip from Wollongong is pretty seamless. Get off at Wolli Creek. Change trains, and two minutes to the domestic airport. My only gripe is the mafia-like extortion for entering the airport via the train. The ‘gate pass’ is $17 an adult, and is added to the train fee.

Gotta love a monopoly.

Anyway, because of today’s travel I recorded the What’s Not Priced In podcast a day early. I mentioned that with the current market relief rally there wasn’t really a standard contrarian play. Not from a sector perspective anyway.

But on reflection, the contrarian play is obvious. It’s small caps. Micro caps. Junior miners. And many resource stocks in general.

In the US, the Russell 2000 (a small cap index) hasn’t enjoyed much of a rebound. The large caps absorb all the money. It’s a similar picture here in Australia. Nervous capital stays away from the smaller end of the market. This is where uncertainty lives.

But uncertainty breeds opportunity. If you can think like a big investor, as James Cooper writes below, you’ll see opportunity where others see uncertainty. His message: Watch the insiders. 

Enjoy…

By James Cooper Editor, Fat Tail Daily

Twitter: @JCooperGeo

[6 min read]

Dear Reader,

When we talk about watching insiders, I mean the BIG players in industry.

That is, the directors of multi-billion-dollar companies, mining magnates and executives from investment banks tied up in mega-deals that shake the industry.

It seems simple, follow an insider and invest accordingly…

So why don’t more people do it?

Well, small time investors want instant returns, especially in the mining sector.

They’re also quick to pull the sell trigger when stock prices decline.

But week-to-week share price volatility matters little to big time investors.

In fact, MAJORS often get market timing wrong (over the medium term).

But that matters little…the big wigs position for long-term growth…the mega trends.

Think about it, long-term growth opportunities in commodities are obvious when you put short-term volatility to the side…

Limited supply thanks to a lack of new discovery and broken supply chains.

This is happening precisely at a time when the world is looking to embark on a once-in-a-century energy transition.

The investment road map is clearly there…crystal clear for investors to follow.

But without knowing exactly WHEN the market will turn, the majors know they must ride-out today’s volatility to capture gains from this commodity mega trend.

That’s what insiders ARE doing and I think you should be following their lead.

Just take Gina Rinehart, Australia’s richest person.

Rinehart heads Hancock Prospecting, a privately owned mineral exploration and extraction company founded by her father, Lang Hancock.

But her role in turning this company into the multi-billion iron ore giant it is today absolutely qualifies Gina as a successful business tycoon in her own right.

In other words, Rinehart is an insider worth watching.

In December 2022, she pumped Arafura Rare Earths [ASX:ARU] with $60 million in capital.

That gave her a 10% stake in the company.

But as an investor that’s looking like a pretty poorly timed deal…

Shares in Arafura have fallen over 50% since Rinehart took her stake.

But I doubt Gina is overly concerned.

Rinehart is positioning for major future upside as rare earths become entangled in trade disputes between China and the west.

As an advanced developer, Arafura is looking to join an exclusive club of rare earth suppliers located OUTSIDE China.

Now, there’s no guarantee China will restrict rare earth trade exports, but my money’s on this multi-billion mining magnate getting this theme right.

Another key investment idea to watch right now is lithium…Gina has invested heavily in Australian lithium companies in the second half of 2023.

Given the hefty price falls, this insider looks to be capturing the steep discounts on offer.

Again, it’s something you should be watching.

Earlier this year, she flouted chemical giant Albemarle’s attempt to acquire Liontown [ASX:LTR] after buying a 20% stake in the Australian developer.

Rinehart is now in a corporate showdown with Chilean lithium giant SQM, and its bid to take ownership of Australia’s Azure Minerals [ASX:AZS].

As retail investors flood out of lithium stocks, Rinehart is buying.

This key element is what separates billionaires from the average punter…

The world’s most powerful investors are intimately aware of long-term growth drivers.

It’s THIS knowledge that gives them the strength to capitalise on market weakness.

You see, insiders are privy to the global dealings between suppliers, buyers, policy makers and the future direction of supply and demand.

They usually have a team of analysts at their disposal and high-level contacts.

The rich get richer by using information, not by luck or an intuitive punt on the stock market.

It is a key reason you should be following their lead.

Now Gina is not the only insider worth paying attention to...

Australia’s second richest person, Andrew ‘Twiggy’ Forest is another successful business tycoon who amassed a fortune by pivoting to iron ore in the early days of the China-led infrastructure boom.

But here, we have another iron ore billionaire shifting into critical metals.

He’s family-owned business, Wyloo Metals, has steadily acquired projects across Australia and overseas as it looks to become a multi-commodity powerhouse tied to the critical metal theme.

Earlier this year, Wyloo completed the acquisition of Australia’s Mincor Resources, a nickel sulfide producer based in Kambalda, Western Australia.

Wyloo also picked up one of the largest undeveloped, high-grade nickel-copper-platinum-palladium deposits in the world…

Known as ‘Eagles Nest’ it is located on the fertile grounds of northern Ontario, Canada…a region aptly called The Ring of Fire by geologists thanks to its rich endowment of minerals.

But it’s the world’s largest miner, BHP, that you should be watching most carefully…

You see, this company delivers more contracts, acquisitions, mining, exploration than any other entity in the world.

It’s a major stakeholder at high-level meetings between suppliers, policy makers and buyers.

Not just in Australia, but in every major mining hub across the world.

It’s why investors should be paying close attention.

Follow BHP’s multi-billion-dollar money trail and it is clear what this mining giant is doing…

Completion of a $9.4 billion takeover of South Australia’s Oz Minerals earlier this year…followed by a $4.5 billion expansion of the world’s largest copper mine in Chile, Escondida.

In addition, it’s flagged more than $10 billion worth of investments into new copper projects in Chile.

It is also throwing an army of rigs and support crew at South Australia’s Oak Dam copper development, near Olympic Dam.

Watch the insiders and follow their lead…Right now, the biggest breadcrumbs lead to critical metals.

Until next week,

James Cooper,
Editor, Fat Tail Daily

By Bill Bonner Editor, Fat Tail Daily

Dear Reader,

As predicted, WeWork didn’t work. Bloomberg:

‘WeWork Goes Bankrupt, Signs Pact With Creditors to Cut Debt

‘Former high-flying startup WeWork Inc. filed for bankruptcy listing nearly $19 billion dollar of debts, a fresh low for the co-working company that struggled to recover from the pandemic.

‘The New York-based company said it had struck a restructuring agreement with creditors representing roughly 92% of its secured notes and would streamline its rental portfolio of office space, according to a statement. The Nov. 6 Chapter 11 filing in New Jersey listed assets of $15 billion.’

Our main goal is to avoid the Big Loss. Today, we look at what causes it.

The idea of the Big Loss comes from the great Richard Russell. He pointed out that most people make most of their money incrementally, over a long period of time.  They earn; they save; they invest. If they’re lucky they end up with a nice little pile of money, but only after they are well into middle age.  

The danger is not that they will miss the next great investment opportunity — AMZN, Google, Netflix, etc. Those opportunities are few…and unpredictable.  Thousands of new companies emerge. Few survive.  

Avoiding the ‘Big Loss’

The real danger for most people, over the age of 55, is not missing out on some unknown new innovation. Instead, it’s getting whacked by something well-known…that turns out to be untrue.

In the late ‘90s, the threat of the Big Loss came from the faith that people placed in new technology — specifically, in the internet and its spin-off dot.coms. Heavily investing in the sector would be okay for a young person. They usually don’t have much to lose; and the most important thing for them is to learn. The popping of the dot.com bubble provided a lesson they wouldn’t soon forget.

The next Big Loss came in the real estate market. It looked like a sure winner. In 2002, the median house sold for $145,000. By 2007, it was $215,000. In other words, it gained about $15,000 per year. Assuming the buyer put down a 20% deposit, that was a return on cash of nearly 50% per year for five years. Smart  investors figured out how to leverage it — ‘flipping’ houses themselves, or investing in housing-related industries.  

There was a lesson to learn there, too. Over the next five years, the median house lost $45,000 in value. The buyer in 2007 would have seen his entire 20% deposit wiped out. As a homeowner, he could hold on for another five years…and he would have been okay. Prices came back. But the speculator, flipping multiple houses or buying shares in a go-go mortgage lender, was doomed. In June 2009, in an article cleverly titled ‘Angelo’s Ashes,’ the New Yorker looked back at one of the great mortgage finance businesses and its founder, Angelo Mozilo:

‘…Countrywide Financial Corporation was regarded with awe in the business world. Fortune published a story in September, 2003, called “Meet the 23,000% Stock,” which said that Countrywide had “the best stock market performance of any financial services company in the Fortune 500, measured from the start of the Great Bull Market over two decades ago.”

‘Shareholders who had invested a thousand dollars in 1982 would in 2003 have more than two hundred and thirty thousand dollars… 

‘On January 11, 2008, Bank of America announced it would buy Countrywide for four billion dollars in stock — a sixth the amount of its market value before the crisis began.’ 

That was a loss of 83%.

Bonds Go Bust

The next big opportunity for a Big Loss came in cryptos. A few people got rich — especially those who got out early. Most cryptos were dreamy scams. Pity the poor investor who put his whole wad into them.

And then came a Big Loss in an area that should have offered no loss at all — bonds. An oft-stated allocation rule is that you should subtract your age from 100; the remainder is how much of your money you should have in stocks. Obviously, as you get older the allocation to equities (considered risky) goes down.

The rest, typically, is invested in the safety of bonds. But bonds are less safe, now that the feds have shown themselves willing to ‘print’ their way out of any emergency. That’s why we have no bonds in our own portfolio. Since 2020, the US Aggregate Bond Index is down 17%. After inflation, investors have lost about a third of their value.  

US Treasury bonds should be about the safest credit in the whole world. But they’ve been going down for the last 39 months, the longest drawdown in history, so odds are that they will recover in the months ahead. But they are far from safe.

And remember, the Big Loss always comes as a surprise. You think you can depend on…real estate…bonds…stocks? Where will the next Big Loss come from?

Stay tuned…

Regards,

Bill Bonner,
For Fat Tail Daily