In this Stockhead series, investment manager James Whelan from VFS Group offers his insights on the key investment themes and trends in domestic and global markets. From macro musings to the metaverse and everything in between, Whelan offers his distilled thoughts on the hot topic of the day, week, month or year, from the point of view of a professional money manager.

Anyone who knows me knows that I’ve always been big on the Hitchhiker’s Guide books. A bit of a sci-fi geek at heart perhaps. But I always loved the way it picked out a new way to look at what we deem “normal”. Similar to why I like Spike Milligan.

There’s a part in one of the books where people crash onto a planet and decide to civilise it. They make leaves their monetary system and chaos ensues:

“But we have also,” continued the management consultant, “run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying one ship’s peanut.”

Murmurs of alarm came from the crowd. The management consultant waved them down.

“So in order to obviate this problem,” he continued, “and effectively revalue the leaf, we are about to embark on a massive defoliation campaign, and. . .er, burn down all the forests. I think you’ll all agree that’s a sensible move under the circumstances.”

I’m still trying to think of what it was that brought this to mind over the weekend as I was driving back from Queanbeyan on Sunday (long story) but I was looking at the forests and thinking about how the US inflation read last week of being up 8.5% year on year but flat (0% change) month on month has caused a cacophony of debate as to whether we have inflation or not.

The inflation problem can’t be solved by metaphorically burning forests. It can only be solved by stopping demand for peanuts. Or as I mentioned last week, to stop people being able to afford to splurge on peanuts. It’s not fixing the leaf problem, it’s fixing the peanut problem.

But enough of this ham-fisted metaphor.

Is this a better argument than the week before’s “are we in a recession or not?” debate which caused brains to hurt across the world?

Almost certainly.

I’m not getting involved. Facts are it’s higher than it was a year ago but has not increased in a month.
 

And the market absolutely loved it

I was on the telly on Wednesday last week and pointed to some significant turning points in the market and how on the edge everything was. Not that we live by it (because we invest for fundamental reasons and not technical) but the Nasdaq was looking like if it fell through a certain level of support it would continue down for at least another 8%. If it bounced it looked as solid as you’d like.

Keep in mind that in the bear corner you have some of the smartest guys in the room. This was their positioning at the top of last week.

Against that was substantial retail exuberance for the market. Wednesday night’s CPI drop was going to prove one side right and one side wrong.

Apparently inflation being slightly lower than expectations was enough to make the smart money wrong and it’s caused one of the biggest short coverings in the last decade.

Above’s chart is significant. The bears were, for now, wrong. And they are covering for it.

Nvidia was caught up in this as well and responded amazingly well. They are reporting on the 24th of this month. They released guidance which was negative for the price but seems to have been accepted, digested and factored in.

Speaking for the broader market, we are seeing bullish market indicators.

So this week is a consolidation week. We are invested to levels that are comfortable and require a continued rally to make back the declines of the first half of the year.

Something of note, and in line with one of my “basic facts” of what faces a generation of investors, is the energy shift away from Russia at all costs. This will take time.

The three best ways to play this is over the long term is:

Copper, which is a given anyway due to the electrification of the planet.

Uranium, which is coming back into vogue and seasonally shows strength at this time of year. Preferred ETF for the exposure to uranium companies is listed in the US, run by Global X and has the code URA. Long term it could be a good sleeper in portfolios (like copper) to gain from a global move to nuclear.

Finally hydrogen which, similar to uranium, looks good off its lows. This is the HDGB ETF held across many portfolios but there are local alternatives now such as HGEN, run by ETF Securities:

Some food for thought there.

All the best,

James

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