Our Expert Weighs In On Inflation, Surging Natural Gas Prices, And How We Can Profit…
From Chinese property giants melting down to ongoing supply chain bottlenecks to political games in Washington, keeping up with the latest news can be mind-boggling.
Yet, in our interconnected world, it also pays to stay on top of things. All it takes is one thing to go wrong that you didn’t see coming, and your portfolio is wrecked. On the flip side, staying plugged in can also help identify incredible opportunities…
To make sense of it all, I reached out to my colleague Nathan Slaughter, Chief Investment Strategist of High-Yield Investing.
As you may know, Nathan has been on a roll ever since the Covid pandemic began. From the very get-go, he scooped up undervalued income names at fire-sale prices and locked in incredibly high yields. And many of those picks are up by triple digits today. He also was quick to call out the Fed for labeling the inflation data we were seeing as “transitory,” while telling readers to get into commodities before they began to take off.
I could go on and on. But the fact is, when Nathan speaks, it pays to listen. Here’s what he had to say in our latest exchange…
For the past two weeks, it seems, we’ve had an outright slugfest between the bulls and bears on Wall Street. And the bears seem to be gaining the upper hand. What do you make of all this?
You’re right. For the most part, the sellers have had all the momentum on their side. The way I see it, three important news items are working in their favor.
First, news broke that Evergrande, one of China’s largest property developers, was on the verge of defaulting on its loans and possibly even toppling into insolvency. The fallout from that massive ($300+ billion) implosion would engulf dozens of other lenders and investors around the globe, possibly triggering another financial crash.
While most of Evergrande’s holdings are in Asia, American firms like Blackrock have considerable exposure to this shaky debt. The fact that this potential catastrophe fell on the 13th anniversary of the collapse of Lehman Brothers did nothing to lighten the mood. The parallels are eerily similar.
Meanwhile, traders also had to digest the impact of the Federal Reserve announcement that it will begin tapering asset purchases, as well as possibly tightening rates sooner than expected. In my opinion, a lot of this is to counter the ominous threat of inflation, which the Fed has been reluctant to admit – but I’ve been sounding the alarm on for a while now.
And if that weren’t enough, a contentious, high-stakes debate in Congress regarding the debt ceiling has also had traders on edge. Without acting, Uncle Sam could run out of money to pay bills as soon as October 18, according to Treasury Secretary Yellen.
Any one of these three wildcards could easily send the market into a deep tailspin, possibly even a full-fledged correction. But all three simultaneously? Let’s just say it’s easy to see why the bears have been gaining the upper hand lately.
On the topic of inflation, you deserve a lot of credit for basically saying the Fed was wrong by labeling it “transitory”. Now that the Fed is getting closer to acknowledging it, and what can we do about it?
You’re right, we’re not seeing that word, “transitory” quite as much these days. And I could sit here all day and rattle off quote after quote from company executives who are bringing up this issue.
I’m about to weigh in on this a bit more in my update issue of High-Yield Investing, so I’ll save the good stuff for my premium readers.
For now, I’ll just say that rising prices continue to pose a real threat. Throw in this Evergrande stuff potentially causing financial contagion and the mess going on in Washington, and you can understand why I am cautious right now.
As for actionable steps, I’m looking to use more protective stop losses to nail down profits on some of our more vulnerable holdings. Our readers would be wise to do the same. We may also revisit Treasury Inflation Protected Securities (TIPS).
I’ve been transitioning my portfolio to prepare for this type of environment for a while now. Commodities are proving to be a key beneficiary. If inflation continues to heat up (eroding the value of your dollars), then my advice is to keep at least a small portion of your investable assets in hard assets.
Winter is just around the corner, and natural gas prices were up 34% in September alone. As bad as it is here, prices are even higher in Europe and Asia. What’s going on, and is there an investment angle here?
Oh, there absolutely is. What we’re seeing right now is the perfect storm of high demand, low supply.
As the world recovers from the effects of the Covid pandemic, we’re seeing a surge in demand for natural gas. But there are ongoing bottlenecks in the energy infrastructure.
You may have seen headlines about a lack of truck drivers in the U.K. leading to gas stations running out of gasoline. That’s just one example. Here in the U.S., we’ve seen part of our infrastructure taken offline during hurricane season, too.
Add it all up, and here’s the situation… Natural gas stockpiles are below 50% of capacity throughout Europe and elsewhere heading into winter. And there isn’t enough pipeline supply, either. Not good.
That means winter heating bills are going to be a lot higher in many parts of the world, including right here in this country. Throw in tighter emissions standards in developing markets and the opening of new liquefaction projects, and you see why liquified natural gas (LNG) shipping spot rates hit record highs earlier this year.
I’ll leave our readers with this quote, from U.S. News & World Report:
Power companies in Europe and Asia are engaged in bidding wars over shiploads of liquid natural gas, thereby driving up the cost. Prices are also spiking in the U.S., which converts some of its natural gas into liquid and ships it to Europe and Asia. Those higher costs are showing up in gas bills for consumers around the globe. Analysts expect those prices to rise further through winter, when customers are most reliant on the fuel.
That’s our investable angle, right there. But I’m more interested in the long-term drivers…
Over the next two decades, global energy usage is forecast to expand by 30%. Natural gas demand is expected to grow twice as fast as overall energy. And LNG is projected to grow at double the pace of natural gas. This is truly the sweet spot of the energy markets.
Can you back up a bit and explain what LNG is and why it’s so lucrative to export it?
Sure. Look, we all know the world is gradually phasing out coal from the power grid. And natural gas has supplanted coal as the chief power source in the developed world.
Natural gas accounts for one-third of the electricity in the United States, more than coal, nuclear, hydroelectric, wind, and all other sources. That’s because it’s plentiful and inexpensive, but also cleaner-burning and more environmentally friendly. Natural gas will play a key role in meeting the future energy needs of a growing world.
Until recently, shipping natural gas overseas was infeasible from a cost standpoint. But all that changed when a way was discovered to chill methane to minus 260 degrees Fahrenheit, a temperature at which the gas can be compacted to 1/600th its normal volume. For context, that would compress a 17-inch beach ball to the size of a ping pong ball, making for economical long-distance shipping.
On the other end of the journey, the super-refrigerated liquid is then warmed back to a gaseous state and pumped into pipelines for delivery to power plants, factories, utilities, and other users.
Editor’s Note: I want to thank Nathan for joining me today, and also tell you that his latest pick over at High-Yield Investing plays a critical role in shipping this LNG overseas…
It’s a global powerhouse that transports nearly 10% of the world’s seaborne LNG. Even better news for income lovers is that it also pays a yield of over 7%.
And yet, it’s criminally underappreciated. That will change as soon enough as the market realizes they key role this pick is going to play in the future of the global energy landscape.