Around the world, demand for dirty coal keeps growing and coal prices are running like the police are after it.
In light of this, it’s worth highlighting just how hated and underinvested coal equities still are today.
In 2006, coal miner Peabody Energy (BTU) traded at 31x P/E and was flagged as a “burning buy” (H/T to @GringoInvesting).
For comparison, today Peabody trades at about 3x P/E. One could argue the stock is closer to being a “burning buy” today than it was when the above article was published. Funny how that works, eh?
FIRST VS. SECOND-LEVEL THINKING
Howard Marks of Oaktree Capital is out with a new client letter, I Beg to Differ. If you haven’t read it yet, it’ll make for a great weekend read. The following nugget in particular resonated with us:
First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favourable, meaning the stock will go up.”
Second-level thinking is deep, complex, and convoluted. The second-level thinker takes a great many things into account:
- What is the range of likely future outcomes?
- What outcome do I think will occur?
- What’s the probability I’m right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future, and with mine?
- Is the consensus psychology that’s incorporated in the price too bullish or bearish?
- What will happen to the assets price if the consensus turns out to be right, and what if I’m right?
The difference in workload between the first-level and second-level thinking is clearly massive, and the number of people capable of the latter is tiny compared to the number capable of the former.
First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple.
For an example of how we use this framework is practice, let’s take a look at the current energy crisis, particularly natural gas. Shortages in natural gas impact the production of ammonia. Ammonia is used in fertilizer production, which we got very bullish on.
A reduction in or increase in the price of fertilizer impacts aggregate food supplies. The most susceptible to food shortages are, among others, African countries. They simultaneously hold dollar loans.
As a consequence, an inability to service those creates a balance of payments crisis, which itself fuels dollar strength as well as impacting multiple layers of the economy using dollar credit markets.
You could extrapolate this even further, but let’s stop here to identify a few key investment takeaways (we are, after all, capitalists at heart).
Long agriculture, long energy, and long geopolitical tensions (which in currency terms is short most everything against the dollar) — ultimately, that’s what any balance of payments crisis brings.
ALL THINGS TRANSITORY…
Feels like a lifetime ago, when — back in February 2020 — we started warning that lockdowns will bring about inflation and shortages. Fast forward to today, and this pesky stuff is now part of our daily lives. We recently set up a dedicated inflation channel in our Insider private forum, where members can share their own experiences with all things “transitory”.
This week, we have a couple of “boots on the ground” insights from around the world. It all started with Sean’s report from a local supermarket:
Cream cheese at M&S was £1, then it went up to £1.10 but today’s price is £1.75. Mr Biden says inflation is 0%
And then Kathryn chimed in:
I can’t speak for you Sean but here in NZ boxes of cake mix have gone up 89% as of Tuesday this week from last month. When at the store this week I could not believe the increase. Frozen chip prices (french fries) doubled literally in one week per bag. $3 to $6 dollars.
And lastly, this one from Ash with a “modest” tripling of energy costs:
So my energy term (gas and electric) is up for renewal (UK resident). The fixed term they offer is 200% monthly increase vs my current monthly cost.
Sheesh if I was smart I should have invested in oil and gas…. oh wait I am part of capitalist exploits crowd….
fat plus-sized dividends from the oil and gas stocks in the Insider portfolio will pay for Ash’s energy bills (and then some).
INFLATION: YOU WANTED IT, YOU GOT IT
While on the topic of inflation, our friend Kuppy reminded us of the time when the Fed pointy shoes were worried that inflation was too low. If our memory serves us correctly, they wanted inflation to run hot (their words, not ours).
Can you believe this was less than two years ago? Life, as they say, comes at you fast. But sadly, in this case, it’s all of us paying the price (no pun intended).
Crazy, right? But that’s exactly where we stand today.
Have a great weekend!