Food, Guns, Gas, and Cash

Date: 8/29/2022
Author: Mr. X

Two picks in the Rogue Investing Daily Model Portfolio are involved with firearms. These are Strurm Ruger & Company [RGR] and Smith & Wesson Brands Inc [SWBI].

As value stocks, both look like good plays. Even in this (still!) overvalued environment, both have a P/E ratio of less than eight. Both are coming off huge sales in 2020 and 2021, including with market sectors that the companies have normally struggled with, including minorities and women. Once gun owners have purchased guns, they tend to remain committed. And the cultural shift that occurred over the last few years can’t be overemphasized.

According to the National Shooting Sports Foundation (NSSF), at least 5.4 million people purchased a firearm for the first time in 2021. In 2020, at least one fifth of those who purchased guns were first time gun owners. NBC news reported in June 2022 that sales of guns to African-Americans increased by 58% in 2020 and that 90% of gun retailers said black customers had increased. This included an 87% increase among black women.

Relative to 2010 to 2020, crime is still relatively high. However, current figures indicate that shootings are down 4% compared to the same time last year, with murders down 3%. This is hardly something worthy of great celebration – but it would still represent the first decline since 2018.

My focus has always been on geopolitics and the interplay between domestic politics and business. Obviously, this has been extremely important this year with the climate change bill, especially with Senator Joe Manchin (D-WV) party-saving about-face. When he abandoned his opposition to his party’s infrastructure bill, he likely doomed any Republican chances of taking back the Senate. I’ve put myself on the line by saying that the GOP will recapture the House, but I am far more nervous about that than I was just a few months ago.

According to a recent Gallup poll, President Joe Biden’s approval rating is 44%. That may not sound like much, but it’s his best figures of the year. Democrats clearly have the momentum, with an impressive legislative agenda they can carry into the midterms and a fired up base angry about the repeal of Roe v. Wade. In contrast, the Republicans are suddenly divided over former president Donald Trump and devoid of a message except for inflation. While inflation hasn’t stopped, it has slowed, and politically, that may be enough.

There is still a lot that can happen over the next few months, most notably in foreign policy. While Russia’s plans for a quick takeover of Ukraine have turned into a debacle, the fact remains that President Vladimir Putin has taken over a major chunk of the national territory. Millions of Ukrainians have fled. There is no evidence of widespread popular opposition to the war. More importantly, it is Europe which is beginning to crack.

“You Have No Idea How Bad Europe’s Energy Crisis Is,” declared Foreign Policy – something readers of the late Dr. Kent Moors’s Classified Intelligence Brief would know. Europe has long been dependent on Russian natural gas. German diplomats (and American journalists) laughed when then-President Donald Trump warned the Continent about their dependence on Moscow, but time has proven him correct on this, whatever you might think about him on everything else. Natural gas prices are an astonishing ten times what they should be. A dramatic heat wave that is crushing areas from England to China is also bringing power to the breaking point. That may lead to a more moderate winter – but that is a desperate gamble. If we get a volatile winter, Europe may simply not have the gas necessary to keep its population warm.

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Europe’s political instability is wildly overrated. Already, the Conservative government in the United Kingdom, which led the effort to support Ukraine, is one General Election away from defeat. Prime Minister Boris Johnson is already on the way out. Italy’s government has collapsed, and a right-wing populist government, led by a party some critics have called post-fascist, is likely to win. Elites may complain, but for ordinary Europeans who are seeing their cost of living skyrocket so their leaders can beat their chest for the camera, sacrifices for a war they aren’t even fighting are unlikely to last the winter.

At this point, Democrats can feel extremely confident about the midterm elections compared to where they were just a month or two ago. However, the possibility of a geopolitical earthquake in the form of collapsing Western European support for Ukraine is very real. Already, Austria has said the European Commission has approved Russian gas shipments to the country, including pay for it in rubles. France is already breaking its own regulations to keep nuclear plants running. Incredibly, the German government is refusing to build more.

On Friday, Federal Reserve Chairman Jerome Powell, quite deliberately, set a pessimistic tone on the economy, suggesting that there would be no reversal on interest rate hikes. Senator Elizabeth Warren (D-Mass), one of his biggest critics (she once called him a “dangerous” man), said she is “very worried that the Fed is going to tip this economy into recession.” She’s right to be worried, especially because there are so many factors that the Fed itself cannot control.

Here are the bottom lines for investors going into this fall:

Natural gas, coal, oil and other traditional forms of energy will likely continue to prosper through the winter. Uranium is having a moment as Japan explores the possibility of rebuilding nuclear reactors, but the possibility of a nuclear disaster in Ukraine is not helping the public perception towards atomic energy.

The Democrats will keep the Senate and have a chance at keeping the House. If that occurs, they are likely to push for a renewal of the assault weapons ban. Paradoxically, this may actually drive another wave of gun sales, especially because the Democrats will not be able to overcome the 60-seat filibuster proof majority. Senator Manchin may cave on climate legislation, but it is difficult to see him being the key vote on assault weapons. He may rhetorically support the ban, but he won’t support getting rid of the filibuster for it.

Russia’s chances in this war continue to be underrated. After the initial disaster of the failed advance, Russia has largely consolidated its control in the east. It has taken Luhansk. President Vladimir Putin believes time is on his side as Europe enters the winter – and what is likely a recession. Eastern Europe and America are propping up the Ukrainian war effort – but resources are strained. Any other brushfire conflict in Asia or the Middle East could snap the supply chain. Such a conflict may be increasingly likely as food prices increase along with energy.

It might not be “lawyers, guns, and money” that will get us through this, but it is something close. Food, dollars, guns, and traditional sources of energy are likely to be good investments going into this winter. Energy positions in the RID Model Portfolio are currently up, though entering this difficult Monday we will see how long that holds. Above all, now is the time to get liquid. With the housing market toppling and the stock market entering something of a controlled demolition thanks to the Fed, those who have the resources to act on opportunities can stand to make the kinds of gains smart investors did at the beginning of the pandemic.

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