Last to Start and First to Finish

The Days Ahead:

• Small business survey and consumer credit

This Week:

• Uranium prices are on the move again.
• The future of nuclear looks bright.
• But it’s a tough business to invest in.
• The ECB is probably done with rate hikes.
• But growth is very slow.
• Japan did a thing!
• It’s a slow road to normalization.
• How to break sanctions part 2.
• Six central banks left rates unchanged this week.

Uranium Revisited

We wrote a few weeks ago about uranium. It’s a strange commodity because most nuclear plants buy their uranium as far in the future as possible, so there isn’t much that trades on the spot market. There are 54 nuclear power plants in the U.S. providing 20% of electricity used. This is about the same as all renewables and about half what natural gas and coal-powered electric generators produce. The U.S. is the largest nuclear power generator in the world, producing 90% more electricity than China in second place. U.S. nuclear plants’ share of total domestic energy output is at 20%—unchanged since 1990. Coal has dropped 60% in 20 years while renewables have risen 217% and natural gas by 160%.

So, the quick summary is: coal is down a lot, renewables are up a lot, natural gas is up, and nuclear is steady. As we mentioned last time, a nuclear power plant uses around 27 tonnes of uranium a year. That would fill up one-quarter of a single rail car. The average coal-fired plant uses 24,000 tons of coal a day—enough to fill 230 rail cars.

The U.S. uses around 19,000 tonnes of uranium a year but only produces 88 tonnes. So, the U.S. buys nearly all its uranium from abroad. Of the total bought at an average price of $39 a pound in 2022, none of it was bought at the spot price. That’s around $1.6 billion worth of uranium a year, or what U.S. oil producers sell in a day. Nearly all of it was presold at fixed prices for periods of up to 10 years.

We mentioned that nuclear was clean, growing at 40% on a global level and reliable, but uranium mining has a long lead time and is complicated to process. It’s also efficient. You can power a typical home in the U.S. with a single one-inch-high pellet of uranium—equivalent to 1 ton of coal, 880 gallons of oil or 17,000 ft³ of natural gas (about two truckloads).

Nuclear is not a popular option in some countries. “Better active today than radioactive tomorrow” was one popular U.S. grievance. There are fewer protests against it these days, even while eight new plants are due to come on stream and another 10 are pending.

In France, where nuclear comprises 70% of the country’s electricity generation, it’s a question of “No oil, no gas, no coal, no choice.” Up to six million French people visit its 56 nuclear plants every year. In Germany, nuclear is not popular, although there may be a rethink after the debacle with Russian natural gas supplies.

China is nearly 100% self-sufficient in reactor design construction, mining and the entire nuclear fuel cycle. It will grow capacity by 45% in the next decade, and its policy is to “go global” with exporting nuclear technology and components. We suspect it’s a wildly popular policy because the 20th National Congress of the Communist Party of China said it was.

We thought this would be a slow-burn problem and we’d revisit it next year to see how things were going.

Well, things have started to move. There are four major uranium miners on the Toronto stock exchange: Cameco Corp., Energy Fuels Inc., Ur-Energy Inc. and NexGen Energy. Together, they produce around 16% of global supply, but one of those—Cameco—produces 14% on its own from a single mine. Only two of the companies are profitable.

Most of these companies have presold production for around $58 per pound and the current price is $74. That seems like a good hedge-fund type trade. Buy the mining companies when they’re selling their output 22% below current prices and wait for the contracts to run out. These four companies have attracted the attention of investors recently with price gains between 44% and 83% in the last two months.

It’s also been a popular trade with retail investors. Three popular uranium exchange-traded funds (ETFs) saw inflows of around $1.2 billion in the last few months to total $3,500 million in assets from $180 million in early 2021.

How will this play out? Nuclear won’t outgrow renewables, but its reliability is a huge advantage when the sun doesn’t shine and the winds don’t blow. The mining side of uranium is fraught with time delays, clean up, capital costs, processing and transport complexity, and political risk. It’s probably not the best way to invest in the sector.

We’re not even sure it’s an investible sector. Do you buy the miners or the utility? Or some other part of the value chain? But nuclear is growing in influence and seeing more attention from retail and institutional investors.

The Last to Start and the First to Finish

A few days after the U.S. announced 4.9% growth in gross domestic product (GDP) for the quarter and 2.9% for the year, the European Union (EU) announced the eurozone had a fall of 0.1% in GDP over the quarter and a 0.1% rise for the year. This is how it looks:

The green bars show the annual growth in employment in the eurozone, which is up only 0.14% over the quarter and up 1.3% over the year. The U.S. is up 0.5% and 1.7%. The unemployment rate is down from its 2020 peak of 7.5% to a record low of 6.4% (although data only goes back to the creation of the euro in 2000). Unlike the U.S., most workers during the COVID-19 pandemic were in job-retention schemes that kept people off the unemployment rolls. The effect was the same: some 20 million (22 million in the U.S.) weren’t working but were technically still employed.

Meanwhile, inflation is running at 4.3%, down from a peak of 10% a year ago. The European Central Bank (ECB) was late to the global trend of raising interest rates, only starting in July last year from the zero level. ECB officials moved rates up to 4.5% without a pause, but last week, they took a break.

Christine Lagarde, head of the ECB, has a tough job. Overall, growth and employment are slow and slowing, with growth going negative. German GDP fell for two successive quarters as the economy struggles with the triple shocks of a downturn in Chinese demand, gas supply shocks and a renewal of defense spending after years of “state failure” in defense strategy. She also shares policy decisions with 22 other central bank chiefs.  

Dissent is frequent, and satisfying the needs of a very disparate EU is hard. Current EU inflation at 4.3% includes a wide range of rates from the Netherlands at -0.3% to Hungary at 12%. The big four—Spain, Italy, France and Germany—range from 3.3% to 5.7%.

It’s the same for growth. It’s -0.1% for the EU, but the range is -4.7% for Ireland to 3.9% for Malta. The big four range from -0.4% to 1.8%.

And unemployment ranges from 2.7% in Malta to 11.5% in Spain. For the big four, it’s 3.0% to 11.5%.

In the end, the uncertainty was all too much and the ECB pressed “hold.” It did, however, leave one bond-buying program in place. This is the Pandemic Emergency Purchase Programme, which accumulated some €1,850 million of government bonds from 2020 to 2022. Today, it’s €1,700 million but that’s because the market value of the bonds fell. The ECB will continue to reinvest interest and maturity repayments at least until 2024.

Just to underline her hard-won credentials as an inflation hawk, President Lagarde all but ruled out rate cuts in 2024. For now, the rate rises seem done, and the ECB will watch and hope inflation eases down. It should. In one direction, housing and energy are 40% of the German inflation basket and they should both ease. In France and Italy, goods inflation is around 56% to 60% of the index, which in turn is heavily driven by energy. That should also start to ease.

Growth is another issue. It’s too low and headed for 0.3% in 2023 and perhaps 0.5% in 2024. The EU is in the unfortunate position of trading slow growth for no more rate increases. It’s not a great outlook.

Things Move Slowly in Japan

We’ve been talking for a while about things changing in Japan. As a quick reminder, Japan has fought deflation, a shrinking population and slow growth for 30 years. The Japan’s 10 Year Government Bond hasn’t been above 1% since 2012 or above 2% since 1999. The policy from the Bank of Japan (BOJ) has been to keep rates low, buy a lot of bonds and equities, and target the 10 Year Government Bond at 0.25%. The BOJ moved this to 0.5% in the summer and 1% a few months ago. Meanwhile, the stock market took off and the Japanese yen weakened to a 33-year low.

On Tuesday, the BOJ announced it would allow the 10-year bond to trade above 1%. The yields now look like this:

When looking at Japan, I find it helps to look at things from upside down. If rates go up, it means the economy is doing better. If inflation goes up, it means Japan is finally slaying the deflation demon of 30 years. If wages go up, it means an increase in real wages, which hasn’t happened for decades.

So, unlike when other central banks raise rates, we see this as a good thing. Rates are artificially low. The BOJ owns about half of all national debt. But BOJ officials now see inflation as staying higher (great) and they’re hopeful that next spring’s wage negotiations will lead to another 4% wage increase (better).

Not everyone’s convinced. This is Japan, after all, and there have been two generations of fund managers and investors who got all hyped up about a resurgent Japan only to go home winless and poorer.

But we would say, the process of normalization has started. The BOJ, the Ministry of Finance and the government are very much linked and in agreement with each other, so it’s unlikely discussions of tax hikes will go anywhere.

Japan doesn’t do drama. We see these recent moves as more steps to put monetary policy on a surer footing. Stocks rose 5%. So far, so OK.

Could Not Pass This One Up

Many of the ways around Russian sanctions hide in plain sight. We discussed how Malaysia manages to export 100% more oil to China than it produces by re-sourcing Iranian oil. Another is the amazing growth in EU exports to the members (excluding Russia) of the Commonwealth of Independent States (CIS), a loose federation of ex-Soviet republics, excluding the Baltics, Georgia and now Ukraine.

Exports from the EU to the eight states doubled from about €500 million per month in 2022 to nearly $1,000 million in mid-2023. About half of that is through Kazakhstan, whose imports with the EU are up 30% so far this year. Some 13% of Kazakhstan exports go to Russia. This also shows up on the Russian side where imports are up 20% over 2022 levels and even 7% above 2021 levels.

It’s a straight-up sanctions dodge and includes some sophisticated machinery that is not really meant to go to Russia under any circumstances.

Not only can trade seem to work around sanctions, money can too. The Bank for International Settlements (BIS) keeps track of claims that Russia has on foreign banks. This is what it looks like:

Claims are up to $212 billion from around $104 billion in early 2022. The number was higher back in 2008 but that was before the collapse of many Russian banks. Half of the increase, and $129 billion of the total of $212 billion, comes from banks in Belgium. That’s because Belgium is home to Euroclear Bank, which is a global transaction and settlement service.

Basically, Russians wire money from their Russian banks to banks all over the world. We don’t know who they are . . . we just know they cleared through Euroclear. The BIS also shows that of the $212 billion, only $32 billion is from nonbanks (or people as they can be known).

So, Russian banks sent their foreign currency assets to overseas banks and continue to have control and access to those accounts. It’s all there in plain sight.

What can one say? Sanctions don’t work? Markets (or nature) will find a way? You need wider enforcement or compliance? We need a reset? In a very bizarre way, it suggests that wars are big businesses and companies can do well during them.

The Bottom Line

The Fed, ECB, Bank of Japan, the Norges Bank, the Bank of Canada and Bank of England all left rates unchanged in the last week or so. The Swiss National Bank only meets four times a year and it made no change back in September. It looks like the rate hiking cycle, which in the U.S. saw rates climb the fastest in over 40 years, may be drawing to a close.

That does not mean that inflation is back to where banks want it. In each case, the decision to not raise was deliberate and cautionary. And each left the door open to raising more if they must.

There are two good news items from the U.S. and both are quarterly reports.

One was the productivity number, which was up 4.7% and the highest reading since late 2020. We’d ignore COVID-19 era data because companies saw a big spike in demand and hadn’t rehired all the workers they let go in early 2020. The same is true around recessions. We typically see jumps in productivity when companies struggle with either firing or rehiring employees. If we look at “steady state” productivity, then the 4.7% number is the best since 2005. The rough calculation for productivity is the relationship between output, which went up 5.9%, and the hours worked, which only went up 1.1%. Unit labor costs fell 0.8%. The Fed will like that. Officials keep a gimlet eye on wage growth but they’re more relaxed if it’s accompanied by productivity growth.

Two is the Employment Cost Index, which measures wages, benefits, bonuses and all employer costs. It’s much broader than the average hourly earnings we see once a month. The annual number was up 4.3%, which is down from 5.0% a year ago. All in the right direction.

The bond market continues its volatility. In the last 10 days, we’ve seen the 10-year U.S. Treasury rate fall from 5.0% to 4.6%. To be fair, it’s had a lot on its plate: strong GDP growth, new supply, Fed guidance on “higher for longer,” the wars and a government shutdown looming. Stocks rallied every day this week, with a gain of 4% until Thursday’s close. They’re still 6% below the high from July but they seem reconciled with the Fed’s policy and message.

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Art: Stephanie Holman (b. 1967)