Hey There Income Hunter,

China has been forced to devalue the yuan due to the Japanese yen plummeting 12% against the yuan year-to-date.

The People’s Bank of China (PBOC) was not happy and finally had to do something about it. 

At the same time  the severe lockdowns in China are tanking economic forecasts across Asia. This has led to the IMF reducing global growth more than anytime since before the pandemic. Global growth has recently been lowered to 3.6% for 2022 and 2023.

These reductions have caused a bit of a deflationary panic similar to the Delta and Omicron variants. However each incident was a major opportunity to add to the energy and metal producers, and I think this one will be too. 

Today, we’ll take a look at the supporting data showing that the timing is right, plus I’ll reveal the stocks I like to position for the revival of the reflation trade. 

Historic Divergence in Central Bank Policy

The Bank of Japan (BOJ) continues with its unlimited QE while the U.S. (Fed) will be initiating tightening to reduce their balance sheet by about $1 trillion per year. 

This divergence in policy is causing the yen to crash and the dollar to strengthen at a breakneck pace. 

The stronger dollar turns up the heat on the tightening of financial conditions in the US even before the Fed tightens an expected 50 basis points next Wednesday. 

The coordinated experiments to bring inflation up in Japan and down in the USA are moving out of control …

Not that the central banks were ever in control, but the bottom line is this:

These policies will break the financial system and return all central banks back to printing new money even as inflation remains well above interest rates.

That is extremely bullish for the energy and metals producers and here are two that you should consider … 

Cameco Corporation (CCJ)

We all know how powerful the nuclear growth story is … 

Nuclear power provides clean, reliable, and secure energy, and is the most efficient way for  countries to achieve their decarbonization goals. 

Now the energy crisis hits Europe and European leaders have been quick to make an about-turn and promote nuclear energy as the key to solving their energy problems.

Cameco is in a perfect position to benefit from the European turn around on nuclear power …

CCJ Technical Condition 

CCJ is testing the 50 DMA and trading at a 40 relative strength, not far from 30, which would be an oversold reading.  

More importantly, notice the bottom panel (red circle) of the chart below, showing the implied volatility (red line) rising above the actual volatility in blue. This shows implied vol trading a premium to actual, which signals a down trade driven more by put buying than real selling.

This condition has historically been resolved by a short covering rally as it did early in the year red circles.

RIO Tinto Plc. (RIO) 

RIO 

RIO mines copper, silver, gold, iron ore, bauxite, and uranium. They have zero debt and distribute dividends that yield double digits.

This correction in price is an ideal opportunity to pick up a mining company that is so profitable and provides double digit income to investors needing to combat inflation. 

RIO’s Technical Condition

RIO has an upward sloping 200 DMA and the runup in 2022 was built on tremendous volume.

Nothing has changed fundamentally other than the Fed tough talk and the China lockdown, which are both issues that will resolve themselves.

The bottom line is RIO is a high quality company that produces many of the commodities that will be in demand for many years, and you can own a stock that will beat inflation.

Bring It Home

I have been adding to my core portfolio of commodity producers over the past week, and I am holding cash on the side to continue adding …. 

Because I am confident that the market has mispriced the amount of tightening the Fed can do and they will revert to printing money this year, which will send energy and precious metals soaring once again. 

For Rio I purchased a one-third position of longer-term calls and will add on a test of the 200 DMA and add a third piece on a bullish reversal. 

When you’re trading based on a longer-term macro view you have to trade accordingly and dollar cost averaging is a great strategy to deploy for that approach.

Give it a try and as always …

Live and Trade With Passion My Friend,

Griff