Just before I had a chance to take a position on ProShares Ultra VIX Short-Term Futures ETF (UVXY) for the second time, President Donald Trump announced a 90-day pause on additional tariffs, and the market flirted with euphoria for a day. The president then went on to announce exemptions for various consumer electronics from the U.S. tariffs on China. However, the arguments made in my second thesis, and my first, which gained 34% in just a few days, are still valid. I expect to redeploy the UVXY and adding on to that, the 2x Long VIX Futures ETF (UVIX), as a riposte to the current disruptive phase of radical uncertainty. This will happen when I think it is, basically, a no brainer. Till then, I thought I would go over my thinking.

UVIX and UVXY Overview

Both the UVIX and UVXY offer leveraged exposure to VIX futures. While UVXY generally aims for 1.5× daily performance of short-term VIX futures, UVIX targets a higher multiple. These instruments are designed to profit in a volatility spike; however, their daily rebalancing and contango roll costs usually induce a decay when held in a low-volatility or mean-reverting environment. In a regime of high and sustained volatility, these products can track, and even magnify, the downward volatility surge. This is a key empirical observation behind using volatility ETFs as tactical tools during periods of systemic stress.

A feature of capitalism is inherent in its name: the accumulation of capital, which has the effect of reducing the cost of capital. For example, a paper by the Bank of England found that in the last eight centuries, interest rates have been heading toward zero. With this comes an easing of volatility. Today’s investor is far more protected against the slings and arrows of outrageous fortune than a merchant sending ships out to trade a millennium ago. What this means is that instruments like the UVIX and UVXY do not tend, in the modern world, to be good buy-and-hold instruments. As capital accumulates, it demands to be invested, and that bids up the price of assets. The S&P 500 will never fall to the price it was in 1871 or even 2000. So, if you held the UVIX or UVXY from their inception in 2022 and 2011, respectively, to date, one would have lost all one’s money. 

In an age of radical uncertainty, time is accelerated. This has profound implications for investors: one of the features of risk is that wealth, in the long run, tends toward its own destruction. Under uncertainty, wealth destruction happens much faster, and downside volatility is more pronounced. In the long run, investing in stocks -or more correctly, in stock market indices-, is by far the best investment that anyone can make, but there are periods in history where stocks underperform other assets. 

There have been periods in which betting on the downside has proven profitable. The CBOE Volatility Index’ (^VIX) best periods have been the current moment, during the Covid-19 stock market crash and the Great Recession of 2008. There is no data pre-1990, but I imagine that the crash of 1987 and the Great Depression would be other analogies. In these periods, volatility indices or products based on VIX futures surged while broad equity indices suffered significant declines. In the last year, the UVXY has gained 21.9% compared to just over 2% for the SPDR S&P 500 ETF (SPY). That is not supposed to happen. According to Fidelity,

There is wide variation for how long volatility tends to last, but one thing’s for sure: Volatility is common. Since 1980, the S&P 500 has experienced a drop of 5% or more in 93% of calendar years. Despite those frequent declines, the market’s average calendar-year return over the same period has been more than 13%.

There have been many bouts of volatility that haven’t led to steep declines, though at times it has. Research shows corrections (generally considered a decline of 10% from recent highs) have lasted an average of 115 days and bear markets (at least a 20% decline) have lasted a median of 19 months.

The UVXY is designed for short-term, tactical attacks on the stock market; it is not supposed to be a buy-and-hold instrument, and certainly not the sort of thing one holds for an entire year. In the year-to-date (YTD), the UVXY is up 101.7%, and the UVIX is up 106%, while the SPY is down 10.5%. I do not know of a single investor who can match those numbers. My contention is that, in an age of uncertainty, the stock market has become dangerous.

The Market Expects Relative Calm

The S&P 500’s 30-day implied volatility (30-day) is currently 0.3522, compared to a historical volatility for the same period of 0.4922. This gulf has been present for some time and illustrates that the market’s current options pricing is forecasting that future volatility over the next 30 days will be lower than what was realized over the past 30 days. Implied volatility is derived from option prices and reflects the market’s consensus of how volatile the S&P 500 will be in the future. An implied volatility of 0.3522 suggests that, based on current option premiums, market participants expect the asset’s returns to fluctuate at an annualized rate of about 35.22% over the next month. Historical Volatility is calculated from past price data, and shows what the asset’s volatility has been recently. A historical volatility of 0.4922 indicates that over the past month, the asset’s returns have fluctuated at an annualized rate of roughly 49.22%. In essence, the market is priced for greater calm and views the high historical volatility as an anomaly or as the consequence of short-term factors that are not expected to persist. 

The market value of the S&P 500 is not an objective fact that market participants merely react to, it is shaped by market participants and their views in what George Soros referred to as “reflexivity”, in his book, “The Alchemy of Finance”. Despite their brief flirtation with euphoria, the Keynesian “animal spirits” are perceiving an increasingly unattractive U.S. stock market, and even U.S. Treasuries have suffered. In this market, the U.S.’s Magnificent Seven have been outperformed by China’s Seven Titans. Having underestimated market risks for so long, investors have still to grapple with the risks inherent in the U.S. stock market, as seen by their day of euphoria. A hidden vulnerability is now becoming visible, making instruments such as the UVIX and UVXY attractive for hedging or speculative gain. Investor sentiment is bearish, and this will shape markets. Euphoric highs need euphoric sentiments and sentiments right now are pessimistic. The AAII Investor Sentiment finds that this week, 58.9% of investors are bearish. In the year ending April 2, 2025, bearish investor sentiment infected 61.9% of investors surveyed. It is noteworthy that the last bullish high was in the year ended July 17, 2024 and that the historic average for bearish sentiment is 31%. BlackRock, the world’s largest asset manager, has already started reporting a slow-down of inflows, as a consequence of growing investor pessimism. This can be seen with how quickly the market’s euphoric response to the president’s announcement of 90-day pause to additional tariffs faded. One of the oddities of that response is that stocks that are clearly harmed by tariffs on China -which are now effectively 145%-, went up by over 10%, with the Magnificent Seven tech stocks regaining $1.8 trillion in market value, a one-day record in which NVIDIA (NVDA) rose 19%, Tesla (TSL) shot up 23%, and Apple (AAPL), and Meta Platforms (META) –whom I have written about– added 15%. This was before the president announced his carve-out for consumer electronics. Not only did the then-current tariff position leave the Magnificent Seven weaker, it also compelled a downward re-rating of the S&P 500. The day after that euphoric response, markets slumped, and the UVXY and UVIX once again triumphed. 

In uncertain environments, investor sentiment can swing widely. I abandoned my attempt to enter this position for a second time because I believed that the losses would be huge. I think the UVXY was down around 36%, which would have meant I would need a 55% bounce to get back to where I started. However, I could have entered it regardless, because in an environment of wildly changing investor sentiment, it is easy to make up such losses, as latent overconfidence gives way to panic or massive downward re-pricing. Regime uncertainty will cause extreme movements in volatility, again justifying a bet on VIX-linked instruments.

Causes for Sustained Downward Volatility

The Aggregate Investor is Overinvested in Stocks

In some ways, this period of intense downward volatility was predictable. Even without tariffs, portfolio allocation was already too heavily tilted toward stocks. An era of prolonged wealth accumulation and stability led to progressively riskier portfolio allocations until the U.S. aggregate investor reached historic levels of equities-allocation. If the previous period of low-volatility and easy wealth accumulation has led to a widespread underestimation of risk, a “Minsky moment” of sorts is plausible, leading to a sudden surge in volatility. In the first and second theses, I pointed out that, using a measure I call, “equity preference”, as of the end of Q4 2024, the aggregate investor’s portfolio was 52.18% allocated to stocks, the highest level since the Fed started collecting the component data in Q4 1945. If equity preference refers to the demand for future 10-year returns, and those returns are relatively inelastic, then, as equity preference rises, the price of those future returns rises, even as their supply declines. A regression analysis I did last year, pre-Q4 2024, when equity preference rose slightly, pointed to 10-year returns of around 1% a year. So even before the new tariffs were put in place, investors had rational reasons to exit the S&P 500. An equity reference of around 45% is probably needed to allow investors to gain 5% plus returns per year over the next decade. That means an enormous exit of capital, and a fall in the price of stocks.

Regime Uncertainty

We are in a revolutionary moment that suggests that a prolonged bout of elevated downward volatility may be emerging due to systemic pressures, accumulated risk, and macroeconomic imbalances. Perhaps controversially, in the second thesis on UVXY, I argued that, regardless of one’s opinion on tariffs, the Trump Admin. has powerful motives for supporting them: 

1. The China Shock has gutted the manufacturing industries of countries across the world, such that, despite the broad wealth created, working class people have been left behind, stoking populist outrage. Such a system is unsustainable. 
2. In a military contest with China, the economic benefits of a global division of labour pale beside the risks of relying on a trade partner that builds the things that America will need to wage war. 
3. From the perspective of economic competition, the current division of labour is not static, and China can use it to achieve parity with the U.S. in those areas in which the U.S. is currently a world leader. BYD’s stunning success is an example of this. 

I stressed that it really does not matter if one agrees with the administration’s motives, just that they are powerful enough that one should not expect tariffs to end completely. At a minimum, tariffs on China are likely to stay, even under a Democratic administration, all that is to be decided is the size of those tariffs. The Magnificent Seven, the most profitable businesses in human history, are a third of the S&P 500. Tariffs will erode their profitability and force investors to look elsewhere for investments, and that “elsewhere” will not benefit from the same premiums-to-value that the Magnificent Seven does, and that implies a downward revision in the price of the S&P 500.

There was another obvious wrinkle:

There are two tiers of tariffs, with 30 countries having special tariffs, and the rest of the world having a flat 10% tariff, while Canada and Mexico can be said to belong to a third tier whose tariffs were negotiated earlier. Although the U.S. successfully used tariffs to force reforms in Japan in the 1980s and 1990s, tariffing the globe presents obvious problems. First, trade negotiations take time, they are not something that can be finished in a few weeks or a month. The Peterson Institute for Economics found that the U.S. takes an average of one and a half years to negotiate and sign a bilateral trade deal, and three and a half years to get to the implementation stage. Jordan has been the quickest off the mark, taking four months to get a free trade deal with the U.S. and eighteen months to get to the implementation stage, while the free trade deal with Panama took thirty-eight months to negotiate and one hundred and two to get to the negotiating stage. Negotiating thirty to nearly two hundred trade deals within a one-to-two year window, especially with a government reduced in size, seems very challenging to me. Key trade partners such as Japan may be given priority, but this would still leave many countries without a trade deal or even the beginnings of a negotiation, for some time. 

Trade wars similarly take time, and this is important with regards to China. To get a base rate for how long trade wars take, I used a list of important trade wars from Wikipedia’s page on the subject. In the pre-modern era, the average length was 222 years, with a sample size of  just 5. In the twentieth century, the average length was 19.7 years, with a sample size of just 7. In the 21st century, the average length is 12.6 years, with a sample size of 23. The current U.S.-China trade war has been going on since 2018, without meaningful resolution. When I looked at trade wars from the post-Second World War era involving more than five countries, I found the Chicken Wars in the 60s, which lasted 6 years, the beef hormone controversy which lasted 19 years, the Tuna-Dolphin case that lasted 50 years and the Trump-era trade wars that have been going on for 7 years. Simply, trade wars seldom fade out very quickly, largely because negotiations are protracted and each side sees it as being of such strategic importance to win that a collapse of one counterparty to the other’s terms is highly unlikely. 

Consequently, the best case scenario is that definitive trade deals will only emerge within the next two years and that whatever is agreed now will be provisional and therefore changeable.

What this means is that there will be no substantive trade deals within 90-days. Like the TikTok deal, these trade deals will require an extension. Tariffs alone destroy both demand and supply, and the resulting attenuated regime uncertainty is an additional cost of doing business, a dis-incentive to invest that will hurt the stock market and the broader economy. I think those in favour of tariffs and those opposed to them are both united in accepting that there will be pain on the road to the final outcome. Regime uncertainty is an idea developed by Robert Higgs to understand how economic agents respond to profound changes in the economic regime, and his work found that investors adopt a “wait and see” approach, lest the rules of the game change again. The only way the president can quicken the pace is by dropping blanket tariffs and substituting them with more focused sector/product tariffs, but even doing that will likely take at least six months to a year, and with 75 or so trade deals to negotiate, it is likely that the U.S. will make mistakes that compel them to demand a renegotiation of some terms. The Wall Street Journal (WSJ) makes a similar point, explaining that the Trump Administration is racing to strike ad hoc trade deals with over 70 countries, while warning that any agreements are “likely to fall short of the kind of fully-fledged trade pacts that traditionally shape global trade.” The WSJ goes on to say that,

Traditional free-trade agreements typically take several years to negotiate. Narrower deals covering specific industries that Trump reached with nations such as China, Japan and Korea in his first term took several months. The White House now needs to speed-run negotiations much faster and with dozens of nations at the same time—something that is worrying lawmakers on Capitol Hill who are eager to see deals reached that can avoid the tariff-induced stock selloff of the past week.

The deals aren’t likely to be fully developed free-trade agreements, which typically need to be passed by Congress. Instead, Sen. Bill Hagerty (R., Tenn.), Trump’s first-term ambassador to Japan, said the administration might settle for written commitments from foreign governments to make certain economic reforms, akin to a term sheet that precedes an investment or business deal. That perspective was backed up by a foreign-government official in contact with the U.S.

Sen. Bill Hagerty (R., Tenn.), who served as Trump’s first-term ambassador to Japan, believes, at least according to the WSJ, that these 90 days will only result in the parameters of a deal. National Economic Council Chairman Kevin Hassett added that countries would need to offer “some kind of extraordinary deal to go below” the 10% base tariff. tariffs are here to stay. 

The combination of the government’s need for tariffs to compete with China and other hostile actors, and to reform the system, and the pressure to do this by the mid-terms, is such that, although the president faces market pressure, he also faces a pressure to deliver. Research shows that, whatever the public believes about politicians, politicians tend to try and do what they campaigned on. The revolution is not over.

This thesis, which also appeared on SumZero, became un-actionable within moments of my writing it up, as President Donald Trump announced a 90-day pause on additional tariffs, which meant markets would go up. However, the crux of the thesis remains correct: 10% tariffs remain and tariffs on China have gone up to 125%, validating my argument that tariffs are, at least for the next 90 days, here to stay and that a trade war with China would be the hardest to de-escalate. Oddly, Apple (AAPL), NVIDIA (NVDA), Meta Platforms (META) and other Big Tech firms that are obviously hurt by tariffs on China, all went up by over-10%, suggesting that the market has not properly digested the tariffs situation. Overall, the UVXY proved my best idea to date, with a gain of over 34% in just days.

As I was I researching for my masters thesis on “The Nature of Risk”, the basis for my PhD -when it commences-, I came to have a rather curmudgeonly reaction to phrases like, “upside risk”, or people quoting Warren Buffett”s, “be greedy when others are fearful, and fearful when others are greedy” remark. “Upside risk” does not exist, risk is always and only the downside. As for greed in times of fear, even Buffett sold his airline stocks during the Covid-19 crash, and he has not yet sashayed into the markets, because there is a magnitude of price decline so large that it is, in and of itself, a risk for the holder of a stock and in this revolutionary moment, even a very attractive stock could be decimated on the stock market before an investor sees any positive returns. On Tuesday, I fell for an absurdity. I closed my four-day old position on ProShares Ultra VIX Short-Term Futures ETF (UVXY), certain that markets had duly considered the obvious reality that China would not scale back their counter-tariffs and that this trade war will be long-lasting. I expected a period of calm and the market duly responded with alarm. It was as if I had tacitly admitted to the strong version of the efficient markets hypothesis. That was incredibly silly. My apologia aside, I am reinitiating my position. I will attempt to do three things in this rather long essay: explain why, from a political and then a historic point of view, this period of uncertainty will be elongated, show why investors have rational reasons to reallocate capital away from the stock market regardless of tariffs, and then, why I think the UVXY will do well for longer than usual. The nature of the argument will be novel to analysts who are used to not having to think about politics first and factor in the possibility of years of uncertainty, so my arguments will be fuller than normal, but I think worthwhile. However, such is the ontology of these changes that developed world analysts have to embrace tools more familiar with analysts from the emerging world, and think about the political and historic before making an investment decision.

Tariffs are Strategically Important to the Trump Administration

In discussions with various people, I have been struck by the feeling that this will all be over in a few weeks. When I have suggested a one to two year timeframe, I have faced pushback. Markets seem to be behaving in a similar fashion. There seems to be a failure to treat the Trump Administration’s policies seriously, which has led to a lot of wishful thinking of the, “If markets keep falling, tariffs will have to be abandoned” sort. This is a mistake: as a rule, when a government believes that a goal is of supreme strategic importance, it is willing to incur the maximum possible economic pain to achieve that goal. When Vladimir Putin invaded Russia, he did not back down when Russia was hit with sanctions, because stopping Ukraine’s drift Westwards was that important to him. In my country, Zimbabwe, between 1997 and 2000, the government enacted a series of measures, including forcible and often violent expropriations of land owned by white farmers, that turned a fairly prosperous country into one whose economy halved in size within a decade, and which, even today, is such that a person living in 1950’s Rhodesia (colonial-era Zimbabwe) was better off than a Zimbabwean living today. Those policies have never been reversed because the government is convinced about their strategic importance. In this section, I will attempt to explain why I believe there is no near-term reversal on tariffs, at least with regards to China. 

Now, this is not an assessment of the Trump Administration’s efforts. The arguments against tariffs are widely known, and although I think the odds are against their success, there are arguments in favour of them. That, however, is beside the point, my thesis is that these actions are revolutionary, regardless of their outcome, and that they create such uncertainty that investors will feel rationally obliged to dump stocks, U.S. stocks in particular, and, because there are so many shocks ahead, we are in a unique moment in which betting on the UVXY outperforming the S&P 500 over sustained periods of time, is possibly the best investment that anyone can make. 

In an article for FRPI, “Obscurity by Design: Competing Priorities for America’s China Policy”, Tanner Greer gives a taxonomy of the Trump world that I think provides a good way to understand the reasons why the Trump Administration will be able to go the distance on tariffs. My reading of this is that there are three major reasons why tariffs matter to the Trump Administration: 

First, although globalisation has been undeniably successful in making the world, and the United States, richer, the China Shock, has gutted the manufacturing industries of countries across the globe, and although the proportion of people affected may be relatively small, the social consequences are such that if the concerns of workers are not addressed, the conditions for revolution are created. Again, Zimbabwe provides an interesting analogy: while the country largely prospered between the 1960s and the mid-1990s -at one time richer than Singapore and Luxembourg-, a proportion of workers and peasants were left behind, and this, coupled with the failure to resolve the land issue, resulted in a social movement to retake white-owned land. In a country of 15 million people today, those involved numbered just 1% of the country. A system is unsustainable if it systematically leaves people behind. 

Second, if China and the United States ever go to war, the United States is at a manufacturing disadvantage and would essentially have to relearn how to “build things” during such a war. Greer explains this view saying, “If past wars pattern future ones, great power conflict means that both parties will stretch their industrial capacity to its limit. In that day of woe, outmoded industries will matter. Whether a country can smelt steel, refine rare earths, and build ships will decide death or survival. “It is foolish,” one Trump official tells me, “to imagine that the external sources of these goods will not be disrupted or interdicted in a time of global war.” The time to prepare for that possibility is now.”

Third, the classic idea of a division of labour is too static and policy needs to be more alive to the fact that a peer competitor such as China can move from manufacturing to services, competing directly with the United States. Greer observes that,

The first is that winning blue-chip firms do not emerge out of a vacuum. Technological revolutions often require an entire “industrial commons” with crosslinked supply chains and shared talent pools. As Oren Cass, the intellectual don of these quadrants, puts it: “Industrial expertise is not something bought off the shelf, it comes embedded deep within an ecosystem of relationships between educational institutions and firms; experienced workers and new hires; and researchers, engineers, and technicians. What a nation can make efficiently tomorrow depends heavily on what it makes today, which is one reason why saying it doesn’t matter what we make in America is so wrong-headed.” Many of these ideas are grounded in a close study of China’s economic model. It is common for Chinese firms to pivot from one industry to another. Phone companies become electric battery companies; car companies build semiconductor fabs; software companies start to manufacture drones. This is easy for these Chinese firms to do because each belongs to a group of interlocking industries that share skilled labor pools, domestic suppliers, and industrial know-how. In other words, if China has an advantage in manufacturing solar panels and electric vehicles, it is because they first had an advantage in manufacturing liquid-crystal display screens and iPhones. Those who advocate for a manufacturing renaissance argue that what is true of China will also hold true in the United States.

This framing is true not just of China, but of the United States’ major trading partners. Ben Thompson of the marvellous Stratechery blog, said in an article, “Trade, Tariffs, and Tech”,

What I do come back to, however, is what I opened with: there is a scenario within the realm of possibilities that is far more painful than anything Trump proposed; is it better to try and force into place a new economic system that, at least in theory, reduces dependency on China and resuscitates U.S. manufacturing now, instead of waiting for the current system to collapse by literal force? This does seem to be the administration’s goal: simply tariffing China is deadweight loss, leading to rerouting and the fundamental problem of the dollar as reserve currency unaddressed; blanket tariffs, on the other hand, are a valid, if extremely blunt and inefficient, way to meaningfully restructure incentives.

Moreover, even if an invasion never happens, is the current system sustainable, fiscally or societally? Trump’s political success is, in many respects, the clearest manifestation of what happens in a system that pushes the gains to the globalized top while buying off the localized masses with cheap trinkets.”

Global capitalism is the greatest economic experiment of all time. Even Karl Marx recognised its merits, saying in “The Communist Manifesto”, that,

The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam- navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground – what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?

Yet, capitalism’s discontents have created revolutionary moments and outright revolutions since it first emerged. The problem for the investor today is not whether or not Trump’s tariff formula is wrong or whether this will lead to the Great Depression, but that these policies are of strategic importance to the Trump Administration and that any change of course will only happen if there are clear signs that the real economy is suffering and that Republicans are headed to electoral wipeout in the midterms.

Tariff Deals and Trade Wars Take Time

There are signs that the U.S.’s leverage is working. Treasury Secretary Scott Bessent has said that more than fifty countries have approached the U.S. for a deal. The European Union’s (EU) president, Ursula von der Leyden, has,

offered zero-for-zero tariffs for industrial goods …Because Europe is always ready for a good deal. So we keep it on the table. But we are also prepared to respond through countermeasures and defend our interests. And in addition, we will also protect ourselves against indirect effects through trade diversion. For this purpose, we will set up an ‘Import Surveillance Task Force’. We will work with industry to make sure we have the necessary evidence base for our policy measures. We will stay in very close contact to minimise effects of our actions on each other.

The EU’s counter-measures are likely to be less forceful than predicted, but more targeted, with a seeming goal of inflicting maximum pain on red states. However, there are banal reasons why tariffs, even if the administration does not see them as permanent measures but as negotiating tools, will remain for some time. 

There are two tiers of tariffs, with 30 countries having special tariffs, and the rest of the world having a flat 10% tariff, while Canada and Mexico can be said to belong to a third tier whose tariffs were negotiated earlier. Although the U.S. successfully used tariffs to force reforms in Japan in the 1980s and 1990s, tariffing the globe presents obvious problems. First, trade negotiations take time, they are not something that can be finished in a few weeks or a month. The Peterson Institute for Economics found that the U.S. takes an average of one and a half years to negotiate and sign a bilateral trade deal, and three and a half years to get to the implementation stage. Jordan has been the quickest off the mark, taking four months to get a free trade deal with the U.S. and eighteen months to get to the implementation stage, while the free trade deal with Panama took thirty-eight months to negotiate and one hundred and two to get to the negotiating stage. Negotiating thirty to nearly two hundred trade deals within a one-to-two year window, especially with a government reduced in size, seems very challenging to me. Key trade partners such as Japan may be given priority, but this would still leave many countries without a trade deal or even the beginnings of a negotiation, for some time. 

Trade wars similarly take time, and this is important with regards to China. To get a base rate for how long trade wars take, I used a list of important trade wars from Wikipedia’s page on the subject. In the pre-modern era, the average length was 222 years, with a sample size of  just 5. In the twentieth century, the average length was 19.7 years, with a sample size of just 7. In the 21st century, the average length is 12.6 years, with a sample size of 23. The current U.S.-China trade war has been going on since 2018, without meaningful resolution. When I looked at trade wars from the post-Second World War era involving more than five countries, I found the Chicken Wars in the 60s, which lasted 6 years, the beef hormone controversy which lasted 19 years, the Tuna-Dolphin case that lasted 50 years and the Trump-era trade wars that have been going on for 7 years. Simply, trade wars seldom fade out very quickly, largely because negotiations are protracted and each side sees it as being of such strategic importance to win that a collapse of one counterparty to the other’s terms is highly unlikely. 

Consequently, the best case scenario is that definitive trade deals will only emerge within the next two years and that whatever is agreed now will be provisional and therefore changeable.  China under President Xi Jinping, long anticipated a need to create a world in which it was less dependent on the U.S. In fact, China’s Great Firewall, which predates Xi, is, perhaps, the greatest example of the success of protectionist policies, leaving China as the only country in the world with analogues to the U.S.’s Big Tech. Xi has broadened and accelerated that attempt to create structures outside U.S. control and influence, and the irony of Russia’s invasion of Ukraine is that it alerted China to how profound its weaknesses were and how sharply they would be exploited, if it entered into conflict with the West. Since President Donald Trump’s first administration, China has assiduously prepared for a heightening of tensions. Today, China feels itself uniquely prepared for this moment. The Economist noted that, not only does Xi not have the space to push through the changes Trump wants, they now believe that they can win a trade war:

Chinese officials may also believe that America will be unable to bear the inflation and economic discontent caused by Mr Trump’s tariffs. Instead of “fighting to the end”, they may only need to fight until American consumer prices begin to rise or employment begins to fall. Senior advisers, government researchers and economists all point to this as the easiest way of bringing Mr Trump to the table. Some talk of finding ways to exacerbate the situation, perhaps by strengthening the yuan. This would be quite a gamble. By the time inflation had picked up in America, Chinese industry and supply chains would be suffering.

An escalating trade war means that Xi Jinping will need to do more to prop up China’s economy. The potential shock is being compared to the global financial crisis of 2007-09, which elicited a stimulus package of 4trn yuan ($590bn). Li Qiang, Mr Xi’s deputy, said in March that the country was preparing for “bigger-than-expected external shocks” and that it was willing to enact policies to ensure economic stability. What this means in practice remains unclear. The People’s Daily, a state newspaper, said on April 6th that cuts to interest rates and banking-reserve ratios could come at any time. The paper has also said that local governments will help struggling exporters to find new sources of demand at home and in non-American markets. Soochow Securities, a Chinese broker, has suggested that China could lower tariffs on the rest of the world, while increasing export subsidies.

All this leads to the midterms. By then, Trump will be hoping to have a series of comprehensive trade victories to announce with a lifting of economic pain, while Xi will be hoping that the pain visited upon the U.S. will be such that Trump will be forced to climb down from his demands in order to save Republicans in the midterms. None of this suggests a quick resolution.

Equity Preference Gives Investors Rational Reasons to Reallocate Capital Away from Stocks

A final argument for prolonged stock market mayhem is that, using a measure I call, “equity preference”, which was first developed by the pseudonymously named Jesse Livermore of the Philosophical Economics blog, I determined that, as of the end of Q4 2024, the aggregate U.S. investor had allocated 52.18% of their portfolio to equities, the highest level since the Fed started collecting the component data in Q1 1951. Equity preference is, in essence, a measure of demand for future returns, returns which are relatively inelastic, which is to say, they are less changeable than demand. Ceteris paribus, if supply is relatively fixed, while demand rises, then the price of a thing, in this case, future returns, will rise, even as the supply of that thing declines. Equity preference tells us that future 10-year S&P 500 returns are inversely correlated with equity preference. At current levels, the S&P 500 was already headed to a decade of returns of around 1% a year. An investor who bought the market in Q4 2024 and holds for the decade after, will likely do worse than an investor who buys U.S. Treasuries.

Investors will recognise the truth of this once they concede that the highest returns usually come at the bottom of a bear market, not the top. Or, to use a quote often erroneously attributed to Nathan Rothschild, “the time to buy is when there’s blood in the streets.” Investors have increasingly bought when the streets have been laden with gold. As investors re-examine their portfolios, they will be forced to exit the stock market, and have already done so at record dollar amounts, because the prospective returns are so low. Equity preference would have to fall to something like 45% for the stock market as a whole to be more attractive. 

While individual stocks and certain sectors may do well, overall returns will be poor. So even if tariffs magically disappeared tomorrow, investors have started to lose their optimism, and that is not a great formula for a sustained bull market.

Downside Volatility Will Be Sustained

The UVXY is typically used for very short periods. It is, at base, a bet that the market will go down. Typically, this is such an improbable event that, if one held the UVXY from inception to date, one would have lost all one’s money. However, it is the very best instrument out them for profiting on sustained downside volatility. In my initial essay, I said that,

While I suspect that this crash will end up greater than the Covid-19 crash, one can use it as a way of benchmarking expectations. Between March 1 and April 1 2020, the S&P 500 slumped some 16.4%, compared to a rise of 187.7% for the UVXY.   

When the UVXY first entered the market October 31 2011, in the wake of the August 2011 stock markets fall, the S&P 500 fell 4.64%, while it gained 21.75%, between October 31 and November 29.   

The final analogy is indirect: during the 2008 financial crisis, specifically between 1 August 2008 and 30 July 2009, the CBOE Volatility Index (^VIX) gained 27.6%, while the S&P 500 declined 28.3%.   

These are the results of a simple buy-and-hold strategy of an instrument that is typically deployed for very short periods. The results are even greater when the VIX is deployed for shorter periods, before decay sets in as the market recovers. At a base value, I expect to gain 20% over the next month from the UVXY, and higher than that in short bursts.

The combination of the uncertainty created by a set of novel economic policies that defy the median investor’s expectations, and the high equity preference levels, both at the same time, compel investors to exit markets and to do so over prolonged periods of time, with sometimes a glut of sales happening has investors process new information that seems to confirm their worst imaginings. Like the Nixon Shock, it may turn out that this revolution was inspired, but despite the immediate popularity of the measures, with the Dow Jones Industrial Average ((DJIA) going up 33 points the day after the Nixon Shock policies were announced, the aftermath, at least in terms of the stock market, was terrible. It is only in the long run that it has been seen as necessary and brilliant. As this rearrangement of the global economic order is occurring, investors will struggle to answer basic questions, and will retreat to safety. As that is happening, downside volatility will rise, and along with it, the UVXY. At base, I expect that the worst of this will occur in the next three or so weeks, after which, the worst of the downside volatility will be behind us. 

Such is the importance of novelty of these conditions that I think that the UVXY will, at a minimum, return to its August 5 height of $61.77 per share, and I am setting that as a target, although, if you believe as I do that this is the greatest series of economic changes in a century, then $61.77 will not only be easily reachable, but will be far surpassed.

Conclusion

Hopefully, I have succeeded in explaining why the Trump Administration is unlikely to lay down arms in the near-term, why even if trade talks are opened today, their ultimate conclusion and the shape of the new economic order is at least a year away, why equity preference levels provide investors with additional reasons to exit the U.S. stock market, and why this combination of factors means that investors should expect prolonged downside volatility. This is true regardless of the final outcome, whether it is the Great Depression Redux or a post-Nixon Shock Prosperity. When investors do not have analytical clarity and that persists for a long time, downside volatility reigns. In such an environment, the most direct way to benefit is an instrument such as the UVXY. I have joked with various friends that, short of Bank of Japan-style direct acquisitions of stocks, I do not think that the Fed has enough tools to bail out the stock market and with inflation a concern, that would be a bizarre turn. Downside volatility will define the market for the next few weeks, at least.

Initiatd on the 4th of April 2025, this position was closed on the 8th of April 2025, from a sense that the market had baked in the likelihood of China’s non-compliance with President Donald Trump’s ultimatum to lift sanctions. The position closed with a return of 34.11%.

Turning and turning in the widening gyre   

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere   

The ceremony of innocence is drowned;

The best lack all conviction, while the worst   

Are full of passionate intensity.

William Butler Yeats

One of the great puzzles of the economics of risk is the insurance paradox: assuming a world of expected value maximisation, why does a market for insurance exist if the price at which insurers are willing to provide it is higher than the price at which consumers are willing to pay for it? A solution suggested as early as the eighteenth century by Daniel Bernoulli in my favourite mathematics/finance paper of all, “Exposition of a New Theory on the Measurement of Risk”, gives a powerful answer: in a world where , in the long run, catastrophe is certain, one needs insurance to emerge from catastrophe wealthier than one would without it. Insurance makes the insurer and the insured wealthier. 

This is not a long-term thesis, but a short-term, tactical thesis to help navigate the risks of the coming days, and weeks. One of the great realisations I had when I wrote my as yet unpublished Masters’ thesis, “The Nature of Risk”, is that losses have a greater impact on portfolios than gains. In a sketch of an idea, named after my masters thesis, I explained that,

Losses impact portfolios more profoundly than corresponding gains. In truth, although perhaps controversial, this can be shown with very elementary arithmetic: a decay in wealth of 10% requires an 11.11% gain just for an investor to break even, while a 20% decline requires a 25% gain, a 50% decline demands a 100% gain, and a 99% decline requires a miracle. As losses mount, the gains needed just to break even escalate asymmetrically. Whether these losses come in one fell swoop, or in dribs and drabs over time, the demands on a portfolio to earn asymmetrically greater returns soar. Managers and investors are rationally obliged to avoid risk, investing only when they have an edge, and, when doing so, investing in concentrated portfolios, while diversifying across time.

For many investors, this will be a period of escalating losses requiring asymmetrically greater gains just to break even. I see this period as, at a minimum, analogous to the COVID-19 crash, as a period of systemic downturns, an idea that informed my thesis on gold and gold miners. Here, I argue for a tactical, short-term deployment of the ProShares Ultra VIX Short-Term Futures ETF (UVXY) over a holding period of one week to one month. The aim is to not only capture upside potential in hedging volatility but also to protect a concentrated 10-stock portfolio, where 30 to 40% of the value is exposed to steep downturns -such as my position on Meta Platforms-, against tail risk. I suspect I will start off at a loss, and this will carry on till Monday, but as the trade war intensifies and apocalyptic nightmares stalk investors, the UVXY will storm forward.

Downside Volatility Will Be Sustained

At one point, the Wall Street Journal reported that April 3 experienced the second biggest daily loss in U.S. stock market value, with an estimated $3.1 trillion dollars wiped off the market. The WSJ quoted Rob Citrone, a tariff-skeptical hedge fund manager who had bet that the early rally was “crazy”, as saying, “I should have sold more”. I think that that feeling is widespread. When the debris has cleared, there will be a lot of value to be had. I suspect I acted too early with Meta Platforms: the thesis was sound, the timing was terrible. Some investors, citing Warren Buffett’s famous axiom, “Be fearful when others are greedy and greedy when others are fearful”, may swoop in, but that only works if the losses incurred are not so great that one needs a miraculous Covid-sized bounce. Some stocks may not recover for years. The Financial Times later reported that the final losses were $2.1 trillion. My arguments from my gold and gold miners piece remain: we have entered a period of such uncertainty wherein selling will beget more selling, as market participant’s rational fears and their deleveraging and de-risking act to make the market more risky for holders of stocks, a moment of negative momentum, and capital outflows from stocks into gold and other perceived safe haven assets. Furthermore, we await the counter moves of the U.S.’ major trade partners, all of whom have promised strong, carefully considered reactions. This season of mutual blood-letting will send markets into a death spiral until the trade war is called off, or, until there is a sense that a grand bargain can be achieved. 

Although value will likely outperform growth, the typical value investor will still return very low returns because of the gravitational pull of this market mayhem. Moreover, because, at 52%, U.S. portfolios were allocated to equities at their highest levels since the Federal Reserve started collecting data in Q1 1951, there were already rational reasons for the aggregate portfolio to exit stocks. This is an era of rational panic. That means, for the next few days to a month, downside volatility will define the market. 

The UVXY inversely correlates with the S&P 500 so that during periods of systemic distress, it benefits from these cycles. As the fund sheet explains,

ProShares Ultra VIX Short-Term Futures ETF seeks daily investment results, before fees and expenses, that correspond to one and one-half times (1.5x) the performance of the S&P 500® VIX®Short-Term Futures Index.

However, the dear reader should note that trading such instruments incurs significant transaction costs, with the UVXY having a gross expense ratio of 0.95% compared to 0.0945 for the SPDR S&P 500 ETF Trust. Insurance is expensive. One has to believe that downside volatility will be deep and sustained enough for this to make sense. One must balance the expected gains from hedging with these costs, especially over short holding periods.

Past Analogies

While I suspect that this crash will end up greater than the Covid-19 crash, one can use it as a way of benchmarking expectations. Between March 1 and April 1 2020, the S&P 500 slumped some 16.4%, compared to a rise of 187.7% for the UVXY. 

When the UVXY first entered the market October 31 2011, in the wake of the August 2011 stock markets fall, the S&P 500 fell 4.64%, while it gained 21.75%, between October 31 and November 29. 

The final analogy is indirect: during the 2008 financial crisis, specifically between 1 August 2008 and 30 July 2009, the CBOE Volatility Index (^VIX) gained 27.6%, while the S&P 500 declined 28.3%. 

These are the results of a simple buy-and-hold strategy of an instrument that is typically deployed for very short periods. The results are even greater when the VIX is deployed for shorter periods, before decay sets in as the market recovers. At a base value, I expect to gain 20% over the next month from the UVXY, and higher than that in short bursts.

Execution and its Risks

The reader will have to work out the appropriate position sizing and risk management tactics based to offset potential losses. My guess is that losses could be as large as 30% for the year for this period and by extension, for my risk-exposed positions. To sketch out how to think about it, let V denote the portfolio value and H the hedge allocation. My goal is to choose H such that:

H = (L⋅V)/ΔP_ETF

where:

• L is the maximum acceptable loss (targeting a reduction in risk exposure by at least 30%),
• ΔP_ETF is the expected percentage move in the ETF during a crash event.

That allocation can be dynamically adjusted using Bayesian posterior estimates.

The instrument is itself volatile, so a stop-loss order is crucial to preventing a market rally adverse events from exacerbating losses. I recommend setting a stop-loss at a level where losses exceed a predetermined fraction of the hedge position (typically 20 to 30% of H). The UVXY is designed such that it suffers a decay due to futures roll costs, especially in a contango environment. This can erode returns if the market remains volatile without a sustained crash. There is also the issue of timing uncertainty. Miss-estimations are the norm, and can lead to over-or-under-hedging. I could go on. Simply: this is not a guarantee of a gain, either because a sustained crash does not happen, and the fees incurred leave the investor at a net loss, or because the UVXY may not hedge against such a  sustained crash in the expected fashion.

Conclusion

Nevertheless, with the commencement of a global trade war, the prospect of stagflation, geopolitical uncertainties fast-emerging, and the possibility of tighter monetary policy, the probability of a sustained market downturn has increased. What is proposed is a tactical, short-term position in the UVXY as a hedge against systemic market crashes. By combining Bayesian probability with quantitative models for position sizing and risk management, and by accounting for transaction costs and market microstructure, the proposed strategy offers a robust framework for preserving portfolio value in these turbulent times. Nevertheless, there are inherent weaknesses, such as the leveraged decay, liquidity risk, and model uncertainty, and these must be closely monitored.

This investment thesis also appeared on the investment platform, SumZero. The thesis was closed on 24 April 2025, with a pair return of 8.15%.

There are decades when nothing happens; and there are weeks when decades happen.

Vladimir Lenin

There is an old Russian novel, A Hero of Our Time, by the great Mikhail Lermontov, whose title alone is delicious. It is the story of Pechorin, a Byronic figure representative of an age when, to quote Lord Macaulay, a man aspired to be “proud, moody, cynical, with defiance on his brow, and misery in his heart, a scorner of his kind, implacable in revenge, yet capable of deep and strong affection”. I often tell my friends that President Donald Trump is, like Pechorin, “a hero of our time”: regardless of whether one lauds him or loathes him, he is the great totem of the age, and his “Liberation Day” policies of global tariffs represent the greatest reordering of the global economic order since the end of the Second World War. 

Warren Buffett, the second greatest investor of all time -after Jim Simons, of course-, famously does not incorporate political concerns into his investment thinking. For decades, he has been correct to do so. Research has shown that the U.S. president has far less sway over the economy than the typical voter believes. However, all presidents since the end of the Second World War worked within a conventional understanding of the benefits of what has come to be called the “liberal order” of which free trade was an important component. The old order is dead, the new order is in the making. 

In an epoch of fear and trembling, uncertainty reigns, and, in response, investors have and will continue to invest in gold and gold miners. Though the consensus opinion is that tariffs will lead to recession and general immiseration, the White House has marshalled scholarly arguments in favour of tariffs, and some economists, such as Oren Cass, have argued that tariffs have unappreciated benefits that outweigh their costs. For investors, I do not think it matters who is right and who is wrong. Having published a review of 2,000 years of literature on money, I am well aware that sometimes history defies economic theory more often than economists like to admit. What one can say is that investors, influenced by the echoes of the Smoot-Hawley Tariff Act of 1930 and its reputed causation of the Great Depression, and U.S.-China Trade War of 2018 to 2019, know that gold did well in both periods. Indeed, gold is negatively correlated to the US dollar, and outperforms equities during periods of volatility.

Market Perceptions Are Driving a Reallocation of Capital Toward Gold and Gold Miners

What concerns investors is this: the defining feature of the present moment, until some grand bargain is achieved, if ever, or at least analytical clarity is gained, is that investors are fearful and uncertain, and the reaction to that spurs investment flows. In The Alchemy of Finance, George Soros proposed a theory of reflexivity, saying,

Buy and sell decisions are based on expectations about future prices, and future prices, in turn, are contingent on present buy and sell decisions. To speak of supply and demand as if they were determined by forces that are independent of the market participants’ expectations is quite misleading. The situation is not quite so clear-cut in the case of commodities, where supply is largely dependent on production and demand on consumption. But the price that determines the amounts produced and consumed is not necessarily the present price. On the contrary, market participants are more likely to be guided by future prices, either as expressed in futures markets or as anticipated by themselves. In either case, it is inappropriate to speak of independently given supply and demand curves because both curves incorporate the participants’ expectations about future prices.

He suggested that market dynamics are governed by the interaction of two equations:

1. y = f (x),
2. x = φ(y),

where f is the cognitive function in which “the participants’ perceptions depend on the situation” and φ is the manipulative function in which “the situation is influenced by the participants’ perceptions”. The interested reader is encouraged to read the Journal of Economic Methodology’s 2013 series on his theory, in which economists reacted to his ideas. The interaction of these equations leads to feedback loops that drive market trends. Applying his theory to the present moment, one sees how investor expectations of economic malaise have led to capital flowing out of stock markets and U.S. Treasuries and into perceived safe haven assets such as gold and the producers of those safe haven assets, exacerbating the perception of the riskiness of US markets and fueling more outflows to safe haven assets, in a positive feedback loop. The perception of risk, because of the manipulative function, leads to a flight into safe haven assets, creating more risk, ad infinitum. This is analogous to Hyman Minsky’s financial instability hypothesis:

The readily observed empirical aspect is that, from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes the economic system’s reactions to a movement of the economy amplify the movement–inflation feeds upon inflation and debt-deflation feeds upon debt-deflation.

…

Expectations of profits depend upon investment in the future, and realized profits are determined by investment: thus, whether or not liabilities are validated depends upon investment. Investment takes place now because businessmen and their bankers expect investment to take place in the future.

…

The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.

In the year-to-date (YTD), the SPDR Gold Shares ETF (GLD) is up nearly 19%, and the iShares MSCI Global Gold Miners ETF (RING) is up just over 37%, compared to a decline of 8.61% for the SPDR S&P 500 ETF (SPY), and 1.5% for the iShares MSCI World ETF (URTH). It is likely that at the end of this year, gold and gold miners will outperform the S&P 500 and many other market indices. Some may respond that surely gold and gold miners are in a bubble, yet, as Soros (and I) would point out, buying into a bubble is rational if that bubble is sustainable. The investor who bought bitcoin is better off than the investor who put his money with 99% of investors across the world. The question is of the sustainability of that bubble.

It is clear that the European Union (EU), the People’s Republic of China (PRC), and other major economies will respond to the US’ protectionism, creating escalatory rounds of retaliation, even if the ultimate goal for those countries, and possibly the Trump Administration, may be to achieve a grand bargain, the so-called Mar-a-Lago Accord. In Bill Bishop’s Sinocism issue today, he writes on the PRC, whose effective tariffs now stand at 70%, that though the PRC’s “reaction is unlikely to be weak, and I doubt Xi and his team will just roll over and do nothing while trying to negotiate”, there are signs of a desire for a grand bargain in the future. He goes on to say that,

People’s Daily commentator Zhong Sheng has launched a new series – Fully Understanding the Win-Win Nature of China-US Relations 充分认识中美关系互利共赢的本质. As of April 2nd there are two installments. This first one is from March 31st and is titled “Moving Towards Each Other, Letting Investments Better Benefit the People of Both Countries.

Excerpt:

‘The logic of China-US investment cooperation is clear. While there is competition between the industries of the two countries, there is even more complementarity. By leveraging their respective advantages and strengthening investment cooperation, China and the US can fully achieve mutual benefits and win-win results.

The expected tit-for-tat response to the US’s protectionist policies will likely go on for at least a year. The Trump Administration will want tangible results by the mid-terms, and it is in the PRC’s interests to negotiate, but from a position of strength, and that means trying to get to near the mid-terms when they will be able to get a more favourable deal, especially as the PRC does not have the scope to make the fundamental reforms that the United States seeks. If a one-to-two year trade war is the bare minimum in terms of the duration of a trade war, the subsequent decline in trade volumes and build-up of economic inefficiencies will make gold and possibly gold miners, more attractive, as investors hedge against the risks of escalating trade conflicts.​

Even without Trump’s revolution, it is notable that the aggregate investor’s allocation of their portfolio to equities, a measure I call, “equity preference” was at 52% at the end of Q4 2024, its highest level since the Federal Reserve started continuously collecting the component data in Q4 1951. As I explained last year, equity preference is inversely correlated with future 10-year returns, in other words, as the demand for the limited supply of future returns increases, the supply of those future returns declines. the investor who bought the S&P 500 in December and holds it for the next decade, will earn low-single digit returns. Investor portfolios, excessively allocated toward stocks, are now under forced rebalancing, and gold miners are, because of gold prices, one of the few exceptions to the gravitational pull that stocks are feeling. In many ways, this thesis is a thesis contra stock market indices, a put against the S&P 500.

Stable Supply, Supports Elevated Gold Prices

In his book, Capital Returns, Edward Chancellor told the story of Marathon Asset Management LLP, a UK firm that uses what they call a “capital cycle” framework to analyse markets. Chancellor explained,

…high returns tend to attract capital, just as low returns repel it. The resulting ebb and flow of capital affects the competitive environment of industries in often predictable ways – what we like to call the capital cycle. Our job has been to analyze the dynamics of this cycle: to see when it is working and when it is broken, and how we can profit from it on behalf of our clients.

That framework has been subsequently backed up by what economists now call the “asset growth anomaly”: in general, low asset growth stocks outperform high-asset growth stocks, and this explains stock market returns far more than any other factor such as value, size and momentum. Commodities are difficult to invest in because their production cycle follows the “cobweb model”, which means that management makes production decisions with long lead-times, long before they can observe the prices at which their products will be sold, leading to overshooting or undershooting in supply and price fluctuations. For example, according to the World gold Council, the typical time between exploration and first output is 15 years. My first job was running a small gold miner in Zimbabwe in 2007. it was, appropriately, named “Scallywag”. Many of the older gold miners had spent the majority of their careers not actually mining gold, but treating “dumps”, or the tailings from gold processing, because for decades, the price of gold was so low that gold mining was not worth it. Firms such as DRDGOLD Limited (JSE:DRD) in South Africa, who primarily engage in the treatment of tailings, have a longer history of profitability than conventional gold miners. The devastation felt by gold miners in former times was the consequence of excess supply leading to a collapse in prices that made gold mining unprofitable. The entry of capital and subsequent expansion in production portended a collapse in profitability and exit of capital. A joke told to me was, “It takes a small fortune to make a large fortune in gold mining”. A report in Reuters captures the history of the industry:

Anyone acquainted with the industry might find that hard to believe. Historically, gold miners have offered remarkably poor protection against rising prices. Over the past three decades the index of U.S. consumer prices more than doubled and the price of gold rose sixfold. Over the same period, the Philadelphia Gold and Silver Index of listed miners climbed by about 40%. The mining benchmark remains well below its peak in 2011. Since that date U.S. prices and bullion have risen by 33% and 55%, respectively.

Few industries have a more dismal record of allocating capital. After the gold price took off in the early 2000s, miners pursued growth at any cost. They borrowed freely, splurged on new developments, and pushed up costs by extracting gold from low quality mines – what’s known in the business as low-grading. Debt levels at the four senior miners – Newmont (NEM.N), Barrick Gold (ABX.TO), Agnico Eagle Mines (AEM.TO),  and Kinross Gold (K.TO)  – rose to an average 50% of net assets. After the gold price dropped in 2011, the miners were left stranded. Barrick, the world’s largest miner at the time, announced some $23 billion of asset writedowns between 2012 and 2015.

That era is, for now, a thing of the past. Today, gold prices are so high that gold miners can comfortably pay their all-in sustaining costs and all-in costs. Although the gold price has shot up to dizzying heights, part of a run that began around 2002, thereabouts, capex has actually fallen from its peak in 2012. In fact, capex for the top miners globally, across all commodities, has not recovered from the 2012-2013 heights, despite the temptations posed by the commodities boom. The economic result is clear: since 2010, supply has risen from 4,316.9 tonnes in 2010 to 4,974 tonnes in 2024, compounding at just 1% a year. Although demand is currently below supply, on balance, demand is more likely to rise quickly than supply is, pushing prices up. I try to avoid demand forecasts. What is essential is the realisation that the excesses of previous cycles have been avoided, supporting high gold prices. 

A recent discussion in the Financial Times shows the extent to which capital allocation has improved in the industry. Not only have miners shunned capex expansion, but M&A deals are far more conservative. As prices have risen, gold miners have become free cash flow (FCF) spigots. The FT cites a report by TD Securities which shows that, at current prices, Barrick Gold Corporation (GOLD) will earn an FCF yield of 9.5% and the Newmont Corporation (NEM) will enjoy an FCF yield of 7.5%. Kinross has doubled its FCF to $1.3 billion year-over-year. Gold miners have also become better about returning capital to shareholders. Barrick Gold, on the back of doubling its FCF in Q4 2024, announced a $1 billion share buyback. AngloGold Ashanti plc (JSE:ANG) declared a final dividend of $0.91 per share, five times the previous year’s dividend, having said that its balance sheet is at its strongest in a decade. Gold Fields Limited (JSE:GFI) has also said it will initiate a share buyback this year, while Harmony Gold Mining Company Limited (JSE:HAR) has said it will be able to self-fund the construction of a new copper mine in Australia. 

My own research suggests that a high-cost gold miner can make $1,000/oz more than it costs to produce, while low-cost producers can earn half of the gold price in profits. Usually, gold miners do not do as well as gold in terms of returns, but as profitability has risen, the market has started to wake up to the attractive economics of gold mining. In March, gold mining ETFs experienced their first net monthly inflows in six months. We are at a moment now where, if gold continues to do well, gold miners will benefit on the market. The capital discipline within the industry is even more remarkable when one considers that gold miners did not budget for prices in excess of $3,000. They have been built for lower prices, so that they are now earning excess FCF which, based on recent history, will be allocated in a disciplined fashion.

How High Can Gold and Gold Miners Go?

The iShares MSCI Global Gold Miners ETF trades at a price-to-equity multiple of 19.11, compared to 22.3 for the iShares MSCI World ETF (URTH) and 25.02 for the SPDR S&P 500 ETF Trust (SPY). This is, of course, a crude way to look at it if one cannot value each business on its own. If a re-rating results in the iShares MSCI Global Gold Miners ETF getting to 23.66 or thereabouts, an average of the iShares MSCI World ETF and SPDR S&P 500 ETF Trust, the share price will have risen by about 25%. I think the SPDR Gold Shares ETF can match that rise, the thesis working out over the next 2 years.

I recently published an investment thesis exclusive to the investment platform, Seeking Alpha, where I will be covering recent and forthcoming initial public offerings (IPOs). The article is on the Hong Kong-based civil engineering firm, Skyline Builders. From the executive summary of the article is the following:

• Skyline Builders Group Holding Limited (SKBL) is rated Unattractive due to regulatory risks, competitive pressures, and financial instability, despite its strong growth potential and market position.
• The civil engineering industry in Hong Kong is growing but highly competitive and capital-intensive, impacting profitability and requiring significant upfront costs for labor, materials, and equipment.
• Skyline Builders’ revenue model relies on government contracts, making it vulnerable to policy shifts and economic conditions, with significant risks from regulatory changes and PCAOB inspection issues.
• The current stock price implies unrealistic growth expectations; a reverse DCF model shows a potential 97% downside if NOPAT margins and revenue growth remain at historical levels.

The rest of the article is available here.