The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, real assets, and alternative assets. Last month’s performance has been:

After the market’s meteoric rise over the last two months, it is in a corrective process. We got a 20% advance, followed by a 5% pullback. As you’re reading this, the market is trying to decide whether to go back to the highs or continue the correction.

Even if the market isn’t racing the way it was, the overall positioning is dangerously bullish, with near record levels of margin debt. The Gray Area portfolio outperformed the struggling market in the first quarter and is up a healthy 4.46% year to date with lower risk.

This model portfolio is reasonably priced for paid members, with free subscribers still receiving three themed research articles each month. Consider upgrading to get up-to-date portfolio changes, allocation decisions, technical analysis, and synthesis of all the research pieces into an actionable plan. To beat the market, reduce risk, and know how to not get destroyed in a bear market, please consider joining with a premium subscription.

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I will continue to provide a preview of two of the positions in the portfolio.

Natural Gas Companies (FCG) - 5.4%

Natural gas and oil have been in a corrective posture and sold off further in June. We added energy exposure before the Iran conflict began on technical and fundamental grounds.

This portfolio position is up 12.23% total, despite the recent selling pressure. As long as FCG holds its low at $26, we could see an 18-30% move to new local highs. An alternative count that is more immediately bearish would be a pullback to ~$15. Both scenarios are quite bullish long-term technically and fundamentally. The short term is more difficult to predict, with oil news headlines unpredictable.

Uranium Miners (URNM) - 4.5% → 2%

The idea behind uranium is that it will be an important aspect of our energy future, and real assets should offer true diversification from both stocks and bonds. Our position is up 20.03% despite the recent selling pressure.

Uranium prices have been moving similarly to precious metals. Managing risk in positions is crucial. In April, we reduced in anticipation of further correction, which was prudent in hindsight. Now, price has built a corrective channel with moving average and momentum not giving any signals to disrespect the trend yet. We identified a potential ABC down to 34-41 for a while, and it looks ever more likely that may be the outcome.

While a good long-term hold, there may be better places to buy. We are reducing the position size from 4.5% to 2%.

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In Fields of Neglect, I introduced three reasons why agricultural commodities could experience increased price volatility in the coming years. My case rests upon three grounds: macro, climate, and price technicals.

The prices of agricultural commodities are very low relative to their own history as well as relative to other assets like stocks and metals. On top of that, cash crops have fallen 50% from the 2022 levels. Finding cheap assets today is a challenge, but agriculture fits the bill.

The macro case centers around high oil prices and the fertilizer crisis. Not only do oil prices tend to lead moves in ag prices, but the oil inputs to fertilizer and the disruption are problematic and not retroactively fixed by the latest ceasefire agreement.

Climatologically, the solar cycle drives ENSO events (El Niño, La Niña), not to mention economic outcomes and human psychology discussed last week. Solar maximum drives El Niño, and the solar minimum drives La Niña, both with a roughly 1-3 year lag. September 2024 marked solar maximum, and last March I flagged the possibility for a strong El Niño before most realized. Now in June, the forecasts are even stronger than before. The median temperature anomaly prediction has been revised by a whole degree and a half higher since then. The median forecast now predicts a historic El Niño. Base forecasts are very strong, average in historic territory, and aggressive forecasts are in uncharted territory.

I have seen some analysts suggest that strong El Niños are bad for commodity prices, so let’s refine the analysis and look again at history. No one argues that there isn’t an impact, but researchers have had a hard time finding a general scientific consensus on solar cycles and commodity prices. There is a paper that shows increased price volatility from ENSO anomalies, plus ENSO anomalies have significant and dramatic impacts on global weather patterns.

Many analysts look at price movements during these times and discover poor correlations. The problem is that every period is not the same, and the context matters. There are many variables, and the starting point matters. Surely, an El Niño with expensive wheat prices will have worse returns than one with cheap wheat prices.

Wheat

Instead of focusing on ENSO anomalies specifically, I will look at the declining phase of the solar cycle as a guide. This is the region where El Niños occur, and as we learned last week has much worse risk-adjusted stock returns. Entering the declining solar cycle phase from an oversold level tends to produce outsized returns for agricultural commodities.

Since 1970, there has only been one solar maximum where wheat had negative returns (1980). In 1980, wheat had just appreciated 143% and was above the long-term trendline in hindsight, but any reasonable person would agree this was a relatively expensive time to be holding wheat. Looking at the other declining solar phases, prices below the median line of the trend channel produced significant returns in the subsequent years. Four out of five periods going back to the 70s had this setup, and wheat prices at least doubled each time. We have the same setup now, with a +175% potential to the top of the trendline.

Sugar

Sugar has a slightly different technical structure. It is not in a rising trend channel, but a rising wedge structure. The solar cycle analysis is the same. The declining phase post solar maximum is historically a great time to invest, assuming it is from an oversold basis. Price is near the bottom trendline now, with potential price appreciation of 81% to the top of the wedge. These wedges can break out in either direction, but often in the same direction as the trend, meaning the returns could be much higher if that plays out (even greater than 81%).

Corn

Corn is following a rising trend channel similar to wheat. Like its counterpart, buying cheap corn at solar maximum has produced incredible returns historically.

Soybeans

The last cash crop, soybeans, shows more of the same.

Cash Crops

Together, the picture is clear. Buying oversold cash crops during the declining solar cycle has been a great bet historically. Even in the 2016 period, when there was no immediate appreciation, the price essentially moved sideways before an eventual 107% move up.

There is room below current prices to correct to the bottom of the trendline, but the risk/reward is still promising. Plus, we can look at other asset classes as clues as well.

Cash Crops/S&P 500

While commodities essentially track inflation over time with tremendous volatility, stocks have earnings and growth. Naturally, the stock market will outperform over time. However, there are periods where this relationship shifts, and commodities outperform stocks.

Initially, looking below at the declining solar phase, you would conclude that most of the time, you are still better off owning stocks than cash crops. While true, this ignores the context, and we can’t simply ignore the times when that did not work, in case you get trapped in that period.

We have to look at the context and circumstances behind the phase where the cash crops outperformed. The late 1960s and 1990s were characterized by stock valuation extremes. The Nifty Fifty and dot-com bubble have names for a reason. Both of these instances resulted in a lost decade for stock market investors.

Instead of losing money during these times, or having cash inflated away, how about finding where money is made? Cash crops returned hundreds of percent returns during these time periods, where traditional investments in stocks and bonds lost money. We are at another valuation extreme today, which is even more extreme if you are skeptical of AI earnings. On top of that, we are coming off a nearly 50-year bond bull market with low interest rates and disinflation. These regimes may also be at a turning point. The point being, it is likely in my eyes that another period of commodity outperformance is in store.

This brings us to now. We have a stock market bubble with low agricultural prices. From this perspective, agricultural commodities are a more attractive investment, with a 189% outperformance potential vs the S&P 500. We’ve seen this movie before, and true portfolio diversification is key. Don’t get caught up in the AI mania and invest to actually make money over the next 10+ years.

Great Depression

I wrote about the economics and returns during the last fourth turning in Tumultuous Times. This provides insight into the longer-term history before 1970. We are in a fourth turning now, meaning these time periods are genuinely comparable. The 1928 solar maximum was followed by a crash of all assets, including agriculture. Wheat held up better, though, falling only 50% while stocks fell 89%.

Then wheat bottomed before stocks and had better returns than stocks over the next 14 years. Then, the next solar maximum in 1938 marked the bottom in wheat prices, once again providing a promising investment opportunity.

Conclusion

We have a stock market bubble with historically cheap commodity prices. This is a recipe for a lost decade in which commodities have better historical returns than equities. The bubble could always continue for another few years, but the price and climate analysis show it is a good time for the cash crops regardless.

Most of the time, it is safe to follow the crowd. Every once in a while, the crowd gets trapped, and not everyone can escape at the same time. We are at a pivotal moment where it makes very little sense to remain in the crowd.

Want to preserve your wealth through retirement? Want to not derail your wealth building in a lost decade? Consider joining me in waking up and finding the areas where it actually makes sense to invest.

-Grayson

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The Jevons paradox is that when a technology becomes increasingly efficient, the overall consumption increases, not decreases. This is paradoxical because, with greater efficiency, fewer resources should be used. However, as technology advances, increased demand offsets efficiency gains. Computers, oil, and electricity are prime examples.

Jevons was also researching the solar cycles’ relationship to economics. Unlike his technology paradox, his solar cycle work did not garner mainstream recognition. He studied the solar cycles’ relationship to wheat prices from 1760 to 1810.

Today, we don’t have to approximate economic activity with wheat prices. GDP data is robust and has been that way for decades, enough to compare to the 11-year solar cycle. A Russian economist, Vladimir Belkin, has a preprint out looking at this very relationship. The paper shows a strong correlation between the solar cycle and GDP. It even proposes a neurochemical mechanism: UV radiation → serotonin/melatonin → economic optimism or pessimism → GDP growth the following year.

In Not So Bright, I introduced this concept and showed how unemployment spikes and stock market volatility are often concentrated around solar maximum. It is actually more likely than not to have poor stock returns around solar maximum. Then, in Not So Bright Pt. 2, I connected this to agricultural commodities specifically.

There are numerous scientific articles linking geomagnetic storms to things like the central nervous system of mentally ill patients, happiness levels, mood, depressive episodes, heart issues, lung issues, decision-making ability, white blood cell count, circadian rhythm, and more.

Regardless of the mechanism, I wanted to expand on my solar cycle and stock market analysis since it is clear we hit solar maximum and are now in the declining phase.

Comparing the increasing/decreasing phases, there is a big difference. Risk-adjusted returns in the increasing phase are much better. The decreasing periods shaded in green tend to have larger drawdowns and lower average returns. You never lost money in an increasing solar cycle phase, where there were two lost decades during increasing solar cycle phases, the 1970s and 2000s.

We can get more clues about why these lost decades occurred, and they both were at valuation extremes, denoted with yellow boxes. We just began the declining solar cycle phase at a valuation extreme, meaning we are primed for a potential lost decade if history rhymes.

During solar maximum, geomagnetic storms impact humans in the ways mentioned above in the literature. During solar minimum, the low sun activity protects the Earth less from galactic cosmic rays, resulting in their own biological impacts on humans.

Going back to Belkin’s paper, he suggests that it is extremes in the solar cycle that cause disturbances in GDP. We can clearly see that in the US GDP data. Each time we had a recession with GDP below 2%, we were at a solar maximum or minimum. The last solar maximum did not trigger anything in the US but did coincide with European and emerging-market crises. The last solar minimums coincided with the 2008 Financial Crisis and COVID.

While my work shows the risk/return is worse in declining solar phases, Belkin’s work implies it may not necessarily be the increasing or decreasing phases. Perhaps we can focus on excess risk at the solar cycle extremes.

All of the worst drawdowns in the stock market also coincided with solar maximum or minimum. Solar maximum marked the top of the 1929 bubble and crash, and the second 1937 crash. It was also the top of the 1968 and 2000 bubbles. We are not out of the woods yet for the current environment to be a bubble top at solar maximum, similar to those times. If we continue without any struggles, it may be the 2030 solar minimum before the risk is high again, based on this analysis.

It is not a guarantee that solar extremes or declining solar activity cause recession and stock market correction. However, the connection is uncanny and significant. There are psychological and biological mechanisms that may show a causal link between the sunspot cycle and economic activity/stock market sentiment.

The first risk is the poor return/risk ratio during declining solar activity environments, which we just entered. The second risk is that recessions and major stock market declines cluster around sunspot cycle extremes. We are in the waning phase of solar maximum still.

Add on top of that the current stock valuation extremes during solar maximum, and you have historical analogues of 1929, 1968, and 2000. These all preceded lost decades for stock investors.

Dismiss this esoteric analysis if you must, but there are other economic and technical reasons why mainstream investments carry historic risk today that I have written about at The Gray Area. To learn how to overcome this excessive risk without destroying wealth, truly diversify, and still collect healthy returns, consider upgrading to a reasonably priced paid subscription.

-Grayson

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Many people are concerned with lasting inflation, and rightfully so. Since we hit 9% CPI in 2022, it has not returned to the Federal Reserves 2% target. Now, with Tariffs, oil shock from the war, record peacetime deficits, concerns about forever inflation are higher than ever. Inflation eats away at returns on assets, so if only there were a way to compensate for this.

Turns out there is, and they’re called TIPS (Treasury Inflation-Protected Securities). Yes, tipping culture is out of hand these days, but this is different. Treasury Inflation-Protected Securities. When you buy a TIPS, it pays a fixed yield on top of a variable principal that adjusts with CPI. This means that your bond yield is a “real yield” and you are not losing purchasing power on the bond. A regular nominal bond paying 4% with inflation that goes to 4%, you are making no money. However, a TIPS may pay you 2% on top of that 4% CPI, paying you 6% and ensuring you are ahead in real terms.

Just like nominal bonds, there is a price that has an inverse relationship to the bond yield. The real rate also fluctuates over time with market dynamics, meaning sometimes it is 0.5% and other times closer to 3%. So just like regular nominal bonds, you can treat them like cash to protect your money, or speculate on the price.

If you buy a TIPS from the treasury, you are guaranteed to return the principal at the maturity of the bond, even if there is deflation and CPI goes negative in a recession. However, owning TIPS ETF through a brokerage account increases your risk through marking to market every day. Are TIPS actually attractive given the current inflation worries?

As of writing this, a 30yr TIPS is paying 2.71%. With CPI at 3.8%, the yield is ~6.6%. For comparison, the nominal 30yr yield is 5.14%, a whole 1.5% lower. Long-duration TIPS yields have not been this high since 2003 (and briefly in 2007/2008). Buying a real 2.71% for 30 years directly from the US Treasury is extremely attractive right now, especially given the stock market valuation's implied future returns and US deficits.

Macro

This means that macroeconomics is as important as ever. If we have no recession, recession, or stagflation, there are different implications for what to own and whether TIPS ETFs are attractive for trading. Personally, my research with The Gray Area leads me to believe that a recession of decent magnitude will be hard to avoid.

In a recession, inflation tends to give way to disinflation or deflation. This means that headline CPI goes down, but there is a lag in the data. In the 1990, 2000, and 2008 recessions, the stock market top preceded the CPI top by an average of 12 months with an average drawdown of 32% to that point. Additionally, the recession tends to be well established or nearly over before this occurs.

Market participants successfully predicted the top in inflation 4 months early in 2008 (10yr breakeven inflation rate). CPI data is notoriously lagging, as borne out by these two observations, but market participants don’t wait for CPI to decide what price they’ll pay for an inflation-protected bond. This is a simple math equation:

Breakeven inflation rate = Nominal 30Y yield − TIPS real yield.

During a recession, there is typically a “blood in the streets” point where nearly all assets are sold to provide liquidity (flows into cash or bonds). Plus, sentiment for economic growth becomes extremely pessimistic. In 2008, TIPS were sold off in distress alongside stocks. This resulted in a harmful correction in longer-dated TIPS (longer duration bonds = more volatility). If you hold a TIPS from the treasury till maturity, you do not lose any principal, but losses can occur if you speculate on prices through ETFs.

This can be seen in the real yield curve (ie, 20yr TIPS yield-5yr TIPS yield) in yellow. When the market puked in 2008, the real yield curve went negative instead of ~1 normally. This marked a good buying opportunity as people were liquidated and lost their minds with pessimism about the future. The spike in black either made you sweat about the value of the TIPS, or marked a great buying opportunity for incredible forward price returns (yields down = price up).

The reason the 60/40 portfolio exists and why you hold bonds is that they provide safety when the market goes awry. The long-duration nominal bond ETF (TLT) went up over 30% in 2008 while stocks crashed 50%. Bonds are boring until they aren’t. The problem, as we discussed, is that inflation eats away at nominal bonds, lowering your real return.

Plus, I discussed on May 20 in Tumultuous Times that the current fourth turning is likely to bring squirly behavior, including financial repression (negative real bond yields). We have largely already been under stealth financial repression since the post-financial crisis, only having a reprieve for the past year and a half. This means that bonds have been a horrible investment for the past decade from a yield/capital preservation perspective. If you were speculating on price, you could argue that bonds were in a bubble over that time and popped in 2021.

Making Money

Long-duration bonds are the single best asset to own during a deflationary episode like 2008. The problem today is that inflation and rising bond yields have people questioning their merits. Even with ~4.5% yield, that has only offset some of the losses in price over the past few years for price speculators. TIPS may offer an alternative, but not without its liquidity risk during a recession. This is why timing is important.

For a portfolio in a fourth turning, it is silly to hold TLT for a long time, which is why shifting to TIPS will be a good idea. With a paid subscription, you can see my exact bond portfolio allocation and plans, but essentially, I will shift TLT funds into TIPS after any deflationary/credit event episode.

You can see below that TLT outperformed in 2008 while stocks were puking and people were losing their minds. TIPS were not a safety play either, as they puked alongside stocks. However, catching the falling knife in TIPS is not as dangerous as stocks. This is because sentiment turns very poor and liquidations force people to sell in greater amount that the market may normally want to (also why gold goes down during this).

Inflation and economic growth will pick up again, despite calls for the end of the world, meaning TIPs will be a good investment at low prices. In this plan, TLT will provide the initial hedge against the stock bear market. Then, some cash will be used to purchase the TIPS at attractive prices. Then TLT will be sold for profit as the safety trade is over, and financial repression begins again through aggressive monetary and fiscal policy by the government. Owning TIPS instead of any nominal bonds or cash is then the only real way to have safety in the portfolio without the government stealthily taxing your money through inflation.

Where does this thesis go wrong? If there is no recession or stagflation. You can go back; much of my writing articulates why a recession is probable. Stagflation is overblown in today’s rhetoric, and sustained 7+% inflation would be less likely today. This is because the working-age population and labor force participation were increasing, driving nominal wage growth. Today, wage growth is declining, as we have the opposite case for both. Furthermore, much less of the economy is manufacturing/construction (other than data center buildout), which drives inflation of real things. Last, money creation was primarily bank lending to consumers and businesses, while today we have a higher share of unproductive debts. I do think we will have an inflation problem in the future, but I don’t think the inflation can stick as high as it did in the 1970s when the recession arrives.

Conclusion

The trade and timing may seem complicated, but it’s really not. We own long bonds because they go up while stocks get crushed in a recession. Shift the bonds to TIPS during the recession because once it’s over, they go back to underperformance, and TIPS still rise in price and simultaneously protect from inflation.

Bonds are a terrible asset to own in the long term, and I may look wrong in the short term, but the safety and outperformance when a recession hits will help me not get destroyed by the stock bubble bursting. Once the world freaks out, TIPS will be the move in the bond portfolio to avoid financial repression in the future. Until next week,

-Grayson

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The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, real assets, and alternative assets. Last month’s performance has been:

The market has been on an all timer since March 31st (+17.55%), indicative of the bubble/speculative nature of the current stock market. This is supported by some technical datapoints I discussed last week in Thin Ice.

It is dangerous to get caught up in the FOMO (fear of missing out), as these market returns and dynamics are clustered around bubbles/manias. The Gray Area portfolio outperformed the struggling market in the first quarter and is up a healthy 6.23% year to date with lower risk.

This model portfolio is reasonably priced for paid members, with free subscribers still receiving three themed research articles each month. Consider upgrading to get up-to-date portfolio changes, allocation decisions, technical analysis, and synthesis of all the research pieces into an actionable plan. To beat the market, reduce risk, and know how to not get destroyed in a bear market, please consider joining with a premium subscription.

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I will continue to provide a preview of two of the positions in the portfolio.

Natural Gas Companies (FCG) - 5.7%

The Iran conflict started on February 28th. I spotted this promising setup in oil/gas in my article No Love, on February 2nd, around the time it was added to the portfolio (green arrow).

This shows the power of technical analysis and key levels. The news doesn’t matter beyond being a catalyst for volatility (e.g., a good earnings report → stock down). This happened just last week, with another incredible NVIDIA earnings report.

I obviously didn’t know that oil going through the Strait of Hormuz would be blocked, sending crude and LNG prices higher. That’s the narrative, but FCG went up 20% before the conflict even happened.

This portfolio position is up 20.17% total. It broke through the resistance level at $30 to finish circle wave iii. It bounced off the perfect circle wave iv support. The target box/take profit zone for this move is +20% at $35, with Fibonacci levels and past price resistance in that area. If FCG is going to really push in the long term, $60s is the upper target.

Uranium Miners (URNM) - 4.5%

The allocation to real assets like uranium metal and uranium mining companies provides real diversification, not just alternative sectors to stocks. Real assets will help provide inflation protection as well as diversify into a less globalized world.

Uranium prices have been moving similarly to precious metals. The pullback has made our reduction last month even more prescient. Many people are getting bullish on precious metals again, but alongside uranium, I see a choppy, low-confidence structure. We are still allocated for the longer timeframe, but I wouldn’t be at all surprised to see another sharp selloff into the orange box around $40 in the green ABC pattern.

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Is the stock market in a bubble? What does that even mean? First of all, the earnings and performance of the S&P 500 are driven primarily by the top stocks. The S&P 500 is cap-weighted, which means a handful of the largest companies determine most of what you see on the chart. The Magnificent 7 stocks (Apple, Nvidia, Microsoft, Google, Amazon, Meta, and Tesla) account for 35% of the index. This is already one sign of market bubbles, comparable only to 1929, 1972 Nifty Fifty, 2000 dot-com, and 1989 Japan.

The Mag 7 are the ones spending the capex, but the broader semiconductor complex and AI infrastructure names are the whole theme. The AI theme is now the core narrative propelling the market. Energy is an example of a sector that doesn’t matter, composing less than 4% of the S&P 500. Semiconductors used to be like that, but have since climbed all the way to a whopping 17.4%.

These stocks have been on a tear, with the SMH ETF up 60% in the last 45 days and up 238% since April 2025. These are extraordinary moves over a short period and are not representative of normal market behavior. Now that semis are acting like crypto or meme stocks and the AI theme is driving the market, it is important to keep perspective. SMH went down 80% in 2000 and 60% in 2008.

Under The Hood

Market breadth is a key technical indicator that measures how many stocks are contributing to the price rally. First, the overall momentum can be tracked with the relative strength index (RSI). Next, the McClellan Oscillator measures the momentum of the difference between advancing and declining stocks. If the market is rising but 90% of stocks are falling, that may not be a sustainable market rally.

This is a common sign before major market tops, which are typically harder to identify than bottoms. If the price of the market is going higher while momentum is declining, this is negative divergence, commonly preceding price declines.

In 2007, before the financial crisis, the S&P 500 pulled back 11% from the July high before moving to a new high in October. While this occurred, RSI momentum made a lower high, or negative divergence. Further, the market breadth shown with the McClellan Oscillator was also declining strongly, meaning fewer and fewer stocks were actually going up on that second rally.

COVID came out of nowhere, but astute market watchers may have noticed some concerning signals ahead of time. The same negative divergences in momentum and breadth occurred in the months leading up to the big down move in Feb/Mar.

After an extremely strong and fast rebound from the 2020 lows, NFTs and memestocks were sounding a lot like bubble behavior. Yet again, momentum and breadth showed negative divergence before the 27% decline.

Very few expected the Trump tariffs in 2025 to be as aggressive as they were. That is the narrative behind why the market fell 21%, but the same technicals seen in the chart below were once again warning us.

That brings us to today. There are many reasons to be careful in the current market environment, from fundamentals to technicals. Breadth in the past rally is now positive, but the negative divergence is still there for now. However, this weekly data shows that the negative divergence in the RSI is no longer there. While there doesn’t have to be negative divergence for a top to form, it is a very common feature of the market and human psychology.

This means that the bubble could continue for some time longer. The strength of this move up shifts the probabilities that there is more upside to go. In my drawings below, a pullback with one more high could reestablish negative divergence on both momentum and breadth. This doesn’t have to happen, but it would be more likely (of course, I could also be wrong about everything, and there is no bear market in sight, but unlikely in my opinion).

So we don’t know when the top will be now? Well, for further technical indicators, we can look at relationships between different sectors of the stock market.

A simple basket of cyclical or discretionary stocks (Home Depot (HD), FedEx (FDX), Lennar (LEN), Toyota (TM)) represents the parts of the economy that move with the business cycle. Housing activity, home appliances, shipping, and car purchases go on hold when consumers are distressed. This typically happens before the official recession hits and is yet another leading indicator of recession and market tops.

In 1989, 2000 (only slightly), 2006, and 2018, these stocks showed incredible weakness relative to the S&P 500 before the market top or recession. Today, these stocks have had a negative thrust as great as any before a major market top and recession.

Consumer staples (XLP) are part of the economy that hold up much better during a recession. Coca-Cola, McDonald’s, Clorox, Johnson and Johnson, and Walmart are some of the names to think of. While they don’t have predictive ability like those above, they offer protection during the recession. Except for COVID, where XLP led and then suffered during the quick V-shape recovery of the general market, XLP outperforms SPX after the SPX tops and dips into recession.

You can see that XLP is generally an unloved sector heading into market tops. This is because these companies are boring and not the high-growth names that drive the market outperformance during bull runs. The AI theme is driving the market and taking a higher share of the index. Historically, given a few years of a bull market and significant undervaluation relative to SPX, XLP becomes attractive.

Despite the narrative that you should be passively buying the S&P500, losing 50% of your money during a bear market severely hampers wealth growth over time. If you own AI stocks, that will be more like 70-80%. Staples are looking much more attractive on a relative basis, and even more so given some of the technical signals that a top is nearing.

The stock market bubble is in a dangerous place, but that doesn’t mean go sell everything. It does mean being ready to get out when key fundamental and technical markers are hit, and perhaps consider some defensive rotation of stocks. To see my model portfolio in action each month, my risk management strategy, and how I position for what I’ve discussed, consider upgrading to a paid subscription.

-Grayson

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History does not repeat, but often rhymes. In a previous piece, Your Turn, I laid out the Strauss-Howe generational theory and its four turnings: the High, the Awakening, the Unraveling, and the Crisis. Each turning lasts roughly twenty years, with the full cycle about a human life. The generations that remember the last crisis age out, institutions grow complacent, and the conditions for the next one quietly reassemble.

The last Fourth Turning (crisis phase) ran from roughly 1929 through 1945. It opened with the stock market crash, deepened through a decade of depression, and climaxed in a global war that killed tens of millions. On the other side was the 1st Turning High: the postwar boom, strong institutions, rising middle class, record household formation. Think of the analogy: hard times create tough men, tough men create good times, etc.

According to Howe, we entered the current Fourth Turning with the 2008 financial crisis, but haven’t reached the climax yet. Whether that is a war, depression, civil crisis, or revolution remains unknown, but we can study the last ones closely. This isn’t the watered-down high school textbook, but what happened to your money, what the government did to it, and what survived if you were there.

Great Depression

If you Google the 1929 stock market crash, you will get told it was rampant speculation in stocks that cascaded into a collapse in debt. While true, this ignores the real cause of it all. The Federal Reserve was established in 1913, which conveniently helped the US fund its entrance into WWI the next year. Alas, the central bank was engaging in easy monetary policy. The government subsidized credit expansion to an unprecedented scale, which led to the roaring 20s and the bubble.

Similar to 2000, and what will happen at some point in the near future, the bubble popped and credit defaults soared. Stocks collapsed and banks failed, similar to 2008. Deflation caused demand destruction and many businesses and farmers went out of business, as well as unemployment soaring higher. The economic depression lasted over a decade until the US entered WWII in 1941.

Mainstream economics tells us that Hoover’s Laissez-faire policies made the depression last for so long, and it wasn’t until FDR’s stimulative New Deal policies that the recovery started. This couldn’t have been further from the reality as I discuss in detail in Great Depression (drawing from key insights from one of my favorite books, America’s Great Depression by Murray Rothbard). In reality, all of FDR’s interventionist policies had already been tried by Hoover to only prolong the hardship. The economic recovery did not occur under FDR, nor was it solved by sending millions of young Americans to die in WWII (hardly a better option).

Groundbreaking Policies

What we got were some of the most draconian and dystopian laws ever enacted in US history in the name of helping. Backed by the threat of force, FDR signed Executive Order 6102, confiscating gold reserves from US citizens. Gold was money and the backbone of the monetary system at the time, and comparable to the government stealing your assets or bank account. At least confiscating Russian bank reserves wasn’t YOUR money… They’ve done it before. Gold redeemability was closed and the stolen gold was revalued 66% higher. This is an important lesson that in a fourth turning crisis, rules change and even private property rights can be violated by the very government claiming to be for them.

The next egregious policy was the Agricultural Adjustment Act of 1933 is taught in most schools as one of the successful New Deal programs. The core mechanism of the AAA was supply destruction: the government paid farmers to reduce acreage and destroy existing output to prop up prices. In 1933 alone, approximately 6 million pigs were slaughtered and their carcasses discarded or turned into fertilizer. Cotton fields were plowed under. Corn was burned as fuel. This occurred while roughly one in four Americans was unemployed and widespread malnutrition was documented across rural regions.

The AAA was later deemed unconstitutional, which led an angry FDR to his infamous court packing scheme (similar rhetoric from Trump’s first term). This policy is a classic, unsuccessful, and honestly horrific government intervention, which laid the foundation for the distorted agriculture system we have today (ie, excess subsidies to corn and soybeans).

The Emergency Banking Act of 1933 also laid the foundation of what we all know and love about the banking system. This is the government bailing out banks, as seen in 2008 and 2022. It also involved the devaluation of US bank reserves to gold, which, of course, is not possible without confiscating private gold holdings.

Then, during WWII, bond yields were pegged at 2.5%. With rampant inflation, this yield curve control/financial repression means that bondholders are financing US debts through devaluation. Along with the heavy War Bond propaganda machine, this was another way for the government to leave the citizens footing the bill (and the troops).

Rise of Populism

Despite what they say or their supposed best intentions, the government is not on your side in these crazy times. Like Trump today, FDR was a major populist president, successfully appealing to the economically distraught voter and placing the blame on the prior Hoover administration, despite only repeating the same and worse policies in office.

Check out my piece on populism, which is largely driven by wealth disparity and political polarization. Populism rises during fourth turnings, then and now, and can lead to some pretty bad leaders. Europe suffered an even worse fate during the 1930s, leading to the election of figures like Hitler, Stalin, and Mussolini, promising to usher in better times in their nationalistic interests. The problem is that many populist leaders merely use the voter anguish as a ploy to get elected and change once they get in power. War, rapid currency devaluation, genocide, and famine were all consequences of these elected leaders.

It is no surprise that some of the worst leaders came during these times, followed by some of the best on the other side, often war generals or those who transition into the first turning (high).

Whether it is stealing private property in the form of gold in 1933, bailing out banks at the taxpayer's expense in 2008, or being lied to and gaslighted during the pandemic, it is a time to have your eyes open and think critically. Hopefully, you understand that it is your job to control your financial destiny, despite the intentions of the governments, then and now.

Asset Performance

Most importantly, we can look at clues on how to secure your financial future, which will not be what governments and the mainstream suggest. Just last week, India asked its citizens to stop buying gold; surely they have the citizens in mind with that statement. By that skeptic logic, surely all the emphasis on putting money into index funds and 401k is a good option too…

Let’s look at the performance of major asset classes during the last fourth turning, seen in the figure below. Most know stocks had the worst performance in history, as the Dow Jones Industrial Average (DJIA) went down 89% in 1929, and down 50% again in 1937 after a few years of relief. Alongside the DJIA, agricultural commodities like Wheat performed horribly early on. Once the bottom was found, tactical allocations of these assets performed extraordinarily well.

The importance of TRUE diversification cannot be understated during a fourth turning. An allocation to bonds showed positive returns in the early crash phase of the Great Depression. This is a similar story to 2008, when long bonds rose ~30% while the S&P500 crashed ~50%. Later on, bonds were used as a form of financial repression, yielding negative real returns, so it is important to aggressively ditch bonds after the initial protection.

Gold would likely have been one of the best performing assets, but it was riddled with price controls and confiscation. It was revalued 66% higher in 1934 and was suppressed until 1971, when it exploded higher. Instead, it was confiscated and price controls capped the price at $35/oz. Gold mining stocks were harder to control. The top miners vastly outperformed during the initial depression as well as through the decade. Homestake Mining went up 580%, and stocks were crushed.

Implications

The Strauss-Howe generational theory has massive implications for today. If we assume a transformative event on the scale of the American Revolution, Civil War, Great Depression/WWII is underway, we should heed the warning and prepare. This isn’t merely fearmongering, as the signs are there: the 2008 Financial crisis, political protectionism, rise of populism, foreign conflicts, massive asset bubbles, etc.

We must be nimble, as the government will implement laws that change the status quo and lie about what the best course of action is. When the asset/credit bubbles pop, overweight bonds and underweight stocks may protect from the initial deflation from debt defaults. Then, as governments start enacting asinine economic policies, real assets like gold and gold/resource miners are critical. Tactical positions in things like agriculture also represent true diversification and asymmetric opportunity in fourth turnings.

Check out the model portfolio with a paid subscription to see these ideas synthesized into my actual portfolio, risk management, and rebalancing. I am not in a bunker and have been outperforming the S&P 500, but have real diversification like the themes discussed here.

-Grayson

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Every few years, a crisis arrives and narratives reshape. The pandemic, regional bank failure, inflation shock, trade war, closure of the Strait of Hormuz. Each one was supposed to break something. Each time, the market recovered to new highs within months. By now, the pattern is so well-established that most investors have stopped questioning it.

The reflexive buy-the-dip psychology that was the best investing strategy over the last fifteen years rests on a foundation that is quietly crumbling. We can’t merely look at the stock price, but at the corporate profits and what’s been driving them.

The Numbers That Don’t Add Up

Warren Buffett once said in 1999: “In my opinion, you have to be wildly optimistic to believe that corporate profits as a percentage of GDP can for any sustained period hold much above 6%.” That statement was made months before the dot-com bubble peak, in which price took 13 years to resume higher from that quote. Today, corporate profits stand at 12.1% of GDP, double Buffett’s ceiling.

To put that in historical context: for most of the postwar era, profits as a share of GDP bounced between 4% and 8%. The long-run average since 1947 is 7.4% and post 2010 average is 10.8%. We have been running well above that average for over a decade, and the market has come to treat this as the new normal.

Corporate profits are clearly high, but the important question is why, and for how long.

The Mechanism Nobody Talks About

Most analysts explain elevated profit margins through the lens of technology, globalization, and operational leverage. While real, they are secondary to something far more structural: the Federal Reserve and unprecedented fiscal regime.

Since inception, the Federal Reserve (like any good government agency) has had mission creep. Founded to provide bank stability, it is now a backbone of the global economy. 2000 dot-com bubble paved the way for modern intervention, but the 2008 Financial Crisis was a step change. Zero interest rates, liquidity injections, bond duration manipulation with the treasury, etc.

Money enters the financial system through large banks and flows disproportionately to large corporate borrowers. The Cantillon Effect suggests that those closest to the money receive most of the benefit. Corporations are closer than consumers, thus subsidizing corporations relative to labor. The bailouts are always corporate-first, with the Fed has going as far as buying corporate bonds in 2020.

Kalecki Profit Equation

Profits = Investment − Household Saving − Government Saving − Foreign Saving + Dividends

This equation is an underappreciated macroeconomic tool. When the government runs a deficit, the money has to show up somewhere in the economy (corporate profits).

The United States has run structural deficits averaging 5–7% of GDP for most of the post-2008 era. Those deficits did not just “stimulate the economy” in the abstract. They mechanically subsidized corporate profits.

We know the government is heavily indebted, but so are corporations and consumers. The net national savings measures a nation's net saving relative to its total income, (representing funds available for investment). For most of the post WWII era, the economy saved at 8.2% of GDI, but since 2010, it has averaged 1.8%.

Zero national savings has only occurred in the Great Depression, 2008 Financial Crisis, and now. It means the economy is consuming everything it produces and then some. In the Kalecki framework, this is peak profit extraction. It is not a sign of economic health, but peak structural dependence with little room for growth.

At Whose Expense?

Every dollar of GDP that flows to corporate profits must come from somewhere. The data tells us the unfortunate reality, it came from wages. Queue the rise of populism

In 1970, wages and salaries represented over 51% of GDP. Workers earned the majority of what the economy produced. By 2026, that figure has fallen to 41.9%. Meanwhile, corporate profits have risen from roughly 5% of GDP to over 12%.

This is the structural divergence is what people are now calling the K-shaped economy. Those closest to corporations and own assets are benefiting at the expense of labor. Sentiments like Man North of Richmond, calls to tax the rich, and even Trump’s election are natural consequences.

Globalization arbitrage of cheap labor and manufacturing, rise of corporate stock buybacks, and supply constraint pricing power are all additional factors which have further supported corporate profit margins.

The share of economic value ebbs and flows over time through conflict, social change, economic change, and political change. Regardless of what combinations may arise, the series is not static. Consumers are nearly tapped of credit and savings. This well is running dry, leaving the government to pick up the slack. Social unrest and political extremism during the 1930s followed an economic crisis when this happened before.

Why Estimates Are Rising Anyway

Against this backdrop, analyst earnings estimates for 2026 have been revised upward in a manner that is, by historical standards, genuinely unprecedented. Analysts are all of a sudden more optimistic on earnings now than every before, by a lot.

Earnings are exceptional for the MAG 7 “AI” stocks, and these estimates actually make sense based on recent growth trends. The S&P 493 is not doing much of anything, but the earnings estimates have also been pulled up, which makes less sense. Earnings and GDP are largely being driven by the immense datacenter capex buildout.

The MAG 7 stocks make up 35% of the S&P 500. If their earnings are to continue, you can argue that there is nothing to worry about.

The Reversion Triggers

The sustainability question has two components: can corporate profit margins remain elevated, and can valuations hold given those margins?

For corporate profits, we are relying on the healthy data center capex, government spending, and consumer spending. The S&P 493 we already know is not likely to magically deliver unprecedented earnings which is the first bullet. Second, data center capex in many areas are facing trouble. Third, the liquidity cycle topped in late 2025 meaning monetary conditions may get tighter reducing some benefit on the government side. Fourth, consumer sentiment, savings, and credit delinquency is weak, showing a struggling consumer piece. I am skeptical of the rosy earnings estimates.

Second, the valuation of a company is the price to earnings ratio (P/E). If investors are optimistic they can pay more for given earnings. If the company earnings rise faster than expected, the valuation is lower because of the ratio. Adjusting the ratio for profit margins(MAPE), the story gets even crazier. Now, the valuation investors are paying is higher than the 1929 and 2000 bubbles. Even after a brief reprise in 2022, there has yet to be true mean reversion in the series.

Conclusion

The K-shape economy is real. Consumers are taking a smaller share of every economic dollar over time. This value is being passed to corporations in the form of higher profit margins. The net national savings and our knowledge of the Kalecki equation show us that mechanically the savings of governments, corporations, and consumers is flowing into corporate profits.

I am optimistic that AI will make the world a better place, and could even see how it can boost profit margins by reducing labors share of GDP further. However, the dot-com bubble shows us that even transformative technologies evolve in unpredictable ways, aren’t immune to valuation mean reversion, and take take longer than expected to sort out.

Not only are earnings at risk to mean revert for numerous reasons, the valuation metric (what investors are willing to pay) is also bound to mean revert. Timing is the big challenge, but the risk in the S&P 500 is unprecedented and would be foolish to ignore.

-Grayson

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The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, real assets, and alternative assets. Last month’s performance have been:

In March, the portfolio weathered the market downturn much better than the SPX. SPX has been on a historic run in April, but we are still up 1.74% and outperforming year-to-date.

This model portfolio is now for paid members and this is the last chance to get the 30% discount! [In just the first 4 months of 2026, a mere $1000 would’ve covered the entire yearly $70 subscription].

There are three themed research articles each month and one paid model portfolio update.

You get up to date portfolio changes, allocation decisions, technical analysis, and synthesis of all the research pieces into an actionable plan. To beat the market and know how to not get destroyed in a bear market, please consider joining with a premium subscription.

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Here’s a preview of two etfs in my real assets bucket.

Natural Gas Companies (FCG) - 5.8%

The Iran conflict started on February 28th. I spotted this promising setup in oil/gas in my article No Love, on February 2nd, around the time it was added to the portfolio (green arrow).

I obviously didn’t know that oil going through the straight of Hormuz would be blocked, sending crude and LNG prices higher. This shows the power of technical analysis and key levels. The news doesn’t matter other than being a catalyst for volatility (i.e good earnings report → stock down). It may seem obvious that the Iran conflict would drive gas stocks higher, but unless you’re an insider, trading the news is a fools errand. Plus, FCG went up 20% before the conflict even happened.

This portfolio position is up 21.96% total. It broke through the resistance level at $31 to finish circle wave iii. It bounced off the perfect circle wave iv support. The target for the next leg higher and take profit zone is $35, with Fibonacci levels and past price resistance in that area. If FCG is going to really push in the long term, $60s is the upper target.

Uranium Miners (URNM) - 6% → 5%

Uranium has been largely moving with precious metals. The past month saw a 5.93% move up off of the ABC correction into the purple wave (4) support.

I added URNM in November and added more December (green arrows). Seeing healthy profits so fast, I trimmed the position in January. The position is up 31.6% in total.

The technical structure I have labeled is ugly and not high confidence. There is a chance it is building out a larger ABC correction so it is prudent to reduce risk and book some of our profits in Uranium.

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What is retirement? Right now, we work and save up enough money in our 401k so we can have enough money in those final years where we don’t have jobs anymore. Older readers may know a different way, where they work for a company for 30 years and collect a pension for the rest of their life. That sounds pretty nice, so what happened?

The whole history is in the figure below, but in the late 1970s, a law was introduced to help structure defined benefit (DB) programs (think pensions). This and other tax laws over time made DBs more burdensome and defined contribution (DC) plans (think 401k) more attractive. Eventually, this evolved into very specific target date funds being the default allocations for 401ks leading to the distorted passive investing conundrum that I’ve discussed previously [1, 2]. Over time, DCs have dramatically replaced DBs.

So what’s the issue? This is more capital efficient and gives employees more flexibility. This worked perfectly from 1980 to 2000 in a raging bull market. In 2000 and 2008, equities took ~50% haircuts. For your retirement to be tied to this is devastating. Many had to delay retirement, rely on housing equity or social security, or suffer a less lavish retirement.

In those years, equities only made up 15-20% of household net worth. Today, it is over 25% and rising. On top of that, the switch to target date funds essentially just owning the S&P 500 accelerated after the financial crisis in 2008. Not only do equity bear markets hurt retirement, equities ARE retirement today.

People have once again become complacent with ballooning assets, whether they be stocks or real estate. With record wealth tied to the stock market and retirements entirely tied to the stock market, the risk is larger than it has ever been. Not to sound hyperbolic, but soon to be retirees could have their lifestyles destroyed if they time things wrong.

The Shiller Price to Earnings ratio (also CAPE ratio) is a stock market valuation metric. It essentially shows the price investors are willing to pay for the given earnings a company generates and has to do with confidence and sentiment. The Shiller P/E ratio is the second highest in history behind the dot-com bubble in 2000. However, if we draw a trend channel, it implies 1901, 1929, and 2000 were more expensive historically. The bottom trendline dates are 1920 and 1982.

What this figure shows us is that while stocks are expensive today, they technically could have more upside. There is typically 30 years between tops and bottoms of this series and it doesn’t have to hit the top or bottom trendlines to mark a major reversal point. 1877, 1949, 1966, and 2009 marked minor reversal points, while 1901, 1920, 1929, 1982, and 2000 marked major reversal points.

It has been 26 years since the 2000 peak, within the territory for a minor reversal. With the leading recessionary indicators I’ve discussed previously, this is a possible and likely scenario. I could be wrong, and valuations could soar in a stock blow off top for a few more years into the darker blue box at ~56 in ~2030.

In 1966, most retirement was in DBs, meaning people were insulated from the equity corrections in the 1970s. While inflation still proved burdensome over that decade for those collecting their pension checks, their retirement wasn’t tied to assets.

In 2000, DCs or 401ks were the majority retirement savings vehicle, causing a much larger stir. Some who held retirement equity in their companies who went bankrupt were wiped out, others who held stocks took a significant haircut. While it took years for stock prices to recover, it wasn’t a catastrophe. No bailouts of individuals occurred this time or in 2008, that is reserved for institutions. In 2006, they came up with a wonderful policy, the Pension Protection Act. This made auto-enrollment in target date funds the default, which only makes people more dependent and reliant on equities. In my opinion, this leaves retirees less protected, not more.

In 2000 and 2008, aggressive easy monetary policy re-inflated assets and eventually restored equity prices and retirement balances. This took years though, and anyone switching to withdrawals or nearing retirement had a lot of thinking to do. Even though corporations were bailed out, individuals were left to dry with their impaired portfolios.

History shows that equity repricing at P/E extremes is always painful. At prior peaks, most people had pensions, savings accounts, or social safety nets that existed outside of equities. Today, the retirement system is the equity market. While social security and housing equity may insulate to some extent, individual retirements are tied to the stock market like never before, with another looming extreme P/E reversal.

Here at The Gray Area we are focused on true diversification, to help you not have your hard earned retirement get destroyed, not take unnecessary losses along your wealth building journey, and find asymmetric investing opportunities. If this sounds good to you, join premium subscription to get access to the model portfolio which synthesizes these themes into my investing plan.

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Until next week,

-Grayson

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In 2022, many people thought we were heading into recession, only for GDP to normalize, unemployment to remain stable, and the stock market to recover and push to significant new highs. They were wrong, and here we are a whole 4 years later with everything still jolly and happy.

For the past few years, AI hype has broadly boosted an otherwise mediocre economy. Data center spending boosts some of the cyclical aspects of the economy like construction and manufacturing, while hype boosted asset prices in the space. This disproportionately helped the top stocks, which also see the most passive inflows and dominate the S&P 500 index.

Of course not everything is jolly, as conflict in the Middle East, involving the US, is certainly spooking investors as of late. Oil price spikes, as I predicted before the war, often times lead to serious demand destruction. Now, the predictions for recession are starting to increase again. Will they be wrong again or is there more to the story?

Sure, oil drives the economy, and this is definitely a volatile addition to the economy, but it doesn’t 100% mean there will be a recession (especially if there is a quick resolution). There are plenty of indicators we can look at to check on economic health, oil shocks just accelerate us towards that end point, not necessarily cause it.

Liquidity is a major driver of the business cycle, especially in our credit/refinancing driven world today. Oil lowers liquidity by lowering margins, forcing liquidations of assets, and causing companies to increase hedges. On top of that, Michael Howell’s liquidity index has peaked at the end of 2025. With growing debt burdens being refinanced each year, the debt to liquidity ratio is steeply rising. With tightening liquidity and increasing debt refinancing demands, the risk for credit events is quickly rising.

The Conference Board leading economic indicators have been flashing recession signals since 2022, leaving many people dismissive of them. In reality, there are better ways to measure leading indicators than there measure.

The economy (GDP) is driven primarily (70%) by consumer spending. Since many parts of the economy are not cyclical (ie. healthcare spending), we should focus solely on the cyclical aspects. EPB Research suggests that durable goods orders, residential investment, and business equipment investment are the three best cyclical leading indicators.

Plotting these, we can see it’s historical usefulness, with rollovers predicting the 2008, and 2020 recessions in advance. The series was weak for 9mo before 2008 and 20mo before 2020. The most recent 3 months have shown a stagnation, but not outright decline (equipment investment propped up by data center investments).

The yield curve is the difference in interest rate between two duration bonds (long vs short). Typically the 10 year note has a higher interest rate than a 3 month bill. Economic growth and inflation are taken into account over the longer time frame. Basically, investors have to decide where to place money (stocks, bonds, cash, etc) and depending on the economic environment, it changes. Bond yields adjust over time based on the sentiment/demand for the bonds (higher yield, less demand). Supply also matters, as excessive issuance of short term bonds like we’ve seen can push yields higher.

For brief times in history, short term yields are higher (yield curve inversion or <0), sending strange signals. The un-inversion concludes with short term interest rates dropping faster than the longer term bonds. This means that investors are demanding bills and bonds as safe assets or liquidity, typically during credit crisis and recession.

The un-inversion of the yield curve has always preceded recession going back to the Great Depression. We just un-inverted from the most extreme inversion in history, bigger than the Great Depression and 2008 Financial Crisis. This is another sign that recession is looming. Plus, with some correlation between inversion magnitude and economic impact, it could be a big one.

Even though we are a credit driven economy, savings spur real productivity and provide resilience. Net savings as a percent of gross national income is at scary levels only seen during the Great Depression, 2008 Financial Crisis, and briefly in 2020. This implies the economy has less cushion and would be less resilient to any credit shocks. Further, it implies that the government will have to respond with ever more debt creation during the next crisis.

What is holding everything together is employment. Recession doesn’t start until the unemployment rate is picking up significantly, although this is last domino to fall, and doesn’t help you predict when it will occur. We can look under the hood for clues.

Full time employment is the real driver of income and productivity. Mediocre or declining full time employment characterizes recessionary periods. Currently, full time employment has been not been growing for years, while part time employment has, making the aggregate unemployment rate look steady.

Broken down by sector, there is very little job growth for the majority of industries. Leading cyclical areas like manufacturing and transportation are showing the most weakness, while job growth was primarily driven by the non cyclical healthcare industry.

Finally, credit spreads are perhaps the best clue to tell whether things are really going to hit the fan or not. I’ve written about them extensively previously. In short, junk bonds from questionable companies demand a higher yield to garner interest from investors over safe US treasury bonds. When things are fine, the spread is low, but when anxiety, distrust, and financial issues arise, the spread widens significantly.

Credit spreads between junk bonds and US Treasuries remain at all time low levels, despite the small increase in March (zooming out you can barely notice). The market is not questioning these companies credit-worthiness at the moment. While typically leading, when credit spreads widen, it can happen fast.

The economy is on the precipice of recession, but is not there yet. Headline employment, credit spreads, and liquidity are all fine. However, they are all trending towards recession.

Liquidity conditions have rolled over, heading into record debt re-financing requirements. True leading indicators are finally showing weakness (even more stripping out data center buildout). The yield curve is currently un-inverting from the longest inversion in history, typically resulting in imminent recession. National savings are at record low levels (Great Depression, 2008 GFC). Full time employment has been stagnant, and healthcare is the only sector with meaningful employment growth. Credit spreads are holding up, but can really only go higher from here.

Everything is fine until it isn’t. It is surprising how well the economy and stock market have held up over the last few years but that doesn’t mean we won’t hit a recession. These leading indicators are flashing warnings, which not taken serious can be very detrimental to portfolios.

Economic and stock market trouble correlate, and here at The Gray Area, we are aware and prepared for these contrarian scenarios. The model portfolio is a great way to not get destroyed by a looming bear market, and way to profit from volatility to come. Until next week,

-Grayson

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Well actually, winter is already here…

They say not to time the market. Other than that is just a marketing tactic for you to put your money in their funds and never withdraw it, it is not good advice. If we don’t want to get destroyed in bear markets and want to make real money it is the only way. High performing assets like bitcoin can drive those crazy returns. The problem is, you HAVE to time bitcoin, or be hit with a 70% crash every few years.

Bitcoin has gone down a lot recently, already having crashed 52% off the October 2025 high. Every bear market there’s a lot of talk about it being the end of bitcoin. On the flip side, I’ve seen many people getting so much hope when it rallies trying to call the bottom along the way.

I’m here to give an honest take on what the price will do not built on hope or fear, but mechanics.

Philosophically and economically, Bitcoin offers some hope. If possible, getting money out of the government’s hands would undoubtedly be the best thing for humanity. I’ve written about its usefulness in the past (1,2), but I’m not blind to some of the risks and valid skepticisms. It will prove itself over the long run (or not).

On a shorter time frame we can use it as an investment vehicle to generate returns. It has been one of the best performing assets in many years over the past decade. It has blown the S&P500 out of the water, even with its brutal bear markets. Clearly catching the green years would drive meaningful returns, even with small allocations. Timing is important to avoid giving it all back in dramatic red years.

Bitcoin doesn’t have earnings to base valuations on. Commodities have the economics of mining and processing which determine new supply, offering some grounding to the asset. Bitcoin was engineered digitally in a similar way, having real decentralized process to create new bitcoin in a constrained fashion, unchangeable by market participants (can’t instantly mine all the gold or bitcoin).

This is one reason why commodities and crypto have more volatility than stocks. If there’s no cash flow to base the value on, then it is sentiment leading the way. While definitely even more driven by sentiment than the stock market (given the rise in things like astrology and other weird bitcoin predictors), is it merely sentiment driving the bitcoin price?

Mike Green, while generally acknowledged as a bitcoin bear, has done some good work on the asset. He is one of the top flow analysts, with his passive investing thesis explaining some key phenomena in the stock market. He has also shown ETF flows are the dominant driver of BTC.

Flows turned negative at the end of 2025, which predicted the slide in price. Recently, this relationship has fallen, meaning liquidations and other factors were likely driving the most recent price declines, not necessarily that the data doesn’t apply anymore. This could mean that we are closer than not to the bottom, but that is speculation. How can we know?

Michael Howell is a world leading expert on liquidity and global liquidity cycles. He shows that the liquidity cycle has a relationship to bitcoin. This is the next clue that gives us an idea of when there is ample money to chase higher volatility assets and boost ETF flows. He shows that with good correlation, there is a 13 week lag from changes in the liquidity cycle to changes in the bitcoin price.

The current liquidity cycle peaked in late 2025, meaning the growth in liquidity has started to wane. This seems counter intuitive since the fed has had “tight” conditions without quantitative easing or low interest rates, but other methods helped keep liquidity conditions loose and growing in the US. Ironically (now that the Fed started to lower interest rates), financial conditions are expected to get tighter. This helps explain why bitcoin and the stock market have struggled, and could give us clues to when bitcoin may turn.

Right now, bitcoin is at 68k, one deviation below the 200 day moving average and nearing the 200 week moving average. It is oversold on a relative strength basis and could be a good buy here. That could be true for the long term, but we don’t want to mess this up.

You may have heard me refer to the bitcoin “seasons” in my portfolio updates. Spring is green, summer is yellow, fall is orange, and winter is blue. The bitcoin bottoms have been very cyclical so far, occurring every four years. Summer is the exponential move up, while winter is the crash phase. Previous winters lasted between 336 and 420 days and had crashes of 73% to 80%. It has currently only been winter for 168 days with a crash of 52%.

This is not nearly the extent of past cycles, meaning there is more time and correction to come if we assume history repeats. While not always the best assumption, we have mechanistic data to give us clues. With the liquidity cycle turning down and not expected to increase until at least late 2026 or 2027, there will be less liquidity for those ETF flows that drive bitcoin’s price. If the flow spigot is closed, bitcoin should continue to lag.

Technically, there are a confluence of Fibonacci targets around the August 2024 low at 49k which would act as major support. It corresponds to my likely count of wave (v) (purple box) of circle c (orange box) down. It also lines up closely with the 61.8% retracement from bitcoin’s inception to the all time highs. It would also be a 61% drop instead of 52%, closer to historic cycle norms.

Bitcoin isn’t a bad buy here, especially for the long haul, especially if we see a sudden influx in money printing. However, there is likely another 29% flush lower alongside another ~150 days before the bitcoin “spring” starts time-wise. You can hope all you want for bitcoin to go higher, the drivers of price are telling you it is not time yet. These mechanistic factors actually correspond nicely to the bitcoin seasons with the bear market over near the end of this year or early next.

Heed the warning that there is more bear market left, but don’t be convinced the asset is toast. Whether we merely retest support around 80-100k or go on to all time highs, this would drive returns far superior than the general stock market. Real tactical portfolio diversification through bitcoin, commodities, etc are real ways to drive meaningful returns instead of handing your money over to institutions just trying to collect their fee. Until next week,

-Grayson

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Most people think that since the Federal Reserve has had elevated interest rates and has not been performing quantitative tightening (QT), liquidity conditions in the US are tight. This is a policy headfake that is actually not true at all. While not performing full-blown quantitative easing (QE), they have been making other liquidity injections as needed since 2022. The major source of liquidity, though, has been from the US Treasury.

Beginning under Yellen and continuing under Bessent (even though he campaigned on stopping it), the Treasury has been issuing shorter-term debt to fund the government. It’s a bit complicated, but bond duration affects liquidity. By juicing the economy with billions of Treasury bills instead of bonds, it contributes to more liquidity and easier monetary conditions. Combine that with higher interest rates actually helping the pay mega-cap corporations with excess cash, who are driving most economic investment, and things have been pretty good monetarily.

No one knows liquidity cycles better than Michael Howell of Capital Wars. His model below suggests that liquidity has peaked in late 2025 and is only now tightening. Again, it seems counterintuitive that now that the Fed is lowering interest rates, liquidity conditions will tighten. The reasons are a deteriorated reverse repo facility, a strong real economy that pulls money out of the financial economy, and the debt maturity wall and refinancing cycle finally arriving. These are also reasons why recession forecasts have been delayed, because there was more to the story.

Most of the world is on a similar timeline to the US or a little behind. China, on the other hand, has already faced massive deflationary pressures in its housing market in recent years. In Howell’s eyes, China’s money printing is not about currency value and attractive exports, but the debt-to-liquidity ratio. If it is too high, problems occur. Similar to Japan in the 1990s, China is having to print money post-debt crisis.

This means China is on the opposite side of the liquidity cycle. To avoid further calamity in domestic assets and protect their financial system, they are printing huge amounts of money to inflate away the debt. They have had tight conditions and are beginning to loosen them. This is the opposite of the US, which has had loose conditions and is trending tighter. This will soon be what the US does with its enormous debt pile when collateral/liquidity dries up.

There are certainly flaws in this strategy by China, but with capital controls on the Yuan and gold exports, they have effectively blocked the exits. What this means is that the newly printed Yuan can keep a relatively stable dollar exchange rate and freely devalue against gold domestically (a big reason for gold’s recent success). This suggests further upside for gold, as the gold run may not actually be the “debasement” trade, but rather a China liquidity consequence that is likely to continue.

As an investment theme, this means that instead of nearing the danger zone, China is past it. Further, with the capital controls, the domestic monetary injections have to go somewhere. While they are hoping this helps stabilize the Chinese real estate market, it is going into other assets like gold and stocks.

Is the Chinese stock market a good value? Looking at the tech sector (CQQQ), after dropping 73% (Feb 21 to Feb 24), it went up 110% in just 2 years (Feb 24 to Feb 26). This put it near the upper band (upper red line) of its four-year average (middle blue line). This four-year average should act as resistance to bounce off of in a bull market, as seen in 2015/16 and 2019/20. The top and bottom bands' widths are also shrinking, meaning consolidation is happening, often before a more aggressive move. The bottom RSI value measures relative strength (momentum), and is showing that it is not relatively expensive anymore. A little more correction may provide a solid buying opportunity.

Looking at the key levels and Elliott Wave Theory, we can get an idea of future scenarios. Given the chart data, which can be seen below, there are two options: 2021 was the top, or we could challenge new highs again.

If 2021 was the top, you would expect a correction before going lower (below circle 5 of C at 27). This correction is denoted by the large green box. Typically, this would target the 0.5-0.618 retracement. The current retracement (higher) has only gone to the 0.382 level, meaning it isn’t likely over yet. This, however, is the ideal target for green wave A of an ABC pattern up. If the lower support region in grey holds (also near the four year average), then the green C wave would perfectly target near the ideal 0.618 level.

The even more bullish case is if Feb 2024 was the bottom. I would still expect the same further into the grey box and a retest of that four year average. From there, the blue 5 wave move could be on the table which would target the highs around 100. Regardless, there is 70% upside in green, or 120% upside in blue.

How I’m wrong. In the shorter term, if the price follows through below the four-year average and below 34.88, it is likely something more immediately bearish is going on. That is not something I want to be investing in. If lower grey box support holds, my ideal buy would be between 39 and 43. Then there is a great risk-to-reward with a stop loss at that 34.88 level.

Given a bit more of a pullback to retest the four-year average and the wave B/2 support, Chinese tech stocks would be in a nice technical setup. Layer in the macro view of an expanding Chinese liquidity picture, and there might be something there. Some may not want to or be able to invest in China, but it is a promising area to keep an eye on.

-Grayson

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The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, precious metals, bitcoin, and a flex option. Last month’s construction and performance.

Both the portfolio (-4.31%) and market (-5.07%) lagged in March. Year-to-date, the portfolio (+3.01%) is outperforming the SPX benchmark (-5.44%). Overall, we are up 30.11% vs 11.05% for the market since inception.

Over the last month, natural gas companies have rocked, bitcoin showed some courage, and it was not a fun time to be yellow rocks.

Before we dig into the weeds and discuss changes, I’m proud to announce a new change to the website.

The three regular articles each month will remain free public posts, but the model portfolio, synthesizing that research and opportunity into a simple and easy portfolio guide, will now be exclusively for paid members.

My pitch is simple

I’m not trying to rake you over the coals to get your money, but I am already providing value and believe I will provide more as things progress.

I’m beating the market while minimizing drawdowns, finding asymmetric opportunities, and making sure to not get destroyed in a market downturns.

My three free articles are the research, but the model portfolio synthesizes that unconventional research into what I actually do with it.

The cost will be $10/mo or $100/yr. I will also be raising the price again to start 2027 as my track record continues.

However, for the channel OG’s that sign up in the next month, will get it for $7/mo or $70/yr (which comes out to $5.70/mo) which will stay that price forever, and absolute steal.

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Now back to the data for a preview of the analysis and what you’re getting!

Natural Gas Companies (FCG) - 5.9%

The Iran conflict started on February 28th. I spotted this promising setup in oil/gas in my article No Love, on February 2nd (denoted by the green arrow). I obviously didn’t know that oil going through the straight of Hormuz would be blocked, sending crude and LNG prices higher.

Many times news doesn’t matter and price goes the opposite way “it should”. There are many news events or catalysts that could back my thesis, but technical analysis is useful precisely because it ignores news. Events are merely a catalyst to drive the sentiment and supply/demand of prices. It may seem obvious that the Iran conflict would drive gas stocks higher, but that is a trap that will lose money over time.

I did not predict the war, but found a healthy, unloved sector with a good technical setup, and macro tailwinds. The portfolio position is up 26.5% since then. It is testing a resistance level at $31. The next level of resistance is the line at $37 and first target box around $45. If FCG is going to really push, $60s is the upper target.

Uranium Miners (URNM) - 5.4%

Uranium has had a healthy correction alongside precious metals over the past month, but good portfolio management allows you to benefit even if things don’t go perfectly. I added URNM in November and added more December (green arrows). Seeing healthy profits so fast, I trimmed the position in January. Even with the drawdown over the last month, our position is up 19.3%.

We sit at a confluence of traditional corrective targets including wave 4 in purple, wave C in orange, 2024 price high, and the 200 day moving average. The technical picture has become messier, but this would be a beautiful spot to find legs higher. If we break below the B wave low and entry at $50, it is time to reconsider this position.

Precious Metals and Miners (GLTR, GBUG) - 4.3%, 3.2%

Gold/silver have been a staple from the beginning. They have also had a serious correction over the last month. Just like uranium, I have been taking profit all the way up. I even warned about silver’s parabolic rise and the risk for a 30-50% correction in my January update, which turned out to be quite prudent call.

The positions are still up a whopping 75% and 126%, in which we trimmed significantly in anticipation of this recent pullback. There is likely more correction to go before making new highs in metals, but the path is unclear. First, it could take quite a long time to get there as wave 4’s are typically choppy and boring. Second, whether we go directly lower through the purple (wave 4) support directly into the orange box (black ABC), or back higher before lower in the green ABC is yet to be seen. Third, there is always the possibility that this parabolic run has hit its peak already and we won’t see higher gold in a long time.

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Energy consumption encompasses more than just electricity. While renewables accounted for 21% of electricity in 2023, they only account for 9% of total energy consumption. This also includes transportation, heating, and industrial use. While it would be nice to have a perfectly sustainable grid, the reality is different. In this series, I will highlight the roles of various energy sources and their outlook. For the year 2023, fossil fuels accounted for 82%, nuclear 9%, biomass 5.4%, and renewables 3.6%.

This is a series I’m going to do where I will research and update my outlook on each energy industry: renewables, batteries, nuclear, and fossil fuels. This week is about next-generation energy sources.

Geothermal

Most people think geothermal energy is a niche technology, something Iceland does because it sits on top of a bunch of volcanoes. They’re not entirely wrong, as geothermal currently generates roughly 1% of global renewable electricity. The 17 GW of installed capacity worldwide is less than what the US adds in solar capacity in a single year. The US actually has the most operating capacity, followed by Indonesia, the Philippines, Turkey, and New Zealand.

The issue with traditional geothermal has always been geography. To extract heat from the earth economically, you need the right conditions near the surface. You need hot temperatures (volcanic activity), permeable rock, and water. That’s why the US capacity is 95% concentrated in California and Nevada. It is regionally unviable in most of the United States.

That limitation is what next-generation geothermal is trying to solve. Enhanced Geothermal Systems (EGS) are the name for the next-generation geothermal energy. The process involves drilling deep wells, hydraulically fracturing, and pumping water through the fractures to extract heat. By drilling deeper wells, it is possible to tap into hotter temperatures in more areas.

The concept isn’t new, but for decades, it was too expensive and technically unreliable to commercialize. The shale gas revolution sparked the drilling innovation to give the industry hope. They spent trillions of dollars perfecting exactly the drilling techniques. Engineers, often from oil and gas companies, started applying those skills to geothermal as well.

The leading company here is Fervo Energy. Fervo proved its concept in 2023 with a 3.5 MW pilot in Nevada that began feeding power to Google’s data centers. Currently under construction, the Cape Station in Utah is planning on delivering 100MW to the grid this year, with a large 400MW by 2028.

EGS is also being invested in by large oil companies like Exxon Mobil and Occidental Petroleum. The main limitation is cost. Geothermal projects carry capital costs of $3,000–$6,000 per kilowatt, which are roughly double wind or solar, and exploration and drilling alone represent 40–70% of total project costs.

Like most things in the US, permitting can take a long time, especially on federal land. The energy density and novelty will make it difficult and time-consuming to scale to truly make a dent in the overall energy mix. There are also seismic risks and fracking risks that need to be carefully considered, as public opinion can sway negatively if issues arise.

The IEA estimates that with continued cost reductions, geothermal could meet up to 15% of global electricity demand growth to 2050. IEA estimates are not good, but of course, if things progress, it may be a promising area. Geothermal has some of the lowest life cycle emissions of any energy source as well. This makes it attractive from a sustainability perspective as well.

Finally, with rising geopolitical tensions, national security and supply chains are high priorities. Geothermal does not require many strategic resources like batteries, solar, or nuclear.

Geothermal is not going to replace natural gas anytime soon, but EGS is crossing from science project to commercial reality in real time. Cape Station is expected to connect to the grid this year, more than you can say for some advanced nuclear reactors, given how promising those are. Costs are key to commercialization. Keep an eye out for this developing industry and see if it can get over its hurdles.

Fusion

Nuclear fusion is the “holy grail” of energy, providing ~4x more energy than fission without the waste. Both are orders of magnitude more energy-dense than oil. Fusion is the process of combining hydrogen isotopes to produce helium, a neutron, and energy. Technologically, labs have been trying to ignite and sustain the reaction for decades, which has technological, financial, and engineering challenges. While there are plenty of conspiracies that the government is hiding fusion and other free energy generators, academic and private startups are working hard to make fusion work around the world.

For most of the past seven decades, that problem remained unsolved at any useful scale. In December 2022, the National Ignition Facility at Lawrence Livermore achieved a fusion reaction that produced more energy than the lasers used to initiate it. Private fusion investment has gone from $1.9 billion in 2021 to $9.7 billion by 2025, with over $2.6 billion raised in the last year alone.

There are a few types of designs, magnetic confinement (tokamaks and stellarators), which confine plasma and apply a magnetic field. The other type is inertial confinement fusion, which hits compressed fuel pellets with lasers. It is obviously very complicated, but this is a brief overview of the various avenues taken.

Commonwealth Fusion Systems (CFS) was spun out of MIT and is building a demonstration device called SPARC in Massachusetts. Their edge is high-temperature superconducting magnets that are dramatically more powerful than anything previously used in fusion research. SPARC is currently 60% complete, with a commercial facility called ARC planned for Virginia in the early 2030s under a 200 MW power purchase agreement with Google. NVIDIA, Bill Gates’s Breakthrough Energy, and Khosla Ventures are among their backers.

Helion Energy is backed by Sam Altman and $500 million in prior funding rounds, taking a completely different approach using pulsed fusion with direct electricity generation (skipping the steam turbine step). Helion broke ground in July 2025 on Orion, what it’s calling the world’s first commercial fusion facility, in Malaga, Washington. They have signed a power purchase agreement with Microsoft, committing to deliver at least 50 MW of fusion electricity by 2028, which is aggressive to say the least.

TAE Technologies has an unconventional approach using a field-reversed plasma configuration that avoids some of the magnetic containment complexity of a tokamak. TAE merged with Trump Media & Technology Group in a deal valued at $6 billion in December 2025.

The DOE released a formal Fusion Science & Technology Roadmap in October 2025, targeting fusion power on the grid by the mid-2030s. The skeptical reading is that the DOE roadmap also acknowledged critical gaps in materials science, tritium supply chains, and regulatory frameworks that don’t yet exist for fusion.

While fusion might actually be 10 years away instead of 20, there are many challenges. Not only are there scientific and engineering hurdles to overcome, but they will also need to overcome the scale, commercialization, and supply chain hurdles. Tritium supply is problematic, as well as the material degradation of the fusion reactor walls.

The funding is real, the milestones are real, and the scientific progress over the last three years has been genuine. However, fusion on the grid before 2032 requires everything to go right simultaneously. Fusion is much more of a bet on the future, in an industry riddled with skepticism for decades. While further away, progress has actually been made on fusion and is worth keeping an eye on.

-Grayson

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The stock market is grossly overvalued according to metrics like the CAPE ratio and Buffett Indicator. Even defensive sectors and small value stocks trade at elevated valuations. With the outperformance of precious metals as of late, it seems like there aren’t many places left to put your money. Over the last few months, I’ve been looking for sectors that are neglected or have potential, like Oil and Uranium.

If an investment is exciting and popular, it likely means it is overbought technically and expensive fundamentally. The AI theme fits this bill perfectly, and even precious metals as of late. While momentum can carry those higher (and lower for the neglected ones) eventually, mean reversion will take place.

Today is about agricultural commodities. No one cares about wheat or sugar cane, especially since they’ve crashed roughly 50% in the last few years. There are three reasons to care, though: macro, climate, and technicals.

Macro

Crops today are not grown sustainably, but require copious amounts of industrial fertilizers due to the heavy tax the soil takes. In Phrosperous Land, I dive deeper into these fertilizers. In short, there are a few main elements that plants need to grow: phosphorus, nitrogen, sulfur, and potassium. The dominant phosphorus supply comes from Moroccan phosphate rock deposits, which are then primarily refined in China. Potassium comes from potash deposits, primarily in Canada, Russia, and Belarus. Sulfur compounds are mostly produced in China, North America, Russia, and the Middle East.

The last piece of the puzzle is nitrogen, consisting of urea, ammonia, and nitrates. Ammonia is the backbone of all nitrogen fertilizers, produced via the Haber-Bosch process with natural gas as key input. Anhydrous ammonia is a liquid, so transportation is difficult. Only in localized supply chains can farmers apply it directly. This is mostly a US phenomenon. Treating ammonia with carbon dioxide yields urea, an easier export, which goes to India, Brazil, Southeast Asia, and Africa. Finally, anhydrous ammonia can be treated and turned into nitrate compounds for easier transportation and application. These are primarily used in Europe and the United States. The US actually consumes about a third of each type.

The Middle East is one of the three main ammonia producers(other than Russia and China). Not only does the conflict in Iran affect the safe production of 33% of the world’s fertilizers (sulfur and nitrogen mainly), but the ability to export is also governed by the safe passage through the Strait of Hormuz. Further, disruption to oil and gas infrastructure in the region could disrupt natural gas, the dominant input cost to ammonium production. We stand at a critical time for the spring planting season. Without adequate fertilizers, crop yields will fall significantly. The regions most exposed to import issues are Brazil and India, followed by Southeast Asia, North Africa, and Australia. The US and Europe are protected but still affected.

This story could be nothing if the Middle East conflicts are short-lived like last time. It is never good to be too convinced one way or another when it is political decisions on the line. However, we have seen the deglobalization trends in other key resources like Uranium, base metals, and battery metals. Even if the immediate supply shocks subside for this planting cycle, the ever-divided global economy has the potential to price fertilizers higher. Furthermore, dull prices have caused farmers to project less planting in 2026. Lower crop yields on top of supply disrpution could be a recipe for higher prices if it plays out.

Climate

You’ve heard me talk about climatological impacts on agriculture before. In Not So Bright Pt 2, I discussed how solar cycles impact global weather patterns like the El Niño-Southern Oscillation (ENSO). ENSO events can be reliably predicted using the 11-year solar cycle and significantly affect the weather in South America and Southeast Asia. The effects extend globally, though, also affecting the US, Africa, and Europe.

Currently, European models indicate a +2°C anomaly, indicating a strong to very strong El Niño event. This is expected in the years following a solar maximum, but was not expected heading into this year. The anomaly is accelerating, and the predicted strength has been steadily increasing over the past few months, so it may not yet be fully appreciated.

If we reach +2 by summer as the model suggests, the ENSO anomaly would be one of the strongest in recent history, similar to the 1997/1998 and 2015/2016 El Niños. These periods drove significant food scarcity globally. Southeast Asia/Indonesia, India, and Southern Africa have the highest chance of negative outcomes. Sugar, wheat, rice, palm oil, coffee, and cotton may be affected. Certain crops, like sugar, may be affected in Brazil. El Niño moisture is typically helpful for most crops (i.e., soybeans) in the region, though.

Dufrénot et al studied the climatological impact of stronger ENSO events on commodity price volatility. While they come from the lens of climate change affecting ENSO models, we can also view the statistically significant solar cycle impact as one that directly influences ENSO timing (not strength, except on larger cycles).

Their study suggests that there is a weak correlation between commodity volatility and ENSO during weak cycles; however, during strong ENSO anomalies, there is a significant increase in volatility. This doesn’t tell us price direction, just that prices will likely move more than normal.

Technicals

There are many different agricultural commodities, including sugar, wheat, corn, soybeans, cotton, cocoa, cattle, and palm oil. These differ from fuel commodities (oil, natural gas, coal), base metals (copper, zinc, aluminum), precious metals (gold, silver, palladium, platinum), rare earths, and battery metals. Gold, metals, and recently oil have experienced aggressive moves higher. Conversely, agricultural commodities have largely been oversold and sit below or near their 3yr moving averages.

Sugar, wheat, corn, and soybeans are considered the “cash crops”. Sugar is 2 deviations oversold relative to the 3yr mean, while corn, soybeans, and wheat are trying to breakout past the 3yr mean. Cattle is the opposite, 2 deviations oversold at all-time highs like most metal commodities. Cocoa just crashed from its exponential move higher in 2023. Palm oil has been rangebound for a few years and sits just above its 3yr average.

Relative to other assets in the market and to historic levels, agricultural commodities fit the definition of neglected and cheap. This is hard to come by these days. Below is a chart of the cash crops (sugar, wheat, corn, and soybeans). The chart is busy, but let me explain. The black lines form a price channel that has had range-bound prices since 1970. The green lines represent the solar cycle. The yellow shaded regions represent El Niño anomalies that followed the solar maximum.

Both times prices were at the lower bound, both soon revisited the upper resistance of the channel, appreciating 2-3x in price. Further, times when El Niño started with prices below the median line were also promising.

Even the price spikes in the 1862 Civil War time and 1917 WW1 time were off the back of a solar maximum and a strong ENSO anomaly. While these commodity spikes may have been catalyzed by the wars, there were agricultural consequences as well as the psychological impacts I discussed in Not So Bright.

Technically, agricultural commodities are near multi-year lows, under-owned, and already showing supply discipline from producers who can’t profitably farm at current prices. The setup for a mean-reversion from the lower trendline is there.

Fundamentally, the Middle East conflict has disrupted the global fertilizer supply chain at exactly the moment farmers needed inputs for spring planting. If not resolved soon, the full crop production impact of this fertilizer shock won’t be visible until harvest, if there are delays or crop yields are affected.

Climatologically, the solar cycle and current projects put a strong El Niño in front of us, a phenomenon that research associates with significant commodity price volatility. While it could take until next year to play out, together, there is a bullish case for agricultural commodities from here. Like any unloved sector, there could be more neglect, and recession could add further volatility depending on how things play out.

-Grayson

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What if there actually was a way to tell if a recession was imminent? Typically, recessions don’t get bad until consumers and companies start defaulting on loans and going bankrupt. This credit risk is priced on a whole spectrum based on how risky the loan is. On the consumer side, Sally, with a high income and credit score, will get favorable interest rates over Bob, who has a low income and a poor credit score. It is the same for corporations, which is why Apple is given a higher credit rating than GameStop.

The safest loan is a treasury bond from the US government, followed by Apple (AA+), then Gamestop (B/B-). Credit spreads indicate the difference between the interest rates charged for different borrowers. The spread between a treasury and a non-investment grade/junk bond (BB or lower) can give interesting information about the health of the economy.

In a booming economy, a 10yr treasury could pay 4%, whereas junk bonds 7%. Naturally, you are paid more for taking on greater risk. If the economy is struggling, the 10yr treasury could go down to 3%, whereas the junk bond goes to 20% as investors don’t trust these companies to pay them back. The spread between treasuries and junk bonds is shown below, and when the spread goes over 8%, it is the danger zone. These are times associated with financial distress, Federal Reserve intervention, recession, and/or significant market volatility.

Credit spreads can be used as an indicator to get out of the market. To avoid false signals, the red line represents a 2% surge in credit spreads, indicating substantial weakness. These signals typically occur at market tops or during corrections. For smaller moves/corrections during the mid-business cycle, the signal may be less obvious. However, this signal would have gotten you out of the market at the dot-com and 2008 market peaks.

On the flip side, the top in credit spreads often shows the end of the weakness and market bottoms. These signals typically occur at or near market bottoms. In a world where it is extremely difficult to call tops and bottoms, these indicators can be useful for getting you close. The blue is a smaller mid-cycle spike, while the green is a major credit spread spike, coincident with recession.

Obviously, you’re not going to know that credit spreads have peaked and turned down either, so we can place another line when credit spreads retraced 40% of the move higher, providing evidence of a trend reversal into favorable economic conditions. The orange signal basically gives you confidence that the worst is over. Each past orange signal has resulted in favorable stock performance until the next red signal (2% credit spread thrust). You also don’t miss out on too much return off the low either.

Typically, when credit spreads move, they move fast. Caution is still warranted given other factors that lead me to be cautious, such as technicals, leading indicators, labor market fundamentals, yield curves, consumer credit, overvaluation, etc. However, right now, credit spreads are very low, meaning there is little risk priced in (may be surprising). Until that changes, the stock market can continue doing well (or at least not crashing). My gut tells me we get more highs in the S&P 500 before a recession starts, but I could be wrong.

I will be watching credit spreads closely. Once we get another red signal, where credit spreads widen by over 2%, that will warn me that the top for stocks could be imminent or in the past. This will impact things like the model portfolio and serve as a warning to investors of looming labor market and stock market weakness.

-Grayson

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If you were asked what the most important energy source in the future is, what would you say? Your answer may depend on your political leanings: Fossil fuels or renewables. Another source stands out, unconcerned with these debates. Nuclear energy is a staple in the US, providing 21% of the grid’s electricity. As I discussed in What’s Up With Nuclear, it has become safer than its reputation suggests, is orders of magnitude more energy-dense, and has some exciting technological developments.

One important takeaway from that piece, given geopolitical tensions, is the foreign dependence of uranium oxide and refined uranium fuels. Nearly 100% of uranium oxide, high-assay low-enriched uranium (HALEU), and 80% of low-enriched uranium (LEU) come from foreign suppliers.

Last month, the Department of Energy announced $2.7 billion to strengthen domestic enrichment over the next ten years. Deglobalization trends and geopolitical tensions have brought new demand for metals for strategic purposes.

The bullish case for uranium prices comes down to supply and demand. On the demand side, you have geopolitics/deglobalization, data center/AI, increased global interest in nuclear, nuclear powerplant extensions, and bipartisan support. On the supply side, you have questions as to whether current supplies can manage and how quickly new supply comes online.

The largest uranium miner in Kazakhstan, Kazatomprom, announced a reduction in their forcasted mining quantity for 2026, despite the rise in prices. Other uranium mines are relatively small and take time to come online (AZ, UT, and more), leaving the supply potentially unable to keep up.

Technically, uranium oxide prices have strong bullish momentum. While pulling back from recent highs, a breakout could see prices as high as $150/lb. This is a conservative estimate; if impulsive, the price could go as high as $300. The b-wave correction into the spring 2025 low retraced in the standard support region. If my analysis is correct, we are in the c-wave higher now. On the smaller time frame, there is a 5-wave move within the c-wave. Wave 2 could come as low as $72 and still be in this bullish scenario.

Uranium mining companies (URNM) in the model portfolio have also been in a bullish price pattern. We are very possibly in a strong circle wave-3 higher with a target around 105.

URNM, compared to the stock market (SPX), did well last year after a poor 2024. If it can continue this trend, it too could make a move higher. Conservatively, if it can break out like it is testing, the ABC would target a 30-50% outperformance relative to the stock market.

This bullish case doesn’t have to happen, but there are fundamental and technical reasons why it can. If a nasty recession strikes sooner rather than later, most assets get liquidated under that scenario. The price of uranium and stocks got pummelled in 2008. Whether uranium and the mining companies are a good investment from today remains to be seen. In a world of expensive assets, it is a good option. Regardless, nuclear energy remains a developing story and is poised to be an even more vital energy source going forward. Until next week,

-Grayson

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To start the year, I released an article called Not So Bright, an unconventional piece. In it, I discussed how solar cycles and “space weather” have an uncanny correlation with the economic business cycle, stock market volatility, and major global events. The science behind geomagnetic storms (a greater chance at solar maximum) affecting human health and behavior is beautiful. The connection to global events is admittedly far from proven, but the heavy correlations and potential causation are certainly there.

In short, a solar maximum is characterized by increased solar magnetic activity. This manifests in greater sunspot numbers, more solar flares and geomagnetic storms (auroras), more radiation and particle bombardment from the sun. While a maximum this can pose a risk to electronic infrastructure, a solar minimum can pose challenges for other reasons.

While we get less bombardment from the sun, the sun deflects galactic cosmic rays entering the solar system. Solar minimum does not modulate these rays as much, meaning more particles hit Earth, despite those increased risks from our own star spitting out particles and radiation.

Long story short, the solar cycle has an impact on temperature, which is substantiated by scientific literature. While I’m not here to argue the merits of climate change and carbon dioxide forcing (that gets you in trouble these days), I’m merely pointing out the effects that the solar cycles do have (the extent to which climatological forces dominate is debated and not my purpose). There is a cooling effect at sunspot minimums, but the mechanism is more complicated than it seems.

[Science] There is less visible and infrared radiation during solar minimum, which reduces the total solar irradiance, but this effect is surprisingly small. Less ultraviolet light means less effect on stratospheric ozone, which has coupling effects with oceans, wind, and surface temperature. Finally, the atmosphere is a big electric circuit, meaning changes in charged particles can impact things like storms (why unusual weather follows geomagnetic storms, like the polar vortex recently). During solar minimum, the increase in cosmic rays or galactic charged particles hitting Earth and attracting water vapor, which contributes to cloud seeding. Greater cloud cover increases solar reflectivity, and less solar radiation reaches the surface, thus causing a cooling effect.

Right now, you are probably thinking that these solar cycles occur every 11 years and global temperatures have been rising steadily for the last 55 years, so what is the point? It turns out we have to think larger than our own lives. The sun, in its magnificence, undergoes magnetic cycles on a timescale longer than just 11 years. These cycles just track the intensity of groups of 11-year cycles.

• Schwabe cycle ~11 years

• Gleissberg Cycle ~100 years

• Suess-DeVries Cycle ~200 years

• Hallstatt Cycle ~2400 years

Solar activity can be traced through tree rings, ice cores, and isotope data. The Suess-DeVries Cycle minimums correlate to the Maunder minimum from 1650-1710 and great depression era around 1900-1930. The Gleissberg cycle lines up with the Dalton minimum, great depression era, and we should be entering one now.

The 200-year Suess-DeVries Cycle is statistically significant, as shown by the paper below. The peaks in the figure below track with the Suess-DeVries Cycle minimums and go back 1000 years of data. We are currently at a high in this cycle.

The ~100-year Gleissberg Cycle is also shown to be significant. Past minimums correspond to the early 1900s, early 1800s, and early 1700s. While we are at maximum in the Suess-DeVries cycle, we are at a minimum in the Gleissberg Cycle.

We know that solar forcing has an impact on ocean temperatures and wind patterns, so it shouldn’t be a surprise that the ENSO events (El Niño, La Niña) correlate with solar cycles. Typically, following a solar maximum, there is a 1-4 year lag to El Niño and a subsequent lag from minimum to La Niña.

El Niño typically brings wetter conditions to the southern US, with warmer, drier conditions to the north and middle. La Niña is typically the opposite, yielding drier conditions in the south and colder/wetter conditions in the middle/north.

It should be clear why these cycles may matter. If the small solar cycles have a significant impact on weather, then the long ones should too. The weather affects one of the most important things: agriculture. While more important during agrarian societies without industrial fertilizers, it is still vital today and has effects on the US in recent cycles too.

The Dalton minimum of the early 1800s brought colder conditions and agricultural hardship to North America. This period is famous for 1816, the “year without a summer.” There were widespread crop failures, food shortages, and commodity price spikes.

Most of you are likely more familiar with the last Gleissburg minimum, the Great Depression era. World War I and the economic depression brought significant volatility in commodity prices. The Dust Bowl was a core issue exacerbating economic hardship during this time. Widespread crop failures and agricultural displacement took place during this time period.

We are at the next Gleissburg minimum now. This is further evidence to suggest volatile commodity prices. With modern technology, food systems, and a non-agrarian economy, we thankfully may be more insulated from its effects. On the flip side, we may be less resilient to its effects and not expect it.

The Midwest is the breadbasket of the world, and a significant centralization of our food supply has already occurred. It may not be unreasonable to suspect a second Dust Bowl or agrarian issues due to colder, not hotter, than expected temperatures.

Gold, silver, uranium, and industrial metals have seen incredible volatility over the last year. Wheat and agricultural commodities, while experiencing volatility in 2022, have not joined this move. We are a technology-driven world, not bothered by boring real-world sectors of the economy like energy or commodities. A boring sector like agriculture may gain a greater share of importance and investment if weather/economic challenges do take place. Until next week,

-Grayson

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