Making Hay Monday - May 5th, 2025
The “Safe Way” to Generate High Cash Flow
Offshore investors now own aggregate U.S. assets that sum to 80% of GDP, after taking into account America’s holdings in the rest of the world. This amounts to approximately $25 trillion more that overseas entities hold in U.S. assets than America owns in foreign nations’ financial instruments, real estate and direct business investments. While that seems alarming, a huge offset is that the USA earns far more on its offshore holdings than do overseas investors. This is because foreign central banks hold vast amounts of U.S. dollars at very low interest rates. In the case of the $1 trillion of U.S. currency coursing through the planet’s arteries, there is no interest cost.
As a result, until recently, the U.S. actually generated more income on its foreign investments than it paid out to overseas holders of its liabilities. The not-so-positive news is that, for the first time in history, America is earning less on its offshore assets than foreign investors are receiving on their U.S. holdings. As you can see from the dark dotted line above, the cash flow deficit is modest, but the trend is worrisome. This is particularly alarming given that offshore investors are demanding, and receiving, higher interest rates on their U.S. assets or are divesting some of them. Japan, for instance, is threatening to dump a large quantity of the $1 trillion of U.S. Treasury debt it owns.
While the preponderance of economic data has been trending softer in recent months, a notable outlier is the status of Federal Income Tax Collections. Due to the fact that businesses and individuals are understandably reluctant to pay taxes on income they don’t generate, this is not a data point to dismiss. Tax receipts from the self-employed, often seen as a proxy for the so-called “gig economy” (DoorDash and Uber drivers, etc.), have been particularly impressive. Overall, the U.S. government’s tax take increased by 8.4% for the most recent four weeks relative to the same period in 2024.
Special note: Great thanks to my close friend Vincent Deluard, Director of Global Macro Strategy at StoneX, for both of the above charts.
“History never looks like history when you are living through it.” -John W. Gardner
“Peace makes plenty, plenty makes pride, Pride breeds quarrel, and quarrel brings war; War brings spoil, and spoil poverty, Poverty patience, and patience peace. So peace brings war, and war brings peace.” -Jean de Meun (as quoted by Neil Howe in his epic best seller, The Fourth Turning Is Here)
“It’s a dangerous time to be overexposed to U.S. assets, and almost everyone is.” -Greg Jensen, Co-chief Investment Officer of Bridgewater Associates, in a March 11th, 2025, Wall Street Journal Op-Ed
The “Safe Way” to Generate High Cash Flow
Happy Cinco de Mayo, Haymaker readers! While noting that tequila is likely to be flowing freely for many of you this evening, and at the risk of sounding presumptuous, today’s income idea might be more celebration-worthy. This assumes you concur with the aged Haymaker that the bull market which began in October of 2022 has hit its sell-by date… literally, as of 2/19/25.
Even if you missed the peak back in mid February, the S&P 500 remains at one of its most generous valuations in history. It is now off a mere 3.9% for the year and about 8% from its mid-February all-time high. Accordingly, using the rally that began on April 4th to reduce your stock exposure might be prudent, particularly for all of you who are entitled to AARP discounts.
Unquestionably, it’s been a strong rally off the lows set around a month ago. From the intraday trough near 482 on April 8th, the S&P has ripped almost 17%. It is now trading at 20 times projected earnings for 2025. Moreover, those are likely well above where they will end up, a maddening, but regularly recurring, tendency to overestimate profits by Wall Street prognosticators.
To be fair to this rally, sentiment is still a long way from bullish. Also, as noted in our April 28th Daily, a Zweig Super-Breadth Thrust was recorded the week before last. Per that Daily, its track record going back over 60 years has been flawless in predicting at least 20% rallies over the ensuing year.
Additionally, the money-flow experts at Wellington Shields, the Brogan Group, are discerning a potential bullish set-up. We highlighted their work at the end of last year when they presciently warned of a correction in the offing.
Before I get into this week’s featured idea, I do want to convey a mea culpa. My positive take on energy has been woefully off the mark, at least when it comes to oil producers and the related service companies.
Fortunately, my bullish call on natural gas and its producers from last fall was actually more lucrative on the upside than my upbeat highlights have been costly to the downside. Names like Antero Resources and Expand Energy (the former Chesapeake) have gained 50% or more in about seven months.
Another gas pick to click, however, Coterra Energy (CTRA) has surrendered about half of what had been a nifty run-up. It does remain about 10% higher, though, notwithstanding an overall market that has been highly volatile and mostly flat since last September. We also mentioned Range Resources, a long-time favorite of our friends at Goehring & Rozencwajg, and it has spurted nearly 19%.
One dark cloud over black gold – aka, oil – is that it has taken out significant multi-year support lately. Based on our methodology, it flashed a sell signal when it broke below the mid-60s last month. It is now at $57 after another slide this morning in the wake of OPEC’s production increase announcement. Somewhat obscuring the validity of that support break, it occurred when the markets were in the grips of what I believed to be a global margin call, leading to involuntary selling of almost every asset class on the planet.
At this point, however, the breakdown is clear. To any readers with a short-term time horizon: you might want to reduce your direct oil exposure if you hold an ETF like the United States Oil Fund ETF (USO). (A key footnote to this is that USO has performed far better than the continuous crude oil contract that is calculated by the rolling price of the spot, or nearby, month. This is because, as this newsletter often pointed out, there was a built-in gain to holders of the USO which is comprised of a mix of current and more distant contracts. The latter provided a carry, or rollover, profit that has offset much of the weakness in oil prices. Illustrating this advantage, USO has not broken multi-year support.)
It’s also interesting that as oil prices were slammed last month, the primary energy ETF, XLE, has actually been rallying, at least since April 8th. The last time I recall seeing this kind of divergence was in April of 2020. That was when the spot, or current month, futures contract for crude went deeply negative due to a massive glut during the Covid lockdowns and a lack of storage. There was simply no place for the longs to put the oil of which they were being forced to take delivery had they not sold… which almost all of them did. Physical oil bottomed around $20. Meanwhile, XLE hit its low in late March and rallied hard through mid June.
The oil futures market is now back into a normal structure with the further-out months trading much higher than the nearby/spot month (similar to how the interest rate yield curve is no longer inverted). This does mean USO will face a serious headwind with the hefty roll profit now poised to generate significant losses. Therefore, that’s a suboptimal way to play a future oil rally.
Rather, the equities seem to me a far superior option to position for an improvement in oil’s fundamentals. With the spot price now below the break-even point for most U.S. shale producers, the drilling rig count is likely to see its already downward sliding slope become even steeper.
The old saying with commodities is that the cure for low prices is low prices. That’s particularly true with a resource like oil, where annual decline rates now represent around 7% of total output (actually, per Exxon, much faster than that).
The overlooked negative with shale oil production is that it has a much more severe decline rate than traditional wells. As this newsletter has noted several times, the U.S. shale basins have provided nearly all of the world’s oil supply growth, outside of OPEC. America’s ultra-enterprising oil producers have also left OPEC in the dust. They’ve raised their output by 12 million barrels/day since 2010, roughly 2½ times OPEC’s increase over that timeframe. The U.S. now outproduces Saudi Arabia.
For sure, the trend in crude prices is from upper-left to lower-right on a chart right now. Frankly, there’s no sign of an impending reversal. However, sentiment toward oil is, predictably, presently exceedingly bearish. Accordingly, any whiff of good news could trigger a powerful snap-back.
Besides natural gas, another more pleasant energy development has been with uranium. For those who followed our average-down suggestion on the Sprott Physical Uranium ETF (SRUUF), you’ve enjoyed a 14% bounce. The market may be belatedly waking up to uranium’s exceptionally bullish fundamentals. A bit of a retracement is to be expected, but I believe it’s heading higher, bigly, over the next year or two.
Now for today’s featured income idea…