The Anti-Fundamentals Paradigm from Passive Investing

I listened to an interesting podcast with Mike Green this week about the implications of passive investing. This isn’t new, and I’ve heard some of this before, but he mentioned a number of implications I thought of and something clicked.

Here’s the podcast: Season 3, Episode 21: Dangers Lurk in Market Structure’s Changing Dynamics – The Contrarian Investor Podcast (

Think for a bit about how money flows into and out of companies whenever money is switched from an actively managed fund to a passive fund. Here are some of the strange implications:

  1. Anti-Fundamentals flow: Active managers do research to figure which companies will surprise on earnings and outweigh these companies and sectors. Sometimes they have a small amount in short positions in companies they think will disappoint. As money moves to passive, they have to reverse all of these trades to re-allocate into the index. Money will reallocate away from their picks and towards what they didn’t pick.
  2. The big get much bigger: Active managers have strict caps to prevent them from focusing too much money into any one stock. Passive ETF’s have waivers for this, so that over 27% of the popular SPY index are focused into just 9 companies (2 of the tickers are Google). Whenever an active fund is exchanged for a passive one, expect these juggernauts to get a big inflow of money:

Note that a lot of those companies at the top do an enormous amount of share buybacks to feed this frenzy. Could the top ten holdings become 37% of SPY over the next year? You’d better believe it!

3. Meme stock champions can remain winners for much longer than you think. I picked Gamestop and AMC Movie Theaters below because most people are well aware of the story behind them with the short squeeze and the various memes. Both video games and movies have been moving toward streaming for years, so they were unloved on a fundamentals basis.

The biggest passive funds by far are run by Vanguard and Blackrock. As you can see below, these institutions hold 17.3% of all Gamestop shares and 14.6% of all AMC shares. When you switch money to a passive account, you are buying these.

In case you don’t know what a meme is, it is basically a cute picture aimed at getting people excited about crowding into a particular trade. Prime example of a meme:

Even the known fraud Nikola, with the CEO fighting in court and the tentative GM contract pulled, is STILL trading at a $4.25 Billion market cap – with Vanguard and Blackrock among the top holders!

4. Much less cash on the sidelines. It is very common for a mutual fund manager to hold 5% in unallocated cash. They do this to deal with various frictions such as account withdrawals, reallocations, and even minor trading so they can take some profits on a big gain or add a bit when the market drops. Passive funds don’t do any of that – they invest 100% by simply purchasing when money comes in, selling when money goes out, and holding in between. That means whenever you switch from an active fund to a passive fund, 5% of that money is newly added to the market which drives the index higher.

5. Much less market liquidity. During the week preceeding the pandemic announcement, the US stock market was collapsing lower day after day. In just 1 month, the S&P 500 dropped all the way from 3,385 to 2,237. The head of Vanguard announced with pride that less than 1% of his accounts traded during that time. What happened?

5A. Leading up to March 2020, there were plenty of warnings about Covid-19 from the harsh reactions in China to the cases found in New York and Italy. Active managers were watching with nervous anticipation, but the market kept climbing into mid February.

5B. Some of the big political insiders got wind that lockdowns were coming and dumped their holdings, followed by other active managers as they got skittish. This only accelerated when the news actually got out.

5C. For every seller, there must be a buyer. Passive funds pay no attention to pricing whatsoever – they don’t see a bargain when stocks are cheaper or a ripoff when they get too high, they just mechanically buy when payrolls send more 401k money in. There were very few entities able and willing to buy during this market drop, many of whom were hedge fund managers closing out their short positions.

5D. March 23rd, 2020 marked the bottom, as the federal reserve came in with a big announcement. Interest rates plunged lower in reaction. Active managers stopped selling. Some started buying. Early April saw an enormous buying binge as target date funds with fixed stock/bond ratios all had to re-balance their holdings in a period that had seen stocks plummet and bonds jump higher in value.

5E. From April 2020 on through today, the market marched relentlessly higher as payrolls kept putting money into 401k funds and many corporate buybacks continued forward. The buying frenzy picked up as active managers realized they were being left behind and started piling in. Low interest rates and the idea of Federal Reserve support created an environment of increasing leverage, as more and more funds started to use margin lending and other forms of borrowing to pile even more money into the markets. Anyone who was bearish lost big time and had to change tactics or quit trading. Narratives came and went in a frenzy as everyone tried to somehow tie the market reaction with recent news or fundamentals in some way – but fundamentals really had nothing to do with this rise.

6. Dismal performance from active managers leads to more switching. Active managers have had their fundamental analysis/earnings driven world turned upside down. Anything they hold gets sold off and anything they avoid or short gets bought up. If their account holders don’t switch their funding, they are heavily incentivized to become closet indexers themselves. Maybe they’ll shoot it to a few different passive funds (which all hold greatly overlapping stocks), so they can meet the index. Keep in mind that showing a 6% gain when the S&P 500 is up 10% can get them fired, but a 10% loss when the S&P 500 goes down 10% is expected.

What Now?

I honestly think this keeps going. We may see some big selloffs from exogenous events, but they’ll turn around just as quickly as long as the passive cash flows keep moving. I’m well aware that this can’t last forever, but try to think about what can stop it?

  1. An exogenous event like Covid-19 lockdowns could get a lot of active managers to sell, maybe even get some people to switch their 401k’s to money market funds. This would create a sharp selloff, followed by a reaction from the federal reserve, followed by the same pattern we saw after March 2020.
  2. A liquidity event could strike. The collapse of Archegos didn’t cause it, but there is speculation that Evergrande might. This would involve big hedge funds de-risking their portfolios by selling and reducing margin debt and other leverage, which would result in a bigger drop than #1 above. The federal reserve and federal government would react to “stabilize” things, but unless it was big enough to engender distrust of passive investing the same result would ensue.
  3. Retirement funds could start getting redemptions. This is many years off, however. Most actively managed funds are held by the older generation, who are slowly switching due to the increasing amounts of closet indexing by their managers. As they retire, they aren’t going to switch money into bonds all of a sudden, more likely they’ll leave the money with the same managers. Even if they have “forced distributions,” that doesn’t mean they’ll spend the money – it just means they’ll pay some taxes and move some money to after-tax investment accounts. No real selling in bulk will happen here until the median boomers are actually passing away and the accounts are divided among their heirs.
  4. Passive funds could hit a critical threshold where they are so big that the market stops functioning effectively. Whenever someone wants to buy or sell shares, someone has to be there to make the market. What happens when so much of it is held by passive funds that there is simply no more MSFT or AAPL for them to buy? Again, it seems like this outcome is years down the road.
  5. Political change. You can’t rule out the rules of the game being changed, especially with the wealth disparity and political anger as high as it is today. This is a roll of the dice however, and it could just as easily accelerate the process (like the Covid-19 reaction) as disrupt it.

What about inflation?

Inflation is widely misunderstood. The crux of the matter today is really all about QE. You either believe that quantitative easing is money printing and that we have excess dollars all over the place, or you believe that QE is a largely irrelevant asset-swap and the federal reserve is actually mainly using the policy they call “forward guidance” to encourage people to invest and spend.

I’m a big fan of Jeff Snider’s writing, and I’d encourage you to read some of it if you’re curious about the workings of the monetary system. Right now I’ll stick with one key chart I’m pulling from here: Leading Out From Japan – Alhambra Investments (

Japan pioneered the idea of using their central bank to buy up bonds in what they called “Quantitative Easing” back in 1998, and it still resulted in a deflationary environment with dropping interest rates despite all the ramp-ups which have even gone to purchase much of the Japanese stock market and even some of the US stock market. This should have created enormous inflation, but didn’t.

The crux of the matter is HOW the central banks are making these purchases. Essentially, they are buying these holdings directly from big banks that have accounts with the central bank, and they are crediting these banks with “overnight reserve assets.” These reserve assets are NOT money, and they cannot be cashed in for executive bonuses, stock buybacks, debt reduction, or anything else.

What can these banks actually do with overnight reserve assets?

  1. They list them on their balance sheets as assets. For accounting purposes, it counts towards a positive book value.
  2. They can settle liabilities with other big banks that hold an account with the central bank. If your employer pays you from their wells fargo account to your citibank account, then wells fargo can transfer “overnight reserves” over to citibank in order to settle this transfer.
  3. They earn interest on this overnight reserve based on whatever the central bank decides. In Europe or Japan they may charge for holding these as part of negative interest rate policy, but in the US they usually get paid some miniscule token amount for holding them, currently an 0.25% annual rate.

Anyway, I’m in the deflation camp in that I believe the inflation we’re seeing is not from an excess of US dollars. The supply constraints from Covid has been significant, as have the temporary government assistance and one-time check payments to Americans. Meanwhile, the fed’s cherished “wealth effect” has worked like a charm as money has plowed into investment vehicles driving up the costs of a variety of investment assets including housing.

Steven Van Metre, a deflationist with on his YouTube channel, asked the following question: With a record number of 60 enormous cargo ships waiting outside the port of Long Beach, CA just as government benefits are drying up and congress fights over the debt ceiling with lower and lower stimulus targets, how much money will consumers have left to purchase all of that inventory when it hits the shelves?

Consider that we’re still 5 million workers shy of January 2020, and anyone who has been skipping rent payments during the moratorium is about to get evicted. Also consider that the vast majority of the wealth gain has gone to the top 1%, who may be able to fly to space on vacation, but they won’t be purchasing boatloads of consumer goods.

Next, consider the situation with Evergrande and the clampdown that China has been having on their big companies. This is a serious problem if you’re long commodities, as the Chinese government is clearly not interested in building enormous “ghost cities” like they did in 2008 as they encouraged a property-purchasing frenzy. Even though I expect the financial spillover to be somewhat limited, I am seriously starting to wonder how much of a dent this will have in the use of base metals and anything involved in construction over there.

I have to admit, I’m also nervous about a pullback in precious metals, as I hold the bulk of my money in a variety of precious metals miners. I’m not planning on selling; Gold and Silver spent a decade carving out a base in pricing during which miners cut back heavily on exploration and development and they aren’t primary metals used in construction. I still believe this decade will be great for these metals even if there is turbulence ahead. Plus, I like something that isn’t tied to the passive investing ponzi we see developing.

Anyway, one thing I’ve done is I’ve decided to get some bullish market bets on the table. One of the guys I’ve been following on twitter for a while just launched a technical analysis/charting service where he finds stocks with bullish chart formations and posts target prices, using a combination of traditional technical analysis with his own take of Elliot Wave formations. His twitter handle is @DereckCoatney with proprietary handle @Derecks_Trades

My current holdings:

  • HEDGES (20.2%)
    • 19.0% TLT Calls
    • 1.2% EEM Puts
    • 9.3% AG (Silver), mainly shares & some calls
    • 6.0% SAND (Gold, Silver & others), all calls
    • 5.4% EQX (Gold), mainly calls & some shares
    • 4.7% LGDTF (Gold)
    • 4.2% SILV (Silver)
    • 3.9% SILVRF (Silver)
    • 3.5% MTA (Gold & Silver)
    • 3.0% MGMLF (Gold)
    • 2.1% RSNVF (Silver)
    • 1.7% SSVFF (Silver)
    • 1.6% LWDEF (Gold)
    • 1.2% WPM (Gold, Copper & Silver), all calls
    • 0.7% GOLD (Gold, Copper), all calls
  • URANIUM (13.3%)
    • 7.1% CCJ, covered calls sold on all of it
    • 4.8% UUUU, covered calls sold on all of it
    • 1.4% BQSSF
  • COPPER & NICKEL (5.4%)
    • 5.4% NOVRF
  • CANNABIS (8.8%)
    • 1.6% CRLBF
    • 1.6% GTBIF
    • 1.7% TRSSF
    • 1.2% CCHWF
    • 1.4% AYRWF
    • 1.3% TCNNF
  • CASH (3.8%)

I did actually buy some RSNVF and SSVFF last week as these silver miners were hammered and I didn’t have much of a stake in them anyway. I am very skeptical about adding more to this sector at the moment though – I’m not selling, but I want to be able to add if we see a significant price drop. In my opinion, the fundamentals are sound and they’ll be fine, but we may see something like the precious metals selloff we saw in 2008-2009 before continuing to their 2011 peaks.

I also bought a decent amount of Cannabis stocks as those were hit pretty hard as well, and I’m thinking they’ve come down enough to potentially stabilize. I’ll continue adding on big drops only with a target of around 10-12% of my portfolio going there.

The Derecks Trades section is simply call options at a variety of strike dates, mainly December, currently divided between 9 different stocks that had bullish chart formations which will go up significantly if they hit their targets. While call options can easily go to zero in a sideways market, I am not expecting a sideways market – we will either have a March 2020 style drop or continue ratcheting higher. Plus, this allows me to put money into companies that have lousy fundamentals so I can reap some of the gains from the passive investing trend without being worried about losing big.

Good luck getting your head around this new paradigm – the implications still have my head spinning. Like I should buy Tesla with a 400 P/E ratio because it’s expensive, it’s in the S&P 500, and active managers hate it … I’m getting dizzy just thinking about it.

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Performance and Allocation Self-Reflection Time

The last couple of weeks have been pretty wild as far as market movements. As such, I’ve done a significant amount of trading. Meanwhile, with a labor day weekend in Ensenada, Mexico I haven’t had time to add up all my positions. This is important to do periodically, and it’s simply not something that a simple trading application like tdameritrade can do for you. They can’t tell you your gains netting out deposits, or categorize your positions into categories, and they don’t make it easy to balance market allocations between multiple accounts (Roth, IRA, Regular). Anyway, I’m starting backwards today – listing my allocations, then explaining my thoughts on each.

Above are the movements of my main holdings over the last 2 months, which is quite volatile as you can see.

  • HEDGES (19.6%)
    • 18.6% TLT Calls
    • 1.0% EEM Puts
    • 9.2% AG (Silver), mainly shares & some calls
    • 6.2% SAND (Gold, Silver & others), all calls
    • 5.4% LGDTF (Gold)
    • 4.8% EQX (Gold), mainly calls & some shares
    • 4.0% SILV (Silver)
    • 4.2% SILVRF (Silver)
    • 3.3% MTA (Gold & Silver)
    • 3.3% MGMLF (Gold)
    • 1.7% RSNVF (Silver)
    • 1.5% SSVFF (Silver)
    • 1.5% WPM (Gold, Copper & Silver), all calls
    • 1.1% LWDEF (Gold)
    • 0.9% GOLD (Gold, Copper), all calls
  • URANIUM (13.3%)
    • 7.3% CCJ, covered calls sold on all of it
    • 4.8% UUUU, covered calls sold on all of it
    • 1.2% BQSSF
  • COPPER & NICKEL (5.1%)
    • 5.1% NOVRF
  • CANNABIS (6.4%)
    • 1.5% CRLBF
    • 1.5% GTBIF
    • 1.6% TRSSF
    • 0.7% CCHWF
    • 0.6% AYRWF
    • 0.5% TCNNF
  • CASH (8.5%)

My lousy returns and my explanation:

To start, I’ll let you know that my overall returns have been downright lousy. I have always been an individual investor who’s “investing” habit is supplemented by a full-time job. By articulating these I hope to get better. Anyway, here’s a rough indication of how I’m doing:

  • -4.8% on the week
  • +3.6% on the month
  • +5.7% since April
  • -27.6% YTD
  • -22.4% since the pandemic lows
  • -44.3% since January 2020

Those big losses are almost all because of puts. I’ll start with the pandemic though…

In early 2020, I was expecting a bit of a rough patch so I had a larger than normal cash position. I went on a 9-day trip through Portugal in early March and partway through the market started collapsing. I was kind of excited, buying dips in a number of things that were less market sensitive dividend payers. By the end of the trip I was levered long. Then they declared a worldwide pandemic and everyone had to get home by Friday the 13th – and luckily that was my planned ticket home anyway.

Over the weekend, they declared lockdowns in Italy and in New York. I didn’t think that this was something they could or would do in Democratic countries, so I decided to just “rip the bandaid” and sell everything the following Monday. At first it seemed like a good move as prices continued falling, then everything started to sharply recover.

I really expected that worldwide lockdowns would be bad for the stock market, and that the indexes would at least fall below their levels during the “Trump Tariffs.” After betting on individual sectors going down around April 2020 didn’t work (cruise ships, airlines and such), I closed off those puts and started with long dated puts in the SPY (S&P 500), which promptly rocketed higher. I closed those out in June/July of 2020 because they weren’t working and decided to focus on the more sensitive sectors with puts in IWM (small caps) and EEM (emerging markets). I really ramped up on these around October/November right before they rocketed higher. The only reason my portfolio didn’t blow up at that time was because I didn’t put everything short. I also had big positions in gold miners and SLV before those rocketed higher, big positions in dividend payers that did okay, and significant positions in Bitcoin & Ethereum that rocketed higher later in 2020.

In 2021, I was becoming more wary of puts. I held my long-dated January 2023 puts for quite a while, eventually selling them all off in mid August. What killed me early on though was my big bet on TLT. After my disastrous timing on all of those puts, I went really heavy on TLT calls in February, right before yields spiked going into March. I couldn’t add on the lows because I was already too heavily allocated, I ended up closing my shorter dated positions on small rallies, and my long dated positions in TLT calls are still in the red (though not by much).

As of now, I am still wary of the markets. Prices have been climbing steadily higher on waves of price-insensitive buying by passive ETF’s and corporate buybacks, while the Federal Reserve holds a dovish stance and margin debt has skyrocketed. Even so, many are worried about a downturn in markets so I don’t think one is coming yet. According to Darius Dale on RealVision, there are still a lot of short positions and puts on the major sector ETF’s which would lead to significant buying power on any dip. At the same time, with the $300bn Evergrande restructuring (along with dozens of similar firms valued at less than $30bn each), there is the potential of a liquidity event like we saw following the Lehman Bros collapse in 2008.

That brings me to explain my hedges:

  1. My hefty cash position is to ensure I have money to buy into significant dips. I plan to keep it large until I see great buying opportunities like I saw in gold and uranium miners back in mid August after gold was hammered to 1650 in thin Sunday-night trading. Then I’ll slowly build it up again with paychecks.
  2. My EEM puts are actually shorter dated (December), so that they’ll have positive intrinsic value below $51. This is mainly in case the Chinese company clampdowns and their property company trouble (Evergrande) actually spill over enough to affect the emerging markets fund. It also hedges my gold portfolio a bit because trouble for emerging markets often means they have to sell gold for dollars.
  3. My TLT calls are all January 2023. I still believe that we are in an economic slowdown. See Jeff Snider’s work on Market Research – Alhambra Investments ( for a good explanation.
    1. Quantitative Easing (central bank balance sheet expansion) is NOT money printing – just an asset swap aimed at pushing money “down the risk curve” into junk bonds, stocks, real estate, etc.
    2. The flood of money into asset markets is offset by mortgage debt (housing), corporate debt (stock buybacks), margin debt (stocks), and other forms of debt that hedge funds can access to put into these investments. The market will continue rising along with leverage until the leverage can no longer grow – then you’re faced with a possible cascade of margin calls, forced sales, and defaults as asset values plummet and can’t support the same level of lending. If interest rates rise enough it will spark this outcome, in which case the Fed will intervene causing interest rates to plummet again.
    3. The working-age labor force participation rate broke back in 2008 and never recovered. It was hit again hard in 2021 and is very low today. Many of these people who fall out of employment effectively become modern-day “ronin,” or economic exiles. They live in cars or tents, and are in a position where it is simply impossible to go back to a private sector job. If they managed to get one paying minimum wage they could not pay rent on those wages, let alone get cleaned up with new clothes and all. Small employers are also rightfully wary of these people, would expect them to steal, and would not trust them to man their stores. Data is all over the place on these issues … is employment really tight? Are median wages ever going up, or is it just wages at the top from excessive corporate compensation with all those stock options plus some wages at the bottom when minimum wages dictate a rise? Tough to tell, but less people earning money doesn’t sound like a vibrant economy to me.
    4. The Federal Reserve created a number of repo facilities which are significant game-changers in how the currency and interest rates interact. Currency swaps in 2020 were widely used, which prevented the US Dollar from strengthening too much after the lockdowns. Those facilities are still available to many countries. Reverse repo was created to put a floor in short-dated interest rates at 5bps (or 0.05%) so that money market funds which have to buy these wouldn’t give negative returns. This was due to a shortage in US Treasury bills, and has climbed to over $1 Trillion in use. If tapering ensues, that $1 Trillion number will slowly fall before any rates actually move. Then there’s the newest expansion of repo facilities which enables many big entities and countries (like China) with enormous US Treasury reserves to swap out treasuries of any duration for an overnight loan at a 0.15% interest rate which can be extended indefinitely. These entities can even lever up and buy lots of 10-year treasuries at 1.3% or 30-year treasuries at 1.9% to make the spread over that 0.15% loan. Needless to say, you don’t need a crash for interest rates to get lower – and you will get a crash if interest rates get much higher – so TLT calls seem like a decent bet.

Mining Stocks:

I like the cyclical story of the mining sector in general. They had great returns in 2000, peaked in 2011, and dropped precipitously over the following decade. During the decade you saw a number of mines close, very little exploration for new mines, and a lot of consolidation in the space. These companies have been very careful with their balance sheets and maintaining positive cash flow, at the expense of expansion and growth. This leads to underinvestment as supply drops lower and lower to reach demand. Then you get a bit of a demand spike and it’s off to the races, like we saw recently. It takes many years to ramp up production in these things, and this cycle will take years to play out. I fully expect to see the old 2008 highs in this sector when it comes to an end (perhaps in 2030?).

Precious Metals:

If you look at the charts of GDX vs SIL or GDXJ vs SILJ, you’ll find a lot of correlation between these miners. I personally don’t bother with gold/silver ratios and all that, I just invest in both.

Gold is primarily a monetary metal, held by all the world’s central banks. I believe that our 30-year trend toward free trade and globalization starting with NAFTA in 1994 is coming to an end. This doesn’t mean imminent war or anything crazy, just that Americans & Europeans will be more guarded about their manufacturing sectors while other countries will be more skeptical about relying so heavily on exports to keep their economies moving. Additionally, many countries look at the potential threat from US Sanctions which have been used extensively this last decade and try to reduce this risk. Part of this trend change will be a decrease in the need for US Dollars used in foreign trade, and a corresponding decrease in the need for US Treasuries as reserve assets. I believe a significant portion of this re-allocation will go towards gold because it is a widely accepted asset that cannot be frozen by a foreign central bank. Keep in mind, the move I expect is a slow multi-decade trend that will be a tailwind on gold prices; it does not entail any kind of currency collapse.

Gold is also used in jewelry and other things, and silver is partly an industrial metal that is used in things like solar panels, but I expect the meat of the move in this sector to be from the view of precious metals as pseudo currencies.


This story has gone on for years … the Fukushima disaster in 2011 led to the shutdown of most of the Japanese nuclear plants causing a supply/demand imbalance that crippled the mining industry. The sector consolidated considerably into a few big players, mine development was abandoned, and many mines like Cameco’s Cigar Lake facility were shut down. Meanwhile, nuclear power is still the most feasible way to bring power to many 3rd world countries without the carbon footprint and environmental problems associated with coal. 37% of global energy is still from coal, and barely over 10% is from nuclear. Technology has improved in leaps and bounds, and many countries like China have been ramping up their nuclear fleets.

Uranium supply is very difficult to get on line. Its radioactive. Its dangerous. Environmental and safety concerns for these mining facilities are immense. That is why I really like focusing on the big guys here – they will benefit the most from a demand crunch.

Uranium demand is extremely inelastic. Nuclear power plants produce a lot of energy with a lot of upfront capital cost with a fairly small amount of uranium fuel. Fuel costs are a tiny portion of the expense of running a nuclear plant, and they can ramp up considerably without leading utilities to propose expensive shutdowns.

Recently, Sprott launched a Uranium fund, with the aim to buy and hold physical Uranium to drive up the price. They launched on August 17, and it was like a rocket firing up on this sector.

I was interested in the Uranium story from 2019 on, and invested increasingly more since the pandemic started. It has had many price spikes – some lasting and some not – and I tend to take profits on the early side when anything spikes. In 2020 I was completely out (covered calls were called) when Cameco hit $12 and the price was screaming higher, so I just bought more shares chasing the price & immediately sold at-the-money covered calls until the price stabilized enough so they calls expired worthless. Every big dip I would add, and every spike I would sell covered calls. This time around I did the same thing, though I’m thinking I should have waited a bit longer. I was long 3-week calls into the spike and the calls I sold were at-the-money so they’ll be solid gains if called. Still, I’m not exiting this sector … if called I’ll chase and sell more covered calls until it stabilizes and I’ll add on future dips.


I got into this stock – NOVRF – as a recommendation from the Silver Chartist Report which I subscribe to. They focus on what he calls the two biggest “battery metals.”

Similar story with the cyclicality of mining and declining supply capacity, except with a major ESG-trend kick. Electric vehicles use a lot more nickel and copper than other cars. Charging stations use tons of it. Wind and solar plants tend to be in remote locations with intermittent supply, requiring many miles of power cables that are vastly oversized (vs stable energy outputs like coal/gas/oil/nuclear) for the power they provide.

Just like the other miners, you’ll want a place in it over the next decade even though we’re likely to see more brutal downside corrections in the next year or so. There’s no way of telling when these things stop bottoming and launch, so it’s best to keep a position, but one that’s small enough so you can still add to on dips.


I really got interested in this trade after Tony Greer mentioned it on Real Vision Daily Briefing months ago, perhaps a week or two after the huge Tilray spike. The idea is that the US producers are operating legally in their states, but they still can’t list on the NYSE and have difficulty accessing funding because of US Federal laws that everyone expects to change. As of now, you can invest in a number of them on the Canadian exchanges which small US investors can get into with pink sheets on the NYSE. When I got into the sector, I knew the price was way ahead of itself and would correct down hard for a while, but I wanted to keep it on my radar so I took small positions in three of the Cannabis companies I heard Greer mention. They have gone down precipitously since then – with CRLBF down 50% from the February highs so far – but I barely noticed and just topped off the positions every once in a while to keep even and totaling around a 5-6% portfolio allocation. The sector had a significant fall again last week, and I’m thinking that it might be a good time to ramp up a bit soon and I’ll want more companies to divide into. So I did some google searches and found 3 more US cannabis stocks I could add to the list and got starter positions in those. The charts show no sign of bottoming yet, but they’re getting to some resistance levels that should provide solid entry points. Next drop I’ll be adding more, possibly taking my allocation to 8% on the next dump and 10% on the following.

I should note that a big part of the reason I’m interested in the space is because I wanted to find something that was a potential value with significant possible upside that wouldn’t correlate with mining. It’s hard to find those these days.


Although I’m not currently allocated to Crypto, I have traded it in the past and may do so again. I have friends who are excited about the space, but I still see it as a risk-on play with little to no fundamental value, some exciting narratives and fast market action, and something to actively trade in small increments rather than to hold or accumulate. No matter what use cases I hear about, I can’t help but see the main drive as hoping that someone else will buy it from you for more money later. You can argue most stocks are that way, especially these days where the divide between stock prices and the economy has never been this large, but my reaction is to go for things that I think will have value even after a bear market ensues. Remember those? I used to think it was normal to have a bear market every decade.

I’ll end here. Hope you find this post interesting, it was certainly interesting to write.


Crazy week for Uranium & Labor Day Weekend

I’m writing this blog from my friend’s place in Ensenada, at the beautiful Ochentos Pizza. I drove down Friday evening, had a nice relaxing weekend, and now I’m contemplating the drive up north.

Last week, the spot price of Uranium went up a lot as the Sprott Physical Uranium fund started building up inventory. I sold all of my call options in CCJ for a solid gain on Friday, then sold slightly out of the money October calls on all my CCJ and UUUU.

I expect a pullback, and this is a good way to take advantage of the price spike while it’s still there. As you can see, this stock just had an amazing run from a low around $15.50 to over $21 in 2 weeks.

That last candle on Friday looks like an exhaustion gap, where buyers pushed the price up to new highs, then sellers came in and pushed the price back down. I expect it to at least test $20, but if it does continue higher I’m happy with the strike price my shares would be called at.

I also bought some puts on EEM last week as it was north of $53 again and I’m thinking that the Chinese tech clampdown and the Evergrande blowup might have spillover effects. I’m still wary of puts after my experience this last 18 months, so it’s a small position.

That’s all for this week, I hope you had a nice holiday weekend.

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It’s too early to taper, stocks rise on decision

On Friday, we had one of the most anticipated events in the asset markets, often more important than earnings: A policy announcement from the Federal Reserve.

Ultimately, Fed Chair Powell announced that it is too early to taper bond purchases and that he will revisit the decision next month.

Here’s a quick breakdown of what this means:

For a long time, the federal reserve has held a dual mandate to promote price stability and full employment. They do this by performing actions which they consider to be either tightening or loosening monetary policy. Up until the great financial crisis, they would primarily use tools controlling overnight interest rates.

Once these hit zero, they followed the Japanese and European central banks into a policy of asset purchases that they call Quantitative Easing. They roughly use this as the next interest rate lever, where more purchases per month is considered easing and less purchases per month is considered tightening. At first it was debated whether reducing those asset purchases was really tightening rather than just “easing less,” but a 2013 event called the “taper tantrum,” where a slight reduction in the federal reserve’s monthly purchases resulted in a spike in interest rates and a drop in the stock market, solidified the view that tapering is tightening.

Since July 2020, the federal reserve has been engaging in Quantitative Easing, where the central bank purchases $80 billion in treasury securities and $40 billion in mortgage-backed securities every month. Powell simply announced that these purchases would continue at the same level for now, which is perceived as “not tightening”, which is perceived as bullish.

What did market participants expect? It depends on their views (inflation vs deflation):

As usual, this brought out the vigorous inflation vs deflation debate back into center stage. Inflationists expected the federal reserve to announce a schedule to reduce asset purchases toward zero, while deflationists expected the federal reserve to wait on that decision.

I am in the deflation camp and I expected Powell not to taper, but here are the arguments as I see them:

  1. Inflationists point out that the CPI has been above 5% for the last 3 months. Deflationists point out the following:
    1. This also happened in 2008 before a deflationary bust
    2. The numbers are narrowly based in 20% of the index. This reflects temporary tightened supply in a few things while true dollar devaluation would show throughout the index.
    3. The numbers are year-on-year comparisons and 2020 was filled with anomalies.
  2. Inflationists point out that the payroll numbers were strong and there are many more job openings than job seekers. This could lead to wage gains, and those are problematic because they are sticky and difficult to reverse. Deflationists point out the following:
    1. The jobs report has many seasonal adjustment factors which make the headline numbers misleading to the upside. While seasonally adjusted payrolls are up 943,000 the non-adjusted numbers are down by 133,000.
    2. The counting of unfilled jobs is questionable, as the methods leave plenty of room for double- or triple-counting open jobs.
    3. Most of the unfilled jobs are the very low wage retail and service jobs that were lost in the pandemic response. While some employers are experimenting with one-time payouts or temporary raises, few are actually increasing hourly pay. Also, these are typically high turnover jobs and there are many examples over the last decade of employees being replaced by workers at lower wages.
    4. The boosted government unemployment benefits are about to end. The people receiving this money are at the low end of the income spectrum, so all of this money tends to be spent. Whether they stay on reduced unemployment or opt for low wage jobs, less money will be spent into the economy so it will have a deflationary effect.
  3. Inflationists point out the skyrocketing asset prices in stocks, bonds, and housing as a negative side effect of QE that will lead to increased rents and increased wealth disparity. This one’s an interesting narrative, but I’ll point out the following:
    1. The federal reserve has consistently shown that it favors higher asset prices and fears asset price declines. In addition, they have repeatedly claimed that their actions do not promote wealth disparity. Regardless of what you think on this issue, this is clearly not something that they are considering as a factor in reducing asset purchases at this time.
    2. Rents are not set by cost of housing, but by the supply and demand of renters. Supply of rental units is about to increase. A bunch of people will be evicted as the moratorium on evictions comes to an end. Many of the evicted renters could not afford their previous situation so they will be both unable to afford a similar unit and unable to pass the typical background & credit checks that most apartments require. At the same time, demand of rental units will be limited to the ability and willingness of renters to pay.
  4. Inflationists point to the central bank balance sheet and how fast it’s grown. In fact, it has more than doubled since 2020. That represents a large increase in the money supply which should ultimately cut the value of the dollar in half. This is a very common misconception, so I’ll point out the following:
    1. Quantitative Easing is not money printing. All it does is take government backed assets from the big banks and replace them with an overnight reserve asset. This reserve asset is not money, and it cannot be spent by the banks or used to pay down debt; it can only be transferred between the large banks that have accounts with the federal reserve.
    2. The Bank of Japan first announced negative interest rates in 1999 and quantitative easing in 2001. These policies have not lead to any inflation in the Japanese Yen.
    3. Most of the asset price increases following the federal reserve policies have been offset by increases in debt. Housing has gone up in price along with levels of mortgage debt. Stock prices have gone up along with levels of margin debt. This leads to a dangerous situation where a stall in the increase of these asset values can lead to sales to pay down this debt, which reduces prices and then cascades into a deflationary flood of sales and margin calls as seen at the end of any asset bubble. Even if this deflationary bust doesn’t occur, higher prices for the same income streams (in stocks, bonds, and housing/rents) mean that more of these income streams must be diverted toward debt servicing which is again deflationary.

How did the fed decision affect asset classes:

I haven’t explored this in a while, but has a “CandleGlance” function which allows you to see a lot of indices side by side. This is very useful for sector analysis. I have reorganized these using Paint, with my own notes added.

As you can see above, there were bullish reactions to everything except for the defensive Utilities and Health Care Sectors. Note that I judged a bullish reaction as a price increase on the day, a bullish trend as one with a 20-day moving average above the 50-day moving average, and I put Flat/Bullish where the moving averages were crossing a lot or very close.

Another side note is Technology, which was traditionally considered growth along with consumer discretionary, but there have been debates about changing that designation. I call it defensive, seeing the big drivers in the sector more as cash cows like staples or utilities than as growth names (Apple, Microsoft, Facebook, Google, Amazon… think about it).

The big question is always “where do we go from here?” There are some worrying signs. Margin debt is a big one, which has actually shown a slight decrease this last month. There is also a low in protective puts on individual names, though this is largely because these moved to index ETF’s. Many of the twitter handles I follow have different sentiment readings, which are surprisingly neutral. Valuations are a major concern, but they are notoriously bad in predicting price action.

I’ll go with my gut and say that if the federal reserved is seen as dovish than asset prices are more likely to rise from here. I still think we’re at a dangerous point in the cycle, but if you look at the final manic rises in the 1989 Nikkei or 1999 NASDAQ they were quite spectacular.

I’m not changing my strategy, but I’ll re-state what it is:

  1. Accumulate junior miners on big dips and patiently wait when they aren’t dipping. The trend is bearish – expect more dips rather than quick gains. The valuations are fantastic in my opinion if you can wait out the trend until that matters, which could take weeks, months, or years. Be mindful that when the bottom hits, though it may be considerably lower, it will be selling off because everyone expects further lows in the future.
  2. Be cautious of puts as a hedge. Use them only in short term bets based on reasonable technical analysis. I still like both TLT calls and unallocated cash as hedges.
  3. Don’t be adverse to considering other opportunities. I recently signed up to receive technical setups from twitter handle @derecks_trades and I’m hoping to get in on some when I come up with a system for doing so, possibly with alerts from the Yahoo Finance app. This system is essential for be because I work full time and I can’t follow the market effectively during trading hours.

As far as opportunities go, I’m not adverse to benefitting from the crazy meme stock activity that I experimented with earlier this year. A couple of the stocks I trade have shown heavy call options activity in the past which have lead to price spikes – particularly AG and CCJ – so I check the options charts periodically.

Here’s what I found interesting:

The open interest column shows a lot of Sept 17 call options being purchased for CCJ. The federal reserve statement catalyzed bullish action, pushing those $17 strike calls firmly in the money. Options dealers will have to buy to hedge and others could joint the party leading to another price spike. I decided to join in with calls at the $19 strike – a bit of a gamble but with decent odds.

Anyway, here’s where my portfolio ended up:

  • HEDGES (19.5%)
    • 19.5% TLT Calls
    • 9.9% AG (Silver), mainly shares some calls
    • 6.3% SAND (Gold, Silver & others), all calls
    • 5.7% LGDTF (Gold)
    • 5.1% EQX (Gold), shares & calls
    • 4.3% SILV (Silver)
    • 3.9% SILVRF (Silver)
    • 3.7% MTA (Gold & Silver)
    • 3.5% MGMLF (Gold)
    • 1.7% RSNVF (Silver)
    • 1.7% SSVFF (Silver)
    • 1.5% WPM (Gold, Copper & Silver), all calls
    • 1.1% GOLD (Gold, Copper), all calls
    • 5.3% NOVRF (Nickel/Copper)
    • 6.5% CCJ (Uranium)
    • 0.4% CCJ Calls
    • 4.1% UUUU (Uranium, Vanadium, Copper)
    • 1.5% BQSSF (Uranium)
  • CANNABIS (5.7%)
    • 1.8% CRLBF
    • 1.8% GTBIF
    • 1.8% TRSSF
  • CASH (8.8%)
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Gold and Silver Miners get Crushed

Junior Gold Miner index above, back at 2019 levels when gold was in the 1400’s. The larger gold miners in the GDX index isn’t as bad, but still fell below it’s Feb 2019 high.

Junior silver miner index above, also below pre-pandemic highs when silver was struggling to break $18. The larger miners in SIL weren’t hit as bad, down to May 2020 levels but above pre-pandemic.

Gold and silver futures above. They didn’t hit annual lows and are still well above pre-pandemic levels.

These charts show the pressure on GDX, GDXJ, SIL & SILJ over this last week.

I think we’re running out of buyers.

  1. Sentiment in gold and silver and their miners has been steadily declining, as neither metal has shown any positive developments since July 2020.
  2. Cryptocurrencies have been skyrocketing over this past year, and many of the would-be metals speculators have gone to the action over there.
  3. Mining stocks are generally excluded from any ESG investments, especially in precious metals, so they get no money from this growing trend.
  4. Mining stocks in general have little if any footprint in the most popular passive investment vehicles such as QQQ, SPY & IWM.
  5. Mutual funds have long favored a mixture between stocks and bonds, with little interest in the mining sector except as a high-beta cyclicals play and generally no interest in precious metals.
  6. Momentum traders and trend followers are usually long-only and simply avoid markets with price action below declining moving averages, especially with the 50 day moving average below the 200 day.

At the same time, economic data has been turning in favor of the deflationist side. Lumber touched below pre-pandemic levels, copper hit 2019 levels last week and has since rallied to March 2020 levels. The labor market is still surprisingly weak, the 2020 stimulus levels will not be repeated, and talk of fed tapering abounds. Interest rates have been plummeting, while TLT (20+ year treasuries) have been strong and rallied past 150.

The bullion banks are trying to reduce their short positions in gold, and they very successfully hammered gold in the light trading on Sunday 8/8 past a number of key levels, causing managed money to reduce longs by 56,000 contracts while they reduced their shorts by 33,000 contracts. According to Alastair Macleod in his interview on, these bullion banks are trying to get rid of most of their short gold positions in order to adjust to changes from Basel 3.

I wouldn’t be surprised if the bullion banks tried to hammer gold again, but their goal is to trigger stop losses and buy back, and they lose a lot of money if they don’t trigger any. There is a limit to how much this can accomplish, especially as more of the managed money is shaken out of their positions. A significant amount of the managed money positions don’t rely on stop-losses and algo trading, and the only momentum traders in the space are going short (hence the 29,000 short contracts opened in the last COT report).

Anyway, I was a buyer last Thursday as the miners were thoroughly crushed, focusing on miners that I had lighter exposure to, and I used that down day in general to finally sell of my long-dated put positions. Here’s where my portfolio ended up:

  • HEDGES (22.4%)
    • 22.4% TLT Calls
    • 9.8% AG (Silver), mainly shares some calls
    • 6.6% SAND (Gold, Silver & others), all calls
    • 5.4% LGDTF (Gold)
    • 4.4% EQX (Gold), shares & calls
    • 4.2% SILV (Silver)
    • 4.1% SILVRF (Silver)
    • 3.7% MTA (Gold & Silver)
    • 3.0% MGMLF (Gold)
    • 1.8% RSNVF (Silver)
    • 1.4% SSVFF (Silver)
    • 1.4% WPM (Gold, Copper & Silver), all calls
    • 1.0% GOLD (Gold, Copper), all calls
    • 5.5% NOVRF (Nickel/Copper)
    • 6.4% CCJ (Uranium)
    • 3.9% UUUU (Uranium, Vanadium, Copper)
    • 1.4% BQSSF (Uranium)
  • CANNABIS (5.7%)
    • 1.9% CRLBF
    • 1.9% GTBIF
    • 1.9% TRSSF
  • CASH (8.2%)

General thoughts and trades on my positions:

  1. Hedges: I changed this back from “downside bets” because I no longer consider it recklessly short. Just last week it was at 30% of my portfolio, last month at 35%, before that hovering near 40%. I’m going to be a lot more careful with long-dated index puts in the future and right now I just consider calls in TLT as a better hedge. Those puts were not only fighting the fed, but also fighting a relentless wave of share buybacks and passive investors. I’ll try to be more strategic about these in the future; right now I just think we’re more likely to see another bounce than a significant correction.
  2. Precious metals: This portfolio isn’t easy to balance, because I work full-time as a project manager and often only have my phone app when trading. During the day I have general ideas of what I’m least long and what I want to add to. Last week (mainly Thursday), I added a few more calls in SAND and GOLD, but mainly stuck with shares of anything my previous allocation was low in. Next dip I will be looking back at EQX, SILV & MTA because these are some of my favorites which I haven’t added to in a while.
  3. Other Commodities: I actually tried to sell some NOVRF at $3 but was too late. I’ll probably add more if it revisits $2 though. I also added a little UUUU but otherwise didn’t touch the space, as I’m comfortable with my current allocations.
  4. Cannabis: I originally entered this sector back in March as a small entry into an area with long-term potential and possible near-term weakness that I figured wouldn’t correlate with the rest of my portfolio. The sector has been weak since then, coming down around 20%, and I’ve added just enough here and there to keep my 3 picks balanced and at roughly the same level. I don’t think about this sector much, and I plan to just leave it on “cruise control” this way until it finally starts to get somewhere.
  5. Crypto: I have no conviction in this space. Performance of the sector in general has been phenomenal, and my trades there have all made decent money in the past year. I may enter again in the future, but for now it feels too risky to me with deflation piping up and stocks struggling. With the junior precious metals miners I can see new lows and think “blood in the streets, I’m buying” with confidence that these will do well this coming decade. With Crypto I can’t help but think “alright, another tether pump. Let’s see how far they drive it. When will this scam finally end?” I’ve heard the bullish cases and how crypto will revolutionize finance, but I still just see a digital game token, a market for expensive 8-bit graphics called NFT’s, a free-for-all with pump and dumps and ponzi-like stablecoins that have questionable backing, and a feverish FOMO frenzy about values rocketing to the moon. In short, I see Crypto as a pure risk-on asset with price action as it’s primary narrative.
  6. Cash: I would’ve had much better performance over the last 18 months if I just avoided puts entirely and stuck to heavier cash allocations to reflect my concerns for risks in the system. I’m still juggling how to play levels of one vs the other, but for now I decided to use puts more tactically and I think a bounce is more likely than a plummet. This is partly because of people I follow on twitter saying something about how there is still a lot of protection bought on this market (as in short positions and puts) which is plenty strong enough to provide another bounce. Anyway, I’ll likely wait for a good time in the charts to buy more puts, and I’ll likely have less money in them when I do, but I really want some flexibility to add to my favorite mining stocks when they get smashed again.

Last note, I am not calling a bottom in precious metals or miners. I am very bullish on both this coming decade, but I have no idea how far they’ll drop or how long it will take. As such, my strategy is to simply buy more every time they get smashed, then wait and accumulate cash when they go back up. I do not plan on using leverage, I plan to stick mainly with shares because they don’t expire, and I plan to limit my call options to the highest duration possible (generally Jan 2023). Many people blindly put money into index funds and mutual funds month after month in their 401k’s, and I simply plan on doing that with mining stocks for a while.


Why I find Gold’s smackdown bullish

Last Sunday, an enormous number of gold contracts were dumped on the futures market, crashing the price below 1680 before it reversed. The week prior, gold was trading over 1800. This activity may seem strange, but it is very common with Gold and you just have to deal with it when trading in this market.

Here’s the part I find interesting:

You can get the attached commitment of traders reports here:

Swap dealers include the bullion banks, which are large banks routinely trading in gold futures contracts. They create the market for gold futures, taking the other side of the residual trades in the market.

Gold producers are almost always short because they are hedging the risk of their mining activities, ensuring that their gold will be sold at a profit after the time and expenses involved. The only times you see them go to neutral or slightly long is when gold prices drop below the cost of production and they start shuttering mines.

Managed money is the big investment funds, and other reportables is a wide swath of remaining sizeable players including central banks.

When gold investors greatly outweigh producer hedges, the swap dealers end up short. They are notorious amongst gold investors for hammering down the price of gold by dumping large numbers of contracts at thinly traded times in order to “run the stops.” Managed money includes a lot of algorithmic and momentum traders, often using stop losses and trading around price targets.

Last Sunday, the swap dealers dumped a lot of contracts on the market to hit some anticipated trigger points, and it worked very well. Not only did stop losses cause managed money to dump 26,486 long contracts, but price signals got momentum algos to open 29,162 short contracts. The swap dealers got to reduce their net short exposure by 32,710 even while the producers got less short and other reportables got considerably more long.

What does this mean? I’m thinking a it’s a possible sign of capitulation. While the bullion banks may try to stop out a few more longs, managed money is near it’s annual low in net bullish exposure so there might not be many more long positions that can be easily flushed out.

Gold is a market that routinely frustrates traders. The activity discussed above means it often has false breakouts and false breakdowns, making it difficult to use traditional technical analysis on shorter timeframes. Moves can be exaggerated, with painfully long corrections that can be followed by relatively swift up moves that are easy to miss.

I often point out that gold has many narratives. It can go up with inflation, as gold meaured in your local currency goes up while that currency drops. It can go up with negative real interest rates, as investors trying to diversify their holdings from stocks become less comfortable with bonds. It can go up with emerging markets or asian markets as the citizens of these countries tend to be big holders of physical gold. It can be a safe haven when investors struggle to find any asset they can trust. In a sense, the gold price is tossed around by many powerful and often competing forces causing the dominant narratives to fluctuate. Traders often get frustrated by this because they get too fixed on one or two narratives, and their signals simply stop working when the dominant narratives switch.

My favorite narrative is the de-dollarization of foreign trade. Major countries including China are tired of being reliant on US dollars for all of their foreign trade. Reasons include persistent Eurodollar shortages, booms and busts from foreign investment flows, and the keenly felt political pressure of US government sanctions. These countries aim to increase their trade in other currencies, such as China using the belt-and-road initiative to encourage trade in their own currency. This reduces their need to for their central banks to hold US dollars. Gold is a primary beneficiary of this sort of central bank reallocation because central banks have held it as an asset throughout their existence, and skeptical governments like having an asset that can’t be created at will by foreign powers. Note that this is a slow process and I expect the US dollar to dominate trade volumes beyond 2030. I just expect this process to provide a bullish backdrop for gold.

Here’s how my portfolio ended up:

  • DOWNSIDE BETS (29.5%)
    • 22.1% TLT Calls
    • 5.9% IWM Puts
    • 1.5% EEM Puts
    • 10.0% AG (Silver), mainly shares some calls
    • 6.9% SAND (Gold, Silver & others), all calls
    • 4.5% EQX (Gold), shares & calls
    • 4.5% SILV (Silver)
    • 3.8% LGDTF (Gold)
    • 3.9% MTA (Gold & Silver)
    • 3.3% SILVRF (Silver)
    • 1.5% WPM (Gold, Copper & Silver), all calls
    • 1.4% MGMLF (Gold)
    • 1.4% RSNVF (Silver)
    • 0.5% SSVFF (Silver)
    • 0.6% GOLD (Gold, Copper), all calls
    • 6.4% NOVRF (Nickel/Copper)
    • 6.2% CCJ (Uranium)
    • 3.4% UUUU (Uranium, Vanadium, Copper)
    • 1.5% BQSSF (Uranium)
  • CANNABIS (5.5%) split btw CRLBF, GTBIF & TRSSF
  • CRYPTO (2.8%) all ADA
  • CASH (2.7%)

Note that my portfolio declined by 7% over the past 2 weeks. I took advantage of the dump in miners by picking up MGMLF, but I haven’t made any other notable trades – aside from slightly reducing my crypto holdings into this fantastic rally.

My outlook hasn’t changed considerably. I’ll lay it out though.

  1. I’m still very concerned about the US stock market based on
    1. Extremely high US valuations driven by a small number of individual stocks
    2. A sharply reduced credit pulse from China
    3. US government largesse of the 2020’s dying off
  2. I am firmly in the deflationist camp as I see large and rising debt levels as a growing monetary black hole, which pulls more and more money away from everything else.
    1. This means I expect government interest rates to stay low and likely drop further, hence my heavy bullish allocation to TLT.
    2. This does not mean that I expect living costs to go down. I simply expect the trend to continue where costs of living rise significantly higher than wages, giving the average person less money to spend on other things.
    3. The CPI does not reflect the basic cost of living; it is heavily weighted by consumer discretionary spending, hedonic adjustments (costs rise but quality adjustments offset to make costs lower in the measurement), and housing as an “owner’s equivalent rent” fudge number which doesn’t tend to reflect cost increases well.
  3. I am bullish on the mining sector because of
    1. Significant underinvestment in mining over the last decade with lengthy downside corrections in precious metals and Uranium in particular. It takes a lot of time to go through the exploration/development/production cycle in mining so these long periods of underinvestment can turn into long periods of supply constraints.
    2. Increased need for Uranium in the future as many countries – particularly in emerging markets and Asia – as they are building a lot of nuclear plants to produce a lot more power without the environmental side-effects of coal or the price swings of oil and natural gas.
    3. Increased need for battery metals in the future as more and more spending is driven by government infrastructure projects, environmental regulations, and other subsidies towards anything considered green. Wind plants require enormously oversized copper power cables over long distances, solar plants require a lot of silver, copper, and other metals in their process, batteries and electric vehicles require a lot of copper and specialty metals.

As a final note, I don’t plan on skipping many weeks on my blog, but last weekend was very busy for me and I’ve been busier than ever at work. Good luck and happy trading!

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Feeling a bit cautious

We’re at an interesting point in the market where it could be turning but it is certainly difficult to read. Chinese tech is still under pressure while the US Nasdaq remains near all time highs. Breadth is still low, meaning most of the strength lies in the biggest 10 companies. Similar story in the S&P 500 and the DOW. The Russell 200 is a bit weaker, but still well within the same range as the last 6 months. While we could form a rolling top here, we could also see another burst to the upside.

There are certainly risks in terms of the political cycle, as the last of the stimulus rolls off and the infrastructure plan is likely to disappoint (chart source noted in red):

Precious metals had a nice rally last week, which pushed my portfolio up to gain 5.7%. That is certainly nice, but we’re still fighting a bearish technical picture and there is a decent chance of revisiting the March lows at some point. I’m just holding here, as my positions are large enough already and it could break either way.

I am tempted to buy some more defensive positions, such as TLT calls on a pullback or EEM puts if it rallies back to 54. I’m a bit more cautious about trying to bet against the S&P 500 or the Nasdaq though.

Here’s my portfolio today:

  • DOWNSIDE BETS (29.5%)
    • 22.2% TLT Calls
    • 5.8% IWM Puts
  • 1.4% EEM Puts
    • 10.3% AG (Silver), mainly shares some calls
    • 8.3% SAND (Gold, Silver & others), all calls
    • 5.1% EQX (Gold), shares & calls
    • 4.6% SILV (Silver)
    • 4.3% LGDTF (Gold)
    • 3.9% MTA (Gold & Silver)
    • 3.3% SILVRF (Silver)
    • 1.6% WPM (Gold, Copper & Silver), all calls
    • 1.3% RSNVF (Silver)
    • 0.6% SSVFF (Silver)
    • 0.7% GOLD (Gold, Copper), all calls
    • 5.8% NOVRF (Nickel/Copper)
    • 6.3% CCJ (Uranium)
    • 3.5% UUUU (Uranium, Vanadium, Copper)
    • 1.5% BQSSF (Uranium)
  • CANNABIS (5.1%) split btw CRLBF, GTBIF & TRSSF
  • CRYPTO (2.3%) all ADA
  • CASH (2.2%)

I was a bit nervous about losing my CCJ position again on Friday as I had $18 and $19 covered calls which just expired. I kept it though. That has been a great one for covered calls for me in general because they are often priced quite high.

Aside from that, I did take advantage of that hit in Chinese Tech stocks to sell off all of my EEM puts that had a Jan 2022 expiry. The strikes were way out of the money, but at least the increased downside volatility allowed me to salvage something out of them.

As for crypto, I actually sold 1/4 of my position in ADA back at the lows a couple weeks ago and I’m just holding the rest. I’ll re-assess whether to add or not over labor day weekend but I’ll let it sit until then. It’s important to wait a month before re-purchasing after selling at a loss to avoid triggering “wash sales” which basically don’t allow you to deduct the real loss. It might seem funny, but I can add to my miners when they plummet and feel confident that they’ll bounce back at some point, while I always tend to be nervous about the valuations of crypto assets.

Anyway, I’ll probably be thinking defensive these next few months, holding what I have while building a bit more of a cash position.

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QE, Margin Debt and Eurodollar Shortages

I’ll start with a chart on margin debt from Margin Debt and the Market: Up 2.4% in June, Continues Record Trend – dshort – Advisor Perspectives

I’ve seen some tweets on Margin Debt starting to roll over, but the latest data I have access to through google search shows a continued rise through the end of June. As you can see on the chart above, margin debt rolled over prior to both the 2000 and 2007 peaks.

A very interesting and important thing is happening with US treasury market right now as well:

Above you can see a chart showing foreign selling of US treasuries, latest data is May 2021. Source: Yet Another Key Warning Sign, Piece Of Strong Evidence: TIC & The Long Misunderstood History of Selling Treasuries – Alhambra Investments (

I’m a big fan of Jeff Snider’s work and I encourage you to look through his articles on the Market Research tab on that website. Basically, he explains how our Eurodollar system works.

Here’s the gist of it. Foreign countries build up reserves in US dollar assets – particularly US treasuries, but also in gold – when the dollar is weak. The world relies heavily on the US dollar for foreign trade, and they tend to build up debt in US dollars when it seems favorable. At the same time, US investment cycles tend to periodically flood into emerging markets seeking growth and then rush back out seeking safety. The ever-growing debt levels increase the foreign need for US dollars over time while the investment flows create periodic scarcity. When Eurodollars (US dollars held in the banking system outside of the United States) are scarce, it can cause defaults and wreak havoc on foreign economies, as in the Mexican Peso Crisis and Asian Financial Crisis of the 90’s.

Foreign reserve assets, particularly those denominated in US dollars, are sold to offset this scarcity in their home countries. This tends to be a sign of coming crisis because foreign CB’s can’t just sell these off indefinitely – it has limits just like tapping into a strategic oil reserve. Similar to the oil analogy, tapping these reserves only alleviates the pressure of a cycle rather than changing the supply & demand function; the hope is to get through until the market currents shift on their own.

In the chart above, Jeff Snider points out the repeating economic crises in the Eurozone throughout this last decade and how they relate to this period of chronic Eurodollar shortage.

Other articles talk about how the federal reserve does not create money through QE – it is mainly a ledger action exchanging bank assets such as mortgage backed securities and US treasuries for overnight reserve assets paying the fed discount rate. These reserve assets can be exchanged between institutional US banks and are counted as assets they can borrow against, but money is actually created through borrowing. There is a long rabbit hole to go down here, but essentially the US Central bank is not creating money to alleviate the dollar shortage, they are just encouraging large investors to borrow cheap and pour money into assets such as stocks, bonds, and real estate. Also, QE has a side effect of reducing the top-tier collateral (short-term US treasuries) from the system and forcing money to park elsewhere, which is why both the BOJ and SNB have been going as far as investing in both US commercial debt and US stocks.

How does this dynamic affect the performance of TLT?

I created the charts above to see how TLT (long-dated US treasuries) relates to foreign holdings of US treasuries. The 5-year chart seems to show that the foreign holdings of US treasuries corresponds somewhat with lower yields at the long end, but the 1-year chart doesn’t say much because the federal reserve reports this data quarterly. The dip in foreign holdings on the chart at the top right ends in Q1 2021 which corresponds with the March TLT low. I threw in the last few months of data with the rally in TLT because it’s there, but there is no corresponding data available for foreign holdings of USTs in that period.

There is an argument that the Fed’s QE tends do drive down interest rates over time, and this seems to hold up with the decade post 2008 but in a rough and volatile process. There are so many questions and uncertainties here it’s insane.

How much can long-term interest rates go down as they approach zero? How does the zero line affect the movements? Japan and Europe have both shown the possibility of negative nominal interest rates on securites going out for several years. UST bulls would point out the path of Japan since 1990 and shorting the Japanese long bond as the famous “widow-maker” trade. Here’s a chart: Japan Long Term Interest Rate, 1998 – 2021 | CEIC Data

Corresponding chart in US 10-year yields from Yahoo Finance:

You can see the implications here, if you believe we are following the path of Japan (which was endless bouts of QE and fiscal stimulus). The absolute bottom in US rates we saw so far was at 0.5%. A TLT bull would point out that Japan’s 10YR yield went negative and ours could too, while a TLT bear would point out the massive rate hike after the 10YR JGB plunged from 2% to a low of 0.5% back in 2002.

We know that the Federal Reserve does not want negative rates, which is why they quickly announced the reverse-repo program where they will essentially take unlimited money from US banks and pay them a 0.05% annual yield on it. We also know that this program has grown massively since announced, and that close to $900 Billion is currently taking advantage of the program.

We also know that the worldwide economy is still experiencing massive shocks, lockdowns, shortages of certain things, and transportation problems.

The most common theories I hear about these days are the following:

  1. Hyperinflationists. They go on about the Fed balance sheet, government defecits, and whatever rose in price lately, convinced that the currency is rapidly devaluing. Their understanding of the monetary system is incredibly superficial, and they show a complete lack of understanding about deflationary forces such as technology, demographics, and enormous debt levels. These guys drive me crazy when they focus on the horrors of wage growth being sticky when there’s been no real wage growth in my lifetime.
  2. Deflationists. They talk a lot about valuations, high debt levels, enormous margin debt and the fragility of our financial system. I identify heavily with this camp and it includes a variety of people such as Dave Rosenberg, Jeff Snider, Steven Van Metre and so on.
  3. Semi-inflationists. Raul Pal from RealVision is one of these (other big names are Cathie Wood from Ark Investments) and he put together an excellent argument on how the underlying economy may be weak and the debt levels may be high, but the federal reserve balance sheet is expanding the money supply by pushing more and more money into investable assets such as the stock market. He sees low overall growth, the continuation of a winner-takes-all economy, and the value of “network effects” which is pushing more and more money into both Cryptocurrencies and anything tech. He explains that it could all turn if the federal reserve tightens, but they will never do that because it would totally crash the economy. The result as they see it, is that we’re stuck in a society with an ever-expanding wealth divide and you have to either buy assets that are increasing in value or you fall further and further behind.

Argument #3 is the newest to me, and it is certainly compelling. However, I still have trouble with the idea of investing in tokens which have no intrinsic value and with the idea of piling into the same big mega-cap corporations that everyone else in the investing world is piling into. I also tend to believe that the federal reserve, while powerful, does not have complete control over interest rates and the economic system. It seems to me that they have been working ever harder to give the illusion that they have control when they are really just following what the market does. Just like 1990 Japan, our debt-driven asset bubble will pop at some point, I have no idea when that will happen, and many assets will remain in a manic rise until it does.

For now I’m still in the bonds-bullion barbell approach because I see precious metals and mining stocks in general as relatively cheap while I want some protection in the case of a deflationary bust. It’s a tough slog when momentum is outperforming, but I can sleep at night without worrying too much. On the bonds side, I don’t think that long-term yields can rise too much without pulling down the financial system and causing a cascade of defaults. On the precious metals side, I am still convinced they go up considerably in the next decade and I don’t think they have much further to drop. Gold can revisit $1600 or even $1200, but these dips will be bought and they’ll be as temporary as the gold price crash in 2008-2009.

Here’s where my portfolio left off:

  • DOWNSIDE BETS (31.6%)
    • 23.3% TLT Calls
    • 6.3% IWM Puts
    • 0.2% QQQ Puts
    • 1.8% EEM Puts
    • 10.2% AG (Silver), mainly shares some calls
    • 8.0% SAND (Gold, Silver & others), all calls
    • 4.5% EQX (Gold), shares & calls
    • 4.5% SILV (Silver)
    • 4.3% LGDTF (Gold)
    • 3.9% MTA (Gold & Silver)
    • 3.4% SILVRF (Silver)
    • 1.5% WPM (Gold, Copper & Silver), all calls
    • 1.3% RSNVF (Silver)
    • 0.5% SSVFF (Silver)
    • 0.6% GOLD (Gold, Copper), all calls
    • 6.0% NOVRF (Nickel/Copper)
    • 6.4% CCJ (Uranium)
    • 3.5% UUUU (Uranium, Vanadium, Copper)
    • 1.5% BQSSF (Uranium)
  • CANNABIS (5.5%) split btw CRLBF, GTBIF & TRSSF
  • CRYPTO (2.3%) all ADA
  • CASH (0.5%)

Notable trades: I sold all my QQQ puts on Monday and used the money to buy Uranium miners. That turned out to be a good move. At the end of the week I couldn’t help but put a little into one QQQ weekly put because it gained so much and we’ve had past patterns of strong Fridays followed by weak Mondays in the past … patterns which have to do with hedging positions of market makers around options expirations. Overall I’m down 0.6% on the week. Have a wonderful and relaxing weekend!

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Bonds soar as Commodities struggle

It’s been a rough month for commodities in general. My last 4 weeks of performance were -10.8%, +2.9%, +0.4%, -0.9%. It looks even worse when you look at the miners:

I own all of these names above, and they make up more than half my portfolio, so it’s a wonder I wasn’t down more.

I sold some more TLT calls this week to pick up miners on some of these dips. I’m trying not to overdo it though, because bonds are currently working, and I am still selling them at a loss compared to my own buy-in back in mid February. One short-term trade I got right though … last week I had reduced my holdings of TLT calls roughly 25%. I expected a high CPI reading on Tuesday, so I looked for a dip in bonds and got 5 shorter dated TLT calls (Jan 2022), then sold them 2 days later for a decent gain.

Still, my performance has been downright lousy as my account balance is roughly the same as it was late 2019 even though I’ve been putting money in from every paycheck in between.

What can I say, I cut my teeth in markets that did this:

I started trading in 1999 and learned hard lessons about bubbles, cycles, and fundamentals. Stocks were mean-reverting beasts and you needed to take profits on any significant gains.

I never expected that markets could start doing this:

The hard lesson I’ve been learning is that fundamentals don’t drive prices – it’s all about cash flows. Who cares if earnings are roughly flat, as long as money piles into passive funds while interest rates are pinned at zero and corporations borrow like crazy for ever-bigger stock buyback programs.

It’s easy to think that this is a mega-bubble destined to pop at any moment. Everyone wants to be Michael Burry from “The Big Short,” proving that fundamentals actually do matter at some point. It’s a very compelling trap thinking “I’ve been wrong so far, but I’m really smarter than everyone else, just wait till this thing blows up!” Unfortunately, that simply leads to trading on emotions which will absolutely kill your performance.

My trading on the miners so far this last year actually wasn’t bad. I managed to get longer at the right times, owning more long-dated call options and such, and to get shorter at the right times by selling my call options down and selling covered calls on my shares. My performance was killed by my hedges … buying too many index puts at just the wrong times, then buying too many TLT calls too early.

I’m still thinking of these mining stocks as being in a beaten-down phase of a multi-year bull trend. These are capital-intensive cyclical businesses which take years to get more production on line. Bear markets (2012-2018) lead to underinvestment, which leads to tighter supply, which leads to rapid gains when demand goes up.

Right now the economy is about to face enormous headwinds as government stimulus programs die off while the total number of jobs fails to recover. The mining shares can be beaten down a lot more. However, I’m still more comfortable holding those than I am holding most other stocks with their extreme valuations. I figure that as long as I’m careful – meaning that I don’t use leverage, I stick mainly with shares (call options expire and must be considered trading positions), and I diversify or offset my risk a bit, these things will eventually start moving.

Here’s where my portfolio ended up:

  • DOWNSIDE BETS (35.0%)
    • 23.0% TLT Calls
    • 6.9% IWM Puts
    • 3.7% QQQ Puts
    • 1.5% EEM Puts
    • 10.2% AG (Silver), mainly shares some calls
    • 8.4% SAND (Gold, Silver & others), all calls
    • 4.9% EQX (Gold), shares & calls
    • 4.3% SILV (Silver)
    • 4.0% MTA (Gold & Silver)
    • 3.3% SILVRF (Silver)
    • 3.2% LGDTF (Gold)
    • 1.6% WPM (Gold, Copper & Silver), all calls
    • 1.3% RSNVF (Silver)
    • 0.5% SSVFF (Silver)
    • 0.6% GOLD (Gold, Copper), all calls
    • 5.6% NOVRF (Nickel/Copper)
    • 4.2% CCJ (Uranium)
    • 2.3% UUUU (Uranium, Vanadium, Copper)
    • 1.4% BQSSF (Uranium)
  • CANNABIS (5.7%) split btw CRLBF, GTBIF & TRSSF
  • CRYPTO (3.0%) all ADA
  • CASH (0.4%)

As you can see, I re-built my Uranium portfolio. On my May 29 post, I had 10% of my portfolio in CCJ and another 1.1% in UUUU. By June 20, these positions were totally gone because my covered calls expired in-the-money triggering a sale. The stocks continued higher for a time, but I waited it out, finally adding a little bit in early July. This week I added considerably, particularly on Friday.

Here’s the big reason for weakness this Friday, and why I bought into it:

This Friday was a significant options expiration. Certain miners like CCJ and AG have very heavy options volume – both in calls and puts. Options dealers sell these positions to retail, and hedge them by purchasing more shares as the price goes up and selling more shares as the price goes down. When these options expire, the dealers need to sell shares at the strike price if it’s in-the-money (for calls) or buy shares at the strike price if it’s in-the-money (for puts), and they automatically buy or sell shares in the market to cover these positions. The result is that share price moves are greatly accelerated into expiration – this time to the downside.

We’ll see how things move forward in coming months. My guess is that interest rates continue lower and bottom in the fall (TLT rises), and that commodities continue to struggle but their downside from here is somewhat limited.

We might see a turn in the major US indices, but I’m thinking of selling off my QQQ puts next week (at a loss) and getting what I can out of those. Big US tech has enormous market power and government support, they get the bulk of any index-fund inflows, and they buy back their own shares like crazy. Also, low interest rates are considered good for the tech sector. I’m more comfortable sitting on puts in IWM which is mainly supported by meme stocks like GME and AMC, but I’ll stay wary as I’ve learned not to overdo it with puts.

Good luck and be careful, these market forces are dangerous, powerful, and quick.

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Significant rally in US treasuries capped with Friday selloff

It’s been quite a week for the US Long Bond:

I actually think that the TLT rally we see still has legs to it. There are a number of reasons to expect economic weakness and reduced CPI going forward including the following:

  1. Stimulus programs such as added unemployment benefits are coming to an end. These have already ended in many states but will expire nationally this September.
    1. This includes the extra $300/week payment, as well as the Pandemic Emergency Unemployment Compensation (PEUC), and the PUA programs.
    2. During the Great Financial Crisis, regular unemployment duration was extended from 26 weeks to 99 weeks. The covid response varied state by state, but still added a maximum of 20+26 weeks before expiring completely: Policy Basics: How Many Weeks of Unemployment Compensation Are Available? | Center on Budget and Policy Priorities (
    3. In short, a large amount of government money that was going into the economy is about to stop. This will force spending downward and put downward pressure on the CPI, inflation expectations, and treasury rates.
  2. Forbearance programs in rents, mortgages, and student loans are also coming to an end. This will divert even more money that previously went into spending.
  3. Inflation measures in the US are based on annual changes. The comparison against the lockdown months is gone, future months will be compared against an economy that combined initial re-opening and massive government stimulus including PPP and stimulus checks.
  4. Dollar shortages are showing up in a number of countries. Many emerging economies responded with interest rate hikes while developed economies responded with some form of tapering of their asset purchase programs.
  5. China just responded this Friday by reducing their Reserve Rate Requirement (RRR). This article explains what they were doing, but I’ll sum up below: How Do You Spell Escalating? C-H-I-N-A-R-R-R – Alhambra Investments (
    1. US treasury interest rates spiked on Friday when China announced that they were reducing their RRR. The thinking is that this will enable their banks to lend more to stimulate the economy, and that a credit pulse in China could boost commodities and inflation expectations like it did back in 2008 when they were building skyscrapers everywhere.
    2. However, China has done this a number of times in the last decade in for a very different reason; their system is short US dollars. In the 2000’s, China was building up US dollar reserves like crazy, which added a lot of assets to their bank’s balance sheets. They would raise the RRR to lock a lot of this money in the financial system in order to prevent credit spikes and keep domestic inflation under control. Now the process is simply going in reverse; China needs to alleviate a domestic dollar shortage by selling US treasuries, which will reduce the assets on their bank’s balance sheets, and they don’t want this to create a domestic credit freeze as their banks hit the old RRR limits.

In short, I expect interest rates in US treasuries to continue lower throughout the year and I wouldn’t be surprised to see weakness in stocks and commodities.

So why did I reduce my position so heavily? In short, because I was over-allocated. Look at my allocations from my posts in February – I jumped in too fast putting nearly half my portfolio into TLT calls, and I got killed as rates moved against me. This over-allocation prevented me from being able to safely and methodically add as rates went higher. I don’t want to exit the trade completely because I’m still confident in the overall thesis that bond yields will bottom in the next few months – but I can’t responsibly manage an options trade that’s 50% of my portfolio, even if it doesn’t expire for another 18 months.

Whenever you trade on a macro thesis, you have to realize that your trade can turn against you and plan accordingly. It’s better to hold back enough where you can responsibly add as you wait for it to play out, and it is better to reduce a bit on the rallies in case of a head-fake and further weakness down the road.

I’m still nervous about the leverage in the financial system causing problems (it can’t increase forever, right?), so I’m not going to make a long bet on general US stocks. Ironically, I feel more comfortable with the mining stocks mainly because they’ve been missing out on much of the post-covid gains. These are cyclical in nature – bear markets lead to under-investment which leads to shortages which leads to bull markets which leads to over-investment then repeats. The miners (gold, silver, uranium, copper) had a terrible bear market from 2012-2018 and they have just started to recover. I don’t feel as comfortable with Oil because it seems to have shorter production cycles due to fracking technology, and OPEC can always increase supply.

As for emerging markets, I remember being over-allocated to them back in 2008-2009 with de-coupling and all that. I learned that EM stocks get hit hard on developed market weakness as foreign investment turns risk-off and rushes back home. Then they miss the initial upside after a bottom (like 2009) but they rally hard on the growth part of the cycle that follows. I’m still short EEM, and I fully expect the same cycle to play out. If the US stock market seriously tanks, then stabilizes and starts to recover, then I will allocate to emerging markets and not before.

For now, I think I’m over-allocated to precious metals miners so I will try to refrain from adding there. Same goes for copper – I have more than I need with NOVRF plus the exposure in my other mining stocks. I would still like to add to CCJ (uranium) on weakness, and I do expect to see more weakness this month. I’m thinking about just sitting on a stronger cash position when I close out my TLT calls. Maybe I’ll get a few more long-dated index puts if we continue to hit all time highs in IWM & QQQ in coming months …. but I’ve lost so much doing that these last 18 months that I’m not too sure about that one.

Anyway, my portfolio was actually up slightly on the week. Here’s where it landed:

  • DOWNSIDE BETS (36.9%)
    • 26.1% TLT Calls
    • 5.5% IWM Puts
    • 3.4% QQQ Puts
    • 2.0% EEM Puts
    • 9.8% AG (Silver), mainly shares some calls
    • 8.1% SAND (Gold, Silver & others), all calls
    • 5.5% EQX (Gold), shares & calls
    • 4.7% SILV (Silver)
    • 4.3% MTA (Gold & Silver)
    • 3.2% SILVRF (Silver)
    • 3.0% LGDTF (Gold)
    • 1.5% WPM (Gold, Copper & Silver), all calls
    • 1.5% RSNVF (Silver)
    • 0.6% SSVFF (Silver)
    • 0.7% GOLD (Gold, Copper), all calls
    • 4.7% NOVRF (Nickel/Copper)
    • 1.7% UUUU (Uranium, Vanadium, Copper)
    • 1.1% CCJ (Uranium)
    • 0.8% BQSSF (Uranium)
  • CANNABIS (6.3%) split btw CRLBF, GTBIF & TRSSF
  • CRYPTO (3.4%) all ADA
  • CASH (2.3%)

I really don’t know what to predict going forward these next couple months. I could just as easily see gold re-test the recent lows around 1670 as I could see it swiftly rally back to 1900 resistance. I could see IWM and QQQ stocks crash big time in a major de-leveraging event, go through a minor 5% correction, or continue hitting all-time highs. All I know is I’m feeling a bit cautious. Good luck and happy trading.

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