Liquidity Drain

My portfolio’s down another 3.7% this week. Its actually even in value though because I put in more cash. One of the good things about having a margin account is that you can use it to buy up crazy dips, which I’ve done a bit these past couple weeks, particularly with Uranium miners. The downside is that a market built on high margin can just keep draining liquidity and dropping lower. In this case, those mining stocks didn’t bounce back, they just kept dipping. If you overdo it with margin, you end up being forced to sell at the worst possible time, and I’m a bit too risk averse to want to get close. Last week I was around 1/3 of the way towards my limit, now that’s closer to 1/4, so if all my stocks were cut in half from here I still wouldn’t trigger a margin call quite yet.

Right now we’re in a world of highly aggressive central bank tightening. The Fed is tightening because they’re under tremendous pressure to bring the CPI down, which has sent the US Dollar roaring higher, and other central banks have been tightening to shore up their own currencies in response.

The Federal Reserve was supposed to start shrinking their balance sheet last month, and they have talked about selling mortgage-backed securities (MBS) on the market. So far, that balance sheet has clearly topped and looks to be trickling down, but the data is choppy. I really doubt that they’ll end up selling much MBS.

This video has a number of important things from the standpoint of the mortgage market: Mortgage Lenders are going BANKRUPT (2022 Housing Crash Just Got Worse): https://youtu.be/KYF6lTbxx6U

Nick does a great presentation here where he shows that “shadow banks,” which are not backstopped by the federal reserve, have been funding 2/3 of the mortgage loans. Mortgage rates more than doubled since the beginning of the year, putting steep losses on anyone holding mortgage-backed securities, and pushing a number of these companies into bankruptcy. Big banks like JP Morgan and Wells Fargo are tightening lending standards further in response.

Back in 2008, bear sterns went under when mortgage-backed securities became illiquid and they had to post a lot more collateral to fund their operations off the repo market. There are a lot of shadow banks like that who are going to need to sell these morgages, and a number of house-flipping companies who are going to need to sell homes, just as buyers are vanishing. I think we’re very close to seeing a number of debt markets seize up here.

Meanwhile we have people comparing the CPI with the 1970’s and talking about raising rates past the CPI as the only way to beat it down, as if the enormous difference in debt levels and demographics don’t matter. Here’s a chart I put together for Twitter showing how different our situation is here:

Note that the CPI (blue) has come down despite much lower interest rates (green) in every instance before 1960 and after 2007. Why? Debt levels matter. If interest rates sharply rise, then in becomes very difficult for banks (and shadow banks) to conduct lending activities as their balance sheets begin to look like trash. Meanwhile, the debt-fueled asset bubble starts to reverse leading to different forms of margin calls in the stock and repo (interbank lending) markets as the collateral backing those loans loses value. All lending markets face these pressures as home loans become higher than property values, auto loans start seeing sharp credit risk increases as used car values fall, corporate loans are based on shrinking earnings, etc.

The latest in GDP estimates has shot down to -2.4% for Q2, after a -1.6% drop for Q1. For most people, this fits the definition of recession.

Right now, the big debate is still about inflation. This is not only the hot-button political issue, but an important issue for investors, even though everyone has a slightly different idea of what it is. As I have strong ideas on the topic, I might as well lay out my views.

  1. Everyone has a different idea of what “inflation” means.
    1. The news media and politicians define inflation as the latest CPI reading.
    2. Most people define inflation as cost of living going up.
    3. Economists like Milton Friedman and Jeff Snider, define inflation as costs going up due to a reduction of purchasing power in the currency.
  2. Milton Friedman’s famous line “inflation is always and everywhere a monetary phenomenon” is one of the most mis-understood quotes of all time.
    1. The CPI = inflation crowd interprets this as “every time the CPI goes up it means the value of the US dollar has dropped”
    2. The “cost of living” crowd interprets this as “every time stuff I buy and bills I pay cost more it means the value of the US Dollar has dropped”
    3. Economists try to divide the CPI hike into supply shocks, demand shocks, and currency devaluation with the general idea that only currency devaluation has lasting power because supply and demand shocks will shift spending patterns, production patterns, and work through the system.
    4. The Federal Reserve calls supply and demand shocks “transitory” for this reason. But they also believe that inflation and the economy are driven by psychological factors they term “animal spirits”, that consumers strapped for cash will spend more just because they expect prices to rise leading to a cycle of price hikes, and that misleading the general public on the state of the economy is the best way to manage this phenomenon. This is why their predictions are generally dead wrong, why they never predict recessions, and why investors comb through their speeches for hidden meanings.
  3. The actions of the Federal Reserve definitely affect markets. In fact, the easiest and smartest market-timing strategy is to take a 401k, send it into money market funds at the beginning of every Fed hiking cycle, and move it back to 100% stocks at the beginning of every Fed easing cycle. The fed is charged with reacting to “employment” and “CPI” which both heavily lag the economic cycle, and their actions tend to be pro-cyclical feeding the frenzy of the cycle peak and draining liquidity after the cycle has clearly turned. Stocks follow market liquidity much more than fundamentals like earnings, and that follows the movements of the federal reserve.
  4. “Costs of Living” have been soaring for decades as housing bubbles have driven rents higher, especially post GFC with money flooding into the housing boom. Food, fuel, mandatory health insurance costs, healthcare costs, tuitions, and cars have also become much more expensive during this time. This effect has been hidden by things like globalization flooding the world with cheap consumer goods, hedonic adjustments from new cars requiring more things considered higher tech, televisions getting bigger, computer chips getting faster, etc. At the same time, the average person has lived with the feel of a being on a treadmill with the speed set ever faster as he still gets nowhere. The idea circulating that “inflation hasn’t been a problem for decades” is misleading and ludicrous in cost of living terms.
  5. “CPIs” have been driven higher as the lockdowns produced some of the biggest supply and demand shocks ever seen when people shifted almost all their spending from services to goods, and a flood of workers moved out of expensive cities and fixed up home offices for remote work. The disasterous energy policies of the G7 have made the situation critically bad, as they consider “environmentally friendly” to mean “block all infrastructure investment.”
    1. We produce much less oil in that US than we did pre-pandemic, we cancelled most new pipeline projects and have seen the supply of “drilled-but-uncompleted wells” drop precipitously as no one is investing in drilling new fracking wells.
    2. We have seen desalination projects blocked in California as Lake Mead dries up and our water from the Colorado River is about to be cut off.
    3. We have seen a number of nuclear plants shut down permanently this year alone, 2 of them after Putin’s invasion of Ukraine.
    4. We have seen the diversion of farmland to biofuels despite a food crisis raging through emerging markets and critical shortages in fertilizer.
    5. We have seen coal-dependent countries like Australia push big “windfall profits” taxes on producers causing prices of energy to soar.
    6. Unfortunately we’re stuck with these problems getting worse as our leaders continue to make it so. These policies will drive CPI higher by reducing supply despite the demand destruction that is also happening.
  6. “US Dollar Devaluation” is not happening, even though most people believe it is. The enormous “money printing” of the fed balance sheet is merely taking one form of money – treasury bills – and turning into a more restricted form of money – bank reserves. The enormous stimulus that went out in some part to people and in large part to big corporations was a big one-off, not leading to a virtuous cycle of increased incomes.
    1. People are not flush with cash and spending like crazy, hence the enormous inventory buildups in stores like Target and Walmart and the negative GDP growth.
    2. The US Dollar has been the best-performing asset of the year (aside from oil) as almost all asset classes have been dropping in dollar terms including most foreign currencies, gold, silver, and Cryptocurrencies.
  7. The labor market is broken in many ways. The job losses from the pandemic have still not been recovered – we still have LESS jobs than Feb 2020 despite working-age population growth!
    1. After the lockdowns & layoffs, prices of rents and real estate soared 30% in many areas, and people have been leaving in droves. Many of these workers will never return to the overpriced cities from whence they came, and those places will struggle to find new low-end workers with no places they can afford to live.
    2. Many of the workers displaced in the pandemic had job skills that take years to acquire. Nurses, longshoremen, construction workers, mechanics, pilots, etc. They will not be easy to replace, especially as high costs of gasoline make commuting expensive while high rents prevent people from moving back to those areas.
    3. Most people are NOT getting huge wage hikes and bonuses like the unionized workers of the 1970’s. Many people are paid in more variable terms with things like bonuses that can easily disappear, and the wages that have moved have been tiny in comparison to the cost of living and stilll fairly small compared to the increases in CPI.

Right now, a financial crisis like 2008 is much more likely than any kind of sustained inflation. Fiscal intervention in the US is unlikely, as the Democrats believe that higher energy costs will be better in the long run and the Republicans believe that workers are lazy and flush with cash that we need to drain from their hands so that they’ll get back off their butts and work. They’ll fight and have government shutdowns and budget battles even as the cracks in our economy become more obvious.

So, what can I say. My strategy remains the same really …

  1. If the economy tanks like I expect, and the Federal Reserve is the only game in town to act, and their only real tool is the interest rates set by their Reverser-Repo-Rate window, then rates will collapse in the next year and my TLT call hedges should soar.
  2. If the federal reserve manages to re-kindle the asset bubble, finding new ways to get more money to rich investors, then my precious metals miners should soar as these investors will again crowd into limited resources rather than investing in long-term infrastructure or production for a shrinking economy.
  3. Uranium demand is absolutely set to increase like clockwork, and the tiny but volatile mining sector will soar over the next decade. Who knows when exactly, but I’ll be there.
  4. US Cannabis is still a sector that big investors are blocked from due to federal law, so many of these investors go to Canadian cannabis companies instead. The Republicans and Democrats both want to make it federally legal in some way so they can get that sweet tax revenue, but Senator Schumer has been blocking it so far in hopes of a big comprehensive reform. I believe that they will end up with some kind of bipartisan compromise here that does the trick, allowing these companies to operate as federally legal enterprises with access to the banking sector, and allowing major investors to participate in the sector. It’s a falling knife until then, and the bleeding is so bad I’ve stopped adding to my holdings here back in February, but I plan to hold what I’ve got.
  5. Battery metals – mainly copper and nickel – are so undersupplied it’s insane, especially with the extremely wasteful use of them that our ESG-infected politicians are pushing. I expect downward pressure until we get to massive infrastructure spending in earnest, but I’d rather have something in too early than miss the move.
  6. Crypto I rarely talk about, but I’m in XRP with some buddies who are crazy bullish and I’ll leave it at that. Many coins will die off, but the sector will remain as long as its legal and it will have wild swings to the upside as well as the downside.

If I had new money to add, I would probably put the bulk of it in Uranium Miners because the long-term story is the most bullish by far. If you wonder why, start here: Uranium Market Minute: https://youtu.be/qkEhOYl9nCg

Here’s where my portfolio ended up.

  • HEDGES (16.4%)
    • 16.4% TLT Calls
  • PRECIOUS METALS (35.8%)
    • 4.3% AG
    • 4.2% MTA
    • 4.2% SILV
    • 3.2% LGDTF
    • 2.7% EQX
    • 2.8% SLVRF
    • 2.7% SAND
    • 2.1% MGMLF
    • 1.9% SSVFF
    • 1.8% RSNVF
    • 1.7% BKRRF
    • 1.6% HAMRF
    • 1.6% MMNGF
    • 1.3% DSVSF
  • URANIUM (24.1%)
    • 4.7% CCJ
    • 3.5% DNN shares & calls
    • 3.3% UEC
    • 3.0% UUUU
    • 3.1% BQSSF
    • 2.7% UROY
    • 1.9% ENCUF
    • 2.0% LTBR
  • US CANNABIS (13.4%)
    • 1.8% AYRWF
    • 1.5% CCHWF
    • 1.3% CRLBF
    • 2.2% CURLF
    • 1.4% GTBIF
    • 2.1% TCNNF
    • 1.2% TRSSF
    • 2.0% VRNOF
  • BATTERY METALS (11.4%)
    • 5.4% NOVRF
    • 4.4% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.3%)
    • 2.3% XRP
  • OTHER (3.3%)
    • 2.5% DOCN (w/ covered calls)
    • 0.6% OGZPY
    • 0.1% TWTR call
    • 0.0% ATCO calls
  • CASH (-6.7%)

Keep a cool head during this cycle. The overall market losses and coming crisis are scary, but money will be moving like crazy. Lots of risk to take on the upside as well as the downside if you’re keen to take it. If you like my TLT calls play, please don’t get into calls dated before November (you’ll want the seasonal TLT bull market in Sept-Oct) and consider the high duration Jan 2024 calls if the premium isn’t too high because the move in rates might take longer than you expect. Be extremely careful with margin accounts here, and good luck!

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The Crazy Trades of a Bearish Leaning Gold Bug

It was nice to end the week with a rally, which brought my portfolio back up for a 0% gain on the week. In order to have a shot at life-changing returns, you need to concentrate on a sector and take in some risk, so that is what I’ve been doing. Needless to say, that can lead to big drawdowns. My portfolio returns right now are:

  • 0% on the week
  • -14.5% on the month
  • -42.7% on the quarter
  • -37.7% on the year

Note that the above returns are corrected for deposits. If I deposit $1000 into my trading account, then I subtract it off the ending balance before dividing it by the balance the prior week and subtracting 1. I simply add the column of weekly returns to get my returns going back. Because of this, my total balance is simply near the low end of the range that it has been stuck in since I started recording it in 2019. Between my relatively low net worth and relatively high savings rate, my losses over time balance out.

What do I get for these regular losses? The chance to have a big win. My net worth was around zero when I bankrupted out of my LED Lighting venture in 2014, and it wasn’t until 2015 that I managed to land a job with that new-grad starting income again. I piled what savings I could into precious metals, then precious metals miners and hit that beautiful $100k savings mark for the first time ever in that amazing gold rally of 2019. I managed to stay well above that range ever since, and I’m patiently waiting for the next big breakout. It will happen, and when it does junior mining stocks can pack quite a punch.

Here’s a quick rundown of my performance in various sectors with charts.

Hedges: This is where I lose the bulk of my money. I bet on individual stocks going down (airlines, cruise lines, etc) in March and April 2020 after the lockdowns and they rallied like crazy. Then I abandoned that approach and bet on the S&P 500 going down with SPY puts and that rallied like crazy. In the fall I thought … okay, people are cramming into the top bunch of tech stocks so the S&P is untouchable, perhaps I should switch to IWM puts (the Russell 2000), and that rallied like crazy. Then I figured that going short anything wasn’t going to work, so I decided to hedge with TLT calls in March of 2021 and they have been dropping ever since. I’m still stubbornly sticking to this trade, thinking that TLT will rally in the big crash to come, and that I’m probably better off sticking to one hedge rather than rotating because my previous rotations were all just before major market moves against me. I like TLT calls better than straight TLT because whatever hedge I invest in needs to have some serious outsized punch if it actually works.

Precious Metals:

  • April 28, 2020: 37% of my portfolio was jammed into long-dated call options on gold miners such as EQX and silver, using SLV.
  • May 14, 2020: 35% of my portfolio was in the above calls as I was taking profits.
  • May 30, 2020: 42.5% my portfolio was in gold mining stocks, almost all with covered calls sold on them.
  • June 21, 2020: 50% of my portfolio was in gold mining stocks. All the covered calls expired worthless. I continued selling at-the-money covered calls on these relentlessly through Nov 6.
  • Nov 7, 2020: 53.6% of my portfolio was in gold mining stocks and SLV. Some long calls, no covered calls.
  • Nov 28, 2020: I piled into precious metals like crazy into the Thankgiving selloff. It was 81% of my portfolio, 26% was in long dated calls. I happily rode this through the december rally,
  • Feb 5, 2021: After the SLV silversqueeze was a dud, I sold off all of my long dated calls and was down to 42.7% of my portfolio in mining stocks and SLV shares, most of which was in SLV shares which I was crammed into with 1-week covered calls sold at a hefty premium. I did lose money in the silversqueeze, basically giving back all the gains that I had from a short-term AMC play a couple weeks prior. A couple weeks later I was back to 35% portfolio in gold and silver miners, and I never messed with SLV as a trading vehicle again.
  • March 1, 2021: I was down to 20.7% of my portfolio in precious metals miners, and was selling weekly covered calls on AG. By mid-March I was back up to 31% into precious metals miners with some long call positions. By the end of March, this was up to 38% of my portfolio. Early April it was 42%.
  • August 2021: I pretty much waited on precious metals up through August, with a 42% allocation including a decent chunk of long-dated calls. I increased the allocation to 47% late August as I was buying into the dip. A lot of articles followed on the smackdown of gold miners, but I pretty much held there.
  • Jan 8, 2022: Mining stocks were really getting hammered and I was adding into dips. I was at a 49% precious metals miner allocation with quite a bit more calls, including a big chunk of long-dated calls in AG. By Jan 22, this was up to 52%. I was starting to get nervous about building up margin.
  • Feb 20,2022: I reduced my precious metals down to 44%, pushing my cash balance positive again. This was mainly by selling shares of AG which I was double-long as I bought a bunch of long dated calls in it to replace the shares, but was waiting for a rally to sell the shares into. I continued to reduce into the rally, going down to a 38.5% precious metals allocation by March 26.
  • April 17, 2022: I got spooked on precious metals when they showed signs of topping, and I sold all of my long dated calls early in the week. Allocation ended up at 29.2% by the end of the week. In addition, a lot of the out-of-the-money covered calls I sold on Uranium miners had expired in the money and were called, so I was sitting on a 28% cash position. Over the next couple weeks, I was trying to be patient and wait for the big fed meeting before buying anything.
  • May 7, 2022: I finally put my money back in, bringing my precious metals allocation up to 35.5%. The following week I got a bonus check and piled into more gold, silver & uranium miners while keeping my cash balance close to zero.
  • June 2022: My discipline has been breaking down a bit this last month as my mining stocks continue to take a beating. I had a bunch of covered calls on Uranium miners expire out of the money on Fed hike week, and continued to add shares using margin. My cash balance went from -2.2% on June 11 to -6.6% on June 18.

As you can see above, my precious metals trading has gone through quite a ride. As for my other trades, I’ll go through a quick summary:

Uranium Miners:

I had been following CCJ ever since Justin Hugn explained his thesis on Real Vision back in 2019, but I was reluctant to pile in figuring it needed a catalyst. I eased into the trade in 2020 with a small position in CCJ. By 2021, CCJ had broken out and I started getting more shares, selling 1-month at-the-money covered calls on them, then buying them back and repeating. I starting getting really bullish around Aug 2021 with the bullish wedge formation and got long a bunch of 1-month calls which made me a bit over $5k in following weeks. I found out after the fact about the Sprott Physical trust as a catalyst, then started really increasing my exposure to the sector and selling out-of-the-money 1-month covered calls on rallies. April was an amazing month for me as all of my crazy high out-of-the-money covered calls, like a $30.50 strike in CCJ, expired in-the-money and my exposure reduced from 22% of my portfolio to 11% after April 8th. I’ve been adding back as it fell, and the covered calls I sold into the last rally expired worthless on Friday June 17th.

US Cannabis:

I started getting interested in this sector when Tony Greer spoke about it in a Real Vision Daily Briefing around the summer of 2021. I put token amounts into 3 of the tickers he mentioned that I happened to catch without bothering to rewind, and just tracked the sector for a while. It was an intriguing story – the idea that big US investors can’t touch it until the federal government passes some kind of “safe banking” bill allowing them to access the US banking system and potentially list on the NYSE. For now they’re still limited to reaching out to private investors from the junior canadian exchange because Cannabis is still in the murky designation of being federally illegal yet legal in many states.

Anyway, the story was intriguing and I liked the idea of having something diversified from my mining portfolio, but the chart was a falling knife. I went from a 5.7% allocation to cannabis in Aug 28, 2021 to 8% in September, to 10% in October which fell back to 8.5% again in October. Then I started increasing allocation after it fell late November up to 11% on Nov 27 then 12.7% the following week, then 13.7% by Dec 24, then 16.5% in Jan 8th. I held the allocation fairly steady for a few weeks by purchasing more shares whenever the valuations dipped below a certain threshold, then I just stopped adding and let them float. That’s where I’m at with it today. I don’t think they’re going to zero, but I’m not planning to add further as they keep falling.

Crypto:

This sector was interesting as I had to figure out what to think about it and how to treat it. I still have physical gold and silver coins that I picked up between 2016-2018 and I don’t bother counting them with my portfolio because they sit in a safe and I don’t trade them. I initially thought of crypto this way, especially since I can’t trade it in my stock account, so I’d mainly been using coinbase. As a result, I never included them in my portfolio return calculations.

I really wasn’t interested in the sector until Rauol Pal got me interested with his narrative about institutional investors coming in and some really bullish looking charts in the summer of 2020. Before that, I had thought of the whole sector as a somewhat legalized scam where pump-and-dump operators ripped of retail traders. I had originally planned on easing into 2 full bitcoins on coinbase when it was trending between $9-$10k. I bought in incrementally and fully expected a buyable dip in the fall. I was close to 1 BTC before it broke out in October 2020, so I just chased into it to complete the 1. I never got the dip, so I eased into ETH getting 10 coins at around $450 each. I ended up dumping ETH entirely once it broke $1000. With BTC, I dumped 1/3 at the end of the year at $27,500 then decided to try trading it by selling into rallies and buying into dips to keep a roughly steady portfolio value of $20k. Once it hit $37,500 though I sold all the rest of it. Over the next few months I dabbled in some small coins, selling them for gains around 20% or so just prior to the big rally in March. Then I abandoned crypto entirely for a number of months.

A friend of mine kept bugging me to get into XRP. He’s really excited about it for a number of reasons, but the main one I found intriguing was that it was difficult to buy due to a court case which would determine how Crypto was regulated but not kill off the token. He found out how to buy it first, then showed me it held in a crypto wallet. I finally got my own crypto wallet and found out that I could buy Bitcoin in Coinbase, then transfer it to my wallet, then exchange it for XRP. I originally tried this with USDT, but settled on BTC because tether used the etherium network and the fees on moving anything linked to etherium are a total ripoff. Anyway, I made my first buy around $0.75 and added a bit at a few points, so I’m only down about 50% on the trade. Not a bad drawdown at all considering what I’m getting used to with the rest of my portfolio. I still don’t trust crypto much, but the sector has been a big winner for me, and it will remain a waxing and waning market force unless it is ever made illegal, which doesn’t seem likely.

Battery Metals:

I subscribe to a mining newsletter called Silver Chartist Report, and I slowly added into a few of these. I really started to get bullish on them more recently, getting it over a 10% allocation after they were gutted in May. It just seems to me like we’ve got a serious shortage of metals like Nickel and Copper, and I want a bit of exposure to this sector over the coming years. I’m actually amazed how well copper’s been holding up with the lockdowns in China and the year-long slowdown in their property sector, and every ESG politician wants to waste tremendous amounts of these critical metals in dubious projects. I’ll probably add significantly more in coming years, but it’s too early as short-term pain is most likely ahead here.

Other trades:

I tried a few things here and there, often moving on. This includes trading high yield dividend stocks and selling covered calls on them in early to mid 2020, playing around with meme stonks a bit when the options interest was high, buying OSTK when I could sell a 1-month covered call for a hefty return, and so on. I loaded up on 10 out-of-the-money XOM calls when it was at $65 and got a decent win, but had other calls that went to zero (looks like ATCO will do just that). I got a DOCN call after a RealVision interview making it sound like an amazing growth story, then sold it at a significant gain a month later, then bought 100 shares this year after it was cut to the low 50’s, figuring I could sell covered calls on it. Its good to try things a bit.

I managed to avoid trading for the most part this last week. Here’s where my portfolio eneded up:

  • HEDGES (13.3%)
    • 13.3% TLT Calls
  • PRECIOUS METALS (36.8%)
    • 4.5% AG
    • 4.4% MTA
    • 4.3% SILV
    • 3.2% LGDTF
    • 2.9% EQX
    • 2.8% SLVRF
    • 2.6% SAND
    • 2.2% SSVFF
    • 2.3% MGMLF
    • 1.9% RSNVF
    • 1.6% MMNGF
    • 1.5% DSVSF
    • 1.3% HAMRF
    • 1.3% BKRRF
  • URANIUM (24.2%)
    • 4.7% CCJ
    • 3.2% DNN shares & calls
    • 3.5% UEC
    • 3.2% UUUU
    • 3.1% BQSSF
    • 2.9% UROY
    • 2.0% ENCUF
    • 1.7% LTBR
  • US CANNABIS (14.3%)
    • 1.8% AYRWF
    • 1.4% CCHWF
    • 1.4% CRLBF
    • 2.2% CURLF
    • 1.5% GTBIF
    • 2.3% TCNNF
    • 1.3% TRSSF
    • 2.4% VRNOF
  • BATTERY METALS (12.0%)
    • 5.8% NOVRF
    • 4.5% SBSW
    • 1.8% PGEZF
  • CRYPTO (2.5%)
    • 2.5% XRP
  • OTHER (3.5%)
    • 2.7% DOCN (w/ covered calls)
    • 0.6% OGZPY
    • 0.2% TWTR call
    • 0.0% ATCO calls
  • CASH (-6.6%)

I really hope that the mining stock rally we finally saw on Friday will carry on a bit. It won’t take much of a jump for me to start selling covered calls into because I’d like to get my cash balance back to positive in this high-risk part of the market cycle. My margin should be at zero when we hit the real liquidity crunch, I’m thinking this fall. I plan to be fully invested at the time though, as those minings stocks are absolute bargains in my opinion, and I wouldn’t mind adding into my Jan 2024 TLT calls again after the fed rate hike next month.

That’s all for today, good luck and happy trading!

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The Fed takes a big hike

Well, the Federal Reserve certainly acted quickly to that CPI report. The headline number rose by 8.6% year-on-year, when they expected it to top out at 8.3% in April. They swiftly put out an article in the Wall St Journal suggesting a 75bps rate hike, as they like the market to price in rates before they set policy, and then they announced the 75bps hike on Wednesday. There was a bit of a rally on Wednesday as the uncertainty left on the announcement, but it quickly reversed in the days to follow.

The CPI number was released after trading on Friday, June 10th, and the market reacted significantly the following week:

Here’s basic commodities for that same timeframe. I had to expand the chart a bit here to get the same date range, because commodities exchanges are always open.

Wow, gold is barely down at all and siver is only down 2.2%. Surely my mining stocks…

That toilet flush sound is the liquidity draining from the system. Gold and Silver are big worldwide markets with currency characteristics, so they moved down a lot less – though everything lost against king dollar this week. Mining stocks on the other hand are small, illiquid, and volatile. A big fund or central bank can sell gold in an emergency, but mining stocks don’t share that property at all.

I actually bought a decent amount of stuff this week, as the prices of all my holdings are so much cheaper right now. Here’s where my allocations ended up:

  • HEDGES (14.0%)
    • 14.0% TLT Calls
  • PRECIOUS METALS (37.3%)
    • 4.4% AG
    • 4.3% MTA
    • 4.1% SILV
    • 3.6% LGDTF
    • 3.0% EQX
    • 2.8% SLVRF
    • 2.7% SAND
    • 2.2% SSVFF
    • 2.1% MGMLF
    • 2.0% RSNVF
    • 1.7% MMNGF
    • 1.7% DSVSF
    • 1.5% HAMRF
    • 1.3% BKRRF
  • URANIUM (22.5%)
    • 4.3% CCJ
    • 3.0% DNN shares & calls
    • 3.3% UEC
    • 3.0% UUUU
    • 2.9% BQSSF
    • 2.8% UROY
    • 1.8% ENCUF
    • 1.6% LTBR
  • US CANNABIS (14.6%)
    • 1.8% AYRWF
    • 1.5% CCHWF
    • 1.5% CRLBF
    • 2.2% CURLF
    • 1.6% GTBIF
    • 2.3% TCNNF
    • 1.3% TRSSF
    • 2.5% VRNOF
  • BATTERY METALS (12.2%)
    • 5.9% NOVRF
    • 4.6% SBSW
    • 1.7% PGEZF
  • CRYPTO (2.3%)
    • 2.3% XRP
  • OTHER (3.7%)
    • 2.9% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.2% TWTR call
    • 0.0% ATCO calls
  • CASH (-6.6%)

My portfolio value dropped 10.2% from last week to this week. All of my uranium miner covered calls expired out-of-the-money after being in the money or close to it at the end of last week. The good news there is I get to keep all my shares, the bad news is they are down considerably.

As for buying this week, you can see that my cash balance is now at -6.6% vs -2.2% just a week ago. It is dangerous to build up too much margin debt in a raging bear market like we have, but the prices are so compelling at the same time. Also, the negative percent is a little bit misleading in that it factors in my holdings in my regular account, IRA, Roth, crypto wallet, and bank balance whereas the margin lies 100% in my regular stock trading account so I am actually just over a third of the way to my limit. Needless to say, I’ll be looking for a bounce to sell into here, at least with a bunch of covered calls.

As for what I’ve been buying … I looked at all my mining stocks with the lowest percent holdings and added to those. Those were things like BKRRF, MMNGF & PGEZF. I also added to NOVRF and SBSW in battery metals, UEC and UUUU for uranium miners, and MTA which I consider a top-tier gold & silver royalty company. I left the pot stocks alone. I’m not planning to add to those any more in the near term, just holding what I have. They’re kind of an afterthought at this point.

Buying cheap is always exciting, so you really have to keep discipline and not overdo it or you’ll get hit by a margin call on a nasty drop. I did add a decent chunk of Jan 2024 TLT calls this week too, as I expect the fed to break something sooner than ever now causing a liquidity event, a scramble for USD collateral, and a nasty recession made worse by persistent shortages in energy and food. The stupid thing is that the environment I’m calling for is not one you want to hold margin debt in. If those TLT calls soar, it will likely be after the liquidity event which could easily shave my portfolio down enough to make that margin debt matter.

Anyway, we’re deeply oversold so I’ll be looking for a bounce, and I’ll be aggressive on selling out-of-the-money covered calls at the very least at the first sign of momentum petering out.

As far as the markets go, we definitely live in exciting times. Good luck, and be careful out there!

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What’s wrong with these inflation charts?

This is a serious question actually. I just typed in a google search for “St Louis Fed CPI”, brought up the consumer price which looked like a hockey-stick inflecting around 1973, then changed it to % change year over year. Here’s the result:

It figured it must be screwy because it dwarfs every YOY change from the past. Here it is with the fed’s favored PCE index:

As you can see, it still dwarfs any prior measures. Here’s a chart which excludes food and energy:

Now we’re beginning to see the charts we’re used to. No meaningful inflation since the 1970’s if you exclude food and energy I suppose.

Here’s the latest consumer sentiment chart, which was also kind of a surprise considering all of the lowest reading ever articles I saw on it:

The chart low is 51.7 in May 1980. The latest here is Apr 2022 at 65.2, which is indeed low, but on par with 1990 and 2008-2009 readings. Apparently ycharts.com includes two more data points though – 58.4 in May and 50.2 in June which would beat 1980 for an all-time low. I’m not sure how they get a monthly reading for June when we’re barely over a week into the month so far though.

Well, what can I say. I just pulled up CPI and consumer sentiment charts because they’re the big numbers this week, and I’m actually quite surprised by what I saw here. I’m going to rewrite my overall narrative and see what I think about it.

My overall narrative is as follows:

  1. People are struggling with the rising costs of food and energy while wages go nowhere
  2. QE is not money-printing, but psychological operations to encourage a bullish investor bias
  3. The money that went out to ordinary people in the 2020 and 2021 stimulus packages was a pittance compared to the total spent.
  4. The demand shock had a big effect in late 2020 and 2021 was mainly driven by a big shift from services spending to goods spending, that the demand shock has already worked through as evidenced by the rapidly rising inventories in consumer goods which started in October 2021.
  5. The supply shock is very real, as the world economy is coming close to the levels of early 2020 yet the US produces a lot less oil, the US and EU have shuttered nuclear plants with no replacements since then, we are desperately short a number of critical metals as well, and we are coming into a major man-made food shortage which our leaders are ignoring or making worse.
  6. The supply shortages are so bad that we will be stuck at depressionary levels of economic activity unless we start to invest in natural resources as well as food and energy production, and we still aren’t doing that.

I am clearly biased to the side that the inflation we’re seeing is driven much more to the side of supply shortages than to the side of monetary excess, and I believe that is why Gold and Silver aren’t just rocketing higher. At the same time, I believe the sentiment has been lousy and the gold and silver mining stocks provide compelling values. I also like to acknowledge the idea that perhaps the inflation is partly monetary, even though that money mainly went to the top and not the average consumer, and clearly any monetary inflation would end up being good for precious metals.

Here’s the commitment of traders chart for gold, where I put circles showing where the Large Spec long interest has bottomed, where the corresponding low in commercial shorts have bottomed, and where they fit in the price chart of gold below. The latest readings are on par with the levels at those previous lows, but I put a ? instead of a circle because I don’t know if they’ve bottomed yet.

Here’s the same exercise for silver. It doesn’t seem as effective, except to say that when large speculators turn bullish price goes up. Still, they’re not very bullish now so they have plenty of room to rise.

My ending portfolio:

  • HEDGES (10.7%)
    • 10.2% TLT Calls
    • 0.5% XOM Puts
  • PRECIOUS METALS (36.4%)
    • 4.5% AG
    • 4.4% SILV
    • 3.6% MTA
    • 2.7% SLVRF
    • 3.1% EQX
    • 3.2% LGDTF
    • 2.6% SAND
    • 2.0% RSNVF
    • 2.2% SSVFF
    • 2.5% MGMLF
    • 1.8% HAMRF
    • 1.4% DSVSF
    • 1.4% MMNGF
    • 1.0% BKRRF
  • URANIUM (23.5%)
    • 4.7% CCJ
    • 3.4% DNN shares & calls
    • 3.2% BQSSF
    • 3.0% UROY
    • 2.8% UUUU
    • 2.9% UEC
    • 1.9% ENCUF
    • 1.6% LTBR
  • US CANNABIS (15.4%)
    • 1.9% AYRWF
    • 1.6% CCHWF
    • 1.5% CRLBF
    • 2.3% CURLF
    • 1.7% GTBIF
    • 2.2% TCNNF
    • 1.6% TRSSF
    • 2.5% VRNOF
  • BATTERY METALS (10.6%)
    • 5.3% NOVRF
    • 3.7% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.0%)
    • 2.0% XRP
  • OTHER (3.5%)
    • 2.6% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.2% TWTR call
    • 0.1% ATCO calls
  • CASH (-2.2%)

My cash is down as I couldn’t resist making a couple of plays. I bought a bit more UEC of Friday’s dip because there’s still a decent chance all of my $4 covered calls on it expire in the money at the end of next week. I also entered some 1-month puts in XOM on Tuesday, as I looked at this chart and figured it’s due for a pullback to the 50 DMA, and the week of June options expirations and the fed hike meeting seemed as good a catalyst as any.

I still think it’s a pretty decent bet that the chart above pulls back to at least the 20-day moving average at 96 if not the 50 day. Its clearly a bullish chart, but also clearly over-extended as everyone frets over the Federal Reserve withdrawing liquidity from the system and crashing the economy.

The Twitter call was a reaction to an article suggesting that Elon Musk will likely have to complete his transaction to purchase Twitter at a cash value of $54.20 per share, as he signed an iron-clad deal to just that, which acknowledged all of the concerns with bots and such. The jurisdiction would be in business-friendly Deleware which is known for quick judgements on such contracts. TWTR trades at $39/share so I have until August to at least see a jump that will allow me a profitable exit.

Anyway, good luck with your trading. Next week should be interesting, and it will be especially interesting for me as I see where my covered calls land. Last week I was hoping my DOCN would be called, but now it looks like it will expire out of the money. Next week I’ll know for sure on that and on all those out-of-the-money calls I sold on Uranium mining shares a couple weeks back.

Afterward:

I just posted my blog and started messing around with the St Louis Fed charts again, and I found the problem. When I clicked on the index, and clicked “Edit Graph,” I was choosing “Change from a Year Ago, Index 1982-1984=100” with the results you saw above.

Apparently that is the wrong choice. If you choose “Percent Change from a Year Ago,” then you get the correct CPI chart like this:

Now that looks correct. I’m not re-writing by blog though.

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Well, I got covid

My first symptom of anything was a slight sore throat Wednesday evening. I woke up the next morning more tired than usual, but its a commute day so I grabbed some coffee and drove in. I ended up staying for a bit over a half-day. Theres a lot going on and 2 people have been out with covid for over a week now. I’m not sure why they aren’t remote working. Anyway, I was exhausted and Mike from the office said I should just head back before traffic got worse, so I did. Drive is 105 miles and took 3 hours, so I was exhausted when I got home. My temperature measured 101.1 F and an at-home covid test came up positive. I just took a tylenol, went upstairs, and went to bed. The next day I had the positive test confirmed at a local urgent care center. The fever was gone, replaced by a cough and an endlessly running nose. I managed to get a full workday logged in. Mike was working remotely too, he showed me his temp was 102.2 F and he also had a positive Covid test. Next week it should get a bit easier as they’re going to make sure the other two who were out last week start working again. Crazy how many bids and active projects are still out there. Also, next week I’ll stay working remote which is nice.

In case you’re wondering what led to the long commute, its just that housing is way too expensive in Van Nuys. For a few years I rented a little office/bedroom behind someone’s house (I’d enter through the side gate). It was used for plumbing during the day, I’d sleep there at night on weekdays, and I’d leave every weekend to visit parents or friends. Rents kept climbing all around and in 2019 I had to move out so that the homeowner’s son could move in. I worked out a deal with work to stay in cheap motels during the week – Super 8’s and such – and stay with my parents during the weekend (90 miles away at that time). Then the pandemic hit, making remote work a thing. When everyone started going back to the office, they tried putting me back in cheap motels a few days a week, but they were 50% more expensive and equally more depressing, so I went with a flex schedule. Since then I’ve been driving in Tues & Thurs and working remote the other days.

My mother and I moved this year. After watching a lot of Reventure Consulting videos and seeing mortgage rates spiking, she thought it would be a good time to sell her house. We rented a new house in March, moved, had the old house professionally staged, listed it in April, sold it in 1 week over asking, and closed escrow in May. Now the commute is 105 miles instead of 90, but its a nicer house in a really nice area near family. She has a professional money manager, but my advice to her was to park the bulk of the gains in a money market fund until the Federal Reserve stopped hiking rates, then let him loose on it.

Enough about me, time to talk markets.

Right now there are a number of narratives on whats going on and how this plays out.

Some believe that the economy is strong, as shown by the recent trajectory of job gains and the strong JOLTS numbers. This camp views inflation much more balanced on the demand side than the supply side, and generally comes up with a “neutral rate” prediction which we need to exceed which can be anywhere from the Federal Reserve’s 2% number to the 8% number that they would’ve hit using the Taylor Rule and plugging in the latest CPI.

I’m don’t even know how to defend this view because it just feels so wrong, so I’ll go over my base case narrative.

The nonfarm payrolls above may be strong on a year-over-year basis, but they have not yet recovered to the levels of 3 years ago, let alone the prior trendline.

As for the JOLTS data, you have to consider the massive migrations that followed the covid lockdowns and business shutdowns in 2020, especially as rents remained high and in many cases went higher while the temporary unemployment boosts allowed people to move out of the big cities. Low wage jobs in high rent areas used to be held by people crammed into tiny apartments, and roommates scattered. They won’t necessarily make the effort to move back into such conditions for minimum wage even if they could. Other professional jobs like mechanics and such can take time to fill as significant training and experience is necessary.

Real median wages are back at levels last seen in Q4 2019. This doesn’t look like a wage-price spiral in the works.

In addition, we all heard about the massive inventory spikes in Walmart, Target, and Amazon which hit their share prices hard. These are consumer goods which ordinary people buy, and these ordinary people are strapped for cash at the moment. Most of the big “wealth effects” of the housing and stock bubbles affected people at the top of the income scale, as they own almost all of the assets. Ordinary workers are back to relying on credit cards to make ends meet with all the price hikes.

Also, I’m not the only one who drives a lot for work. Most middle class workers are in that boat. You can double the price of gasoline, and they will just have to suck that spending from somewhere else. They can’t afford to quit their jobs or to move to the expensive cities that they work in.

So anyway, the real economy is weak. However, CPI inflation and labor force data are notoriously lagging indicators. It takes a long time for housing data to wash into the CPI, and companies are reluctant to sell anything at a loss as input costs and freight remain high. They stop ordering before they reduce prices to a loss, and they stop hiring before they start laying people off. That being the case, the Federal Reserve can continue hiking rates at 50bp every month or two without anything noticeable showing up for quite some time yet. This has a lot of people predicting rates can go up well over 2% by year end. Note that the front end rates are at 0.80% right now, set by the RRP (reverse repo rate) more than anything.

How much the fed hikes has a lot to do with every investment. The smart play here really is to sit on money market funds until the rate hikes stop. I am doing that with my 401k, but with my trading accounts I simply don’t want to stop playing when massive money is changing hands. Call it a learning experience.

Back to fed hikes.

I predict that the federal reserve won’t be able to hike many more times. Maybe twice this summer, and that’s it. Why? They are going to create a massive Lehman Brothers or LTCM type blowup. The worldwide bond market is somewhere around $120 trillion. many of these bonds are levered up in hedge funds through repo transactions. Bear sterns used repo to borrow against mortage-backed securities and was effectively destroyed when they became illiquid and their counterparty (JP Morgan) asked for more collateral which they didn’t have. Many funds today use similar forms of leverage, and package things into ETFs like LQD or JNK. Now take a look at this chart:

Since the fed began with the hawkish speeches in December, the value of long dated treasuries (TLT) has collapsed nearly 25% while investment grade corporate bonds (LQD) fell over 15% and high yield corporate bonds (JNK) dropped 8.5%.

These bond funds in general have all had liquidations from investors, and the muted move in JNK suggests that they have been selling their most pristine, liquid holdings to cover these with minimal market losses. If funds like these are forced to sell, individual corporate bonds are fairly illiquid, especially in a market dump, and that mark-to-market value is used by lenders in the repo market.

Every rate hike has the potential to drop the value of these bonds just enough to bring in collateral calls that can’t be met followed by forced sales. These forced sales can make the prices of these bonds drop rater fast, pushing more levered funds into the mix until you have an avalanche of forced sales going through. This will cause an event like the 2008 Lehman Brothers collapse (which we will be told no one could have seen coming), and that is what will force the Fed to pivot.

Note, however, that the federal reserve is not permitted to intervene in the junk bond market like they did in March 2020 without an act of congress. They will probably move front end rates near zero and maybe do QE, because those are the only “tools” that they have. In such a scenario, this will definitely not be good for most risk assets. TLT would soar as the holdings can be accepted by the federal reserve so there is always a market for it, but corporate bonds and junk bonds would have to wait for congress and we would see a nasty recession.

Anyway, that’s my theory. Here are my latest holdings:

  • HEDGES (11.0%)
    • 11.0% TLT Calls
  • PRECIOUS METALS (35.5%)
    • 4.4% AG
    • 4.3% SILV
    • 3.6% MTA
    • 2.8% SLVRF
    • 3.1% EQX
    • 3.0% LGDTF
    • 2.6% SAND
    • 1.8% RSNVF
    • 2.1% SSVFF
    • 2.4% MGMLF
    • 1.8% HAMRF
    • 1.4% DSVSF
    • 1.2% MMNGF
    • 1.1% BKRRF
  • URANIUM (22.6%)
    • 4.6% CCJ
    • 3.4% DNN shares & calls
    • 3.1% BQSSF
    • 3.0% UROY
    • 2.8% UUUU
    • 2.3% UEC
    • 1.8% ENCUF
    • 1.6% LTBR
  • US CANNABIS (15.6%)
    • 1.8% AYRWF
    • 1.7% CCHWF
    • 1.6% CRLBF
    • 2.3% CURLF
    • 1.7% GTBIF
    • 2.3% TCNNF
    • 1.6% TRSSF
    • 2.5% VRNOF
  • BATTERY METALS (11.0%)
    • 5.5% NOVRF
    • 3.9% SBSW
    • 1.5% PGEZF
  • CRYPTO (2.1%)
    • 2.1% XRP
  • OTHER (3.3%)
    • 2.7% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.1% ATCO calls
  • CASH (-1.0%)

I didn’t do much trading this week, and my plan is not to do much in following weeks either. I’m mainly watching my Uranium miners, as I might sell some covered calls on more of them if they get a decent spike higher. The ones I sold expiring in 2 weeks aren’t in the money, but if they get called I’ll get a decent gain and then by back on the next down leg. I’d actually prefer if they’re called in the money as it would build up some cash. What can I say, it’s a fundamentally bullish sector while we head into a potential liquidity crisis.

As for everything else, I’m waiting for the most part. The miners in general are a tiny, undervalued sector with amazing fundamentals and I believe they will do well over the next few years. I’m down 50% on some of the names, but I can wait it out. If anyone ever builds anything ever again then we will need them all. With cannabis its similar except that its really an afterthought in my portfolio at this point. I’m not buying any more dips, so the disparity on weightings is increasing, but I’m not going to sell either. Either these get full federal legalization in coming years and re-rate, or I won’t pay much attention to them.

That’s all for now. Happy trading!

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Bear market rally?

Rauol Pal of Realvision suggested that this rally is being led by re-balancing of stock/bond funds, which would explain why you see inflows into stocks while Cryptocurrencies, which are not part of mutual fund flows, continue to struggle.

I anticipate fierce rotations under the surface, so here’s an RRG chart from stockcharts.com:

It looks like anything consumer-related got killed this week, which makes sense given the large inventory builds at Wal-mart and Target, and the earnings disappointment and layoffs at Amazon. Money is piling into energy, utilities, health care, and materials for that combination of inflation hedge and defensive sectors with dividend yields.

I actually sold covered calls on a lot of my Uranium miners a day early. I saw this awful bearish wedge pointed out on Uranium Insider, and decided to pull some money out by selling out-of-the-money covered calls for the big June 17 expiry:

The rally friday was actually strong enough to get a lot of my covered calls close to the money. With CCJ for example, I sold a $25.50 strike. I will very likely follow through with even more covered call selling next week, so if this rally continues through June 17 then I could end up significantly reducing my position again, just like I did on April 15th.

Note that I am actually very bullish Uranium miners in the next few years, but we are in an incredibly steep rate-hiking cycle as the economy is clearly turning down. This chart right here should scare anyone invested in risk assets:

Note that the data here is monthly, and it only goes through April 30th, but it already shows a -$162 billion (-17% so far) decline in margin debt with another -$173 billion (-29% further) to go to bring us to the pre-Covid trend or -$293 billion (-61% further) to bring us to the March 2020 bottom. Keep in mind that reduced margin debt is pulled directly from the stock market, and that it is the visible tip of the iceberg when it comes to financial leverage. We are clearly in a de-leveraging cycle right now, which is driven largely by the rate hiking cycle.

As risk-free interest rates are pushed higher, a few things happen:

  1. Margin debt gets more expensive. This also affects all other forms of financial leverage from new mortgage loans to collateralized loans in the vast and opaque repo market.
  2. Bonds lose value as interest rates go up, so any leveraged bond funds (perhaps using the repo market) will be able to borrow less from their bond portfolios. If the bond values fall enough, they could get a margin call in which case they have to sell off some of their bonds to pay down the margin (or repo) loan. Meanwhile, their income goes down as the spread between the interest of their held bonds and the interest on their repo loans shrinks.
  3. Stocks also lose value in this type of environment, which could lead to margin calls if the investors (or funds) don’t sell enough to keep their margin levels manageable.
  4. Non-leveraged investors start to get better options if they decide to reallocate money more defensively. Stock market declines encourage them to consider these options.

The way I see it, the Federal Reserve is intent on raising interest rates until we start to see some real forced selling here. They see the combination of sky-high asset values with CPI in the high single digits for over a year as a real shot to their credibility. Consider that the pre-pandemic peak in the S&P 500 was 3,380, which is 23% lower than Friday’s closing price. In addition, look at median housing prices:

Median housing prices are up 25% from the pre-pandemic norm. The federal reserve likely realizes there are significant risks to popping this bubble, and that it will take time to see this come down, but they are certainly of a mindset to want to reduce these back to levels they consider “normal.”

Right now, I’m still of the mindset that I don’t want to sit on the sidelines while massive amounts of money change hands. I’ve still got decades before retirement, and I still need to get significant returns if I want to have a chance at getting anywhere. My tiny 401k will simply sit in a money-market fund until the Fed goes back to easing, and then it will go back to 100% stocks, and I wouldn’t be surprised if that simple strategy beats my individual market performance – which is pretty dismal to date. So anyway, what now?

I still believe that we’re in the early stages of an upturn in commodity prices. There has been underinvestment for a decade, and we simply need a lot more investment going into energy and mining in the future. Still, a deep recession will hurt things badly between now and then. Mining and energy were extremely choppy from 2000-2003, so you really had to take profits on those rips higher. They also had an incredible run from 2003-2008, but even there it was incredibly choppy with opportunities to sell overbought rips and buy oversold dips throughout. Needless to say, I need to keep this in mind and be ruthless about selling this next rally so that I can be there to buy the following dip.

This includes the uranium miners. The funamental story behind them gets more and more bullish by the day, so I don’t want to let my exposure go to zero, but in a de-leveraging environment you need to sell those rips so that you have money available when others are forced to sell.

I also believe that the ramifications to the financial system will be tremendous as the federal reserve continues there hiking cycle, and that they will be forced to stop for fear of creating a systemically destabilizing event such as the Lehman Brothers bankruptcy in 2008. With the amount of leverage out there, they will probably hit the limit this summer and be forced to immediately pivot back down to zero interest rates and easing. The best strategy is actually to wait on the sidelines until this moment hits, but I will more likely increase my hedges, primarily in Jan 2024 TLT calls, after the next 50bps rate hikes go through around June 15th.

So here’s my plan going forward…

  1. Sell more June 17 covered calls on Uranium miners if they continue to rally. Same with my other miners if they catch a serious bid. Some of these are things I can’t sell covered calls on or the calls too cheap to make it worth my while, so I’ll just sell them if they rally a lot by June 15th.
  2. Sit and wait in mining stocks that are still way down. I know it sounds stupid, selling winners and sitting on losers, but I am long-term bullish on the sector so I’m not selling a stock like LDGTF which is below the March 2020 lows, or MTA which is hovering at 2-year lows, or AG which is between the two. I’ll be careful about allocating more here at the moment, but sentiment in precious metals miners is in the tubes while the metals themselves aren’t doing too bad. Same goes with my battery metals miners.
  3. Sit and wait in my US cannabis names. I’m not going to add on new lows, I put in enough, but I am still overall bullish on the sector and my allocation is low enough where I can just wait it out.
  4. Buy more TLT calls and possibly SPY puts if they’re cheap enough, but not until after the federal reserve meeting.
  5. I should not buy anything for the next 3 weeks.

Here’s my latest portfolio allocation:

  • HEDGES (13.9%)
    • 13.9% TLT Calls
  • PRECIOUS METALS (34.5%)
    • 4.3% SILV
    • 4.1% AG
    • 3.5% MTA
    • 3.1% SLVRF
    • 2.9% EQX
    • 2.9% LGDTF
    • 2.5% SAND
    • 2.1% RSNVF
    • 2.0% SSVFF
    • 2.0% MGMLF
    • 1.8% HAMRF
    • 1.4% DSVSF
    • 1.1% MMNGF
    • 0.9% BKRRF
  • URANIUM (22.2%)
    • 4.5% CCJ
    • 3.4% DNN shares & calls
    • 3.0% BQSSF
    • 2.9% UROY
    • 2.8% UUUU
    • 2.2% UEC
    • 1.8% ENCUF
    • 1.7% LTBR
  • US CANNABIS (15.3%)
    • 1.9% AYRWF
    • 1.8% CCHWF
    • 1.6% CRLBF
    • 2.2% CURLF
    • 1.7% GTBIF
    • 2.2% TCNNF
    • 1.6% TRSSF
    • 2.3% VRNOF
  • BATTERY METALS (10.7%)
    • 5.1% NOVRF
    • 4.0% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.1%)
    • 2.1% XRP
  • OTHER (3.2%)
    • 2.6% DOCN (cloud computing)
    • 0.5% OGZPY
    • 0.1% ATCO calls
  • CASH (-1.8%)

I actually did add to a number of things this last week, in small amounts at least. This includes a number of Uranium miners like LTBR, UUUU & UROY as well as some precious metals miners like MTA and LGDTF. They were pretty beaten down early in the week so it was hard for me to resist.

It looks like I’ll lose my DOCN allocation soon though, as I sold a June 17 $45 call on it when it was still sitting at $38. It absolutely soared since then so its in-the-money now. Closing this off at a 10% overall loss at this stage in the cycle isn’t bad for a beaten-down tech name.

Anyway, I hope I gave you some food for thought here. Good luck on your trading strategies going forward, and be careful out there!

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Tech Bear, Commodity Bull

This week I figured I’d explain my thesis of what’s going on with markets, and why I expect we’re at the early stages of a bull market in commodities despite the bust in speculative tech, downturn in stock indices, rate hiking cycle, and pending recession.

The first idea I wanted to show was that of the decade themes I’d come across about years ago – own gold in the 70’s, Japan in the 80’s, Tech in the 90’s, Commodities in the 00’s, Tech in the 10’s, so now what. It makes sense to me that commodities are cyclical, going through cycles of over-production and price collapse, chronic underinvestment & consolidation, underproduction while the world works through stockpiles from the past, rapid increases in the commodity spot price, then massive investment in the sector until we hit overproduction again.

In order to show this, I first looked to the ETF’s, but they are all created recently. Yahoo Finance doesn’t let you make log charts so multi-decade charts don’t work, and they let you download historical data for stocks but not for futures. So here’s the proxies I came up with using Microsoft for tech, Alcoa for base metal miners, and Barrick Gold for gold miners, importing into excel, and then messing with the log charts to make them look somewhat reasonable (log 2 worked the best; log 10 just had too much space between the axis):

All I can say here is, real world price trends won’t always match your theory. Maybe better proxies would fix it because of idiosyncrasies of the individual companies over the decades, who knows.

I can tell you that the reason I focused on mining stocks rather than oil is because the fracking cycle shortened the curve. With fracking in the US, we could get oil wells drilled and supplying in a year or two and they would run dry a year or two after that, whereas previous oil supplies such as ocean rigs would take nearly a decade of investment and then produce for a long time. Mining still can’t be rushed, it takes years to get a project going and then it will produce for a long time.

Uranium has the most classic bullish supply cycle going on, and I am strongly considering increasing my allocation to that sector. After working through massive stockpiles following the shutdowns driven by the Fukushima disaster, we are in a massive worldwide cycle of nuclear plant construction while mining capacity is glaringly inadequate. Follow Justin Huhn and his Uranium Insider for more information there.

Gold miners are simply grossly undervalued in regards to price. I posted a chart on that 2 posts ago (May 7th), so I won’t re-post it now, but I can’t easily explain why that is. Its tempting to question the fundamentals, perhaps its much more costly to mine and the new grades arent as good, but I don’t think thats it. Besides, fundamentals often have much less to do with stock price movements than most people think.

We’ve seen an incredible decade where money has flooded into the SPY and QQQ indexes more than ever, with the result that value stocks got cheaper while big growth stocks skyrocketed. Other trends from ESG to outright political hostility towards anything involving energy or mining have played a big role as well, leading us to a world of chronic under-supply of many critical materials.

The way I see it, demand for many commodities such as oil and copper have never recovered from the covid crash, while supply has been hit so bad that prices are near all-time highs in many key markets. Here are some examples:

We fly a lot less planes today (with higher priced tickets):

We certainly haven’t increased industrial/mining production in the past 20 years according to this chart:

China’s copper demand hasn’t been decreasing despite lockdowns and property busts and everything:

US production of oil is still down at 2018 levels, and is set to fall sharply do to lack of investment. DUC = drilled but uncompleted wells. With fracking, wells are pre-drilled and then tapped later to produce their oil. We are blocking new drilling for fracking, so the uncompleted wells are falling sharply as they are tapped for use, and oil production will plummet when they run out.

Sorry about the crazy chartstorm above, but I am a retail investor with a full time job and no subscriptions to proprietary data, so I am limited to the random array of charts I can get from yahoo finance, the st louis fed, and whatever google searches can bring up.

Anyway, I’ll summarize my perspective here:

  1. I agree with deflationists like Jeff Snider & Dave Rosenberg that we are actually seeing signs of acute dollar shortage in the system and we’re likely in a nasty recession already (GDP was surprisingly negative in Q1, at -1.4%).
  2. This downturn will have an enormous effect on the general stock indices if margin debt reduces to anything near its pre-pandemic levels. It has already been decreasing since October.
  3. Despite the recessionary trends we see including the active lockdowns in China, many commodities like copper, gold, and oil are at or near their highs.
    1. I believe that this means we will be stuck in recessionary conditions until we actually improve supply conditions for raw materials. Instead, we see production declining in many key sectors – particularly oil and farming. Mining will be complex going forward as populism in emerging markets explodes, and I might not be riding the best horse here, but I see an under-invested and under-priced sector and I’m taking a risk there.
    2. I realize that 2008 saw similar conditions in terms of peak commodity prices preceeding a downturn. I just believe that what we see much more resembles the 2000 tech bust that led to a commodity bull market. In the 2008 commodity peak, miners and drillers were flush with cash after an era of massive expansion.
  4. Right now it feels like investment money is much more crowded in the tech sector than in the commodity sector, and I expect investment funds to slowly rotate toward commodities over the next several years. This will be volatile, especially in sectors like Uranium which are relatively tiny in market cap and volume, but the small size leaves a lot more room to grow.

Here’s where my latest allocations landed:

  • HEDGES (14.9%)
    • 14.9% TLT Calls
  • PRECIOUS METALS (32.9%)
    • 4.2% AG
    • 3.9% SILV
    • 3.4% MTA
    • 3.2% SLVRF
    • 3.0% EQX
    • 2.4% LGDTF
    • 2.0% SSVFF
    • 2.0% SAND
    • 2.0% RSNVF
    • 1.5% HAMRF
    • 2.0% MGMLF
    • 1.1% MMNGF
    • 1.4% DSVSF
    • 0.9% BKRRF
  • URANIUM (20.5%)
    • 4.4% CCJ
    • 3.1% DNN shares & calls
    • 2.7% BQSSF
    • 2.5% UROY
    • 2.1% UEC
    • 2.7% UUUU
    • 1.6% ENCUF
    • 1.4% LTBR
  • US CANNABIS (16.1%)
    • 1.9% AYRWF
    • 2.0% CCHWF
    • 1.8% CRLBF
    • 2.4% CURLF
    • 2.1% GTBIF
    • 2.4% TCNNF
    • 1.7% TRSSF
    • 1.9% VRNOF
  • BATTERY METALS (10.3%)
    • 5.1% NOVRF
    • 3.8% SBSW
    • 1.4% PGEZF
  • CRYPTO (2.3%)
    • 2.3% XRP
  • OTHER (3.0%)
    • 2.5% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.1% ATCO calls
  • CASH (-0.1%)

I didn’t trade much this week. I sold an out-of-the-money covered call in DOCN as I don’t expect it to be higher after next month’s fed hikes, and I bought a bit more UUUU because it is one of my favorite Uranium plays and I currently feel under-allocated there.

Right now is really all about patience. Everyone knows that the Fed will continue to hike aggressively until something breaks, so sentiment is very negative. I don’t want to cram into puts because we could have an aggressive bear market rally at any moment, and I don’t want to cram into TLT calls because I could be wrong about how long it takes the Fed to pivot and how high TLT ultimately goes.

I am fully invested, and I feel that everything I’m in is both cheap and ripe for a major move higher in coming years. I don’t want to use much leverage – either in margin or in call options – because we could easily go much lower; we haven’t even seen forced selling hit the markets yet. So basically I’m waiting. If there is a massive selloff, I’ll nibble at some really cheap mining shares as long as my margin doesn’t get too high, and if there is a significant bear-market rally then I plan to sell out-of-the-money covered calls on all of my positions again.

Best of luck, whatever your strategy happens to be.

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Liquidity is Draining from the Markets

It was a great week for the US Dollar. On the flip side, it was a terrible week for any kind of investments. Everything sold off against the dollar including all stocks, bonds, crypto, foreign currencies, and commodities. Thanks to Friday’s rally I’m only down 6.4% on the week, which is better than the prior 3. My portfolio is actually down 35% since the beginning of April, so it’s quite volatile.

As you can see above, these last few weeks have been tough on all investments as everything was sold down together. Above is the S&P 500 next to proxies of everything in my portfolio.

As you can see, margin debt peaked around October and has been coming down. This is the tip of the iceberg as far as market liquidity goes. Margin debt is lending directly on stock portfolios to buy more shares, but it is just one small form of leverage in the system that happens to be visible.

In the fall of 2019, there was a dollar shortage which led to a spike in the repo markets leading the Fed to intervene. This was dubbed “Not-QE” by the fed, and let to a market meltup prior to the crash in March.

Lately, the federal reserve has been intervening heavily in the reverse repo markets instead. Notice how reverse repo ramps up and flattens roughly in sync with QE (Total Assets). The way I interpret this, the federal reserve wanted to keep QE going because they thought it would “provide liquidity,” helping the stock markets and the economy. This led to a shortage of collateral, especially among money market funds that have to invest in short-term treasuries. The Fed intervened by effectively selling treasuries in the Reverse Repo market to put a floor under the yields and prevent them from going negative. Once QE stated to top out, so did RRP. Using this logic, as QT progresses (Total Assets falls), I would expect the RRP to follow it down. What does this mean? Does this reflect excess liquidity in the system? These questions are certainly up for debate.

One thing that is very clear these last couple of months is the spike in the economically sensitive 10 year treasury yield, on which many loans such as mortgages are based. In addition, the recent rate hikes (matched with hikes in the RRP rate) set a higher floor on interest yields which increases the cost of margin debt and borrowing in the repo markets while reducing the value of the bonds and stocks used as collateral for those loans. Margin debt is still 25% above 2019 levels and 40% above the march 2020 trough, so I expect that to continue falling which means more general selling pressure in all the markets.

Note that all bear markets see sharp rallies, sometimes for months, but I expect general de-leveraging and selling of risk assets to continue as long as the Fed keeps hiking interest rates. I actually have my 401k (which is much smaller than my portfolio below) sitting in money market funds until the Federal Reserve announces it is done hiking rates, at which point I plan to move it back into a stock fund.

Here’s where my portfolio ended up:

  • HEDGES (14.1%)
    • 14.1% TLT Calls
  • PRECIOUS METALS (34.0%)
    • 4.3% AG
    • 4.0% SILV
    • 3.8% MTA
    • 2.9% SLVRF
    • 2.9% EQX
    • 2.7% LGDTF
    • 2.1% SSVFF
    • 2.0% SAND
    • 2.0% RSNVF
    • 1.9% HAMRF
    • 1.9% MGMLF
    • 1.3% MMNGF
    • 1.3% DSVSF
    • 0.9% BKRRF
  • URANIUM (20.3%)
    • 4.3% CCJ
    • 3.1% DNN shares & calls
    • 2.9% BQSSF
    • 2.6% UROY
    • 2.3% UEC
    • 2.0% UUUU
    • 1.7% ENCUF
    • 1.5% LTBR
  • US CANNABIS (16.0%)
    • 1.6% AYRWF
    • 1.9% CCHWF
    • 1.8% CRLBF
    • 2.3% CURLF
    • 2.2% GTBIF
    • 2.4% TCNNF
    • 1.8% TRSSF
    • 2.0% VRNOF
  • BATTERY METALS (10.5%)
    • 5.1% NOVRF
    • 3.8% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.2%)
    • 2.2% XRP
  • OTHER (3.1%)
    • 2.5% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.1% ATCO calls
  • CASH (-0.2%)

Note that I actually managed to keep margin near zero. This isn’t easy when all of your assets which you believe to be long-term buys keep falling. I have to admit though, a bonus check enabled me to buy some this week so it wasn’t purely discipline there.

I am happy with my portfolio allocations overall, despite the current market pressure. Still, I consider my mining stocks as my biggest priority right now – Uranium, Gold, Silver & Battery metals – so if these low levels persist then I won’t be adding paychecks to any of my other holdings. You can see how unbalanced my cannabis shares are getting as a result, as I had been keeping them above a minimum market value as they sank in the past whereas now I’m just letting them fall where they land.

These are dangerous times in the markets for sure, but there are also opportunities. Last note, Dave Rosenberg was interviewed on the Macro Voices podcast a few days ago, and I was very happy to hear that his views aligned with my portfolio. He believes that 10Y interest rates are in the process of topping out for the cycle and will be much lower by year-end, that gold will start to outperform likely by the end of the summer when Powell announces a freeze in future rate hikes, and that he is bullish on certain commodities such as Uranium from a supply perspective. It always makes you feel better when one of your most trusted financial analysts talks up your positions.

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Crazy Fed Week Buying

This week I figured it would be fun to start with my predictions from last week and how my gameplan panned out.

Here is exactly what I said last week:

  1. Relief rally Monday morning from oversold lows, speculation that perhaps the federal reserve will ease up after the massive disappointment with Q1 GDP falling by 1.4% when it was expected to rise by 1%.
  2. A violent shock sometime between Monday & Tuesday, as Powell makes it clear that he is moving forward with a 50bps hike, and that his main goal is to crush inflation Volcker-style.
  3. Markets wobble a bit Wednesday as institutions look for buyers to appear.
  4. A significant selloff in both stocks and bonds on Thursday, probably through Friday as the buyers supported by Japanese yield-curve-control policies don’t show up at all during Golden Week.
  5. Counter-rally the following week from oversold lows, massive influx into US treasuries to get that sweet yield.

If it all works out as I expect, I should be 100% invested by the end of the week. I’ll buy a little bit here and there, focusing on Thursday as my biggest potential buy day. I plan to pick up a lot of TLT calls and Uranium miners specifically, though I might go for some of my other names if they are truly beaten to a pulp. I also plan to buy some more XRP which I expect to get somewhere in the 50-cent range.

Here’s how it played out:

  1. Market continues lower into Monday and TLT dives. I bought (3) Jan 2024 TLT calls and re-entered SAND, one of my favorite precious metal royalty companies that I had exited completely a couple weeks back. Market rallies at end of day, as institutional shorts finally take some profits off the table.
  2. Markets hover around at low volume until Powell’s speech on Wednesday. I bought a couple more crushed commodity plays – CCJ, UEC, NOVRF, etc. I also topped off my US Cannabis (again).
  3. Powell’s comment takes 75bps hikes off the table on Wednesday. Algo’s re-price bonds a bit and market shorts frantically cover through the end of the day. I remember thinking that I was going to end the week with a lot of excess cash after all, and being glad that I at least purchased some things earlier in the week.
  4. Markets plunged Thursday and Friday as they digested Powell’s message of 3 back-to-back-to-back 50bps rate hikes this summer. Short speculators re-entered, long speculators backed off. I bought 3 more TLT calls as that plunged, then focused on the fire sale in my favorite mining shares. I bought a lot, and even ended up pricking up some XRP in the 50’s at the end of the week (well, $0.59 or so).

All-in-all, I feel like it was a pretty successful week, which is funny because my portfolio ended down 8.8%. In fact, my portfolio value is down 25% since the beginning of April, but who’s counting? Psychology is weird that way I suppose, it doesn’t seem so bad if you’re accumulating. I suppose that’s why us retail investors often catch falling knives in these markets.

Here’s where my portfolio ended up:

  • HEDGES (12.9%)
    • 12.9% TLT Calls
  • PRECIOUS METALS (35.5%)
    • 4.3% SILV
    • 4.0% SILVRF
    • 3.2% AG
    • 3.2% EQX
    • 3.0% MTA
    • 2.9% LGDTF
    • 2.5% MGMLF
    • 2.4% SSVFF
    • 2.2% RSNVF
    • 2.1% HAMRF
    • 1.8% SAND
    • 1.6% MMNGF
    • 1.5% DSVSF
    • 0.8% BKRRF
  • URANIUM (18.0%)
    • 3.2% CCJ
    • 1.4% UUUU
    • 2.8% UEC
    • 2.9% BQSSF
    • 2.4% DNN
    • 1.2% DNN calls
    • 1.5% ENCUF
    • 2.5% UROY
  • US CANNABIS (17.4%)
    • 1.9% AYRWF
    • 2.2% CCHWF
    • 2.1% CRLBF
    • 2.4% CURLF
    • 2.2% GTBIF
    • 2.5% TCNNF
    • 1.9% TRSSF
    • 2.1% VRNOF
  • BATTERY METALS (11.4%)
    • 5.7% NOVRF
    • 4.1% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.3%)
    • 1.9% XRP
    • 0.4% BTC
  • OTHER (3.1%)
    • 2.4% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.1% ATCO calls
  • CASH (-0.5%)

Speaking of retail investors catching falling knives, that is exactly what all of my US Cannabis buying has been. The sector ETF MSOS went from $42 to $14 in one year. As my holdings are simply top ones in MSOS, that’s a pretty good average of all of those. My stake is higher mainly because I topped it off to keep the dollar amount the same while my portfolio value went down as a whole. To be honest, I probably lost more in TLT anyway though.

As for the successful part, I re-entered and/or accumulated a lot of my favorite miners that I had exited week ending 4/14, including AG, SAND, EQX, CCJ, UEC, DNN, UROY and more. I also shifted more towards battery metals by adding to the severely beaten-down NOVRF and SBSW, and I greatly increased my share of Uranium miners.

Here’s the basic reason I’m so bullish on Gold & Silver, Uranium, and Copper mining in 3 charts:

With gold, it just seems amazing that the miners are so beaten up while the spot price is near its 2011 peak. Copper miners fare better against their metal, but they are still below their 2011 peaks while the spot price is higher.

Uranium is a similar story, although the chart isn’t as clear. I had to get Uranium spot pricing from the St Louis Fed and combine it with monthly close pricing of CCJ and DNN from Yahoo Finance and put them together in Excel, so it’s not a relative performance chart like the other two. I tried a log axis and it made things more confusing, so I just put DNN on an axis on the right so that it would show up despite the lower price. Needless to say, but Cameco and Dennison are much lower than they were at comparable Uranium spot prices in 2006 and 2011, at a time when Uranium Spot price has enormous structural pressures to the upside.

Anyway, the miners are all super cheap compared to the metals. In addition, mining in general hasn’t expanded much in the last decade due partially to the collapses in spot price and partially because they aren’t ESG and passive indexing has led much more money into growth than value. Mines take years to get online and producing, and during that time the price should continue higher due to undersupply. It still seems incredible that Copper is near peak valuations while China is not only locked down, but has been going through a drawn-out homebuilding bust for over a year.

We are in a very strange time, where it’s extremely difficult to find good comparisons for where we are headed. The 2008 housing bust came off high commodity prices and low tech valuations, with enormous stimulus in China, mainly going into construction. The 2000 dot-com bust came off low commodity prices and high tech prices as globalization and US outsourcing & off-shoring were expanding like crazy. The 1970’s oil shocks was during a time of a rapidly growing labor force, a big war with a draft, strong unionization, strong US production capacity, and low overall debt levels. The late 1940’s commodity spikes were just after WW2 as the Korean war brought demand forward in fear of rationing. Debt levels were high, valuations were low, and we were about to start a period of massive rebuilding internationally and massive infrastructure investment in the US. None of these periods seem to fit today.

Today we see signs of an incredibly weak economy in the US and abroad, crazy high debt levels worldwide, property bubbles that show signs of turning in many countries, and a Federal Reserve intent on hiking rates like crazy despite a soaring US dollar and inverted yield curves. To make matters worse, the state of the economy itself and the reasons for it are in complete confusion. Here are some examples:

  1. Labor market
    1. Many people like me, Jeff Snider, David Rosenberg, etc. see a weak labor market shown by a sinking labor force participation rate, a smaller workforce than 2019, and negative real wage growth. This trend has been going on for decades, it took a serious and permanent change for the worse in 2008 and it never recovered.
    2. The concensus view, particularly among our political leaders and the Federal Reserve economists, is that we have an incredibly tight labor market as shown in their headline unemployment rate and their soaring JOLTS data (which is flawed in a number of ways, but that’s another story).
  2. Money supply
    1. There have been serious signs of dollar shortages and collateral shortages that have been resulting in weak demand, weak growth, and recurring crises in much of the world including the Eurozone, China, and elsewhere. The US has been somewhat shielded from the effects, but it still shows up in our incredibly slow GDP growth, shrinking labor force, and lack of real wage growth. We took years to “recover” from the great financial crisis, but we never reached the former trendline growth so arguably we never recovered.
      1. The high CPI is largely due to the combination of demand shocks and supply shocks.
      2. Demand shifted from services to consumer goods in the pandemic and was temporarily boosted by fiscal transfers from worldwide governments (particularly the US) in 2020 and early 2021.
      3. Supply remained constrained partly due to the lockdowns, but also partly due to the complete lack of willingness in natural resources development. The US and Europe block most energy and mining investment citing “environmental concerns” while the emerging markets have seen a decade-long series of accelerated booms and busts in these sectors, and they have trouble accessing capital anyway.
    2. The consensus view is that the central banks of the world united in a money-printing binge that left way too much money in the system. The inflation is a reflection of the incredibly strong economy and consumer demand (ignore the fact that less units are sold at higher prices so the only increased demand is nominal).

To this day, we still see an astonishing lack of willingness to invest in natural resources and related infrastructure despite soaring prices. Politicians are torn between subsidizing the poor due to rapidly rising costs and an extreme wealth divide, and limiting any spending whatsoever to reduce inflation. Investing in energy production and distribution, desalination plants, mining, oil & gas production, nuclear, etc is seen as wasteful government spending and bad for the environment to boot.

We will eventually invest a lot more money in metals & mining, especially if governments are serious about spending on alt-energy projects which use an incredible amount of these resources per unit power. Meanwhile, prices of these materials should really start to soar. In investing we’ve heard about generational opportunities a lot lately, and this is the one that I’m planning on riding.

My base case currently is that the federal reserve’s rapid hiking cycles will break something in the enormous and opaque repo markets. A recent statistic was that bond markets worldwide have lost over $2.6 Trillion in 2022. That was reported back in March. The federal reserve receives reporting on tri-party repo (going through BNY Mellon), but nothing on bank-to-bank repo.

These overnight repo facilities can be thought of as massive margin debt on the worldwide bond markets. Banks (and sometimes central banks) lend at a very low overnight rate, protected by the right to sell off the underlying collateral at any time. This collateral comprises of a variety of widely traded bonds including US Treasuries, other sovereign debt, and corporate bonds of varying ratings and maturities. When interest rates spike higher, these bonds lose value in the spot market, and borrowers have to post more collateral or their bonds are sold. Bear sterns went bust in March of 2008 because their enormous holdings of mortgage-backed securites lost value in the spot market and they did not have enough collateral to post to make up for the shortfall. These are highly levered markets and this will happen.

Anyway, in that base case we see a liquidity cruch after which central banks intervene and TLT spikes. Then I can sell off the TLT calls and buy a lot more mining shares on the cheap.

My alternate case is that we somehow avoid this liquidity crunch and muddle through, in which case my TLT calls could go to zero but my mining stocks should do very well.

As for the other sectors I’m in … US Cannabis, a touch of cypto, and DOCN for cloud computing … I see those as highly speculative bets which might pay off big but might end up like a dot-com stock after 2000. I wouldn’t invest in them if I didn’t think they had staying power, but my main conviction is that we are in a commodity bull market that will last through the decade of the 2020’s.

Enjoy your weekend everyone!

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Golden Week, A Buying Opportunity

We’ve been having one of those months that makes all investors feel stupid. I’m down 7% on the week, down 19.5% on the month, down 14.6% YTD, and down 11.8% on the last year. If you’re interested in these little retail-dominated sectors like I am, than you’re probably in the same boat.

Here are the charts relevant to my portfolio:

SPY: S&P 500 index

If you just stuck with investing in the S&P 500 index, SPY, you’d be about even on the year, though with a somewhat volatile ride. It certainly has some powerful tailwinds as blind money from stock buybacks, 401k’s, and pensions crowds in heedless of valuations. Still, the downside risk can be quite significant as the fed hikes interest rates making portfolio leverage more expensive, the earnings cycle peaks and declines, and consumer spending shows the strain of keeping up with basic living costs, and so on. All of the mega-caps have fallen significantly below their peaks, and some of them like FB had enormous drops overnight. When steady flows of passive money push these stocks ever higher, sellers can find quite an air pocket before any real buyers show up. The chart also has the look of a nasty topping formation with a lower low on Friday. On the flip-side, it seems that everyone is bearish, so you never know when a massive rally will start to squeeze out anyone who’s positioned short. That has me nervous about short hedges, though I’m not going long either.

TLT: Long duration US Treasuries

This is my main hedge. Looking at the chart above, it’s easy to ask why. Basically, I don’t think that the Fed will get that far with rate hikes. Parts of the yield curve began to invert from hawkish talk alone, before they hiked 25bps. After that the inversions became deeper and more frequent. Many other recessionary signs are apparent, and recessions typically mean top tier collateral that banks and hedge funds can borrow against like crazy get bid up. If worries start to spread about the vast junk bond market, the banks and funds which invest in those with leverage (or regulatory constraints), they will have to post more collateral or be forced to sell. This often leads to a rush toward higher tier bonds that allow the most leverage when borrowing in the repo markets. Aside from that complex view, you can consider that unlike stocks, long duration bonds are absolutely hated and that they do tend to go up in recessionary periods. Besides, look at the chart below. In the post-GFC world of ZIRP & QE, TLT is more prone to spike than ever, and it is hitting a line of decade-long support.

SILJ: Junior Silver Miners

The SILJ index best represents my precious metals miners. That 30% of my portfolio is all in this highly speculative sector, which has been struggling for almost 2 years now. The recent drops don’t surprise me much, as commodities are overcrowded in general and this is a volatile retail-dominated sector. Basically, I’m sticking to this alternating-decades idea with mining stocks. You have a strong decade like 2000-2010 ending with a spectacular investor frenzy and crash as too much production comes online, then a huge decade-long bust where all investment in the sector halts and supply slowly shrinks down below demand. During such busts, like the 1990’s or the 2010’s, other investments like tech soar as commodities are generally not a constraint. I still feel like we’re seeing a major commodity shortage which will play out over the decade of the 2020’s. In other words, this is a long term play, and I plan on adding or reducing support based on the charts in between. As such, I have made some really good calls, such as levering up like crazy with call options in AG back in January and then selling all of my long calls and reducing dramatically the week ending April 14th. I don’t know when this sector will really soar, but I am convinced its within the next 6 years and I’m planning to be there when it does. Then I’ll exit and move on to other things; there is no such thing as an investment to hold forever. That being said, the time to exit will be when metals and mining stocks are a significant portion of the S&P 500 and new production is coming online. We had a bit of a speculative frenzy during covid, but we did not see any significant growth in mining production. Here’s a chart for you. Make of it what you will, but I see production back down to levels a decade past – and during a time when it’s industrial use has gone up with much more widespread electronics, batteries, etc. Unfortunately I can’t find a good silver demand chart for you, but I do expect that supply will go back to levels seen in 2012-2019 before it peaks out.

URNM: Uranium Miners

The news from this sector is nothing but bullish. Just like with precious metals miners, I believe that this cycle will last the bulk of the 2020’s decade, and I plan to ride it through while reducing at peaks so that I can add at valleys. I reduced a lot week-ending 4/14, and I’m planning on building my position back up despite the coming recessionary backdrop. This sector is small, extremely volatile, and dominated by retail investers so expect massive swings in price. Makes it more fun, don’t you think?

MSOS: US Cannabis

This is a sector which I believe holds much promise, but still acts like a falling knife. Major US institutions can’t invest here because it isn’t federally legal yet. They aren’t opposed to the sector however, as institutional investors have entered into Canadian companies like TLRY. It’s a bizarre situation, as US producers & distributors can only list on the junior Canadian exchange and are restricted from the US banking system while foreign producers & distributors have full access and list on the NYSE. There is a continual barrage of states opening up to it and eying that precious tax revenue, and there is a significant movement to change the situation federally. I see it as a matter of time, and I’ve been steadily adding at new lows to keep my allocations up, without selling anything, and my earlier positions are already down 50%. Whatever, as a retail investor I won’t get fired from managing my own portfolio, and I fully intend to keep my minimum allocations near 15% until this thing plays out.

XME: Metals & Mining ETF

I see my battery metals allocation more in base metals category of the XME chart. I fully expected gold and silver miners to outperform first, then base metals later on as industrial demand really picked up. We had worldwide shutdowns due to Covid restrictions for much of 2020-2021, followed by a real estate bust and subsequent construction bust in China, followed by the current extremely aggressive Chinese lockdowns, and base metals have been absolutely soaring. You wouldn’t know it with the likes of Nickel-Copper royalty company NOVRF, which is flirting with 16-month lows, but the underlying metals must be in critically short supply if they are soaring in this environment – and all at a time when western governments are planning on funneling ever more money into alt-energy projects that absolutely waste these metals with enormous power-lines spreading for many miles which are vastly oversized to deliver intermittent power without breaking at the peaks. Anyway, I intend to build this sector up a bit more.

Here is my latest portfolio:

  • HEDGES (10.6%)
    • 10.6% TLT Calls
  • PRECIOUS METALS (29.8%)
    • 1.3% AG (Silver)
    • 2.2% EQX (Gold)
    • 4.0% SILV (Silver)
    • 4.0% SILVRF (Silver)
    • 2.9% LGDTF (Gold)
    • 2.9% MTA (Gold & Silver)
    • 2.7% MGMLF (Gold)
    • 2.6% RSNVF (Silver)
    • 2.3% SSVFF (Silver)
    • 2.3% HAMRF (Gold)
    • 1.2% MMNGF
    • 1.5% DSVSF (Silver)
  • URANIUM (10.6%)
    • 1.4% UUUU
    • 1.3% UEC
    • 2.3% BQSSF
    • 1.6% DNN
    • 1.3% DNN calls
    • 1.4% ENCUF
    • 1.3% UROY
  • US CANNABIS (15.1%)
    • 1.8% AYRWF
    • 1.9% CCHWF
    • 1.7% CRLBF
    • 2.2% CURLF
    • 1.8% GTBIF
    • 1.8% TCNNF
    • 2.0% TRSSF
    • 2.0% VRNOF
  • BATTERY METALS (8.7%)
    • 4.7% NOVRF
    • 2.6% SBSW
    • 1.4% PGEZF
  • CRYPTO (1.2%)
    • 1.2% XRP
  • OTHER (3.0%)
    • 2.5% DOCN (cloud computing)
    • 0.5% OGZPY
    • 0.0% ATCO calls
  • CASH (21.0%)

I’ve been waiting for a while to get the perfect buying opportunity, when the federal reserve continues with its 50bp hike and tries to scare the heck out of everyone while the Japanese institutional buyers aren’t there to purchase US treasuries. I did jump the gun a bit this week though, adding a little bit each to of a number of different names in my portfolio in all my main sectors – precious metals miners, uranium miners, battery metals miners, and US Cannabis. Its hard to sit on more than 25% unallocated cash while some of your favorite names are hitting new lows.

That being said, here’s how I see the week playing out:

  1. Relief rally Monday morning from oversold lows, speculation that perhaps the federal reserve will ease up after the massive disappointment with Q1 GDP falling by 1.4% when it was expected to rise by 1%.
  2. A violent shock sometime between Monday & Tuesday, as Powell makes it clear that he is moving forward with a 50bps hike, and that his main goal is to crush inflation Volcker-style.
  3. Markets wobble a bit Wednesday as institutions look for buyers to appear.
  4. A significant selloff in both stocks and bonds on Thursday, probably through Friday as the buyers supported by Japanese yield-curve-control policies don’t show up at all during Golden Week.
  5. Counter-rally the following week from oversold lows, massive influx into US treasuries to get that sweet yield.

If it all works out as I expect, I should be 100% invested by the end of the week. I’ll buy a little bit here and there, focusing on Thursday as my biggest potential buy day. I plan to pick up a lot of TLT calls and Uranium miners specifically, though I might go for some of my other names if they are truly beaten to a pulp. I also plan to buy some more XRP which I expect to get somewhere in the 50-cent range.

Anyway, that’s my plan. If you decide to follow me on this, look once more at the lousy returns I mentioned at the top of the page, and realize that this is a bit of a gamble, and that I could lose money in these sectors for quite some time before they turn. I’m still young enough to take risk, and I feel that I need to more than ever if I hope to get anywhere. It’ll pay off some day. Happy trading!

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