An Indecisive Market

The market does seem very indecisive at the moment. For my two biggest bets, gold has been struggling at 1900 for nearly a month, while silver has been struggling at 28 for over a month. QQQ (Nasdaq) just passed the February highs and is approaching the April highs again but hasn’t yet broken out. IWM (Russell 2000) just bounced lower off the highs set in March, and has also been in the same choppy range since February.

Bitcoin certainly looks bearish, but there is an interesting dispersion among the cryptocurrencies here:

My view right now is that cryptocurrencies have not yet peaked for the cycle, but there is a significant rotation away from Bitcoin. A significant part of the narrative here is around the relatively high power usage of Bitcoin and the challenge of the power-intensive “proof-of-work” model with the “proof-of-stake” model.

I tend to think that the reason just as much to do with the size of these assets:

  1. Bitcoin market cap $673 Billion
  2. Ethereum market cap $280 Billion
  3. Cardano market cap $49.4 Billion

A big part of the investment thesis in cryptocurrencies is the potential for multi-bagger returns. Speculators looking for these returns can easily expect that if Bitcoin doubles then you could easily see a 4x gain in smaller Ethereum and an 8x gain in a smaller altcoin such as Cardano. Where is the money going to pile in?

I’ve been building a small stake in Cardano personally – big enough so I can be happy riding it if crypto shoots skyward, but small enough to allow me to add if it corrects down more. The main reason I chose this altcoin is because it trades on Coinbase (which I still use), it has a narrative of superior software for building smart contracts, and it seems an obvious #3 after Ethereum. The closest competitors by market cap are BNB and XRP (which I can’t buy on Coinbase) and DOGE (which I still see as a highly inflationary scam coin which Elon is pumping as a joke).

I’m happy about the solid breakout of TLT past 140, we’ll see if it backtests and continues skyward. I’m still down a lot on my TLT calls, but I’m still in the camp that sees government bond rates turning lower shortly after “recovery” as they have in every recession in the past 40 years. I’ll expect different results when our government has a different playbook. For now, here’s the way I see it with bonds …

Government bonds are NOT intuitive investments. Why?

  1. They not only have many uses in the banking system which are highly complex, involving massive leverage and derivative agreements as well as strict regulatory rules based on asset safety as defined by government regulators. Treasuries are Tier 1 capital, which is key.
  2. Many participants, such as insurance funds and money market funds, have to hold assets that they can liquidate immediately in a crisis at full value.
  3. Many participants, such as foreign central banks, are not market sensitive investors looking for the best gain – they are looking for the deepest and most liquid US dollar markets that they can use to manage their currencies.

One thing is even more strange with government debt – it is the only asset that can actually increase in value with increasing supply. Here’s how it works:

  1. High debt levels are very deflationary because they continually pull money out of the system for servicing long after the money was spent & went through the economy.
  2. The primary way we create money in our system is through lending.
  3. The higher debt levels get, the more money is needed to combat this deflationary force just to keep cash flows even. If these debt levels aren’t allowed to climb, you end up with a deflationary bust like we saw in the Eurozone in the mid 2010’s.
  4. This requires more and more lending, which typically shows up as higher government deficits. This pushes debt levels even higher, requiring even more lending to compensate.
  5. Thus deficits skyrocket and once their short-lived passage through the economy completes even bigger deficits are needed until something in the system changes.

Essentially, we are caught in a debt/deficit sandtrap and we’re still digging ourselves deeper, which ironically results in lower interest rates on government debt.

Please note that the above view does not necessarily mean a stock market collapse is imminent. I certainly fear the possibility, but margin lending has shown no signs of slowing and corporate share buybacks have been accelerating. If much of the debt we create goes straight into the stock market through these paths, I’m not sure the market can crash – which means you really need to brace for rotations from one sector to the other, and I’m convinced that these rotations will start to favor precious metals miners a lot more as interest rates drop.

Enough for today – here’s where my portfolio left off:

  • DOWNSIDE BETS (37.5%)
    • 26.4% TLT Calls
    • 5.0% IWM Puts
    • 1.4% EEM Puts
    • 4.7% QQQ Puts
  • GOLD (19.0%)
    • 2.7% WPM & GOLD Calls
    • 5.4% EQX Calls
    • 10.9% SAND Calls
  • SILVER (22.5%)
    • 10.2% AG (w/ covered calls)
    • 1.0% AG Calls
    • 5.3% SILV
    • 1.2% MTA
    • 1.5% RSNVF
    • 2.6% SILVRF
    • 0.8% SSVFF
  • COMMODITIES (5.1%)
  • 1.1% UUUU (w/ covered calls)
    • 0.9% BQSSF (Uranium)
    • 3.2% NOVRF (Nickel/Copper)
  • CANNABIS (5.4%) split btw CRLBF, GTBIF & TRSSF
  • CRYPTO (2.3%) all ADA
  • CASH (8.2%)

I should note that my CCJ position is gone because I sold covered calls a month ago and they landed in the money. There has been no significant pullback to buy into, so I’ve been waiting on that one. I didn’t actually add to TLT – that just went up in value – but I did add QQQ puts in recent weeks as I anticipated a significant pullback which hasn’t materialized yet. If it does, then I’ll probably sell off a number of these put positions as I can’t dismiss Rauol Pal’s view of another end-of-year melt-up in markets.

This is honestly why I put so much in gold and silver, and probably also why they have been performing poorly over the last year – these are some of the few positions where I can comfortably see higher prices a couple years out. The way markets work is that if a play seems obvious then it is probably overcrowded and will probably fail.

Someone tweeted the idea of going long ROOT for a short squeeze, maybe I’ll jump on that next week. The one-week call options certainly show a lot of volume. Good luck and happy trading!

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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