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
    • 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!

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 gluskinsheff.com. 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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