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Orthodox Investor – The Angry Trade

The Angry Trade was inspired by a comment left by “Bob” at https://wolfstreet.com/2021/04/26/forget-2-inflation-with-margins-forcefully-squeezed-big-companies-are-raising-prices-and-point-at-massive-inflation-overshoot/#comments. The comment received many replies from other commenters. Bob wrote:

I’m angry. I’m completely despondent. I’ve missed this entire bubble market and have been sitting in cash. My entire life savings is being systematically destroyed and I have no idea what to do with my money. I’m ready to end my life if I end up being destroyed by this, but not before getting some justice against the criminals that have done this to me and other prudent people that “followed the rules”. There’s nothing to look forward to in this country. I can barely be bothered to work anymore. What for?

Part 1

I originally posted part 1 of The Angry Trade at https://wolfstreet.com/2021/04/29/its-a-perfect-time-to-sell-a-home-to-fomo-driven-buyers/:

It’s my personal belief that only those who are ridiculously overlevered will be allowed to fail, so the logical thing to do is to use maximum leverage while making sure you’re slightly less levered than the most reckless speculators. People who are sitting in cash have been taken to the cleaners by Jerome Powell’s monetary policy. It’s easy for those who are invested in risk assets to say “just do what I do and you’ll be fine”, but that ignores the fact risk assets are only good to hold if you had a good entry point. What do you do if you missed the speculative melt-up? What if assets prices never come down?

I’m going to present what I call “The Angry Trade” to appeal to those who have been sitting in too much cash and want to get back at Powell and those who cheer him on. Looking at the chart history, it’s too risky to bank on a decline in stocks or real estate. I have no confidence in my own ability to predict them. The trade I’m going to propose is to go long 30 year treasuries (10 or 20 year works too). In the unleveraged version, you are guaranteed to come out ahead compared to holding just cash, provided you wait long enough, and since treasuries tend to peak when risk assets bottom, it works for people who missed the rally and are waiting for asset prices to come down.

But the Angry Trade is to use leverage. The rationale is that we’ll win either way: Either the stock market keeps going up and yields remain low to sustain the bubble, or the stock market tanks and yields go lower in a flight to safety. In follow-up comments, I’ll go into more details.

Today, it’s looking like yields on the 10 year and 30 year are breaking out of a bull flag. The basic idea is to wait for for the 30 year to double top around 2.5% and use that as an entry point for a small initial position. The reason for starting with a small position is that the market may panic as inflation proves to be less transitory than Powell expected, causing a run toward 3%. The trade will involve futures contracts

Part 2

I originally published part 2 at https://wolfstreet.com/2021/04/30/wtf-charts-of-the-year-free-money-from-the-sky-stimmies-blow-out-consumer-income-and-spending-on-durable-goods/#comment-338558:

If we have reached peak stimulus, there is a possibility that treasury yields have already peaked. I don’t want to look like a fool suggesting a trade where I never pull the trigger to take an initial position. This brings me to:

The Angry Trade (Part 2)

Part 1 was posted in the comments section of the transcript for “It’s a Perfect Time to Sell a Home”. To recap, the Angry Trade is meant to put cash to work in an overvalued market where prudent investors are punished at the expense of leveraged speculators who are continually bailed out by the world’s central banks. The Angry Trade hopes for a crash in risk assets, but does not require it to be profitable.

In Part 1, I suggested waiting waiting for the 30 year yield to double-top at around 2.5%. That is the safer option, but I went ahead and went long treasuries at a yield of 2.3% as I will explain below.

An important aspect of The Angry Trade is getting paid to borrow money. This is accomplished by going long treasury futures contracts that trade in backwardation. The contracts expire 3 months apart, so they need to be rolled 4 times in a year to maintain the position. The backwardation effectively results in a positive carry. In other words, if interest rates remain constant, you are being paid to hold the position. This is largely thanks to other investors who want to short the treasuries and are willing to pay a counterparty to do so.

For those unfamiliar with futures trading, the thinkorswim application allows you to trade “paper money”. Your account is funded with fake money and you can trade like in a real account without risking anything, until you understand how it works.

There are four long-dated treasury contracts that are of interest. The Ultra Bond /UB contract can be thought of as having a 30 year duration. It has an $8000 margin requirement and for that money you speculate on treasuries with a notional value of around $185,000 at current prices, effectively giving you 23x leverage. The most actively traded contract is currently the June contract. The price difference between the June and the September contract is currently around $1650, which is similar to a 3.6% yield. However, the value of the contract decreases by more than a year’s worth of yield if the interest rate rises a mere 12 basis points in one year. It can easily rise that much in a single hour. Hypothetically, if the 30 year yield went back to where it was in 2018, you’d lose around $40,000.

The 30 year bond /ZB contract behaves more like a 20 year bond. It has a $4000 margin requirement and has a notional value of around $157,000 at current prices. Here the price difference between the June and September contract is around $1500, similar to a 3.8% yield. A 19 bps rise in the interest rates effectively wipes out a year’s worth of yield. (Currently the spread between the 20 year and 30 year yield is 10bps. The last time interest rates peaked around 2018, the spread was around 10bps as well. In 2018, the /UB traded in contango and I didn’t touch it.)

The 10 year Ultra Bond /TN behaves like a 10 year bond. It has a $3100 margin requirement and has a notional value of around $145,000. The price difference between the June and September contract is around $1300, similar to a 3.6% yield.

The 10 year Bond /ZN behaves like an 8 year bond. It has a $1700 margin requirement and has a notional value of around $132,000. The price difference between the June and September contract is around $800, similar to a 2.4% yield.

The actual specifications and mathematics underlying treasury futures is complicated and discussed at length in a downloadable CME publication. What I’ve covered is a more intuitive explanation.

Currently, I believe there is a risk that the 10 year yield will rise faster than the 20 or 30 year yield, so the initial trade is to go long /ZB at a price of 155’22”. That’s the exact price at the time I’m posting this and it has been near this price all morning today. If interest rates go back to 2018 levels, I expect to take a $20,000 loss on this contract. In part 3, I will discuss the strategy for doubling down on the trade as interest rates rise further.

Part 3

https://wolfstreet.com/2021/04/30/wtf-charts-of-the-year-free-money-from-the-sky-stimmies-blow-out-consumer-income-and-spending-on-durable-goods/#comment-338558:

It takes a lot of time and research to figure out the prospects of individual corporations and their stocks. I could never gain any meaningful competitive advantage playing that game, and the key to investing is to learn what you’re good at. With that in mind, I’ll continue discussing a trade for those who are overly invested in cash-like investments, and have little or no leverage in their personal portfolios.

The Angry Trade (Part 3)

In part 1, I introduced The Angry Trade for investors who have been cautious with their portfolios and watched in dismay as irresponsible gamblers get bailed out time and again. In part 2 (see comments section of “Free-Money Stimmies Blow Out Consumer Income”, I described how The Angry Trade involves getting paid for using leverage. In fact, it is perfect for those who currently hold CDs and want to put that money to use without necessarily making an early withdrawal. You can continue earning money on the CD while using the asset as a backstop for long-dated treasury futures contracts such as /ZB. With a long position in /ZB, you’ll earn over 3.5% in yield on over $150,000, and the good part is that you only need to liquidate some of your CDs if interest rates move against you. In the best case, you effectively earn double interest. If you don’t want to risk losing money, you can always cover the futures position at some point in the future and buy actual treasury bonds and wait 20 years for maturity. The Angry Trade can be tailored to create the exact level of risk you’re looking for.

As mentioned in part 2, I bought a /ZB contract at a price of 155’20/32. I expect to lose $2000 for every 10bps rise in interest rates in a 20 year bond. The most useful guide to predicting the future path of 10-30 year yields is a multi-decade chart. The yield goes up and down almost like clockwork in a downward channel. Arguably, the 30 year bull run in lower yields is approaching its end and it may seem foolhardy to press long treasuries (especially using leverage) having missed most of the bull run that could have turned us into gazillionaires already.

During the 2018 peak in interest rates, you had Jeffrey Gundlach as a contrarian indicator when he predicted 6% yields on the 10 year. That was my cue to implement The Angry Trade at the time. This time, I find myself mostly agreeing with what Gundlach says, and that’s concerning. He now thinks the Fed can control the yield curve. So what if Gundlach gets it wrong again and yields blow out?

I think it’s extremely unlikely that yields will exceed the 2018 highs. I’m almost certain that we’ll see a lower high. It would be wise to have enough funds accessible to survive a brief spike to 4% in the 30 year yield (as in a flash crash), but I don’t see how the financial system survives a sustained rise in long-term yields. Financial assets would get decimated. Even real assets such as real estate and tangible assets of corporations would plummet in value as they rely on cheap debt. The only thing I see doing well is precious metals because there would be nothing else left to invest in, nothing else left to trust. This would be the scenario when the Wallstreetsilver crowd’s prediction of the silver moonshot would come true. Make 100 times your money. The problem with buying silver now is that premiums are over 15%. However, platinum works just as well. If The Angry Trade fails completely, I’m willing to bet that platinum will explode higher. In part 4, I will delve deeper into constructing an overall portfolio and the overall investment philosophy that The Angry Trade is based on.

The recent peak in treasury yields resulted in a record oversold condition, so any meaningful spikes higher from here will likely meet resistance. With that in mind, the strategy for doubling down is straightforward: Buy 1 /ZB at 2.3% yield (30 year yield or TYX), buy 1 more at 2.5%, buy 2 more at 2.7%, buy 4 more at 2.9%, buy 2 more at 3.0% to go ALL IN for a total of 10 contracts. I set up GTC orders, since the market trades 23 hours a day, so I will most likely not be watching when the levels are hit. The faster and more unexpected the rise in yields is from here, the more aggressively I will go long (I can always reduce exposure on pullbacks). The slower and steadier the rise in yields, the more patient I will be.

Part 4

https://wolfstreet.com/2021/05/11/job-openings-explode-in-manufacturing-other-sectors-spike-to-record-overall-as-companies-struggle-to-hire-while-16-2-million-people-still-claim-unemployment-benefits/#comment-341450:

In parts 1, 2, and 3, I presented The Angry Trade as a way to profit the most from a major selloff in risk assets, but that is likely to be profitable even if risk assets never see a significant downturn. Part 3 is in the comment section of “Intel & TSMC on Chip Shortage…”. In part 4, I comment on overall portfolio construction.

Based on historical market patterns, a 5-15% drop in the S&P500 from current levels sometime this year is a probable event. The trough will likely coincide with a short-term trough in long yields, so we want to try to time the trough and sell a portion of treasuries at that point.

While the 30 year yield looks like it just had a clear break out of a bull flag, the bull flag on the 10 year yield still seems to be in the process of forming while the 10 year yield remain below 1.65%.

The overall trade is likely to take 1-2 years based on how long it has taken historically to go from peak to trough in long-term yields. The next action to take will be to triple down on the long position by buying more of the September ZB contract if it drops to 151’22/32. This roughly corresponds to a 30 year yield of 2.5% (20 year 2.4%). The initial purchase of one ZB contract occurred at a price of 153’22/32 (0.2% lower yield).

The orthodox view of investing is that what matters is relative performance. Investing is a competition. You need to be more worried about how much the rich have and how you can catch up with them. The reason is that the rich could theoretically buy up all tangible things in the world. Then they’d own everything, and you’d own nothing. As the rich are now getting richer at a faster and faster pace, the only chance to narrow the wealth gap with them is to buy things that they don’t already own. In this limited sense, the cryptocurrency boom is highly rational. You’re not gonna make progress buying unlevered real estate, a diversified stock portfolio, or unlevered fixed income products. The market cap of these investment classes is already large, so if you double your money, so do the wealthy people who are the owners of these assets today. The only real forward progress you can expect to make is to look for overlooked assets or go for broke using leverage.

Given the brainpower that is being deployed to outsmart everyone else and come out ahead in the game of investing, the most important competitive edge that a little guy can have (unless you have a special talent or special knowledge) is the ability to do nothing. Big money managers are forced to chase performance, or they will lose clients. The little guy can afford to be patient, sitting in cash until an opportunity presents itself.

The key lesson from financial market history is that various assets become absurdly cheap on a regular basis. There is wisdom in investing in many different things, but as an individual investor, you can afford to wait for good entry points. In late 2020, Jeffrey Gundlach did many interviews in which he suggested a simple portfolio model: invest 25% in cash, 25% in long-dated bonds, 25% in stocks and 25% in gold. Steven Van Metre, who quickly gained popularity on Youtube kept telling his followers that the long bond yield would go down when the 30 year yield was below 1.5%. It’s as if they are trying to lead the lambs to the slaughter. The 30 year yield had just dropped from a cyclical high of 3.5% to 1.5% when Gundlach and Van Metre started recommending 30 year bonds. That’s selling low and buying high.

The ideal portfolio is close to 0% invested in cash because we were able to buy things cheap and even a sharp selloff wouldn’t affect the profitability of our portfolio positions. Orthodox asset allocation depends entirely on what goes on sale. The market will tell us what to buy.

The goal of The Angry Trade is to achieve a 100% gain on idle cash in a 2-3 year time period and use the proceeds to buy whatever is cheap at the moment. However, if yields don’t rise enough to warrant a leveraged long position in treasuries, I will make no attempt to force these gains. I’ll take a 5% or 10% gain, if that’s all the market has to offer.

Part 5

July 31st, 2021 update: The yields on the long-dated bonds have been trending relentlessly lower so far. If it continues, the time to cash out is when the yield goes to around 1.25% (lower bound of multi-decade channel). Profits will be minimal, around $50k. Otherwise, the trade continues as originally planned.

Other Thoughts

The clear winner of the dumbest investor award goes to the Reddit silver apes for the following reasons.

The first is that their discussion groups reward the most superficial posts with their voting system, so unless you say something like, I’ll buy an ounce of silver for every upvote I get, your comments will remain unread.

The silver apes made two noteworthy attempts to drive up the price of silver this year, timed in the absolute worst possible way. First, the buying occurred after the price of silver had already doubled and was ready to give back at least some of the gains based on technicals, speculative positioning, momentum, and seasonality. But more importantly, they all tried to buy physical silver at once, driving the premiums to over 20%. This made physical silver the dumbest of all investments because with what other investment do you lose 20% as soon as you make the purchase? (Bullion dealers rarely pay more than spot for your metal, even with high premiums and the average guy on the street doesn’t even recognize what precious metals are, so you can’t sell to them, either.) Maybe when buying a new car or a new dress you take a bigger loss as soon as you make a purchase? Then again, you are likely to have made money buying cars, while the price of silver is down since the Reddit crowd got involved (this statement was accurate as of July 28th when this text was published on https://wolfstreet.com/2021/07/28/the-zoo-has-gone-nuts-paypal-will-give-me-25-if-i-buy-cryptos/#comments under Orthodox Investor).

The easy alternative to high preimums, of course, is to buy the ETF to lock in the price of silver, wait for the premiums to come down, and then sell the ETF and buy physical silver when the premiums are lower. Only the fear the that a total collapse of the financial system is imminent could justify buying silver at high premiums. Mints are reluctant to add capacity because investor silver demand is notoriously short-lived. In the worst case, investor demand remains persistently high and then when more capacity is added, premiums come down later. They’ve already dropped from roughly 20% to 12%.

It’s hard to think of another investment that is dominated by so many irrational salesmen and blind believers of those salesmen. The irony is that if they had picked any rare metal other than gold, silver, or platinum, the squeeze would have been a spectacular success. Almost every rare metal has rocketed higher. Palladium has quintupled in price in less than five years. Rhodium has gone up fifty-fold in less than 5 years (peak to trough). Iridium and ruthenium are way up. These metals have gone up primarily due to industrial demand alone, so any material investor participation would have resulted in a true moonshot.

The whole premise of the silver squeeze is that paper contracts artificially reduce the price of precious metals when the commitment of traders report clearly shows that the opposite is true. Speculators buy using leverage to artificially inflate the price of silver and when they unwind their bets, the price of silver crashes. Yet every price decline is blamed on evil manipulators such as JP Morgan and anyone who disagrees with this narrative is treated like a heretic.

One of the unique aspects of pure precious metals is that anyone with a grasp of some basic physics can quickly and inexpensively test the metals for authenticity. You don’t need to rely on an expert telling you so. Yet the average silver ape seems to rely either on faith or opts for the most expensive ways of testing the metals (they’ve driven up the price of a Sigma Metalytics precious metals verifier to over $1000, double what it used to cost).

They’re all supposed to be somehow rebelling against our spendthrift government, yet the most popular silver coin is the silver eagle produced by the US Mint, which has a face value of $1. Why would I pay over $30 for a coin that our corrupt government says is worth $1? I’m not even trying to be sarcastic. I really want to know. I though they’d be boycotting any money produced by the US government. I haven’t found anyone who is able to provide any explanation at all.

Orthodox Investor Part 3

Most of us are old enough to remember the dot com bust and the housing bust first-hand. Something interesting happened on both occasions. A lot of people who had gotten rich and could have cashed out near the top decided to push their luck and go for broke. Many of them would end up spending another decade or more working just to regain the wealth they had to begin with. Somewhere there’s a Tesla employee who bought 500 shares of TSLA a decade ago at $20 a share, thinking he’d keep it for at least 20-30 years because it’s meant to be a long-term play. Seeing the price go to over $2000 a share last Friday should cause him to think “You know what? I just won the lottery. I’m gonna cash out. Gimme my million dollars now, and since that’s more than I would have earned working for the rest of my life, I’m not gonna work anymore.” For every such example, there are probably 100 others who also accumulated a million dollars, but did so by putting their wages in a savings account, through home price appreciation, inheritance, etc. When they look at the median wage of $60,000 and assuming that a frugal person can save about $30,000 of that per year, they have to be thinking to themselves, “Wow, that million dollars corresponds to a lifetime of savings. Who cares about working to make more, how do I lock in what I already have?” If you spend any serious time trying to find an answer, you realize that you can’t. Your wealth is determined by the percentage of the total that you own. If you own stocks, the most relevant question is what fraction of the $35 trillion US stock market capitalization do you own? If you own US dollars the relevant question is what percentage of M2 money supply do you own? Since M2 has increased by about 20% year-over-year, cash holders are now 20% poorer than they were a year ago (mathematically a 20% increase in supply makes you more like 17% poorer, but these things can’t be measured that accurately anyway). Given that the entire financial system is effectively a casino, every millionaire is necessarily a speculator, it’s just a matter of coming to that recognition. Most portfolio managers take comfort in backtesting their allocation models 50 years or 100 years or more. While the next few years are likely to be similar to the last 100 years, the two pillars of the investment industry, equities and real estate, rest on a shaky foundation. They are outdated rent extraction schemes forced upon a working class that over 100 years ago had no choice, but to work because the alternative meant either starvation or a lower standard of living. Today, many people would enjoy a higher quality of life if they stopped working, they just don’t realize it, yet, so in that sense, people cannot be relied upon to remain indentured servants for long. The risk that rent extraction is significantly reduced due to an ideological shift in the general population is not priced into either equities or real estate at the moment. At the same time, demographics and low debt levels were tailwinds over most of the last 100 years and are turning into headwinds. As a result, there is no investment that has compelling fundamental merit on its own. Every single investment asset can be thought of as nothing more than a competing currency. TSLA is arguably just another currency. You click and you own it. Same with bitcoin, same with gold ETFs, junk bond ETFs or REITs. All that matters is being able to frontrun the next fad or the next Fed rescue. Half the population is less skilled than average and likely to lose when they play this game. More likely, 20% of the speculators will gain at the expense of the remaining 80% based on the frequently cited 80/20 rule. The system works well for a few at the top, but it’s clearly not in the interest of the majority. The stability of the financial system hinges entirely on the willingness of this majority to eat the cost of money printing by working for a smaller and smaller share of the wealth pie. It’s made possible by the misunderstanding of the purpose of work. You don’t work in order to provide for your family. The necessities we need for life are largely automated through technology today. Most of us could quit work and we wouldn’t be any worse off (and neither would society as a whole). In reality, the economic system is more like a poker game. The objective is to make out like a bandit, and you do that at the expense of the suckers at the table. If you’re not getting rich really fast, well, then you’re the sucker who is helping the rich stay rich or get richer.

Negative real interest rates are a blatant market signal telling investors that too much money has been created, so negative investment returns should be expected. Better use up that money now while it still has purchasing power because in the future it will buy less. The first logical response to this is denial. Investors pile into all investment classes, creating the illusion that returns that beat inflation are possible. The big three (stocks, bonds, and real estate) become too big to fail and the central banks will provide unlimited support to thwart deflation. But this means that all too-big-to-fail assets can be thought of as money. Hertz will be allowed to go bankrupt, but the overall stock market capitalization will not be allowed to go down. For all intents and purposes, you can construct a portfolio and whatever the liquidation value of that portfolio, you can bank of having that amount of money, as long as you diversify enough and focus on the too-big-to-fail assets. This creates a funny situation where we could all be millionaires, as long as we don’t try to spend that money because then the reality would be exposed that the money isn’t worth what we think it is. The average net worth in the US is currently close to a million dollars (there’s a report that indicates it is close to $700,000 as of 2016, up from $550,000 in 2013 so it should be close to $1,000,000 today, see https://www.federalreserve.gov/publications/files/scf17.pdf). But it’s so concentrated among the rich that we have a situation where the money isn’t being spent. It’s just a bunch of rich people thinking they are getting richer and richer. There’s no theoretical limit to how rich an extremely rich person can get. Jeff Bezos could be worth a quadrillion dollars and there would be no noticeable change as long as he doesn’t try to liquidate or spend that money. This lack of consequence leads the average person to believe that they should focus on themselves, be appreciative of how much they have themselves and not concern themselves with the wealth of billionaires. But the amount of wealth that billionaires have is extremely important to anyone who saves any amount of money because if there is ever a financial reset and everyone loses 99% of their wealth, the billionaires will still be wealthy while the millionaires will be broke. The richer the billionaires the more meaningless each dollar in savings becomes. If you’re young and not yet a millionaire, you had better go for broke and try to make a killing because if you lose most of it, they’ll still give you food and shelter for free, as we are already starting to do today for the hapless unemployed. If you play it safe and accumulate a few hundred thousand, the risk is great that it won’t be enough to mean anything. Anyone trying to save money today for retirement needs to realize that there’s so much money being created today, you need lots and lots of Benjamins for it to make a difference. Anything under a million dollars is below average. You might as well have nothing. That figure is likely to go up every year. If you’re not saving $100,000 a year, you’re likely falling behind.

Right now, the trick of giving people positive real returns in stocks and real estate (even though bonds offer no return) is working. But if bonds are trading at a negative real yield, and stocks and real estate are backstopped to the point where they are almost as safe, it’s just a matter of time before the market prices stocks and real estate at a negative real yield as well. There has to come a point where this realization kicks in, yet in a market where everyone believes that the trend is your friend, valuations are likely to continue to fluctuate between extreme overvaluation and extreme undervaluation. Valuation, however, becomes an increasingly unimportant metric, as there are too many uncertainties. On the one hand, there is safety in size, but the fact that the market cap of equities and real estate is so huge relative to all other investment options means that there is more room for it to get worse. The favorable tax treatment means it’s more likely to get less favorable in the future given the increasingly popular calls to do something about wealth inequality. A society driven by rampant consumerism could turn into a society driven by slightly less rampant consumerism. If unprofitable businesses are propped up, does it really matter much what the valuations are? Can’t we think of everything as just another cryptocurrency or precious metal, where the value is whatever you want it to be? At the end of the day, you’re trying to gauge at what levels should stocks trade relative to real estate, relative to cryptos, relative to precious metals, relative to bonds, relative to competing fiat currencies. If there is some way to gauge what is cheap and what is expensive, you can implement a strategy of buying low and selling high. As for myself, I don’t attempt to predict short-term trends. In 2008, when I saw my co-worker get all excited about the iPhone, I thought he was joking (he wasn’t). But he was an engineer, and I know nerds like toys to play with, but I also thought I knew that there wasn’t a snowball’s chance in hell that the smartphone would be adopted by the average person. I was wrong and Apple is now a 2 trillion dollar company. I was one of the last to catch on to the trend, and I still don’t understand why people buy smartphones. Nonetheless, from a very high level, I see an inevitable trend toward more and more distrust. Most financial assets are hard to understand, and the average person takes a leap of faith to invest in them. Is the stock you’re investing in really very profitable or is it engaging in creative accounting? Are cryptocurrencies really a cheap and efficient way to transact, or does the distributive nature and the never-ending growth of the blockchain make it wasteful and unmanageable? These questions are impossible to answer for the average person and that makes them faith-based investments. The habit of believing and trusting is so strong, the average precious metals investor chooses to rely on faith in others to judge the authenticity of his investment. It only requires a basic understanding of physics to test metals. With a few cheap tools and using concepts of mass, density, specific gravity, magnetism, and ultrasonic testing one can quickly determine the authenticity of metals with near 100% certainty. There is a very finite number of elements in the universe, and investing in pure metals is orders of magnitude simpler and straightforward than anything else. If this doesn’t trump all else in the end, I don’t think any better decision would have been possible anyway. You can come up with an infinite number of other investments, but they are all complicated, involve counterparty risk, or cannot be held in your hand. When trust in equities and real estate disappears as the Ponzi nature of our economy is exposed, the logical alternative is obvious.

Since the S&P 500 made its 666 low in March 2009, the financial markets have moved in this predictable back and forth pattern of risk on and risk off. Every time the Euro peaks, it also coincides with peak positioning by non-commercials in the weekly COT report, high treasury yields, a high silver price, and a strong stock market. As we move from peak to trough, everything that was previously strong performs poorly or tepidly at best.

In the summary below, EUR is the Euro/Dollar exchange rate, Ag is the price of 1oz of silver (argentum), TYX is the 30 year US treasury yield, and SPX is the S&P 500 index.

RISK ON 03/08 $1.60 EUR $21 Ag 4.4% TYX 1350 SPX (COT positioning did not correlate with EUR/USD between 2006 and 2008)

RISK OFF 03/09 $1.24 EUR $12.50 Ag 3.6% TYX 750 SPX

RISK ON 10/09 $1.50 EUR $16.50 Ag 4.2% TYX 1050 SPX

RISK OFF 06/10 $1.19 EUR $17 Ag 3.85% TYX 1000 SPX

RISK ON 04/11 $1.49 EUR $49 Ag 4.5% TYX 1363 SPX

RISK OFF 07/12 $1.20 EUR $26.5 Ag 2.4% TYX 1360 SPX

RISK ON 03/14 $1.40 EUR $22 Ag 3.7% TYX 1862 SPX

RISK OFF 03/15 $1.05 EUR $15 Ag 2.5% TYX 2075 SPX

RISK ON 02/18 $1.25 EUR $17 Ag 3.2% TYX 2750 SPX

RISK OFF 03/20 $1.05 EUR $12 Ag 1.3% TYX 2200 SPX

RISK ON 08/20 $1.19 EUR $30 Ag 1.5% TYX 3375 SPX

This pattern will break at some point, but right now it’s looking like market participants are making the exact same mistake that they’ve been making at every other peak or trough over the last decade: they overextrapolate the current trend based on compelling “stories”.

First of all, the current peak Euro is remarkable because we’ve seeing new record COT positioning every week for over a month now. The 10 year and 30 year yields didn’t go higher in this cycle (they remained flat), so this could be an indication that they need to rise before we get to the final peak. It looks like we are close enough to the peak that we can attempt a prediction of where the next trough will be:

Time Frame: 3 months to 2 years

EUR $0.85-$1.20 It would be highly inconsistent for the Euro to get stronger from here based on futures market positioning

Ag $10-$35 This is a tough one to predict. There are few people who invest in silver so it doesn’t take many dollars to drive the market higher or lower. Also, investors tend to buy and sell at the worst possible time, exaggerating the oversupply and undersupply of the metal. Nonetheless, a dramatic increase in the silver price would be highly inconsistent with recent history.

TYX 0-1.5% The zero bound limits the downside. Yields are already deeply negative in real terms, but history says an increase in yields from here contradicts the pattern we’ve seen over the last decade. A spike higher followed by a drop would fit the pattern, however.

SPX 1500-3700 The lesson that the last 11 years teaches us is that the S&P will dip below current levels in the future creating better entry points. In addition, upside is limited at this point. We need to hit the next trough before the market goes more than 10% higher.

I’m not making the prediction because I’m particularly confident in my ability to predict the future on a short-term basis, but it’s a good test to see how my perception of the markets compares to reality. Within another year or two, I can review how and why I was wrong.

Orthodox Investor – what to invest in

I originally started writing on the theme of the “Orthodox Investor” six years ago in an e-mail I sent to a former co-worker. In that e-mail the main concrete investing idea I had was to buy US treasuries because the yield curve was destined to flatten towards zero over time, making the countertrend rallies the only significant risk in the trade.

I recently wrote another piece in which I made several references to what seemed to me like a sacrosanct work ethic that would make it impossible for people to stop working for peanuts. So when they first started with the COVID-19 lockdowns, it was preposterous. It had become too much trouble to clean up after tenants moved out that I had begun leaving houses empty and just waiting for their value to appreciate. Shelter-in-place was my cue to go out and get my two empty houses listed ASAP. I still have a hard time wrapping my head around what the implications are when we’re willing to paralyze the economy for fear of catching the sniffles.

Now that interest rates in all developed economies are at zero, what is left to invest in? What’s the orthodox investment now?

All things considered, I believe precious metals are a horrible investment, but the best there is, making it the ultimate TINA trade (There Is No Alternative).

In a world where the vast majority of economic activity is senseless and unnecessary, earnings and valuations are primarily, and in most cases entirely, a reflection of scams and frauds. You trick people into buying stupid things or better yet, something abstract, like services, to generate a profit. Encouraging average people participate in the scams via their 401k plans, gives them a financial interest in keeping it going year after year.

This is the reason why it doesn’t matter whether the government increases its deficit spending each year (regardless of whether debt growth outpaces economic growth), or whether corporations don’t generate enough cash flow to cover their interest payments. How can there be such a thing as a poor choice in allocation of capital when nearly all economic activity is foolish to begin with? There are these popular memes going around saying something to the effect that the economic Ponzi games we play today, whether it’s deficit spending, MMT, or underfunding our pensions somehow steals something from future generations. Even Jerome Powell recently said something along those lines, suggesting that the ballooning national debt beyond the growth rate of the economy will burden our children with interest payments. In reality, the only thing we’re saddling our children with is overcapacity. We’re producing so much more stuff than we should (whether it’s cars or appliances), it shouldn’t be a big deal to retool the factories to makes simpler and more reliable things, if that’s what they prefer. The children and grandchildren are not the ones with millions of imaginary wealth in their trading accounts, and the loss of theoretical wealth will most likely take the form in disappointment when the inheritance turns out to be a small fraction of what they thought their parents were worth.

Intuitively, it seems so prudent to think that the money-losing actors in the economy should bear the consequences and that spendthrift governments be punished by the bond vigilantes. But there is a possibility that we’ll be able to print 100 times the money we have in the past, that inflation will remain low, and that the percentage of zombie corporations just keeps increasing while the president keeps congratulating himself on new all-time highs in the stock market year after year. With each 10% increase in the money supply, the average worker is probably only getting a 3% pay raise, so if the average person was mathematically astute, he’d simply boycott the situation by saying he doesn’t care what the CPI number says, he wants his fair share of every form of wealth, whether it’s a certain percentage ownership in the stock market, a certain percentage of the real estate market, or a percentage of the precious metals market.

The problem is that the worker that demands that his wage be indexed to either some measure of money supply or some measure of asset prices is nonexistent today. If some small percentage (say 2%) were demanding this today, you might think that the seeds have been sown and in another 5 or 10 years something might actually change. Instead, what we’re faced with today is a world whose future can be predicted fairly easily. The belief in working today is unshakable. It’s considered good and virtuous and any alternative to that view is unthinkable. This tells us that we are still very far away from reaching the limits of money printing and papering over any hiccups that might disrupt our financial system. It’s this willingness to work for less and less wealth that will keep inflation under control in the years ahead.

We’re all here to play a myriad of financial Ponzi games, and the key to winning is to buy early and cheap before the suckers and bagholders are drawn in. A simplified view of the investment universe regards every asset class as a money substitute, a competing form of currency. Stocks are just another currency, and we’re probably in the early innnings of central bank intervention with only the Swiss and Japanese making equities a part of their balance sheets. As a currency, stocks (individually or in the form of ETFs) have major advantages. Platforms for buying and selling stocks are extremely widespread, trusted, and even automatic for many workers via 401k or various pension plans. With size and acceptance comes safety. Central banks have an excellent track record in levitating stocks. Even the 2000 and 2008 crashes were followed by rapid reflations (just a few years of waiting and losses are recovered).

At the highest level of generality, the big mistake investors are making today is likely to be the exact same mistake that workers are making today: thinking of one’s wealth in terms of CPI-adjusted dollar terms instead of percentage terms. For example, if my stock portfolio doubles in 2 years, but the market capitalization of stocks in general doubles during those 2 years, I have made no progress in percentage terms. US stocks today have quite a large market capitalization at over $30 trillion making stock ETFs such as the SPY or QQQ some of the most questionable investments from a risk-reward perspective.

Over the last 40 years, one of the easiest ways to make money has been to go long bonds. Unlike a junk bond, a 30 year treasury bond has a zero chance of default. If it pays an interest, this practically guarantees a gradual grind toward zero. Thinking a step ahead, we can view the corporate bond market as a fairly “safe” form of currency because the Fed will only allow a small percentage of firms to go bankrupt. So the only interesting question we need to ask ourselves is “What will be the next popular currency?”

While it’s a safe bet that the world’s fiat currencies are out of control and a sure way to lose wealth over time, it is not clear what the best alternative currencies are. Many forms of currencies have limited supply. Apple stock, for example, ensures a limited supply through buyback programs. You can buy an infinite number of alternative cryptocurrencies or a finite number of alternative elements in the periodic tables, such as iridium and osmium. Real estate is just another currency, too. It has low liquidity, but high stability, and a yield in the form of rental income, which is a euphemism for a tax placed on an innocent person’s wages.

A person who buys a meal at McDonald’s pays a substantial tax to the managerial class of MCD and KO (ticker symbols) as well as the equity holders. It really isn’t a good deal for the consumer to pay dollars for pennies worth of potatoes and sugar, and it’s a bad deal for the workers who are working too hard for their share of the revenue. But as long as there is no strong distaste for this economic model, real estate and stocks will likely remain an excellent way to steal the fruits of the labor of the majority of the population, who are sometimes referred to as the sheeple.

There is nothing unsustainable about record debt-to-GDP ratios and record wealth inequality. No amount of money printing will trigger hyperinflation, so long as slaves continue to want to be slaves. If we start measuring our wealth in terms of what share of the total we own, and we refuse to go to work unless we get our fair share, then stocks, real estate, and the world’s national currencies will implode.

It is exceedingly unlikely that money managers will ever admit that investing in equities and real estate means promoting inequality and serfdom because humans like to put a positive spin on what they do. Even an investment in gold means promoting those who currently hold power. You’re validating all those rich people who currently hold gold as well as the world’s central banks that hoard gold. The fact that gold is a monetary metal rather than an industrial metal is simply evidence of its overvaluation. It means that industrial applications exist only at a much lower price point. Furthermore, if you are not already extremely rich, the share of the world’s gold you can buy is small, while it is much larger for the other three precious metals that are actively traded on the futures exchanges as well as by bullion dealers, namely, silver, platinum, and palladium.

The investment thesis for silver and platinum (we exclude palladium because you should have bought it at $200 not at $2000) is that they are one of the few options that will make a difference in the best case scenario. You can buy a basket of equities, but the worst outcome is that you lose a lot and the best outcome is that you gain nothing in terms of the share of the world’s wealth that you own. There are very compelling and logical reasons for investing in silver and platinum, but they don’t matter because the actual reasons why a specific investment takes off will most likely be highly irrational.

The only likely way I see the value of silver and platinum going substantially higher is because rich people try to hide their wealth from confiscation by the poor who finally demand to get their fair share. You own almost every asset in the world because some electronic record says you do, and in that case, your wealth is always at risk of being traced and taxed. The only way rich people can effectively evade this is if they own something that they can physically hold. This means gold. But as a shortage of gold develops, the next best alternatives will immediately catch a bid (even today bullion dealers are mostly sold out of silver and platinum). Currently investment demand for silver is 20% of total demand and the number is around 10% for platinum. These percentages have room to grow, which will be the driver for their outperformance over gold. Therefore, an investment in platinum and silver is a way of front-running the world’s wealthy who try to evade a populist revolt.

Orthodox Investor

I wrote this prior to the current COVID-19 scare. I have some related orthodox ideas (@OrthodoxIdeas) that I haven’t yet put into words that I may decide to publish as well in the coming months.

I have a strong suspicion that it’s not worth the effort and it’s not worth the risk to work for a living in order to save for retirement. I believe that the economy as a whole is a massive con game and if you try to invest in any part of it, even in precious metals, the risk that you will lose most of it is too great, so if you have no savings, you’re probably better off being as lazy as possible, collecting food stamps and any other freebies such as the Obama phone., and just wait until there is no choice, but to give everyone a universal basic income (UBI).

But if you’re like me and you already have savings because at some point in your past you were indoctrinated to believe that you needed to work and save money in order to have a good life, then you have no choice today, but to play in the casino that is our financial system.

There is so much fraud and corruption in the world now that the disaster scenario or the apocalypse scenario occurs if everything remains the same, stock prices keep on rising, and people keep on going to work without producing anything useful. That’s the worst case scenario. So to insure yourself against financial armageddon, you should just follow the financial advice of the mainstream, which is based on some kind of asset allocation model like 60% stocks, 25% bonds, 10% gold, and 5% bitcoin.

What I want to talk about is not the worst-case scenario, but what if things get better? What if the healthcare monopoly gets broken up, what if education is reformed to teach relevant skills, what if we stop imprisoning people for non-crimes such as drugs and prostitution, what if salespeople become less effective in manipulating people into making bad buying decisions, what if the trend towards bigger and more bureaucratic government reverses, or what if people improve their quality of life by living without smartphones? Any significant positive change is going to increase our collective wealth and well-being almost by definition because a larger proportion of the work we do will go towards useful things.

Of course, the current financial system can’t function unless everything keeps on growing, which by definition means that the number of scams in the world needs to multiply because technology is deflationary, so to inflate the system you need more people doing useless things, like give people more speeding tickets. I think at least on a subconscious level many people recognize the issue and understand that eventually we’ll just have to give people UBI.

A lot of people believe that if you put your money in stocks in the long term you’ll be fine because it tends to beat inflation over long periods of times and has done so for hundreds of years. What more convincing argument can there be that something has worked for a very long period of time?

There are some pessimistic analysts such as John Hussman who are projecting negative stock market returns over the next 10 years based on overvaluation, but even this viewpoint is completely delusional because it fails to ask a crucial question? Where exactly is all this wealth supposed to come from? You invest money and it’s supposed to magically multiply and become more. In fact, this scheme of making money “grow” is supposed to work in aggregate., so everyone can be a winner!

The notion that you can make more money by putting money to work for you is the basis of much of the financial industry. Pyramid schemes and Ponzi games are supposed to be illegal and Bernie Madoff was sent to prison for it not too long ago, but if you think about it for a few minutes, you’ll see that the entire economy is nothing but lies, scams, and fraud, and therefore money gained through investment must be somebody else’s loss.

The first thing to understand in order to invest correctly is that on average, investors are going to lose. So therefore, the goal should not be to make money, but to lose as little money as possible. In aggregate, investors will lose because there is overhead involved in all forms of investment. When you buy, you have to pay more than when you sell because there are middlemen who will collect a fee.

Economists love talking about abstract concepts such as productivity gains, but it’s all a scam. A personal computer in in the 90’s might have had 4MB of RAM and people used to type e-mails and prepare Excel spreadsheets on them. Today, many computers have 1000 times more RAM (4GB), and people still type e-mails and prepare Excel spreadsheets, the difference being that the computer will often grind to a halt and take 10 minutes to reboot because computers have become more wasteful and inefficient. In theory, today’s processor is faster, but in practice, there has been no productivity gain. Do you really think that taking a dirt cheap commodity such as the ink for an ink jet printer, and encouraging people to buy cartridges for $25 a cartridge makes us richer as a society? As cars and appliances become harder to fix and more prone to failure, does this make us richer as a society? But if it doesn’t, how can you earn more than inflation by investing in stocks? Technologically and sociologically we’re going backwards. All gains at this stage are just Ponzi game that’s waiting for a trigger to cause a collapse.

What is the solution to this? All we have to do is stop valuing work. We have to stop believing that work is inherently virtuous. Once we incentivize people to work less, we can transform society to where we work 90% less while our standard of living goes up.

So why does everyone including Peter Schiff, Karl Denninger, Jeffrey Gundlach, Charles Hugh Smith, as well as Donald Trump himself have their head buried in the sand? Because they all religiously believe that working is so virtuous. They want to believe that giving away money is worse than having people work. It just seems so sensible that you should have to work for what you get. Everyone should contribute to society. The insanity of their viewpoints is that if you make people work, you force them to be dishonest because the useful jobs are already taken, so by encouraging work, you are encouraging all the lies, scams, and frauds these people are railing against. The exception is Donald Trump because he doesn’t rail against scams. He’s okay with it. But even Donald Trump criticized the Fed for keeping interest rates too low and creating a stock market bubble not long ago, and now he is cheering on the all-time-highs on the S&P 500, so who knows what he really thinks, right?

So how many people in world refuse to believe that working is virtuous? Well there could be many, but no two people who share this view can ever be allowed to meet each other. The reason we know this is that no two people who believe in this most obvious idea of all time have met each other in the past and there are billions of people with internet access.. If it were possible it would have happened a long time ago and the world we live in would be very different today.