I’ve been inundated with questions from many of you following the recent events. Brexit, that is, not Justin Timbertrouser’s latest antics. While I can’t publish all of them, I’ve selected what I think are some of the most important ones.
A lot of questions were related to positioning during and post Brexit. I hate to mention it as I may choose to trade out of whatever I mention at any given moment so please bare that in mind.
- Sold a bit of GLD on Thursday and will look to buy back after the shock/euphoria subsides.
- Long GBP/EUR and USD/EUR.
- Net short equities.
- Lightened up by 25% on short Spanish 10-year and long US 10-year. (hint: you get paid to do it and are synthetically short EUR which I’m OK with).
Ok, onto the questions…
“By the way, your latest article “World out of whack” was great. I believe the next crisis country will be Italy with their massive banking problems. The Euro is simply too strong for them and in the old days they were able to compete against Germany by constantly depreciating the Lira.
Excellent points on the historical situation with Germany and Italy, and pinpointing the currency aspect.
Not everyone agreed with Italy as it came in a close second to France, as you can see below from the poll I ran in the recent World Out Of Whack.
We’re actually dealing with two drifferent problems here – the EU and the currency. Let’s take a closer look at both.
The EU was originally designed to stop Europeans killing each other (something they’ve been doing for centuries) and to foster closer ties between European countries by eliminating barriers to trade. As the old adage goes, “When goods don’t flow, bullets do.” And this was at the core of the EU idea.
Giuseppe always loved BMWs, didn’t care for sauerkraut (I don’t blame him), and – while being infuriated with Hans who is as punctual as Big Ben – saw no reason not to make the buying of his BMW any easier.
Hans, on the other hand, still believed that all Italian woman were smoking hot, all Italian men were plumbers, and though he couldn’t understand how pasta could be eaten everyday without causing some sort of digestive problem, he welcomed the idea of shooting down to Puglia for a weekend’s sun – sans silly visa requirements.
So why not allow Hans and Giuseppe to manage all this with less friction?
Increasingly though, the EU has become a barrier to trade rather than an enabler. Today there are restrictions and laws governing how bendy a banana must be. Not bendy enough and it doesn’t meet regulation. Cucumbers can’t be too bendy, on the other hand. Not straight enough and they too are in the tip.
Then there is the famous case of the EU directive stating that water does in fact NOT hydrate you. Retailers of water were banned from suggesting water would in fact hydrate you.
Prunes are not laxatives (contrary to anyone who tests the theory), turnips are not allowed to be called swedes, and eggs are not allowed to be sold by the dozen. Instead, they must be sold by weight only.
Powerful vacuum cleaners are banned. You see, they chew up too much energy. Diabetics should be banned from driving and the list goes on and on. It’s enough to make blood shoot out of your eyes.
When looking at the sheer weight of unexplainable laws, you’re left thinking that only a mentally ill person could have put them together. And you’d be right.
The European Parliament is mentally ill and though Britain’s exit from this “fustercluck” will have immediate negative consequences, I’m all for a controlled demolition rather than a supernova which is where the EU is most assuredly headed.
The single currency, on the other hand, was always as terrible an idea as walking through Damascus with an “I hate Muslims” T-shirt would be. You just knew it would cause pain and suffering.
Each European country experiences unique business and credit cycles which are often independent of one another. They always had a shock absorber, allowing for economies to adjust to the economic bumps of the business cycle. That shock absorber was their own currency.
Let’s use an admittedly simplistic example.
Let’s say that Greece becomes uncompetitive in terms of trade. It would then experience weakening corporate profits, leading to less investment, leading to higher unemployment. This could then be met with weakening the currency, which in turn leads to lower operating costs, higher profit margins, renewed employment growth, and a renewal in investment.
The reason Greece is clocking a 51% youth unemployment and Spain a 45% youth unemployment rate is directly tied to the fact that the currency as a shock absorber has been taken away. Instead, these countries are forced into a straight jacket where rather than a weak currency they get a persistent weak economy.
Ironically this economic pain – left unchecked and unresolved – has the potential to cause rising nationalism as I discussed earlier this week. At the extremes we’re talking war.
Here’s the next one:
“Chris, thanks for the ton of really insightful material you put out. I have a question: you first mentioned to buy Bitcoin and it was at $380 or thereabouts I think. Then you put out that report on Bitcoin being a way to play the devaluation in the yuan and it was at like $480. I ignored you at $380 and again at $480 (I’ve a habit of doing this though I’m determined not to repeat it again). I watched in awe as it rocketed to recent highs and just yesterday it collapsed again back to $599. Have I missed the boat?
Well, it’s back up at $674 as I’m writing this which simply demonstrates how volatile it is.
Think about it like this: Bitcoin market cap is about $10bn. Around $3bn of that is reportedly owned by founders and early adopters, leaving around $7bn actively traded. Of that, over 80% is traded in China which is a black box.
It is one reason I’m paying a lot of attention to China and goes back to my devaluation argument.
One other thing to consider…
Do you know of any other asset with a market cap of say $6bn which has anywhere near the airtime that Bitcoin has?
Right now the ability for institutional money to get into Bitcoin is still somewhat limited. It is clear that market acceptance amongst the suited and booted is on the rise so it’s not just Molly dealers and kiddy fiddlers who are using it. If we get a real ETF in this space watch out!
Bottom line: I think Bitcoin either goes to zero or it goes supernova. I’ve spoken at length around the geopolitical environment which is highly conducive to Bitcoin doing well.
“I think you is a shill and dead wrong on the USD. Getting sick of you dollar bulls. Do you secretly work for Goldman Sachs or other jews? That turd is going to wipe out like all the other currencies before it and you helping people line up to be shot. Screw you. I hope you go down with it.”
I didn’t respond to this clown but I did remove the idiot from my mailing list. Aside from the vitriolic response and the fact the guy needs to be fed a brick, there are some key points any sane investor should consider as the only arbiter at the end of the day is the market.
Whenever I look at any market I try to form an opinion based on data sans opinions. I always find I come down with a basic viewpoint and I know it’s biased in some regard. It might be bullish or it might be bearish. The next step is to find credible people who think the OPPOSITE.
The reason this works for me is due to something called first confirmation bias. It’s been proven that the first conclusion we come to is very difficult to remove, and the longer we hold that viewpoint the greater the risk of us identifying ourselves with it.
The risk is that once you’ve reached a certain viewpoint you do what fully 90% of people do – you seek confirmation. You’ll find it, I assure you. If you want to believe that Elvis is alive and you search for evidence to support this viewpoint, you’ll find others agreeing with you. They may be mentally ill but you’ll find them.
So yes, right now I’m bullish on the dollar and I don’t at this point in time work for anyone at all. As for Jews, why are they any different from Armenians, for example?
Capitalist Exploits is not a home to xenophobic bigots or people who wear their socks with sandals (kidding). So if you’re reading this and are a xenophobic bigot with a small brain and a large mouth, do me a favour and hit the unsubscribe button at the bottom if this email please.
Otherwise, you’re welcome to stay with us and tell your friends to come and join us – even if they wear their socks with sandals.
Onto the penultimate one:
This is neither feedback nor a new market topic but more just requesting your thoughts.
For context, I’m an agricultural commodity trader, and started trading macros with my own money early last year, so quite far from being an expert or even very knowledgeable. That said, just read your WOW for this week, and I’ve been thinking for a while that the global bond market is the single most out of whack thing across markets right now.
The way I see this playing out, I think there is further contagion in the EU, China is not looking too good, and between everything don’t think the fed raises rates. That’s not bullish the dollar but think that will be overwhelmed by dollar buying on flight to safety. So, back to bonds, I guess my question is, what might trigger the bond bubble to burst?
Don’t think risk to shorting them here is that high but you simply never know with central banks. Also think long gold covers every scenario that might potentially play out. But just curious on what actually triggers a breakdown in the bond market. Sorry to baldly ask a question without much contribution from my side, but I really don’t have much experience in this. Would greatly appreciate any insights you might have.
I could write an entire chapter of articles on this so let me try be brief. I’ll be covering many of these aspects over the coming weeks and months.
Contagion in EU and China looking bad are in my mind bullish the dollar. Why would this be bearish dollars?
Also, if you look at global yields right now the US 10-year sports a higher yield than the UK, Germany, France, Italy, and Spain.
Right there is a fantastic arbitrage opportunity which I’ve been plying for the last 3 weeks and one which you get paid for. Carry is on your side: short European bonds and long US bonds allows you to get paid for the trade. You do take currency risk but I’m struggling to find reasons why I’d be bullish the Euro.
As to bonds, too much to talk about so let me cover that in future missives.
And the final question:
“You mentioned in your very inspiring post on change that you’re not investing in private equity anymore. Can you provide more thoughts on why?”
I see too many risks for my own liking given the global macro landscape. I’ll still be doing very specific private deals. I mentioned some questions to consider on this topic in my article last week but here’s some further bullet points to consider, namely a shift in risk capital.
If you’re a young startup company looking to raise capital without a clear path to revenue (not growth) then you’re dead. Forget it. I’m not interested.
Funding companies which will need to be going back to the trough in another 12 months elevates the risk MASSIVELY for me. And right now VCs are still living in la-la land because many are 20-somethings who don’t understand global macro capital trends.
After having done over 50 deals and diligencing hundreds more, I can promise you that every company underestimates its time to revenue, overestimates its revenues, underestimates its cash burn, and overestimates its ability to raise additional cash.
Structuring and knowing what risks you’re taking is absolutely critical and never more so going forward into the macro environment lying before us.
Add to this the kind of valuations that are still legacy 2014 and you’ve got a lot of new deals which will be entering a market they don’t actually understand.
Additionally with the type of asymmetry being exhibited in the macro space and the opportunities available everything for me is relative.
Other than that I’m very focussed on doing less and having time to think every day.
This requires elimination of non-essentials and private investing is incredibly time consuming if you’re doing it properly. Sure, you can throw money at a bunch of deals that you’ve perused the pitch decks on but proper due diligence takes months, not a couple hours on the sofa.
And with that I wish you all an awesome weekend and I will see you next week. I’m off to take my wife on a date.
“Women need a reason to have sex, men just need a place.” – Billy Crystal