Macro Hedge Funds: Creating The Right Mix of Assets

I have a friend. He’s a gold bug. He’s also…how do I say this? Eccentric!

I went around to his house recently and he showed me this gold bar. He’s using it as a door stop. I mean it looks like what it is. A bloody gold brick. It’s a small brick. A 1kg bar. Still that’s 32.15 ounces sitting there on his floor, making sure the wind doesn’t catch the door and blow it shut. He told me his dog peed on it. Clearly the dog doesn’t think much of his gold bar. He mentioned something about cutting its testicles off but I never checked. It was wagging its tail gaily for me so….

He figures that even if someone were to break into his house…which never happens where we live, there’s no way they’d look at that gold brick on the floor and think…ooh I have to have that fake gold brick over there. Instead they’ll head for the jewellery box, maybe nick the telly and any electronics but not a “fake” brick on the floor. He may be right, but I’m not about to leave gold bricks lying about my house. After all, as I’ve told him multiple times, he’s American and we all know that people who can’t say aluminium properly aren’t to be fully trusted.

Invest in Gold and Silver Commodities

Gold isn’t really anything special in my book. I mean it’s really just a lump of metal. It pays no interest, you can’t do anything with it and it just sits there and looks..well…golden.

Silver’s not much better, to be honest. Just a bit duller, really, and heavier.

And it’s those attributes…the sitting there and, in a trustworthy fashion, not changing, even when peed on. That is in many ways why it is that gold’s value at certain times presents such extraordinary value. 

This friend used to read a lot of those newsletters from “the world’s going to end crowd” as he now calls them. And after losing so much goddamn money finally sold almost all of his gold and stopped reading them. Now, he just broods and grumbles, which is oddly reassuring for me.

The thing is, I think the time for him and his fellow gold bugs is coming shortly…not that many will understand why…or indeed when to get out. But that’s a story for another day.

Let’s take a look at why this may be the case and then I’ve a special something that explains exactly what we’re doing about it, why, and how.

But first. Let’s begin with what the trend looks like.

Here’s the monthly chart for gold.

And here’s the one for silver.

Both look to have broken out of long boring trading ranges. Technically, they look bullish.

Look at The Global Market Trends

Now, let’s look at a sampling of things taking place in my world. The macro landscape.

Jeezuz…where to start?

Consider Governments’ Fiscal Policies

Let’s see. The EU. How to describe such a mess?

There are many things I could talk about with respect to the fustercluck that is the EU. Readers of this site are familiar with many of them. However, most importantly right here and now, there is one thing which I’ve been harping on about more recently, which I think is important as to why boring gold and dull silver are attractive. Fiscal spending is going to replace existing monetary policy.

In fact, the European Commissioner for Economic and Financial Affairs, Mr. Pierre Moscovici, recently said as much at the Bloomberg Global Business Forum. In any event…the pointy shoes have run out of options and this is the next iteration of their disastrous ill-conceived machiavellian response to a host of problems of their own creation.

Easy money and fiscal austerity has proven to be a perfect recipe for lackluster economic growth. These clowns are slowly (they’re not that bright) figuring this out now. And so, next comes fiscal. Watch!

As Kevin Muir wrote about in an excellent article entitled Don’t fight the Fiscal.

“Maybe if the ECB cuts another 25 basis points to negative 75 basis points then the company which was previously on the fence about CAPEX investing will finally reach the point where they want to take out a loan… Yeah, nope. Not a chance. Monetary policy has reached its limit and Central Bankers should be like that hero in the war movies – you know, the shy quiet kid with a few lines that jumps on the grenade when it gets tossed into the foxhole saving everyone.”

Actually, sticking with fiscal spending, I don’t believe this will be a uniquely European phenomenon. I think it’s coming in the US, too. Remember it’s much easier to win elections by promising handouts to the masses than instituting austerity and cutting taxes for the wealthy. And as the rising tide of socialism gathers momentum, this is what’s probable, whether we like it or not. I don’t care if you think this is a good, bad or a “meh” idea. I’m here to figure out what WILL happen, not what I WANT to happen.

What fiscal policy means is that the treasury will need to borrow – massively. And that’s a bond trade. If you’re concerned with bonds, which are essentially just long-dated currency, do you suddenly love short-dated bonds..aka currency, when fiscal hits? Certainly cash or T-bills are preferable to bonds, which is actually one reason we think both gold and the dollar will rise. But…and this is the critical part, fiscal spending is never deflationary. You don’t really want either.

Political divide

Over in the US, one thing that I’ve been bringing to your attention on this blog is something that’s not currently priced. Namely, that while everyone is looking around every corner for nazis and right wing extremists, it is the revolution of the left that presents the most significant threat. In fact, the 2020 elections look to potentially become extremely violent…more so than anyone currently realises. Why do I say this?

Take a look around you. Civility and discourse are no longer part of the process. It looks like we’ve crossed the proverbial Rubicon. No matter who wins, the other side isn’t going to accept it. That’s especially so if Trump is re-elected. Things are likely to get pretty spicy.

So we have social discontent, globalisation reversing, and the coming fiscal spending, which, I dare say, is never deflationary and it often leads to a loss of faith in currency.

Rates

The pointy shoes at the Central banks can keep cutting rates. Of course they can. They sure as hell can’t raise them. The math simply doesn’t work. So they won’t. Put simply, this creates more distortions in the market. And what that means is they’re backed into a corner. That corner is a stagflationary corner. You see, messing about with the cost of capital doesn’t produce real goods or services. And so, we’re not looking at a demand-led growth story here contributing to inflation, which is what the markets have been looking for to identify inflation (because the last inflationary story was demand led), instead we’re looking at a supply constrained setup leading to stagflation.

Oh, and here’s the fun fact of the day. 
In the last 65 Years in 11 of 13 rate cut cycles, do you know how gold stocks performed?
Gold Stocks Average Gain: +172%
Put that in your pipe and smoke it, central bankers.

Consider for a minute the recent repo crisis. Banks won’t lend to banks, especially US banks to European. It’s blindingly obvious that risk is so dramatically mispriced, that betting on continued stability is like expecting this guy to keep cutting with no adverse repercussions.

And I’ve not even touched on UK politics. What a f’ing shambles. I mean, really? Really??

Looking for solitude, we turn our attention to Asia, only to find that the bastion of democracy and western civilization in Asia, Hong Kong, is on fire. Literally.

As the rioting continues, China will continue to tighten its grip. It’s already producing a steady stream of bloodshed. Not to expect more would be myopic. Aside from the obvious loss of freedoms coming to Hong Kong, and the massive blow to democracy in the region, (no western nation is coming to their aid, remaining oddly silent), capital has been pouring out of Hong Kong for 2 years now and at an accelerating pace. 

In an article last week in the FT entitled “Events in Hong Kong reveal the thin veneer of civilisation”, Jamil Anderlini describes how “everyone in this most genteel of cities is witnessing a real-life lesson in the fragility of what we call civilisation. All too true. With the realisation that civilisation is fragile comes the need to own assets which are…in the words of Nassim Taleb, antifragile. The gold brick my friend’s dog peed on looks pretty good here, as does boring dull silver.

All of the above leads me to…

Separatism

The dictionary states “A common definition of separatism is that it is the advocacy of a state of cultural, ethnic, tribal, religious, racial, governmental or gender separation from the larger group. While it often refers to full political secession, separatist groups may seek nothing more than greater autonomy”

As globalisation retreats, so supply chains break, constraining supplies by pushing up the costs of transportation. As the political divide intensifies, both domestically and globally, we expect nationalism to be a topic you’ll be hearing a lot more about. We are already seeing this trend accelerating with China’s aggressive push into global markets and securing resources. We don’t believe, however, that this will be confined to resources. We anticipate that technology will become critical. Possibly a splitting of the internet. Think Chinese style censorship but on a grander scale, where tech companies end up needing a license to operate in jurisdictions. 

Separatism really comes down to a form of tribalism, where parties don’t trust each other. Show me any society where trust is low or falling and where my gold bug friend’s gold bar isn’t outperforming.

Execution: Minimize Risks, Maximize Returns

All of the above is fine, Chris, but what do you do about it?

The obvious is to own some assets that can benefit from this, or at the very least, protect you from the inevitable fallout. Over a year ago, I was thinking long and hard about this very topic. The problem I faced is a problem many of us face.  What the hell do I know about gold mining? I don’t have the skill set to know enough about mining companies’ operations. Sure, I can read financials and invest in companies that will benefit, but look very carefully to see who really makes a killing at market turning points such as this, and you’ll see it’s the guys getting into PIPES with superior management teams. I didn’t want to listen to any of the guys who’ve been wrong for over a decade on this stuff because clearly they don’t understand the macro and at the same time I realise we’re talking about an industry which, let’s face it, probably has more scumbag CEOs and promoters in it than if Adam Neuman and Elizabeth Holmes had a lovechild which was then cloned.

This is why just over a year ago, I brought on Jamie Keech to the team here, joined shortly thereafter by Nick D’Onofrio. Jamie’s not an ex-plumber, an ex-sandwich maker or, and this was important for me..a newsletter writer. He’s a mining engineer who’s worked all over the world in every aspect of mining. He’s also ridiculously well-connected. And because he’s worked in every aspect of mining, he can and does quickly and regularly call bullshit on the stories that get told. It took me nearly 12 months of interviewing many fine folks…(and some shitty ones) before bringing him on board. In the end, I felt if I couldn’t find the right guy then, I simply wouldn’t get involved at that level. I needed someone that would allow me to deploy my own capital intelligently, not someone who would simply write newsletters that would breathlessly promise untold riches because the world is going to end. Something that used to appeal to my gold bug buddy. Anyway, here we are today. I may be wrong but the timing looks pretty darn good to me. 

And on that note, I’d like to cordially invite you to join Jamie as he discusses what we’re presently doing with our capital. Go here (if you’re an accredited investor) to find out what Jamie has identified as the next opportunities in Resource Insider.

-Chris

“Let me be more aggressive: we are largely better at doing than we are at thinking, thanks to antifragility. I’d rather be dumb and antifragile than extremely smart and fragile, any time.” – Nassim Taleb

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