Stocks Mentioned: Canfor Pulp Products Inc. (CFX), West Fraser Timber (WFG), SPDR S&P Homebuilders ETF (XHB), Japanese stocks (EWJ), Grayscale Bitcoin Trust (GBTC), VanEck Vietnam ETF (VNM), South Korea ETF (EWY), China Large-Cap ETF (FXI), Invesco China Tech ETF (CQQQ), Singapore ETF (EWS), Abrdn Platinum ETF (PPLT), Biotech stocks (XBI), Teucrium Wheat Fund (WEAT), Graphite India (NSE:GRAPHITE)
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December 20 2022
The Bank of Japan maintained yield curve control and the yen strengthened from a pre-announcement low of 138.18 to 133.1. I closed out the fx position. Moves of 2.5% in a day aren't normal in fx land. When all other central banks are busy trying to destroy their economy, the market cheered BoJ's surprise dovish stance. My thinking that the central bank which dares to maintain an independent monetary policy (and not follow the Fed off a cliff) will be rewarded with a stronger currency has been validated.
I expect the Nikkei to start reflecting this soon.
Canfor Pulp Products Inc. (TSX: CFX) is announcing the immediate curtailment of its Intercontinental Pulp Mill, which is expected to be in place for four weeks. The curtailment is due to the lack of available economic fibre as a result of sawmill curtailments. The downtime will remove approximately 24,000 tonnes of market kraft pulp.
Inflation leads to demand destruction which cures the inflation problem automatically. With Fed hikes thrown in, you get supply destruction which leads to higher inflation in future as existing capacity and capex projects get shelved.
USD.JPY is down 3.1% today (yen appreciating). In any other year, that would be the financial news headlines, not Avatar. Futures point to a broad based collapse in US assets. Gold and bitcoin are holding steady. All major stock indices are down, including the Nikkei. The Nikkei should be a key beneficiary of this shift from US assets, so I expect that to change soon.
When the pound went into free-fall, the Bank of England interfered. The UK government changed their policies. I think the Fed doesn't care what happens to the dollar or to asset prices. Powell isn't going to stop until he gets inflation under 2%, even if that means mass layoffs, a Great Depression style collapse in asset prices, and a run on the dollar. "Operation successful, patient dead" as we colloquially say in India. The speeches of the various Fed governors read as if they are gleeful about the effect they are having on asset prices. Almost as if they are measuring success based on the amount of misery and fear they are causing.
A few days ago, I wrote that American exceptionalism was dead. The Greenspan-Bernanke-Yellen put which put a floor under asset prices has morphed into a Powell sledgehammer which puts a lower ceiling on asset prices. I'm sure there are pockets of value left in US equities, but it's time to start looking elsewhere.
The treasury market was under pressure on Monday as traders expected a hawkish pivot from the BoJ. That would have reversed flows from Japanese investors, causing capital rotation out of US bonds and into Japanese fixed income. Even though there was no such pivot, treasuries continued to sell off. I believe this is an opportunity to go long the 10Y and 30Y. In a deflationary collapse, bond yields will fall. The Fed is propping up short term rates by raising the Fed Funds rate, which forces banks to hold excess reserves at the Fed and contracts the availability of credit for short-term borrowing. The resulting squeeze makes it harder for financial market participants to finance their "inventory" (all balance sheet assets held as trading positions). Treasuries are the best collateral, making them a beneficiary of a flight to safety. Then yen moving 3% tells me we're in for a hell of a move into safe-havens at the expense of all risk assets.
Stay long gold and treasuries. Yen too, but there should be a better entry following the short liquidation.
In India, farmers and small businesses can access 1Y gold-collateralized loans from state owned banks at 7%. In the US, small businesses are paying 7.9% for short term borrowing. The sell-off in US real assets is only getting started.
The National Association of Home Builders (NAHB) is expecting weaker housing conditions to persist in 2023, after homebuilder sentiment fell for 12 consecutive months in 2022. If the Fed is serious about destroying the housing market, there's a long way down for home prices, and construction should be in a bear market for the foreseeable future. Sell West Fraser Timber (WFG) and XHB.
Dollar selling off. Treasuries selling off. Stocks selling off. Central banks are really in control of markets today. Gold and bitcoin are higher amidst all the uncertainty and fear. Bitcoin could go either way but gold is definitely in a bull market.
I know of a guy who sold bitcoin at $26k in December 2020 thinking January profit taking would be the end of the bull run. He made over 200% in a few months, which is a pretty good trade by any metric. Except, come January and bitcoin shot up to $42k. And suddenly, a 200% return looked like a terrible trade. After exiting my JPY position in the ~134 range today, I understand his emotion. It certainly feels smart to take a profit thinking that's the end of the move, but the really smart move would have been just sitting on my hands and letting my winners run. Note to self for the next trade.
December 21 2022
The US Energy Information Administration expects US crude production to come in at 11.7 million b/d in 2022 and add another 600,000 b/d next year to reach an all-time high of 12.3 million b/d.
US crude exports have averaged 3.4 million b/d this year, reaching the annual peak in November, with almost 60% of all departures going through Corpus Christi, TX.
A counter-argument against QE and ZIRP is that it benefited borrowers at the expense of savers. This is textbook economics, which was thoroughly debunked by empirical evidence. As a saver, you benefited from the Fed's QE and ZIRP by seeing capital appreciation in your home and IRA. The Case Shiller home price index compounded at ~6% per year since 2009. If you financed your home with 100% equity, that appreciation equaled a CD ladder. If you borrowed at 2%, you made a killing. Savers don't just hoard cash under the mattress, they invest. Even bonds benefited from capital appreciation as interest rates went down.
What about those without assets? Say, pensioners or those living off social security? Did they have 2-day Amazon delivery or the convenience of Doordash and Uber earlier? No. They saw their living standards go up as they got more bang for their buck. Young people without assets? If they were smart enough to pick STEM courses, they landed high paying jobs and moved up the income ladder. And whatever assets they managed to accumulate compounded far faster than the CD era pre-2008.
As an aside, back in the 1960s, the communist government of India wanted to cap growth at 3%. They called it the "Hindu rate of growth". They didn't want a productivity and economic miracle, just a slow plod where nothing changed from one year to the next. Those with savings invested it in fixed income schemes at the Post Office or bought whole life insurance policies from a government owned insurance monopoly. It was an era with no growth and no capital appreciation. But hey, you got 4% interest, which was above the GDP growth rate! Any Indian would trade the current 3% deposit rate and the last two decades of prosperity for that horrible time in the country's history. It's not the rate of interest so much as the rise in living standards that people actually care about.
Coming back to the US. Easy money worked, not in defiance of the laws of economics. The missing variable is that it enabled innovation, productivity, and brought in capital from all over the world, which was massively deflationary and more than offset the inflation created by the Fed's money printing. The dollar can go down even as the money supply contracts, and go up even if the money supply expands. Forex rates aren't determined based on a single variable. QE wouldn't work in Argentina since nobody wants to have their capital stuck in Argentina. QE in Venezuela would only cause hyperinflation. The US was a special case.
The unwinding of QE will be the unwinding of this virtuous cycle of cheap money fuelling innovation, productivity growth and rising asset prices. It will mean the dollar losing its over owned status and becoming just another freely floating currency. While the yen strengthened following a deflationary bust, the dollar will depreciate.
Macroeconomics is not like arithmetic where 1+1=2. Sometimes, money printing leads to inflation. Sometimes it doesn't. In 1929, debt deflation caused the Great Depression. Maybe it doesn't in 2023. I am just putting out my current thinking on why the era of US outperformance is ending, knowing fully well things can change in a heartbeat.
[Existing home] sales have now declined for 10 straight months, the longest such stretch since 1999. Reports this week showed confidence among homebuilders dropping for a record 12th straight month in December, while single-family homebuilding and permits tumbled to a 2-1/2-year low in November.
While stocks can sometimes bottom when the news flow is terrible, and that's something I'll be on the lookout for, I don't think this is one of those times. The full impact of Fed rate hikes hasn't even begun to be felt. It's going to get worse, and worse, and worse as the leverage gets sucked out of the system. Negative homeowners' equity is going to become a buzzword like in 2009.
December 22 2022
Buy VanEck Vietnam ETF (VNM)
In keeping with my thesis on dollar dominance fading, I've been looking for opportunities outside the US. Japan is the top choice. I looked at South Korea (EWY) but Samsung Electronics accounts for nearly a quarter of the ETF holdings, so pass. The Chinese ETFs FXI and CQQQ look interesting chart-wise, but I'm not comfortable with the tech heavy portfolio allocation.
I looked at Singapore (EWS) as a China proxy, and that would be my third pick if I was looking to add more risk (I'm not). Singapore is extremely banking and financials focused, with the top 3 holdings (DBS, OCBC, United Overseas Bank) accounting for 37% of the portfolio. If a Chinese recovery really kicks off, Singapore would be a good buy. But not yet.
That brings me to Vietnam. The ETF has a PE of 10, is diversified among real estate, staples, consumer cyclical and financial services. The currency is down ~4% ytd vs the dollar, and the ETF is down 42.6% ytd. The time to invest in emerging markets is when things turn from extremely terrible to slightly less so. I think we're in that moment. The dollar cooling off should make things slightly less awful for Vietnam. The ETF is at an all-time low if you exclude the covid bottom. I expect a sharp bounce within a month if I'm right on the dollar, so I'm bottom fishing.
Stop loss at $10.5, below the 52-week low, for a risk of ~13% with an initial target of $16. Timeline: by Jan 2023.
It's time to get defensive, and that means buying precious metals. We've already got exposure to gold via the miners. Silver is both an industrial and a precious metal, plus it's too volatile for my taste. Palladium is too tied to automobile demand. That leaves platinum and rhodium, and I'd much rather go with the former given it's easily tradeable.
Buy Abrdn Platinum ETF (PPLT)
The expense ratio is 0.6% and tracking error is minimal. The metal is in a choppy uptrend, arguing for patience, a wide stop (3 ATRs), and a smaller position size than you'd normally take.
Bonds, agriculture, Brazil and carbon credits. That's the list of everything that's up today, with the biggest winner being the KRBN ETF with a 0.9% gain. Powell has done great in his role as the Christmas Grinch, nixing the usual Santa Class rally and turning the mood somber on Wall St going into the holidays.
Biotech stocks (XBI) have been stuck in this channel for 3 months. Chances are, this breaks lower given how weak the bounces are. I've been wanting to recommend buying biotech stocks but the repeated failure to bounce to near the top of the channel makes me cautious.
December 23 2022
If you're a non-US person holding popular futures linked ETFs or ETPs, SELL. I know I recommended Teucrium Wheat Fund (WEAT) earlier and I know several people don't always follow through on my exit recommendations. If you don't sell before Jan 1 (trade settlement is T+2 days), you will be taxed at 10% of gross proceeds. Applies to several energy cos, UUP, SOYB, etc as well. Full list here
Stopped out on the Graphite India trade. Three consecutive down weeks for stocks tends to do that.
I've tried both approaches - using stops to get out, and stubbornly holding on to value and waiting to be proven right. This trade just happens to belong to the former camp, so I don't mind getting stopped out.
PCE increased 5.5% yoy and 0.1% from October levels. Spending on goods took a hit, but spending on rent and utilities increased 23.4% yoy. The more the Fed hikes, the more this component will go up. Although spending on lifestyle is rapidly collapsing, we'll continue to have inflation in the statistics.
