Sometime in May, after nearly 2 months of quarantine, my wife and I made the executive decision to spend most of our summer in Lake Tahoe. There is something about Tahoe that never gets old, and with remote work becoming the norm, we couldn’t pass the opportunity. As such, we drove out here with our two young children in late May. In preparing for our trip, the best decision was changing our cell phone plan to include a hotspot on each of our phones such that the kids could occupy themselves. We would not have survived the 28 hour drive otherwise. Most days have been spent at the beach or hiking. We have found several “new” beaches, including one gem that requires a half mile hike to get to, and the kids have loved using the inflatable paddle board. My personal preference is to be outdoors as much as possible while maintaining a safe distance from people.
As we enjoy the mountain life for the summer, I continue to keep a keen eye on markets, the pandemic, geo-political events, and ongoing social unrest in the U.S. and many parts of the world. Regarding the pandemic, it is pretty clear to even the casual observer that it is not going away anytime soon. As I type this, states are scaling back or pausing reopening plans; for example Florida and Texas have closed down bars again. The surge in infection rates is no surprise to me given the re-opening and increased testing; however it is also a matter of personal responsibility and behavior. I am referring primarily to social distancing and hygiene. Many in the public view *masks* as the panacea to stop the virus (aside from lockdowns), however I view this as laughable, especially without social distancing and washing hands without constantly touching your face (see CDC website). It is not to say that masks do not provide any benefit, I just view it is a small incremental benefit that rides on the coattails of social distancing and hygiene. The other urban legend I find interesting is that lockdowns will *stop* or *kill* the virus. No, they will simply slow it down. The virus will run its course regardless. And as we have seen, there is a trade-off between lockdowns and the tangible human toll of a devastated economy. Some rationalize this as the US will simply print money to have people stay at home and collect a universal basic income. If someone can show me ONE example of where money printing did not lead to complete and total destruction of an economy and society, I might buy into this. There is no example, of course. Long story short, we are in between a rock and a hard place with the pandemic. We will have to ride it out and walk a tightrope without overwhelming our medical infrastructure OR collapsing the economy (jobs).
As the pandemic rages, we also face social unrest both domestically and abroad. In my view, the social unrest domestically is just a carry over of the ongoing civil war in this country that started years ago. And no, I don’t believe it started with *Trump*. Simply stated, there are drastically different visions on how to run this country and how we fit into the world, and we have now reached a fulcrum point. We head into this crisis completely divided as a nation which of course makes us weaker and susceptible. Based on the current rhetoric and sentiment, I honestly don’t know if we can exist as one country much longer. Further I will cut to the chase and say this, I view the notion of having all or part of what I have worked for my entire life taken from me in the form of reparations, confiscation or otherwise, to be unacceptable. I will let the reader use their imagination as to what lengths I (and many others) would go to avoid this outcome. Meanwhile, as the divide and conquer strategy works to perfection on common Americans, corrupt politicians continue to wage war against each other in Washington. The epicenter of all of this may be the Flynn case, which I urge people to watch closely. Not necessarily the outcome, which currently stands at a dismissal of charges mandated by the DC Circuit Court of Appeals; however the details of the case and notes which have been released. Without even looking closely, you will see a disturbing trend that led to the current years long debacle; i.e. an existing administration spying on and framing an incoming administration in an effort to either a) prevent it from taking power and/or b) delegitimizing it so as to be ineffective. No matter where you stand, this appears to be a political scandal of historic magnitude. Therefore keep on an eye on the Flynn case, AND the Durham investigation. I predict some kind of metaphoric mushroom cloud to blow in the next few months.
On top of internal disintegration and the pandemic, we have an ascendant China. When I say ascendant, I mean in terms of its impact on global trade as well as influence in the world. It is quite interesting that we have domestic propagandists that have recently put China in a positive light, both generally and with respect to its handling of the virus. Of course that assumes that China has been forthcoming about anything with respect to the Virus and its containment or simply…anything. Whatever the case, first tier diplomatic communication channels between China and the US are deteriorating rapidly. Historically this leads to bad things and “accidents”, which often lead to broader conflicts. Right now we stand in a very precarious position as people realize that the “phase 1 trade deal”, which I contended previously was impossible to complete anyway, is in jeopardy. This is aggravated by the fact we are in an election year with Trump seemingly cornered into “doing something.” What I think that means is either 1) a complete disintegration of the trade deal primarily due to China dragging its feet on agricultural purchases and/or 2) an actual kinetic military conflict between the two nations, likely in South China Sea.
The cherry on top of all of this depressing stuff is an unsustainable debt explosion in the US, China, Europe, Japan etc. Basically all of the developed nations (I consider China to be developed and no longer “emerging”). At minimum, this is setting the stage for massive inflation, AND the possibility of a complete systemic reset depending on who blinks first in this twisted game of monetary and fiscal insanity. Both outcomes will be ugly. The Fed and other central banks continue to exasperate the problem by enabling burgeoning deficits and not letting any big company or bank fail. So for those who cry about “capitalism”, you must be talking about some relic of a system that no longer exists. What we have now is nowhere near capitalism, where creative destruction is necessary and encouraged. That said, I tend to view all of these things in aggregate through the language of markets. My position continues to be short equities and long gold. After successfully shorting the initial plunge in February/March, I covered and then began to re-implement equity shorts in April. As it turns out, I was a little early however we are still on track in spite of a Fed driven spike.
Below I show charts of both Dow and Nasdaq futures as of around mid day today. The Dow appears to be impulsing down in a series of “1’s and 2’s” after reaching its intermediate peak a few weeks ago. You see a clear 5 wave move down followed by about a 70% retrace. This is an ideal setup for a big plunge, perhaps after one more mini short squeeze.
The Nasdaq, on the other hand, has behaved quite differently as it actually set new highs after its initial plunge (wow!). One could easily chalk this up to supercharged Fed liquidity and rampant speculation for which the Nasdaq is known, however something bigger is afoot. In my opinion, the pandemic has accelerated the existing trend where our economy has become “virtualized” and completely dependent on technology moving forward. That is another way of saying that property in the form of software technology, AI, and the associated intellectual property will be more valuable than traditional “real” property, the latter of which will be under attack by tax authorities and eventually rising interest rates. In technical terms, the Nasdaq looks to be forming a head and shoulders pattern that is currently breaking. Translation = more downside.
Lastly we look at gold. It is essential to own some gold right now, either synthetically via futures contracts or physical coins. I own both. Gold is a hedge against monetary insanity and systemic breakdown, both of which are occurring or rising in probability to occur shortly. I thought gold had broken out of a consolidation pattern back in May, however it retested lows of its consolidation pattern and subsequently formed a bigger flag pattern! Now it appears to breaking out again. In other words it has been coiling in a range for long period and poised to make a big move, which I contend will be upward.
With that, I hope everyone stays safe and enjoys the summer and every day to whatever extent possible. We never know what tomorrow will bring, and as the past several months has taught us (again) the world can change in an instant.