Fire and Ice

Hi folks. It has been a while since I posted, so thank you if you are still following this lowly blog. The past two years has been incredibly difficult as many of you know. Losing a parent is devastating, but losing both in a relatively short period of time is a huge gut punch. It feels like a permanent emotional hole has been blown thru the center of your body . If that weren’t enough, I just had a close call with cancer. I went in for an elective procedure to have my tonsils removed and some other work on my uvula which is the little flap that prevents food from going down your airway or in your nose while eating. As part of the normal post-op procedure, the removed tonsils were sent out for pathology. In one of them they found a small cancerous tumor. Scary AF, I know. The good news is that I had a follow up PET scan and no other cancer was found in my body, at least from the neck area to my thighs. So I think I dodged a bullet and was very fortunate it was found this early, by chance of me getting my tonsils removed. I do have to be monitored moving forward, but there is a sense of relief that I am in no immediate danger that requires chemo or some other treatment. Whew, I am glad that is off my chest.

Please don’t confuse the title of this post as a cynical comment about climate change, although I could offer much commentary on that subject, and will eventually. When I reference fire and ice, I am using the terms in the context of inflation and deflation. You see, much of what is advertised to you by the press is meant to confuse on the subject. It is the notion that inflation is subdued, and we are living in world of unicorns and rainbows where money can be printed without consequence. Of course, nothing could be further than the truth. Without showing a bunch of charts, many of you know that house prices are hitting all time highs. Food prices have skyrocketed in the past year. Energy prices are now following suit. Costs of basic materials such as copper and lumber are rising in parabolic fashion. Meanwhile officials at the federal reserve have the view that all of this is “transitory”, and that it is OK if inflation runs hot for a while.

I often follow Dr. Michael Burry of the “Big Short” fame. He is a very unconventional fellow, having gone to medical school and then started a hedge fund in lieu of practicing medicine. I love guys like this, partially because I consider myself to be unconventional as attested by many who know me. Burry was actually the catalyst behind the recent Game Stop mania. It started when an industrious and observant member of the Reddit forum known as “Wall Street Bets” noticed that Burry had taken a position in Game Stop in the fall by virtue of reading his quarterly disclosures. Burry was bravely taking the other side of the trade versus other hedge funds that were shorting the stock. Then of course the reddit crowd got involved and supercharged the situation. As it turns out it is the same as it ever was, in that most people lost money on the parabolic short squeeze and then crash that ensued. Back to my point regarding Burry, recently he has been commenting on twitter about the prospect of hyperinflation in the US. This is not a new sentiment, but when I guy like Burry feels strongly enough to put his thoughts out there on the subject, I take notice.

Recently many have observed the very sharp rise in mid to long term interest rates here in the US. For some, notably members of the Federal Reserve and other “establishment” types, this is viewed largely as a good thing, i.e. a sign of growth. Others have rejected this premise and noted how fragile and dependent the US (and world) economy is on ultra low borrowing costs. The conventional view however is that Fed will again come in and save day by instituting “Yield Curve Control”, which is just a re-branding to describe more quantitative easing (money printing), albeit perhaps in a more targeted fashion as to achieve specific results along the treasury curve. This is where I will offer an unconventional viewpoint, and one that ties in the concept of runaway inflation. Whenever you have an exogenous buyer of last resort that buys indiscriminately, i.e. a central bank, eventually the “tonic” that is buying (QE) becomes the poison. Why, you ask, hasn’t the “real” market for government debt always lowered rates (increased demand and prices) of bonds in anticipation of the Fed buying? Well, that is the case provided the Fed’s balance sheet AND rate of purchasing don’t become so big that they risk the underlying the currency depreciating at an uncontrollable rate. It is the market participants view, i.e. the real world demand of government debt, that will judge this, not the Fed. Taking it further, when the Fed’s balance sheet becomes big enough, it will become a systemic risk to the US and the entire financial system. Why? Because quantitative easing and MMT (modern monetary theory where free money is handed to the plebs) are explicitly inflationary and will eventually cause rates to rise. In which case the Fed’s balance sheet will decline in value precipitously, with the currency falling right along with it. What if the Fed says it will never sell, or sell sometime well in the future? Same result, rates will rise since they can never escape what they have wrought. And if they say they are going to sell? Guess what, the market price for debt will drop because it knows exogenous supply is about to be dumped on the market. In other words, a liquidity trap.

The above commentary doesn’t consider the other evil sister of inflation, increased taxation. Never in the history of the world has out of control debt issuance and money printing by the taxing authority resulted in anything other than complete devastation of the underlying economy. So here we are, in a massive liquidity trap that has created the biggest asset bubble in the history of mankind. Linking this to equity markets, many of you know that I thought the drop in March was the beginning of the “big one.” It turns out I was wrong, which is outright scary. The Covid induced drop last year was simply a warmup drop before the final leg up where we currently reside. So, the “big one” is still in front of us, and may very well result from runaway inflation and the dollar “officially” losing its status as the reserve currency of the world (a process which is already underway). That said, if you are playing at home, I have re-shorted the macro indexes via futures. This includes the Dow, Nasdaq, and Russell 2000 (small caps). I am also long VIX call options, long gold as of this morning (re-entered around 1725ish), and long OOM April call options on Gold Miners (GDX). Honestly, I hope I am wrong. However we hope for the best and prepare for the worst. As this involves human nature and the ability to repeatedly make the same mistakes over and again, which is then amplified by a complicit media, I feel it is prudent to take a crash position posture.