Monthly Archives: June 2022

2022-06-19
Bonds, Foreign exchange, Investments, Property, Shares, Technology

The Romeo Must Die

In a world or rivalry, only one thing is certain, Romeo must die.

Following up our drastic turn on June 13th, horsemen number 4, seems to appear sooner. RRP and TGA are not helping yet. We still hold our thesis, liquidity is there but unfortunately they are not helping yet, possibly because their goals are not achieved yet, therefore we will keep on focusing on them, until we see their confirmation. It’s getting worst with the Fed taking drastic turn following up market expectation, to raise rate faster, 75 bps, following higher inflation. It’s positive that the Fed is holding strong but it’s bad that the Fed is still following market expectation. In year 2010, I remember there’s a research showing that Central Banks were actually a market follower, rather than market decision maker.

Since our two weeks ago previous article when there’s a massive change, we still continue to unload our energy and commodity top picks while they are still above 20% compared to early 2022. We don’t regret to keep our top picks until two weeks ago and this moment. Unfortunately since mid of June major change, we don’t have any where to go. Nasdaq is still about 8% to our next lower target with possibility to break down further 20-30% in long future.

Oil is still far away from our target and commodity might experience under pressure. The good thing is, most of us are not limited to specific industry investment, therefore we have quite lots of flexibility to switch for our own. Usually oil critical number is around 80$ and we may suspect market may tease below 70$.

Oil Future

As we have discussed many times in our previous articles since early this year, this inflation is all about energy. If they could suppress the energy, we may have better shape in our investment journey. In order to save bigger shape, unfortunately this Romeo must die.

Anyway, while others are busy contemplating their fate to die, let’s have a look into other things. The Fed drastic move to raise rate by 75 bps is not without consequences. SOFR (Secured Overnight Financing Rate) is jumping much to 1.45%, nearing to RRP 1.55%. It may mean that we now have much lower difference between RRP to SOFR. We may think this 10 bps difference is much less than one rate hike (25 bps). There are positives as well as negatives as you can imagine. Less pull, more pressure to non inflationary, but less inflationary.

We may have to wait until next month to see any indication that RRP and market starts to show their indication of liquidity delivery for any possible capitulation.

Another thing to watch is the USD. We still believe since last month, USD near to this level might not be sustainable, even though Japan explodes their bond and currency. In my argument, RRP, TGA and USD are the keys to sanitize this energy and inflation move, and I will follow them very closely.

In my opinion killing the energy Romeo to save inflation, that was a mistake.

Unfortunately we are merely market followers, not decision makers. We will argue with this mistake thesis, once energy is near to their fair value.

Another thing to watch in our opinion is Biden infrastructure project. Should inflation is lower and controllable, Biden infrastructure project may start to appear in next few months after their actually reported good progress, but lack to go in news. We do believe they still have lots of momentum to build, under pressure of China tariff negotiation for other interests.

It will also be quite fascinating to see if China and emerging are not under pressure to take their drastic maverick move that we argued in early June 2022 article.

Not surprisingly Bitcoin and another digitals are undergoing massive pressure. We still believe from December 2021, technology is still quite expensive and digital coin with their massive run should undergo massive correction. Since 2021, we argued digital coin for no investment, for still same two main reasons:

  • due to their none with unlimited resource (like Central Bank), they do not have someone to bail them out,
  • due to their distributed strategy, they don’t have strong market policy to enforce policy for their advantages.

unlike our traditional investments who are fortunately surviving for decades, merely due to these reasons. Therefore for people who asked for our opinion about digital coin, we still believe, it may unfortunately have probability to continue falling below 10k$. Unfortunately that means a lot of other industry might also experience pressure as well, indirectly. If existing water tap is no where to turn up, I’m sorry, I don’t see they may have any supportive arguments.

Any idea in this blog and website are my personal own. They are not financial advise.

2022-06-13
Bonds, Property, Shares, Technology, Uncategorized

Four Horsemen of Apocalypse

1st Horsemen: Pestilence – CoVid and many more diseases

2nd Horsemen: War – Russia and China War

3rd Horsemen: Famine and Inflation

4th Horsemen: Death

It’s quite fascinating how we see opening of the 4 horsemen. We have seen 1st, 2nd, and 3rd. We will see the 4th of course in future. Death is what gives life a meaning, to know our time is numbered, we can utilize the time better. At the end, everything will die, including cash, by the high inflation. During that time, there’s usually investment that delivers substantial amount of return for those who seek and do them well.

Let’s have a look into what is happening on last Friday, June 10th 2022. As usual, many should notice significant amount of insiders moves on previous day. One piece of information changes the way financial players think and move. It’s a higher inflation, 8.6%, higher than expected 8.4%. The problem is, it was announced at the time where market is very sensitive to rate hikes and tightening issue. FOMC and first QT will be held on June 15th, along with largest Option expiry ~2T$ a day after, suddenly terrifies anyone who expects higher rate/faster tightening from 50 bps to 75 bps or 100 bps.

The economy and liquidity are still moving according to the Fed plans, but market makers need to move them around to keep them alive, reduce weaker hands and keep market healthy. Also to show competitors, who is mightier.

There’s two businesses that haven’t been completed from May 2022 carnage, which are cryptos and debt market. There are still quite a lot of issue with crypto and techno due to higher rate and inflation. We have advised to stay away from any of this since December 2021. Bitcoin is still above their overrated value, if any.

Treasury also seem to catch the flue. This move has caused 2y10y to go zero, which is starting to flash a risk of crash to entire global banking. We have to admit, debt has been increasing much faster than producing GDP, therefore rate hike will be more sensitive than any past.

If we still have time to extend life, the main issue, energy should be sacrificed, i.e. the OIL. Their bull flag is already very close to technical target and may not able to break their double top formation. Therefore we believed it might be wise to start unwinding/correct some our top commodity, with energy mostly due to this risk. We don’t see yet long term energy bull over, however this extreme move has raised much to our concern. If inflation is expected to raise much higher in future, oil should have been breaking double top, but they don’t. It might be one of comforting sign to overall market but significant sign that energy might need to be corrected soon.

When energy or inflation is much more controllable, liquidity from RRP and TGA should comfort market for time being, but we haven’t seen them yet. It seems market hasn’t yet seem to see inflation to peak. Unfortunately, it might be complicated with recent moves of crypto and bond market. We might see crash in crypto market, where another 12B$ or Celsius and MSTR might still carry very big problem. From our previous articles, I don’t get surprised with bond market issue. Even though it’s quite challenging, I think treasury strong hands might still be able to handle treasury market well, unfortunately unlike crypto ones.

The biggest question is when inflation/energy to peak? Looking at above, as long as the Fed and strong hands keep their head cool and keep their hands strong, not easily intimidated by market expectation, I think they can pass their difficult time and landing economy softly.

I should agree that risk is currently high. We have lowered down significantly our tone last week. I think it’s unwise to emphasize much of internal conflict of interest for lower price expectation. We should still maintain pain level and take quite substantial amount away from the market until we have further confirmation that energy has at least peaked/controllable for time being.

We still have quite a lot of positive components. It’s just when it’s moving to the other side for some reason, there will be quite a lot of negative sentiments. It’s not that excessive fears not driving market. Significant increase of put volume compared to call, obviously is moving price lower, like a rubber. The bottom might not be far, but we should always remember, bottom call normally has long overshoot, therefore we should have protected our investment to that risk while we were on upper level of the channel. I would leave safety position to the end of the week or so.

I will update further as it’s progressing.

Any idea in this blog and website are my personal own. They are not financial advise.

2022-06-06
6 Comments
Bonds, Investments, Shares

Maverick

The end is inevitable, Maverick. Your kind is headed for extinction.

Maybe so Sir. But not today.

While everyone is busy having imagination of their inevitable extinction in bear market, let’s review back to what it was. In December article, we believed that Nasdaq was going down hill and their indirect consequence, inflation would be triggered. Eventually, it has been going down hill quite remarkably. When liquidity tide is gone, expensive premium is surely getting normalized. Nasdaq has been notoriously running very expensive for decades with average PER (Price Earning Ratio) astonishingly above 100. To make it worst, its capitalisation, 20T$, is about half of the entire US industrial share market (40T$) or about global listing. Yet human life spending is not half to technology if we are willing to step outside. There are way more than half of the earth population are still fighting their life with centuries old of economy practice and not just to technology and capital growth. Look no further to SME (Small Medium Enterprise) or sustainable human economy practice resiliency, when their high life society run is being revolted.

Heavy NASDAQ trucks are going down hill sparking inflation from fund creation to juice them.

When those expensive technology funds are being normalized in higher society, there should be a lot of money being juiced, spiking high energy and inflation as we expected since our December article.

Do we think this energy maverick graph/move is expensive already? Oh come on. Tesla, just by itself, in only 2 years of their move, is already equal to about half of all USA energy market, let alone many decades running gigantic technology companies, like the FAANG. It doesn’t make sense to hold USA technology dependence funds without thinking about enormous amount of “Energy” and Commodity fund being juiced up. These energy and commodity capitalisation is still remarkably very small compared to overall US financial market. Why does the Fed even think about massive tightening IF inflation (in which most of them are driven by energy and commodity) is not a real threat in near future? The Fed might even think, Nasdaq still has some room to continue their downhill to support this narrative.

In previous month article, I promised to start looking into ESG (Environmental, Social, and Governance) issue in H2 2022. In near future, in my argument, I believe the ESG could be one of future solution to our high inflation negativity. Before getting into this argument, I may give some background about the ESG. The ESG funds had been running super fast past few years or in simple word, they are expensive and there’s not yet enough growing room/capacity to capture them. Abundant amount of liquidity due to years of QEs (Quantitative Easing), has given enormous amount of excess fund to go after futuristic ESG, trying to replace centuries old fossil fuel. Since December 2021, when market started to realize abundant liquidity is to slow down, expensive and overrun ESG funds are getting normalized as well. One of their significant impact was in battery industry which were too crowded with the funds, e.g. Lithium, Nickel, etc. Since there are too much investment supply but not enough economy demand, this leads to many ESG dirty secret/frauds. Some of ESG funds are not actually invested in ESG, but they are just directed to any normal fund, fraud to their disclosure, and helping bubble to many non ESG assets. There are few raids and whistle-blower stories already.

On the other hand, fossil fuel, which is still fuelling almost all of the earth population are still under investment. The rush to futuristic ESG itself may unfortunately reduce/prohibit investment to fossil fuel to meet real demands.

We believe that Energy, our top pick since 2020 is still one of our favourites. We still avoid precious metals since 2020 because they don’t really offer value into inflation and economy growth cycle. Indeed since year 2020, we might believe there could be an issue with the precious metals at the end of this high inflation cycle. We will continue to hold energy and commodity sectors strong.

Yet you refuse to die. You should be at least 2 star admiral by now. Yet here you are. Captain. Why is that?

It’s one of life’s mysteries, Sir.

So, why do we need to bring ESG issue from H2 2022? After being normalized since December 2021, there are many ESG funds experiencing massive outflow. Indeed in May 2022, ESG started to experience first huge outflow.

Overpriced lithium and nickel for example, have been driving EV cost beyond their competitive value to non EV. It comes to the main question. Should they be over or are they going into normalization process. We do believe they will go through normalization. At what level? We think, it might be easier to measure with inflation, mainly in energy. Once energy price is fair enough and those expensive prices are normalized down, they should meet an equilibrium. This article may explain well the situation of ESG and non ESG.

We believe, during the Fed normalization, we would need to come down to earth. We may hold our top picks, food, energy, and commodity, while we normalize our EV and EV commodity. We are still considering EV sector better than oldies and being obsolete technology which may already get stuck in their innovation. Market is expecting need of faster pace of technology innovation but they may already stall. An ironic example is The iPhone’s lock screen is getting its “biggest update ever” so you can customize the colors and design of your screen.

Since we are focusing on real economy, we feel the need, the need for speed. Look no further to China and emerging, they are about to reach their due for speed once inflation momentum threat is about to plateau. Their growth has been stalling and they need the speed. We will highly focus our investment on their speed needs. To drive their growth, they obviously need massive amount of energy and commodity, things that emerging have been very sensitive and lack to generate internally.

To compete with China and emerging, we believe that advanced market should also focus on real ESG. Advanced countries should still have strong power in financial. While recently many disagree with lower USD, they should at certain point use the currency and lower rate weapon to drive their critical but still profitable companies. We therefore follow company with strong ability to tap cheap fund like the ESG fund to combat interest cost during high inflation. If we may suspect, they may use cheaper ESG to fund merger and acquisition, when their competitors are having issue with expensive cost.

This high interest might be indirectly related to the Fed balance run-off theme. Every month the Fed receives about 128B$ from their maturity. Since there’s about 30B$ QT (Quantitative Tightening) cap, the Fed is actually still re-investing about 98B$ every month. These run-off should be fairly funded enough with existing 2T$ of RRP if we balance their number.

We do think, it’s enough to run until about end of 2023, in which we should then see lower inflation by next year. I may think there is a possibility of commodity and energy mergers and acquisitions during the time.

This situation may be well supported with YCC (Yield Curve Control) to ensure banking systems are still functioning when the Fed is raising their front end rate. At same time, the 30B$ in which the market has to consume, should be sold at discounted price. Our these two arguments, should support our expectation that long yield may continue to increase and indirectly maintain sustainable high inflation thesis.

Any idea in this blog and website are my personal own. They are not financial advise.