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The Pause…

I have frequently described “Project Zimbabwe” as a highly inflationary cycle where both fiscal and monetary stimulus go into insanity mode. While I sincerely hope we don’t go hyperinflationary like Zimbabwe, I certainly think we see an elongated period of substantial and debilitating inflation. When this cycle finally ends, society and our financial system will have been irreparably changed. For those who are aware of where we’re heading, this is going to be the golden age of inflection and Event-Driven investing. For everyone else, it will be absolutely miserable.

One point that I made last year, was that “Project Zimbabwe” will be a process. It will not be linear. Look back at old charts of Weimar Germany, they all look like parabolas, however that is quite deceptive—there was actually a whole lot of volatility. There were multiple deep pullbacks that bankrupted speculators who knew what was coming on the inflationary side but got over-levered or overstayed their welcome in the various rolling bubbles of the period. Looking into the weeds and ignoring the parabolas; there were frequent sector rotations, speculative bubbles that crested and collapsed, and multiple 50% or greater pullbacks. As I have said many times, the trick to managing “Project Zimbabwe” is to be as long as possible, without getting taken out during one of these pullbacks—especially as the increased level of stimulus warps the market’s ability to price securities, leading to violent and often arbitrary movements.

Let’s go back a century to Weimar. Most speculators knew that the government had lost control and that the only path forward was to print money. However, occasionally the politicians would try and arrest the inflation—as inflation crushes voters. Sometimes, it was an offhand quote from a government official, sometimes it was concrete action…

…click on the above link to read the rest of the article…

Oil Is The Wrecking Ball That We All Deserve…

I’ve been pretty clear on why oil is going higher. If you want a refresher, click here. I’ve also been clear that when oil overshoots, it’s going to create the next Lehman moment. Oil is the wrecking ball that will crush every CUSIP, because the Fed will eventually panic. Look at bonds. They’re getting smashed along with equities today. This will blow up the Risk Parity boys. Their model says that bonds are supposed to hedge out risk-off periods in equities. As expected, their model stops working when inflation explodes.

Oil is the ring to rule them all. If you think European power prices are crazy, just consider it a dress rehearsal for what’s about to happen when oil goes parabolic. Energy = Inflation and we’re just getting started here because the ESG crowd is still controlling the narrative. They’re restricting supply into an energy crisis. Meanwhile, politicians are already in panic and subsidizing consumption. Imagine a world where demand stays stable or even increases at higher prices. Failed government policies created this monster. Global politicians keep making it worse. It will take a whole lot of pain before they finally adjust course.

But Kuppy, isn’t oil up a lot already? According to who? Here’s Brent oil divided by the Federal Reserve’s balance sheet. You tell me when the bull market gets started. ‘Cause I’m still waiting for it to get going… haha

I know it’s counterintuitive, but if you want to hedge your long book against the coming inflation, you can do it with long-dated OTM oil calls. They’re stupid cheap because the curve still hasn’t figured this out…

…click on the above link to read the rest of the article…

The Problem With Ponzis…

The Problem With Ponzis…

Over the past few years, I’ve been highly critical of the Ponzi Sector. This is a whole grouping of companies that has no ability or desire to ever become profitable. Instead, these businesses have focused on rapid revenue growth because the stock market has rewarded them for this growth—especially if there are no profits. In reality, stock promotion is the core business of the Ponzi Sector—it allows the companies to raise capital and fund unprofitable growth, while insiders dump stock at insane valuations. Now, as the Ponzi Sector equities go into free-fall, a problem has emerged.

Let’s look at Peloton [PTON], the overpriced clothes rack with a built-in iPad. We just witnessed the best possible 6-quarter environment that the company will ever experience. The whole world was locked down, gyms were closed, and work was cancelled. People literally sat at home, bored out of their wits, armed with massive government stimulus checks, fixated on buying products. Despite every possible tailwind, Peloton lost $189 million in the year ended June 2021. As the stimmies wore off, losses exploded to $376 million in the most recent quarter. If this business cannot make money in this perfect environment, what is the operating environment where it earns money?

Investors will say that the goal at Peloton is to lose money on the hardware and make it back on the subscription product. Sure, I can see how investors may fixate on the growing subscription business, but this is a fad fitness business, churn will be high and accelerating now that gyms have re-opened. The expected monthly annuity will underperform, and marketing will always be necessary to bring in more customers.

…click on the above link to read the rest of the article…

ESG = Energy Stops Growing

For most of my career, oil demand has grown each year and supply has roughly kept up. Sure, it’s overshot in both directions. We’ve seen shortages and we’ve seen gluts. We’ve even seen oil go negative. Throughout this time, we’ve always intuitively known that the cure for high prices is high prices. Last week may have forever changed this prudent logic. I’m starting to wonder if ESG really means Energy Stops Growing.

For those not paying attention, an obscure ESG hedge fund, Engine No. 1, captured two Exxon Mobil (XOM – USA) board seats. It now seems that for companies in indexes, whoever controls the ETF’s votes, now effectively controls their corporate destiny. ETFs are about marketing and asset gathering. There is no better way to stay in the news, looking responsible, than to burnish your ESG credentials. Does an ETF manager care if energy, one of the smallest weightings in most indexes, is now forced to destroy capital by going into run-off while trying to do “green” things? Probably not—they’re all cheering as BP (BP – USA) does exactly that. The attack on XOM was meant as a warning shot to all of corporate America; go along with ESG—or risk a pirate attack.

Meanwhile, over in Europe, Royal Dutch Shell (RDS.A – USA) was told by a court in The Hague to cut emissions by 45% by 2030. Clearly this is impossible even if they don’t drill another well. I expect that this will only embolden similar lawsuits. Most will be thrown out, but enough will be decided against energy producers that it will move the needle. If courts legislate against energy production, then producers will go into run-off. It’s not like there are a lot of investors stepping up looking to fund production growth anyway.

…click on the above link to read the rest of the article…

Ponzis Go Boom!!!

For the past few years, I have been critical of the Ponzi Sector. To me, these are businesses that sell a dollar for 80 cents and hope to make it up in volume. Just because Amazon (AMZN – USA) ran at a loss early on, doesn’t mean that all businesses will inflect at scale. In fact, many of the Ponzi Sector companies seem to have declining economics at scale—largely the result of intense competition with other Ponzi companies who also have negligible costs of capital.

I recently wrote about how interest rates are on the rise. If capital will have a cost to it, I suspect that the funding shuts off to the Ponzi Sector—buying unprofitable revenue growth becomes less attractive if you have other options. Besides, when you can no longer use presumed negative interest rates in your DCF, these businesses have no value. I believe the top is now finally in for the Ponzi Sector and a multi-year sector rotation is starting. However, interest rates are only a small piece of the puzzle.

Conventional wisdom says that the internet bubble blew up due to increasing interest rates. This may partly be true, but bubbles are irrational—rates shouldn’t matter—it is the psychology that matters. I believe two primary forces were at play that finally broke the internet bubble; equity supply and taxes. Look at a deal calendar from the second half of 1999. The number of speculative IPOs went exponential. Most IPOs unlock and allow restricted shareholders to sell roughly 180 days from the IPO. Is it any surprise that things got wobbly in March of 2020 and then collapsed in the months after that? Line up the un-lock window with the IPOs. It was a crescendo of supply—even excluding stock option exercises and secondary offerings…

…click on the above link to read the rest of the article…

adventures in capitalism, ponzi, interest rates, bubble, financial markets, psychology, speculation,

“Project Zimbabwe”

“Project Zimbabwe”

Roughly a month ago on the afternoon of Sunday, March 8th, Fed Chairman Powell had an emergency staff meeting.

Powell: I want the nuttiest money printing plan ever. What action plans do we have that are prepared and ready to initiate?

Admin: Well, we have this one named “GFC 2.0”

Powell: Sounds tame and sedate. Won’t impress anyone.

Admin: What about this one named “Whatever It Takes”

Powell: Lemme look… Meh… I want more shock and awe. This needs at least two more zeros.

Admin: Well, we have this other one named “Project Zimbabwe” but it’s so ridiculous that the Fed would forever lose all credibility…

Powell: hmmm… I like the sound of “Project Zimbabwe.” Just makes you want to turn dollars into toasters and washing machines to preserve wealth. This one will force guys so far out on the risk curve that they’ll think crypto-coins are value investments.

Admin: Yeah, it’s absolutely Wuhan-bat-shit nutty. We’d be criminally insane to unleash this on a population that isn’t prepared for hyperinflation…

Powell: Perfect!! Let’s have a press conference.

A few hours later…

Powell: Mr. President, I finally took rates to zero and launched QE infinity. Can you stop trolling me on twitter already? I can’t take any more of my wife cracking jokes about your tweets.

Trump: Be a man. You got it easy. Wait until you see what I do to Biden. He puts the “Dem in Dementia” haha…

Powell: Please, no more nasty tweets. Even my kids laugh at me.

Trump: Fine, but you’re thinking too small with “Project Zimbabwe.” Figure out how to print more aggressively. Look at what Mnuchin is doing with all his bailout programs. He’s gonna blow $10 trillion by early summer, then try to double that by election time. You better crank up that printing press of yours. I’ll stop tweeting if you keep monetizing the “Mnuchin Money.”

…click on the above link to read the rest of the article…

Inflation Is Coming…

Inflation Is Coming…

Investing is all about probabilities. If the perceived odds of an event are high, certain securities will be priced based on those expected probabilities. The corollary is that when an event is perceived as almost impossible, securities do not price in any chance of it occurring. If that event does occur, all sorts of securities need to re-price—often quite rapidly. I like to spend my time pondering what potential events the market completely ignores. Of all potential economic outcomes, the one that is least anticipated and least priced in, is an uptick in inflation.

It is said that generals always fight the last war. In terms of macro-portfolio wars, Japan’s experience with deflation colors all views. This seems odd to me because we have over two millennia of history showing inflation and currency debasements to be universal constants, with one outlier in Japan. The question is if Japan is the new normal or a true outlier?

Academics have studied the causes and effects of inflation ever since emperors and kings fixated on halting its effects. Despite a massive body of work, there is little agreement amongst experts on the causes of inflation. Since I tend to ignore “experts,” let me start by giving you the Kuppy definition of inflation. “Inflation is when too much of a certain currency chases a scarce resource and pushes its price higher when defined in terms of that currency.” Using that definition, we’ve actually had rather dramatic inflation over the past decade—it just hasn’t shown up yet in the core consumer goods that central bankers are often concerned about.

Did they time-stamp the cyclical low in yields?

When a country prints money, no one knows where within the economic ecosystem it will ultimately flow. If a resource is scarce, it tends to experience inflation—when it is artificially scarce, it has even more extreme inflation.

…click on the above link to read the rest of the article…

Getting Ready For The Stock Market Crash…

Getting Ready For The Stock Market Crash…

It is something of a tradition amongst market commentators to make bold stock market calls because they gain you notoriety if you get it right. Over here at AiC, I don’t particularly care what people think. I’m here to make money—that’s it. Therefore, I’ve refrained from big market calls—particularly as I have no real edge in guessing where an index of a few hundred companies will be trading at a certain date in the future. This doesn’t mean that I don’t recognize economic and share-price cycles and manage my portfolio accordingly. 

Over the past few years, I have been increasingly concerned about the massive structural imbalances in the world, along with excess debt and asinine monetary policy leading to an epic equity market bubble. Remember, your investment returns are directly correlated to the price you pay, not your analytical ability and I refuse to play in the greater-fool theory of finance. With that in mind, I have consistently managed my portfolio with a rather reduced overall exposure profile. Despite holding plenty of cash, I have certainly not been a perma-bear—those guys tend to complain a lot but make no money. Rather, I’ve continued to find opportunities to do smart things in esoteric sectors of the market, leading me to consistently trounce the US equity markets over the past few years. Yet, the whole time, I have been quick to sell companies that appreciated to 80% of fair value, I have been un-willing to take on risk and have passed on many perfectly good investments as I preferred to miss something than increase my market exposure.

 …click on the above link to read the rest of the article…

Why The Fed Should Not Stop Raising Rates


Why The Fed Should Not Stop Raising Rates

A very smart and wealthy friend always reminds me that you have to invest in the market landscape that exists today—not the one you wish for. That said, I like to think of myself as a pragmatist who views the capital markets through the lens of financial history. That history would imply that the Fed should keep hiking rates and ignore the yield curve. In fact, if I were the chair of the Fed, I’d have an emergency 50bps hike today; just to show that I’m serious about putting the economy back on a sound footing for future growth.

To start with, capital markets exist to finance businesses—they should not exist to drive economic growth through a distributed wealth effect that narrowly benefits the wealthy who have capital market assets. The state of affairs that exists today, is an anomaly historically—it isn’t sustainable and shouldn’t be supported by the Fed at the expense of the rest of the economy. Capital market bubbles are disruptive and destructive of long-term GDP growth. Today’s bubble is unparalleled by almost any historical standard—only made possible by abnormally cheap credit along with an implicit Federal Reserve put.

Since the Fed sets the cost of capital, they need to change priorities from supporting financial bubbles to supporting the actual economy. The cost of capital should be at a level that allows businesses to profitably re-invest in growth endeavors. If capital is so cheap that returns on capital investment are minimal, businesses instead focus on driving returns through financial engineering. This isn’t only because they’re obsessed with their stock options—it is because they now have no viable investment opportunities in a world where there is endless competition funded with almost free and limitless capital.

 …click on the above link to read the rest of the article…

Bailing Out Member States: The European (Dis)Union

Bailing Out Member States: The European (Dis)Union

Over the years, my good friends at Capitalist Exploits (I highly recommend subscribing) have put together a number of outstanding thought pieces on where they see things headed.

They recently came out with a great overview of where Europe is headed. The trends they highlight are both interesting and actionable for those willing to put the time into thinking through the consequences of the new “Strongmen of Europe.” The EU has now had a decade of economic crisis and is slowly moving from economic crisis towards a full-fledged political crisis which will be its ultimate undoing. There will naturally be many actionable trades along the way. Most important amongst these will be;

  • Increased inflation
  • Issues with energy security
  • Increased national sovereignty
  • Ultimate breakup of the EU

Having a roadmap, gives you the ability to stay a few steps ahead of events with your positioning. With that in mind, I suggest you read the roadmap from Capitalist Exploits. While I don’t agree with everything that they point out, it is those minor disagreements that make late night Skype calls so interesting…

What Lies In Store For 2019 –  Specific Focus: The European (dis)Union

There is so much going on that it can be hard to know where to look without throwing your hands up in the air and saying, “oh fuck it, I give up”. The problem is ignoring problems doesn’t make them go away, and if we get it wrong, we could end up seriously regretting decisions made today.

I’ll be honest with you, we’ve spent time reviewing much of what is taking place in the world at the moment. Not here with you, but with my team and often inside my wee head, hunched over my keyboard at 1AM after tossing and turning annoying my gorgeous wife and getting out of bed to look into something that’s bugging me and keeping me from sleep.

 …click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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