Hi all, with the lockdown here in Ireland I thought I would do lots of new things. It made me lazier than ever. I have enjoyed reading the financial press and added subscriptions from the Wall Street Journal, the FT and miscellaneous others. I probably can’t see the wood for the trees anymore. My personal trading has not been good as I am trading more short term and while busy I’ve been a busy fool. Also as my preferred trading style is to go short(make a gain from declines) and there have been very few opportunities, as everything keeps going up,up,up. I now have finally realised that the influence of central banks has significantly changed. They used to be the policemen of the market but now have are becoming an active player in the market. Changing from gamekeeper to poacher.

I was delighted to be in the top three worldwide in the FT Stockpicking competition at the halfway mark. Unfortunately as we all know with investing that timing is everything. If I had another few weeks I would have won (sour grapes). My overall performance was a gain today of 1,600%. I enclose my list below. My star performer was Novavax with a staggering 6,654% gain and worst was Boeing which I shorted and netted me a loss of -36%. I enclose my list and performance below.(Competition ended last month so figures are true as per today.) Also links to the FT articles on the competition. My picks this year are all short positions particularly in US REIT property funds and that chancer Elon Musk who runs Tesla.

General Feelings on the Market

In reducing interest rates over time they have forced investors to risk more to pursue income or yield. For example, ten to twenty years ago a person looking for say a reasonable 7% return would invest in government bonds(treasuries). Very little risk, sit back lick up the honey and ask no questions. Today it’s totally different, you must invest in riskier equities and highly illiquid securities (Neil Woodford the star investor met his doom in the UK on these treacherous rocks.) So investors are bidding for riskier and riskier securities and moving into a more crowded trade. This coupled with

1) The move from active to passive investing etf’s.

2) Migration from active discretionary mutual funds to indexed etf’s traded in baskets.

3) The rise of concentrated high frequency trading that is highly leveraged and has capital constraints which means if very little goes wrong they will get a margin call and need a bailout immediately or they are gone. Melvyn Capital needed a bailout of $2.75 Billion after only one of its positions went badly wrong (Gamestop).

I see a very violent unwind coming. Which will no-doubt will lead to another even larger central bank intervention and the same cycle starts anew. Of course until one day it does not work. Each time the intervention gets larger. The present intervention by the US government, 1.9 trillion $ will be nearly three times more than the initial intervention in 2009. Notice how we have lost all reality in understanding the scale of these figures. This is wait for it, 46 times the amount of the Marshall Plan (US European Recovery Plan, unveiled in 1948)!

Every new president or leader whether Biden or Van der Leyen says the same thing. I didn’t cause the problem and its not going to unwind on my watch so as Dragi said in 2012 as leader of the European Central Bank. We will do “whatever it takes”! This effectively takes all fear away as the central banks have your back and you can increase risk as it doesn’t effectively matter. Here we see one of the greatest flows of capital in the last 100 years from government taxpayers to parties that would never survive in a free market. They say the easiest way to rob a bank is from the inside. Remember Robert Rubin? a former secretary of the United States Treasury, he collected over 100 million $ dollars in bonuses from Citi bank in the decade proceeding the banking crash of 2008. When the insolvent Citi bank was rescued by the taxpayer he invoked his power to transfer risk from the banks to taxpayers. Not only transfer risks but pay for the losses he made. Corruption and cronyism have now reached such a scale that criminals are now not in a bank but firmly within governments. Effectively the free market has been dissolved and a radical form of socialism imposed. Hayak was right but 60 years early. Central banks aim for price equality, creating great social irregularities in society. As Hayak said in his book ‘The Road to Serfdom’. The downsides of government regulating the economy and greater market in such detail are that they inflate bubbles even more quickly. And as an aside he said ultimately individual freedoms will be crushed in the process. The road to hell is surely paved with good intentions. Schumpeter said that the intellectual elite want to control everything ultimately leads to socialism. The US federal reserve is not the fire fighter but an arsonist!

So investors as they say are forced to take more risk or as the economists say they are forced up the risk curve. To cool this down the solution usually is to increase interest rates, but as we are so bloated this could pop the balloon. The cure would be worse than the disease. So they must be more selective and only intervene in areas that are seen as more essential. They will protect against a crash but will stand by as certain companies and industries fail. For example, I don’t think that Michael O’Leary of Ryanair or Stephen Cohen of Point 72 will be on the list. But any flea bitten mangy bank will be bailed out immediately.

The S&P500 companies returns have increased over the last 30 years peaking in 2008. We are now again peaking. These greater extremes are occurring with greater frequency. I don’t need to show you the charts you know it’s true. Also another phenomena I am repeatedly being asked is how to buy a bitcoin. Irish property like property worldwide has increased by about 6% during a pandemic. When I walk in my city I see empty buildings creating very little return and yet they are increasing in value. US real estate REIT etf ticker XLRE that covers commercial REIT companies in the S&P500 increased from $24.84 in March to today’s $37.96. That’s a 52% increase. If this doesn’t splash cold water in your face and wake you up then nothing will. All this and the dam buildings are empty. This divergence is stark. But I suppose this time it’s different? Money is cheap so it’s easy to ignore fraud and aggressive accounting.

Think of this if people are working from home, so you can do your job from anywhere. Then the logical conclusion is the question, ‘Can anyone do your job?’

It ain’t what you don’t know that’s that gets you into trouble it’s what you know for sure that just ain’t so. And this is one of them. How safe is your job really? Governments can print money but they can’t print jobs.

Governments have flooded all markets with liquidity, these flows are actually changing the market. It’s like the idea of eating yourself fit. It only works if you exercise and at least take a walk and not sit on the couch eating. We are at a strange time. We are all depressed because of the extended lockdown, we are suffering but financial markets are in an ecstatic state of hubris. Hubris sells but ultimately only humility survives and I see very little of that.

As most cads have learned, no matter how fearful the present predicament, however horrid the odds and dangers ahead, they’d get no better with being fretted over. It ain’t always easy, if your knees knock hard with fear, but you must remember the golden rule: when the game’s going against you, stay calm – and cheat. Anyone who has ever raed the Flashman novels know this is also true in real life.

Thank goodness that idiot malignant narcissist Trump is gone! Despite all the evidence of Bidens win. Mr. Trump’s actions place him among other such anti-democratic leaders as Robert Mugabe of Zimbabwe, Nicolás Maduro of Venezuela, and Slobodan Milosevic of Serbia.

Trump uses virility in relationships with other male leaders. Projecting virility using media. Personality cults require mass media, the leader must be omnipotent, the alpha male. Like most past dictators they need to saturate society with their presence. And that’s so easy now with the infrastructure of technology that Twitter and Facebook have supplied slavishly.

Trump seems to despise those that love him. The masses supply love and adoration, Trump feeds on this. He is nothing without his slaves, sorry I mean his audience. Mussolini was once described as an empty shell without his audience. This is so true of Trump also one other common feature that he has in common with Mussolini is that he despises his own people and only cares about himself. To focus on this power he forms a cocoon with only people around him that will flatter him. His skill is exceptional. I could never really understand how Hitler was elected until now. Whats frightened me to my core is how smart intelligent people I know are taken in by his hubris. One of my friends jokingly says “poor Trump” at the slightest accusation of his wrongdoing.

When in 2015 at a rally he had loyalty oaths with his followers based on duty, just like Hitler did after an attempt on his life. Trump retweeting Nazi memes from extreme right platforms. Take the Republican party with a long and grand history. The party that liberated slaves in the US. Wrap the party around his fingers so that senators were afraid of him. Even now even after he incited thugs drunk on riot and violence to invade the capital his boundless ego creates fear within a critically wounded Republican party.

Let Get Down To Business

Technicals always precede fundamentals with signals. You can’t technically analyse maximum pain. The market will cause the most amount of pain to the most amount of people most of the time.

The stock market should reflect the economy. The reality is that the economy is now reflecting the stock market. The more you print money the more you make a laughing stock of your currency. Its like Will E. Coyete running off a cliff.

Go to the centre of the danger. There you will find safety. This I believe to be what trend following is all about no matter what the asset class. Cash is no longer a protector of purchasing power. Assets like property, gold…are real money, everything else is credit.

Bitcoin

What gets a pyramid scheme going is communication. One of the common things about great bubbles is that they are always preceded by a large communication event. For a better explanation check out Edward Chancellor’s, ‘Devil Take the Hindmost’. They are contagious events. It doesn’t matter if its tulips, railroads, telephone, radio or the internet. Communication is the fuel for the fire. A communication of enthusiasm. Euphoria communicated digitally. Bitcoin is the purist bubble in history. The only thing purer is a chain letter. A pure Ponzi. The message is always the same, be quick it could be your last chance to get in. One day you just might get up to the news that governments will jointly ban it. People’s memory is short, remember the US made physical ownership of gold illegal in the 1930’s. I’m all for the security aspects of a distributed ledger called the Blockchain. There is nothing to stop central banks from issuing their own.

I was intrigued a few years ago and purchased on for about $200 and sold at a profit for $2,000 its now $50,000. I sold it because I couldn’t even buy a coffee with it. Remember its only a store of value if you can buy something with it. With Tesla $1.5 billion in Bitcoin you now have a bubble within a bubble. To me Tesla is a rag and bone shop. Elon Musk is a charlatan showman. His bragging is the bravado of despair. Fraudsters seem to have an instinct for playing out their charade. Were the fools. People will more likely swallow lies than truth. There’s a tribe behind it, they’re infected by the bitcoin virus. Science is used in the falsification of scams. Now respectable economists are hopping on the wagon. Innoculate yourself against them all. Not sure which will tumble first into the void (Bitcoin or Tesla). I wont waste another moment writing anything about such nonsense.

Recovery Cycles

This lead me on to what happened in the past and when a bubble pops how long it takes to recover. The conclusion is quite stark.

The Dotcom Bubble in the late 1990’s lost 47.5%. It took 307 days to recover half and 705 days to recover 75%.

The Global Financial Crisis lost roughly 55% . It took 153 days to recover half and 453 days to recover 75%.

The Global Covid Pandemic which kicked in February 2000 lost 34%. It took 15 days to recover 50% and 50 days to recover 75%.

A quick look at these crises is telling us they are happening more frequently and the recovery time is significantly faster. Anyone familiar with the Fibonacci number sequence knows that a moment of truth is upon us this year.

Do what you can with what you have with where you are. Based on this I will be focusing myself into survival mode this year. There will be great opportunities.

FT Stockpicking competition 2020

Final results for 2020: How did our stockpickers fare in the time of Covid-19? https://on.ft.com/3sWEHSO

Halfway mark in July 2020: Stockpicking tips from FT readers https://on.ft.com/3ittbt1

Best wishes, we’ll hopefully have the vaccine soon and can resume some sense of normality. I’m going to murder a nice pint of Guinness with relish. I might even have two!

Regards, Pearse.