My Dilemma

I spend a lot of time trying to understand reality. To understand reality you need to pick the signal out of the noise and focus because in that differential (not in the absolute) is where the information lays. Everybody has an opinion. I read some who think it’s 1929, I read others who don’t think anything has changed. I look at the landscape and it sure looks different to me.

The US has had the honor of being the biggest debtor in the world. It is through our largess to always buy more shit that the rest of the world stays afloat. Japan sells shit, we buy shit. China sells shit, we buy shit. Europe sells shit, we buy shit. What happens if we can no longer afford to buy shit? Shit backs up is what happens. Shit backs up and a new order ensues because shit has to go somewhere or the whole thing comes to a halt.

How will it reorder? I’m guessing it will be along debt/gdp lines. If the debt is big and the gdp is small the quotient is big. If the debt is small and the gdp is big the quotient is small. If the debt is small and the gdp is small the quotient is medium.

The US has the biggest debt, and a debt to gdp of well over 100% and with the creation of new debt it’s heading higher. The new debt is to prop up the dead wood of US business. Companies that are virtually worthless are kept alive by ever increasing debt, companies that should dissolve and go away. They are like tumors sucking blood supply and nutrients and energy. You don’t feed cancer you excise cancer. If you feed cancer the cancer will consume you.

Something about debt to GDP is some debt has a multiplier effect on the economy. Some debt can improve gdp at a greater rate than the increase in debt in a positive feed back loop. So if you have a dollar and you borrow 90 cents when it runs through the money machine 1.25 is created and you have 2.25 – .9 or 1.3 instead of 1 at the end of the day. Studies have shown however this relationship is not to infinity but is limited by debt. In the limit oncen debt to gdp goes beyond 0.9, when you borrow 90 cents you get back 80 cents so at the end of the day your dollar invested lost a dime. This is called deflation. You can “hide” deflation by financial engineering and using balance sheet tricks so for example stock prices appear to rise, so Uber may appear to soar in price but when you count the debt the company is worthless, and so you don’t own an asset you own a narrative, and a debt.

What if the S&P 500 is actually the S&P 250? What if there are actually 250 Ubers lurking in the index? What do you own? When you plow your kilobuck a month into the index and the index goes up does it go up because of commerce or does it go up based on your kilobuck buying the index which contains 250 Ubers? Price would normally be what clues you in but if the price is jiggered by financial engineering like share buyback you loose the signal. Do you even care what it is your kilobuck is buying or do you do it because it’s easy and the bottom line seems to go up every year? Seems to go up because at some point the tide goes out and all the naked Ubers flash their asses, but the government comes in and covers their nakedness with an illusion of solvency using government money blasted into private coffers, but wait a minute, we only get 80 cents back for every 90 cents spent and after all is said and done you still own something that effectively is worthless.

The promise of Uber is the greater fool bargain. You buy a piece of crap narrative low with the idea you can sell the narrative to a greater fool at a higher price. FIRE is like this. You buy indexes then promote the hell out of buying indexes, and when indexes are bought they are bought at a higher price because the greater fool bought higher, but then you plow in another kilobuck into the index and you are the greater fool. Since the government can’t tolerate the index going down and the 250 Ubers being exposed they pump a ton of dough into the index and attempt to inflate it but each pump is less and less effective.

It’s like the old days of running a code. You give epi, then you give more epi, then more epi, but the acidosis and hypoxemia is relentless. Cells that were aerobic are now anaerobic and pumping out way more hydrogen ions than the buffers can tolerate, for way less ATP created, the pH falls and you die. You furiously bag and pump but no O2 reaches the mitochondria. That’s what kills you. The partial pressure of 02 at the mitochondria become nonexistent or the mitochondria itself can no longer respond to 02, ATP ceases to be made and you’re dead.

Are we dead? Russia had a debt to gdp of .17. They have no debt and several hundred tons of gold. In fact they are the second biggest gold producer in the world. They mine money and put it in the bank, and they have nukes. China has more than 1000 tons of gold in the bank and they have nukes. China and Russia are creating a members only crypto currency which would allow dollar free trading between counter parties. China needs oil Russia makes oil Russia sends oil and gets crypto (backed by gold) back and since no dollars are involved the demand for dollars effectively falls, weakening the dollar. Weak dollars means the good we buy are more expensive at the consumer level.

I could go on, but the point is, what’s the signal? Is this a V recovery or a dead cat bounce? What happens to your bank account when you inject 10 trillion and get only 8 trillion back, inject another 10 trillion and get 7 trillion back? Sounds a lot like the code scenario. You probably don’t want to own dollars when they are headed to becoming worthless, but what do you buy to store their value in? Uber? Berkshire? Extended duration treasuries? Rubles? Gold? Copper? BTC? Presently I’m thinking yes gold yes EDV yes BTC and yes to BRK when the lows are retested.

What if my analysis is wrong and it’s a V shaped shallow recession? But unemployment is going to 25M and JP Morgan is predicting a 40% gdp drop in the face of a triple increase in debt yielding a huge increase in debt to gdp and a further huge deterioration in intrinsic value, so is a shallow V anywhere on the table or is that just narrative? If you didn’t buy the dip not to worry. When we retest the lows a couple times you will have ample opportunity to buy low or if the lows are breached even lower still. I know what we need is more debt! Just send me a check!

Here is a good video

4 Replies to “My Dilemma”

    1. because the fed is buying everything in sight and edv will be above negative interest rates longer than 10 year. the edv is a greater fool play.

      1. If inflation picks up, Fed will be forced to raise rates, then EDV will be clobbered, wouldn’t it?

        Overall, I am also see economy in a lot of trouble (though not as pessimistic as you) but I am thinking every day that I might be wrong and might be missing something. I did not see such a violent crash coming even though I knew about the virus, I did not predict the recent rally (quite the opposite), why would I think I can predict the future now…

        1. Regarding EDV why yes if inflation picks up, EDV is a bad investment but how you make money is buy low sell high. Right now EDV has a future since we are in frank deflation. The prediction is a 40% cut in GDP and who knows how many unemployed so not much inflation in that scenario. If inflation starts I go to cash or BTC or GLD. I’m done with this buy and hold bullshit. I don’t want to watch my money evaporate because somebody thinks that’s an OK strategy. Inflation is a risk but it’s a risk in the future. Deflation is a present day reality. Between then and now I wan’t to make some money. The problem with FIRE logic is people have been trained to always buy and never sell. That’s based on an assumption the market always goes up. What if the market stay’s flat or trends down for 20 years? Let’s say we hire a socialist to run the joint, what do you think the market will do?

          You can’t predict the future. There is a measure of how much you can’t predict the future. That measure for stocks is called the VIX. For bonds it’s called the MOVE. For gold it’s called the gvx and for oil osx. People call these fear indexes but they are not fear indexes. They are a measure of how accurate your guess will likely be. In March all of these measures blew out at least 5 standard deviations over their normal range. With that much uncertainty if you own Any RISK you own too much and if you’re making bets you have no idea what you are doing. Since most people can’t or don’t know how to trade short and have traditionally only traded long they just keep doing what they know. If the market drops from 3300 to 1800 the guy who made the money was the short seller. He sold at 3300 and bought back at 1800 and made 1500 on the trade and put that in the bank. The long guy had 3300 and the market dropped so he lost 1500 at the bottom if he sold. If he didn’t the market rebounded so his loss is less but he’s still at a loss. If he’s at 2700 he’s down 600 or about 20% to get back to even he needs to make 40% on his money. How fast is he going to make 40% in a market with -40% GDP and 25 million unemployed and maybe 200K dead and several million debilitated from the virus? How many businesses are actually out of business and won’t be coming back meaning their employees will never see that pay check again, and therefore will never buy a F-150 based on that paycheck? No F-150 sales = deflation.

          So we live in a time of relative lack of information as gold oil and stocks still have high volatility. Bonds are high but within a range of stability. Gold moved into a range of stability last Thursday oil and stocks are still unpredictable. so I own some gold (which is a currency) and some EDV no stocks and no commodities (oil is a commodity proxy). I don’t think there is ANY WAY the lows are not retested and likely retested several times so 1800 is still on the menu and maybe piercing 1800 is on the menu. It depends on how many businesses go out of business in the mean time. The idea this is going to be over in a couple months and everything will be hunky dory is lunacy. Once the VIX falls below 30 and the market retests 1800 I’ll think about buying stocks. Buy low sell high. The market has been giving ample opportunity to get out relatively high so you can buy back low. This is a demand shock and a supply shock and a world wide disruption. Let’s say China actually comes back online, who is going to be there to buy their shit? Italy? Are you in the market for a new iPhone or a trip to Wuhan? If you took that 18 hour trip you’d have an entire 747 to yourself. Bread lines are already forming. If you can’t short sell you can do 1/2 of the process ride the elevator up then go to cash book the profit and wait for the elevator to come take you up again. If your just going to buy and hold risk, in this kind of environment the risk will happily eat your lunch IMHO. What if 1800 doesn’t hold and it becomes 1200? The 52 wk low for the VIX was 11.03, today it’s 44.49 in March it was 85.47. Better, but not good enough to buy any equity risk IMHO.

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