Dead Sea

The bottom of the Dead Sea is the lowest land mass place on earth. In order for a sea to be alive it has to flow and the water in that basin has nowhere to go. I was talking to a friend about the market and she made a comment about valuations falling back to earth, and it triggered this map in my mind. Suppose the valuations fall back to the lowest place? Suppose all the leverage, narrative, smoke, mirrors, sales gimmicks we get sold by CNBC FBN Bloomberg, guys with pony tails and bald heads, what if it all falls back to the lowest place, not a place of zero but a kind of gravity well of negative vitality. Why Not? Covid, Fires, Hurricanes, political idiocy, clueless arrogance, near open war fare in the streets, deficit to 6T, unemployment sky high, bankruptcy, what’s to stop it?

I belong to Real Vision as a narrative source which I use to inform my judgements (among others) and they sent me a survey about whether or not Covid (which actually to me means the present state of affairs) has changed reality forever. In my opinion the answer is yes. Reality feels different. There is a subtle hum of volatility and loss of cohesion in the background that didn’t exist before 2020. There is a radical shift in the narrative.

In times past the narrative oscillated around reality. It was like a metronome.

The center was reality and the narrative revolved around reality sometimes slightly correlated to the negative, sometimes to the positive, but always correlated to a relatively high degree. In times of crisis the correlation became very high. I think that correlation no longer exists.

Now what exists is alternate realities based on narrative alone. There is still a reality, you still need food etc but you can live entirely in a screen, work in a screen, see your people in a screen, and base your judgements entirely on what is presented by the screen and there is no longer much correlation between screen and reality. Reality and narrative have become uncorrelated or even counter correlated. To the extent the narrative is uncorrelated is the extent it becomes unreal and so who is going to win, reality or unreality?

That’s what is different now and why things will never be the same. We now live in a time where we have become unhinged, literally and I see little reason for people to become hinged once again.

Money in the future will be made by exploiting “unhingedness” If the narrative is a complete lie then the narrative will necessarily be crafted to separate you from your money, and that’s how you get to the bottom of the Dead Sea. That’s how you get captured by a gravity well.

We see vendors for THC based hallucinogens. It’s a big industry. In Canada they are expanding to other hallucinogens under the guise of “religion”. I recently met someone who was undergoing a series of ketamine “therapies”. Her particular series cost $11.000. In their nature these things are dissociative to the personalities of the users. Is it a measure of depravity that we have turned personality dissociation into a business under the guise of medicine and religion? I’m not speaking from a moral perspective but at what point does “freedom” become “slavery”? I expect at that point the future no longer a linear progression of the past.

I use a vendor that carves up risk into 4 quadrants based on economic growth and inflation

  1. QUAD 1 = Growth Accelerating; Inflation Slowing
  2. QUAD 2 = Growth Accelerating; Inflation Accelerating
  3. QUAD 3 = Growth Slowing; Inflation Accelerating
  4. QUAD 4 = Growth Slowing; Inflation Slowing

1 and 2 are when long portfolios make money

3 and 4 are when short portfolios make money

We are in Quad 3 also known as stagflation. The probability of Quad 4 is rising. Quad 4 is what happened in March. It is called deflation. Today the NAS is down 200 pts and the NASVOL (VXN) is up 2.5% to 37.

5 Replies to “Dead Sea”

  1. Agree with your sentiments. Stagflation is a more desirable outcome than deflation. Recent Fed remarks bear this out. Feels like the Fourth Turning is reaching towards a crisis point.

    1. Depends on how your portfolio is positioned. In deflation if you are in cash (risk off) “inflation” goes negative and the relative value of your cash skyrockets. If you have 1M for example and the value of housing crashes from 1M to 500K the relative value of your cash from a housing perspective has doubled. If you have “risk on” depending on the rate of inflation the price of your risk also will tend to inflate. The problem is the cost of inputs also inflates so in stagflation rising inputs and decreasing sales squeezes the margins and eventually you go out of business, which then becomes deflation, so you stagflate your way into oblivion. If you can move to a regimen where economic activity improves and inflation decreases margins stabilize and you live to fight another day. In stagflation if inflation becomes hyperinflation, game over.

      Gold which is also a currency tends to increase in value in either deflation or inflation and the advantage of gold is the FED can’t print a bushel basket. Gold is called a hard currency in that there isn’t much change in the world wide amount so in the equation dollars/oz, oz stays relatively constant. In deflation stable value is a good thing and in inflation an inflating value is a good thing. I sold some gold last week when it was high and booked some profits. Today it’s down 3.5% so I’m buying back in, adding some of those profits to the principal to realize some compounding when it goes back up. Gold vol has increased 17% to 23 so I’m putting only a part of what I sold last week back into the market and I’ll keep the rest in cash for now.

      Remember the FED’s goal is to steal value from you to pay their debt. They do this with inflation. If there is inflation they pay their debt each year with cheaper dollars. If there is deflation they pay their debt with more expensive dollars so the FED’s goal is to inflate the hell out of things despite what it does to your balance sheet. If you have a 2% rate of inflation, in 35 years the value of your money drops in half. In the above example 1M cash would only buy a 500K house in 35 years with a 2% rate of inflation, so the FED effectively stole 500K from you over 35 years with their inflationary policy. Despite their PR machine, the FED in the land of deficit spending IS NOT YOUR FRIEND.

  2. Hi Gasem,

    Thanks for the QUAD 1 to 4.

    A great way to frame to see where things might be going in the forseeable future.

    If you don’t mind , I would love some advice from you on how best to prepare for this scenario I think could become a reality in the next 3 months.

    Also , if you could recommend any bloggers and experts besides yourself who have similar world view for me to follow and learn to take advantage of this potential crisis.

    I have heard that gold (and not cash) is the best asset to tide over this crisis I am going to describe below. What do you think?

    The scenario I have in mind for the next 3 months or so is — >

    After the November 2020 election in USA , whether Trump wins or loses , USA is going to plunge into a deeper political crisis.

    USA will have more riots and what have you. It will make the street protests of today look like child’s play.

    Probably about the same or worse than what you went through during the Vietnam war demonstrations back in the days.
    I don’t know , I wasn’t old enough to experience it.

    The volatility in the markets will go through the roof.

    Which market exactly ? I wonder.

    I think we are likely to be in some kind of 1930s scenarios with 1960s riots thrown in.

    This time may well be different.

    What would be a good way to take advantage of this potential scenario?

    More gold ? More commodities ? More real estate ? More bitcoins? Less stock ?

    Any asset class to avoid or to buy like crazy now before the November election ?

    Your advice are very much appreciated.

    Thanks for all you are doing.

    1. Take a free trial at Hedgeye and then decide what if any products you want to purchase. I have about 9. As you go up the scale the cost blossoms. Depending on whether this is a kind of hobby to you or an actual business determines how engaged you become. 9 products gets me pretty far down the road for my level of interest. My renewal comes up in November. I will be renewing.

      How you manage the data depends on how you think about risk and your apatite for trading. Trading is like playing poker. If you maintain a 51% win rate eventually you will own all the money. That’s a state function dependent on the beginning value and the end value and is path independent. If the path takes you below 0 however you’re dead so the outcome is not entirely path independent because if you’re below zero you can no longer play. Zero money forms a hard boundary. Typical 60/40 types stick in their money and hope it doesn’t go to zero in the drawdowns and hope time causes recovery. If you loose 50% it takes 100% gain to break even. If you loose 20% it takes a 25% gain to break even (start with 100 20% loss is 80 to get back to 100 takes a 20/80 gain or 25%). This means the loss is asymmetric in a negative direction to the gain needed to get back to zero. These losses translate into time. A 50% loss (100% rebound) loss may take 5 years to recover to 0. A 20% loss (25% rebound) may take 3 years to recover to zero and then it has 2 years to compound while the 50% loss (100% rebound) is still trying to achieve 0. Like zero money running out of time is a hard boundary.

      Suppose you retired in 1999. 2000 happened and you lost half your money. The annualized rate of return between 1999 and 2009 inflation adjusted and dividend reinvested was -3.17%. So you lost half your money and then “grew” at -3.17% for 10 years, while retired and that’s without spending $1 to support the cost of your retirement. By 2019 the inflation adjusted and reinvested you were at a 20 year net return of 3.84% without spending $1 on your retirement. If you were taking out 4%/yr and started with 1M 100% invested in SPY 20 years later you could very well be out of money. (On a Monte Carlo analysis 25% of the time you were out of money meaning you had hit the time and zero boundary conditions) And THEN 2020 hits which may lead to an insolvency crisis (likely IMHO).

      It is said you CAN”T market time but can you actually afford to dollar cost average a clearly manipulated market? What if the mantra you CAN’T market time is a lie? Take the free offer, learn what you learn.

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