How Could We Be Wrong?
How Could We Be Wrong?
The most important question to ask.
Well, I read a note from
today that sparked a realization “oh this is how we could be wrong.”It’s important to always be thinking about that when you are trading. You should always ask yourself “what would make me wrong?” so that you can spot it quickly when you are, in fact, wrong.
We are long stocks and short bonds which I still think is good positioning. However, the short bonds portion of this trade is relying on liquidity conditions to tighten, or at least for the market to realize how bad liquidity conditions are when it comes to govt debt.
Over time with the amount of treasuries being issued we assume, probably correctly, that the market will start demanding a higher yield to finance US fiscal insanity. Eventually, we expect that these higher yields will result in the Fed injecting liquidity like they always do.
But what if we skip the most important part of this for our position and the market never grapples with needing higher rates before the Fed injects the liquidity?
Either way, our equities side of the trade will do fine. But how can we more directly play this “Fed will inject liquidity” idea? Both as a hedge for our bond shorts and also as an added layer to take advantage of it?
Commodities.
Gold
I touched on Gold at the end of yesterday’s newsletter, just to share a headline about Gold “mysterious rally” baffling analysts.
There’s nothing mysterious about this. Gold has been responding to the exact idea I mentioned above: no matter what happens this ends with the Fed injecting liquidity.
And I don’t think we are too late here to scoop up some of the money that is going to be made in Gold and other commodities.
Gold’s previous all-time-high when adjusted for inflation would be something around $3200 in today’s dollars. That level was last reached in 1980. Below is the best chart I could find on the subject, although it’s a few years out of date.
Just stop for a second to appreciate that in 2014 when this chart was made the inflation adjusted peak was $2458. Now, 10 years later, that $2458 would “cost” $3200.
Our Basket
So, our basket of trades is going to be fairly consensus among the “sharps” but it looks like this:
Short TLT
Long SPY + QQQ
Long Commodities/Gold
Long Crypto
Just quickly noting these are our trades, this is not a balanced portfolio by any means and I’m not telling you to do anything with your money but I’m certainly not telling you to put your savings into these positions.
And we want to watch for the following things:
Exogenous shocks
Fed dovishness
Returning inflation
Economic slowdown
How hard can it be?