white mountain weekly march 29th, 2018 - pinecone macro · 2019-11-26 · inflation fears should...
TRANSCRIPT
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
www.pineconemacro.com @pineconemacro [email protected] 1
Welcome to the first White Mountain Weekly. My name is Chase
Taylor and I am a trader and macro strategist currently living in Southern California. Most of you probably know me as Pinecone
Macro from twitter and from my website pineconemacro.com. I sincerely hope you will enjoy this letter each week and will send me
feedback, especially when it is critical of my thinking and analysis. Before we begin, I just wanted to address the name of my letter.
I obviously have a fascination with pinecones and coniferous forests.
This started with my reading of Mark Spitznagel’s brilliant book The Dao of Capital, where he outlines the “strategy” of coniferous trees
and the genius use of the pinecone to fulfill this strategy on the tactical level. If you have not read the book and find this odd, you
should go and read it now – but not to worry, I plan to weave in some of the lessons we can all learn from trees in this letter each
week. The White Mountains in California are home to the oldest living species on the planet – the bristlecone pine (pinus longaeva).
Some of these trees are over 5,000 years old. I admire the resilience
of bristlecones in the harsh conditions of the White Mountains where it is often the only plant species able to thrive. We are talking
about a tree that is content to grow ever so slowly in cold, heat, dry soil, high winds, short growing seasons, and shallow alkaline soil
made of limestone, sandstone, or quartzite. More to come later on the bristlecone but let’s hit the markets.
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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Most of my writing over the past year has been about bonds, with
my thoughts on inflation and the bond market taking up most of my twitter feed and my writing. I am a firm bond bear for the coming
months and years but certainly see a rally developing. Below is a chart of the 10 year yield. As you can see I was incredibly fortunate
with the timing of my short. With that said as I write this the 10 year yield looks to be breaking down with a retest of the support
area taking place. I am buying some TLT here in order to hedge my shorts and to add some yield to my portfolio. If bonds were to rally
near the trendline I would sell TLT and likely add to shorts expecting a new leg higher in yields. To me this looks like a technical rally
based on stock market fears, positioning and sentiment in bonds, and the fading of the inflation and trade war fears. Inflation fears
should calm down for a while but they will be back.
My thoughts on inflation are somewhat based on a similar story as
1966 held and I would like to share an old newspaper clipping from that time period. This is from the LA Times (Sep 15, 1966)
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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It is interesting to note that the article more or less suggests that the
President should not worry about inflation and that he is merely trying to keep from needlessly provoking a recession or depression
by not fighting inflation. The article quotes President Johnson as saying the US would not buy price stability at the expense of growth.
Will President Trump and the Fed buy price stability at the expense of growth? Not to mention at the expense of keeping real rates low
and assisting with the over indebted and over levered system. I doubt it and this is why I think we could see inflation that runs
hotter than consensus expects over the next few years. Nobody seemed to expect a destructive inflation in 1966 and the same is
true now in my opinion. The writer referred to inflation fears as “sensationalized” and “propaganda.” As it turned out the US was on
the cusp of the most destructive inflation since at least the 1800s and the most destructive outside of large scale war on US soil in
American history. I will continue to revisit this time period through the newspapers as I find it instructive.
I first approached this idea thanks to the great Hugh Hendry and an
interview he did on Real Vision in June of 2017. He also underscored the fact that bonds may not be the shock absorber they
have been over the past generation when a shock occurs in financial markets and I could not agree more. This is an idea that is not
considered deeply enough in the investing world. I think the size of bond allocations in portfolios will be the largest driver in the coming
pension/retirement crisis in the US. Bonds are starting to build a rally, but so far this year the bond market is not acting as that
shock absorber we have come to know and love for the past generation - the shock absorber most portfolios are constructed
around. Below is a great chart from a recent Bloomberg View article by Scott Dorf. If this trend continues, managers can either accept
this risk and allow underperformance or they can recognize the changing paradigm and sell some bonds, further hurting the bond
market and creating a damaging reflexivity in bonds. Perhaps the Fed could stop this by buying all of the bonds – but at what price?
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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It is interesting to note that during this period of rates rising and not
being great shock absorbers – Chinese bonds are performing better as the Chinese bond market grows and gains global acceptance
while the currency does the same. As Luke Gromen has covered so well, the Chinese now have an oil futures contract traded in yuan.
All of this together is quite intriguing. This chart is from @Sunchartist via twitter.
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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If I am right about an inflationary period starting and bonds not
being the best way to hedge – what will be? Thanks to a great EVA from the great folks at Evergreen Gavekal I have some great charts
to show us how we could shift portfolios.
I recently posted a chart of the GLD/TLT ratio on twitter as a loose
way to track this important ratio. Check out the charts on the next page.
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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Below is the weekly chart of gold to bonds. We saw a trend break in
the summer of 2016 and a three year base that broke out at the beginning of this year. Perhaps we retest these lines but the change
looks clear to me.
Also worth noting is the same chart on a daily where you can see the 200 day moving average now gaining steam with an upward trend.
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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What about gold itself right now? We broke the down trend from
2011 but have been stuck around the $1350 area and stuck on this neckline of a truly massive inverse head and shoulders pattern.
Currently the 200 week moving average is flat and we are near the neckline and the up and down trendlines – so a critical juncture. I
expect gold to break this neckline and explode to $1700 over the next couple years but I am currently flat. I want a weekly close
above the neckline before I get long gold futures and mining stocks.
Another way to potentially play this is to go long silver. Speculators are extremely short and sentiment is poor and the chart has been
asleep for months. There is not a clear potential breakout like there is in gold but silver is absolutely worth watching moving forward.
The last trade I want to cover this week is the EURUSD. I have been
short for a few weeks, getting whipped around and currently about even money. Outside of being long USDTRY most of my shots at
dollar strength of course have been a fool’s errand.
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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We have a couple levels that could be trouble for yet another market
that has very skewed positioning and sentiment. As you can see there is a down trendline that looms large as well as a strong
horizontal area and a steep up trendline that could soon break. I could see a fall down near the top of the 2+ year horizontal channel.
To wrap up my first letter, I want to return to the bristlecone pine.
The bristlecone can live for thousands of years despite incredibly slow growth. The tree also dies an incredibly slow death, often by
soil erosion that exposes the tree’s vitally important roots. As investors we should mimic the bristlecone’s adaptations that make it
so successful and long living. The tree has thought of most everything and developed a system to overcome environmental
challenges. All but soil erosion. You could argue that our modern portfolios are well adapted, long living portfolios, built for the long
haul. We live in the age of big data, the back test, quants, Sharpe ratios, and “all weather” portfolios. Well the bristlecone is the
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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ultimate all weather organism – yet the tree still has that damn blind
spot of exposing its roots every few thousand years. This problem is so slow to form that it is difficult to notice or adapt and it may take
thousands of years to adapt, if it ever does.
In my mind an inflation shift after forty years is our version of soil erosion. Our investing roots have worked for so long and our roots
(think bonds in our case) have been so trustworthy that we naturally feel as though we can ignore our roots and focus on other areas. We
can focus on FANG’s P/E, and Donald Trump, and Chinese data, and CAPE ratios, and which factors back test well over the past
cycle or two. We are focused on our needles and our cones and our branches and even the temperature and wind to make certain we
are in the best possible position to survive. We should focus on all of these factors, but we must never ignore our roots. Just because
bonds have been a steady performer and shock absorber for every investor under 60 years old does not mean we should ignore them
and count them as a sure fire portfolio cornerstone. Unfortunately for the bristlecone there is not much the tree can do about the soil
eroding over hundreds or thousands of years from around its roots – but as investors, we can keep a close eye on our portfolios without
assuming that the roots are always strong and healthy. Inflation stands ready to erode the roots of portfolios people depend on and
we owe it to ourselves to view this asset class through the lens of all of history, not just the past four decades.
Below is a cool graphic about the bristlecone from Inyo National
Forest. The tree grows where other trees cannot and will not. As investors we tend to grow where the rest of the trees grow and hope
to get some of the same nutrients. We all love Tencent and India and view ourselves as contrarian. The real success, even the most long
lived success is sometimes where nobody else is willing to go. If the longest living trees on the planet go where nobody else will, why are
we afraid to invest there?
I hope you enjoyed this week’s letter.
WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018
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“Look back in memory and consider when you ever had a fixed plan, how few days have passed as you had intended, when you were ever at your own disposal, when your face ever wore its natural expression, when your mind was ever unperturbed, what work you have achieved in so long a life, how many have robbed you of life when you were not aware of what you were losing, how much was taken up in useless sorrow, in foolish joy, in greedy desire, in the allurements of society, how little of yourself was left to you; you will perceive that you are dying before your season!”
― Seneca, On the Shortness of Life