Performance Report: 04/30/2023
All performance data for our strategies is net of all fees and expenses. All performance data for indexes or other securities is from sources we believe to be reliable. All data is as of 04/30/2023.
Administrative note: Previously, I have tracked performance by averaging the returns across all program accounts participating in our managed strategy (MAP) as our exposure was fairly standardized prior to 2022. But as I integrate more derivative (1256) contracts into our strategy, exposure will vary depending on account size. For this reason, I will report performance based on various bands which are determined by account size.
April saw mixed results for my investment strategy. All my client accounts were essentially flat with some appreciating just a bit and some depreciating just a bit. The performance disparity was due to account size and thus access to larger contracts in the real asset space. Sugar and orange juice have both done very well this year but both are larger contracts and only available inside larger accounts. We have taken some hits in other real assets like natural gas and in the grains but my approach to risk management has limited those losses. The end result is that we have been treading water while we wait for the seismic shift in the real asset space.
Given what has taken place the past few months in the real asset space, I'm very pleased with our performance. I wish I could find a way to communicate the desperation I'm seeing in the markets to keep inflation under control while rescuing the at-risk banks. The scheme which I detailed in my Thesis is reaching higher and higher levels of force to contain the prices of hard assets. What the FED and Wall Street have been able to accomplish has been truly remarkable. But, at the same time, it's clearly not sustainable. More and more money is being put into these positions and when something breaks, the force of the countertrend will be even greater.
I have been pleased with my ability to get in and out of securities using the MAP system. I am growing more confident that when something does break, we'll participate in the ensuing trend in a significant way. My two concerns going into this year were first, how long could the FED keep this charade going and, consequently, how much losses would we have to endure in the interim? Second, would the MAP be agile enough to get us in the right positions with a modicum amount of risk? Thus far, those two concerns have been alleviated to some degree. Rather than losses, we are actually sitting on small but decent gains YTD. And we have been moving in and out of hard assets with relative ease. My third and final concern is to what degree will we participate in the inevitable rally in hard assets when it takes off? Only time will answer that question for us.
Several banking failures have taken place over the past two months, including the 2nd and 3rd largest banking failures in our nation's history. To have these institutions wiped out in such short order is really quite incredible. These failures have gripped the market since March. As late as the FED's February meeting, FED Chairman Jerome Powell admitted that he had no knowledge or foresight that a bank run would take place. How incredible that the most powerful banker in the world and our nation's chief banking regulator could not see what was about to take place just a few weeks before it happened? Either he is lying or clueless, either way, it's pretty scary. As I wrote in last month's update, until the Glass-Steagall Act is reinstated, banking failures will be the norm rather than the exception.
In addition to dealing with the banking failures, it's becoming even more clear the FED is all-in on their scheme to contain physical asset inflation by leveraging paper derivatives. Here are just a few highlights:
OPEC+ Makes Surprise Oil Production Cuts: This headline came out on the first Sunday in April causing oil prices to spike. The Reuters article says, "The cut will also punish oil short sellers or those who bet on oil price declines." But quite the contrary took place. As I write this, crude oil for July delivery is 10% below where it closed on Friday, March 31st, before the cut was announced. Oil prices are down over 30% over the past 52 weeks. Despite claims by the media, the short-sellers in the energy space are doing just fine, at least for now. And if the short-sellers are winning, we know exactly who is doing the short-selling.
Over the past year, several large oil-producing nations have broken away from the Petrodollar agreement between OPEC and the US. Russia was first but others have followed suit. Even Saudi Arabia, the lynchpin for the Petrodollar, is starting to sell some of their oil in alternative currencies. Oil has been the one commodity the FED has been reluctant to push lower because oil is priced in US dollars, or more aptly US Federal Reserve Notes. If oil goes down in price, then US dollars/US FED notes go down in value which could put the FED in quite a pickle. But given how crucial crude oil is to the US economy and how price-sensitive US citizens are to gasoline, the FED has added it to the long list of commodities it seeks to depress. At some point, this scheme may further alienate oil-producing countries which would result in an even weaker Petrodollar.
On several occasions over the past two decades, the "two-headed fiscal monster" has lost control of the energy space. It happened in the back half of 2008 when oil prices collapsed from $140 down to $35, which came on the heels of the infamous Goldman Sachs call for $200 oil. Then it happened again in 2015 when oil prices crashed from over $100 to below $50 in a few short months. The latest took place in 2020 during the Pandemic when the spot price for oil went inverted "selling" for negative $35. To my knowledge, that is the first time in US futures history a commodity has traded below $0. So, it is not all that uncommon for Wall Street's paper market to become unhinged from the physical market. I do believe that other commodities are in greater jeopardy of breaking the paper market, but given the geopolitical pressures in oil and the enormous size of the market, it merits a close eye.
Next up is wheat, a commodity I covered in my Thesis. In my thesis, I stated how wheat prices at the beginning of the year were largely unchanged since before the Russian invasion of Ukraine. Thus, the disruption of wheat supplies from two of the world's largest exporters of wheat has miraculously had no impact on the price of wheat! Now, we are seeing wheat prices far lower than at both of those points. Wheat was 28% higher in January than it is today. The price spike after the invasion of Ukraine is 100% higher than current prices. But that is only part of the story. The more telling piece of the story is the fact that wheat is trading in significant contango. The change in price between the current contract and the 12-month out contract is just over 8%. Add in 5% which is the risk-free US Treasury rate then we get a contango figure of 13%. I have never seen contracts trading at such an inverted level. It is a clear sign that powerful forces are shorting wheat, and just like in the energy space, the shorts are winning. And again, if the shorts are winning, we know who is shorting these contracts.
I'll wrap up with a real head-scratcher. This year corn is down 20% while sugar is up 25%. While corn and sugar are not exactly the same, these two ag products do many of the same things. We know that most "sugar" consumed in the US comes from corn. And both corn and sugar can be used to make ethanol.
Thus, while not the same, in many ways corn and sugar are substitutes. So much so that their price should not diverge in any meaningful way. An "efficient market" should not see corn falling 20% while sugar goes up 25%. Eventually, expensive sugar would be replaced by cheaper corn in areas where they could be substituted for each other. And this change at the margin would certainly keep their price close to parity. But in reality, we are not living in an efficient marketplace; we are living in a highly manipulated marketplace. The manipulation has two objectives at this juncture. The first objective, which has always been constant, is to confiscate as much wealth from the middle class and funnel it into the pockets of Wall Street bankers. The second objective, which is a more recent development, is to contain inflation...so they can continue with the first objective unimpeded!
Monetary inflation is at its core, a wealth confiscation scheme. The "two-headed fiscal monster" has been consistently engaged in monetary inflation for over 60 years debasing the value of existing dollars by creating more of them. The sole objective of their scheme is to make sure the Wall Street banks retain a disproportionate share of the newly created dollars. Unfortunately for them, price inflation is the FED's kryptonite. So they have engineered a complex scheme to suppress price inflation but that scheme will fail in spectacular fashion, as schemes like it always have in the past.
Currently, the FED is playing the role of Dr. Suess' Cat in the Hat. It is in a terribly precarious situation trying to juggle too many conflicting economic forces. Monetary inflation versus price stability, raising interest rates while rescuing banks with severe interest rate risk, maintaining maximum employment while containing wage inflation. Just like the Cat in the Hat, we have to wonder how long can they keep up this balancing act?
In a letter Michael Burry wrote to his investors in October of 2005, he wrote of the impending housing crisis:
Markets erred when they gave American Online the currency to buy Time Warner. They erred when they bet against George Soros and for the British Pound. And they are erring right now by continuing to float along as if the most significant credit bubble history has ever seen does not exist. Opportunities are rare, and large opportunities on which one can put nearly unlimited capital to work at tremendous potential returns are even more rare.
Today the market is continuing to err in a very significant way assuming the FED can perpetually suppress the price of tangible goods using intangible financial instruments. Over the past 100 years, markets have erred in the same way many times. In every single instance, the physical market ultimately won. It takes time. It takes a significant dislocation between the paper and physical markets. But eventually, it does take. And when it does, just like Burry playing the housing market in 2008, the opportunity for tremendous potential returns will present itself.
As I've said over and over, just because something is inevitable doesn't mean it's imminent. I'm seeing it take shape but I really can't estimate for how long The Cat in the Hat can continue to juggle all the competing forces. I will seek to keep treading water until things start to break.
As always, please do not hesitate to call me at 512-553-5151 if I can be of assistance.
1) Inception date of 4/30/2019
2) All benchmark prices are obtained through the Yahoo!Finance website. S&P 500 Index is calculated using the index price. AOM is the iShares Core Moderate Allocation ETF. Global Balanced is calculated using a 40% allocation to the S&P 500, a 40% allocation to BND and a 20% allocation to IEFA.
3) VORR is our "Value over Risk Ratio": Calculated by taking the total return divided by the sum total of all negative months. Ideally, the ratio represents how much loss does an investor have to endure to get X gain. A negative RORR score implies there is more risk in the investment than return.