Dash for Trash

Back in 2017, when I was working on my investment thesis, I made the observation that trading in Bitcoin is a little like trading in bankrupt companies. It's all about scarcity with no regards for utility. Little did I know back then that such trades would be popular by 2020. By early 2021, trading in trash is all the rage, with Game Stop up hundreds of percent in hours, outpacing the volatility of Bitcoin by leaps and bounds. However, none of this is irrational, as some commenters appear to believe. What's going on is perfectly rational in a world where interest rates are kept artificially low.

The rational behind the dash for trash is quite simple. Institutional investors have large short positions in such stocks in the expectation that they will go to zero. Due to cheap credit, such bets are more leveraged than they used to be, but still based on conventional metrics of value. However, with cheap credit available to all traders, there's an opposite position that can be taken without much cost. This is the bet on a short squeeze. If a heavily shorted stock is suddenly pushed higher in prize, weak hands will be forced to cover their positions by buying back the stock they sold. This drives the prize higher, allowing the engineers of the short squeeze to profit.

A short squeeze has the additional effect of extending the expected life of a company in trouble. The company can issue fresh shares, and it can borrow money based on its higher share prize. This further pressures short positions that often bet on bankruptcy dates. Even prudent short positions will need to readjust for a later bankruptcy date. In extreme cases, a short squeeze can end up making the troubled company the financial victor. Instead of going bankrupt, it prospers on the back of its new valuation. It can buy up a competitor, restructure its business, and start dominating its industry, as happened in 2008 with Volkswagen when Porsche took a controlling stake in that company.

But such windfalls are difficult to turn into lasting profits. Short squeezes are not a sign of health in the economy. Rather, its a sign of serious trouble. Interest rates are too low, and long term profitability is on its way down.

Hertz

By Raysonho @ Open Grid Scheduler / Scalable Grid Engine - Own work, CC0, Link

Forced Deleveraging

Two seemingly unrelated processes are currently coming together to produce what may end up as a perfect financial storm. On the one hand, China is continuing to push local interest rates higher, and on the other hand, there's what looks like insurrection in the US markets.

What the two processes have in common is that they forces speculators to deleverage. In China, the mechanism is immediately clear. Higher interest rates makes it more expensive to borrow money, and highly leveraged bets will therefore have to be reduced. However, the wreckage caused by the rag tag army of day traders in the US has the same effect. Margin calls forces people to abandon their leveraged bets. Only those playing with their own money, without leverage, are able to weather the sudden gusts of long and short squeezes. Those with margin are forced to abandon their positions, often at the worst possible time.

Forced deleveraging reduces in turn the money supply, making currencies even more scarce. People become more reluctant to lend, and those in debt become desperate with a crash in financial assets as the inevitable endpoint.

The only alternative to a financial crash is a coordinated debasement of all currencies. However, central banks cannot go that way on their own. Every central bank has to be on board with such a plan, or people will catch on to what's going on and rush for the exit. Without China on their side, other countries cannot very well debase their currencies. Buying the Yuan is just too much of an obvious exit. But even with China on board, the debasement option seems increasingly unlikely to work due to the loop hole that this creates for day traders to game the system.

Deleveraging appears to be where we're heading. Interest rates are going to go up, and anything depending on leverage for its current price level will return to its true level, probably overshooting fair value due to momentum. Those with ready cash can in that event pick up true bargains. Even better than cash will be gold and silver since the prices of these metals are kept low through rehypothecation, a type of leverage used to suppress prices.

Sovereign

By Heritage Auctions for image, Mary Gillick for coin - Newman Numismatic Portal, Public Domain, Link

Insurrection in the Markets?

The markets have acted strange lately, with hedge fund hates going to the moon while their darlings get battered. So much damage has been inflicted on hedge funds that the Biden administration has found it necessary to monitor the situation. However, conservative and libertarian commenters are besides themselves with glee. For every hedge fund being carried out on a stretcher, there's a hushed hurray making the rounds. It very much looks like an army of rag tag speculators ganging up against their pet hates.

Now that it has been revealed that Nancy Pelosi has put about 1 million dollars into Tesla call options, it will be interesting to see if this rag tag army will crush Tesla just for the fun (and profit) of it. The coming days will be interesting in this respect. Not least because things are poised very much in favour of a swift and effective attack. Nasdaq call option volumes are at an all time high, so there's no lack of long positions to shake out, and Tesla looks weak, making it an especially tempting target.

The only problem with Tesla is that it's very big, so it requires a lot of muscle and determination to crush it. However, if we are indeed seeing an army of speculators determined to see their political opponents cry, we may well see them band together to take down this financial giant. If so, we can assume that it's at least in part a political statement.

Nancy Pelosi

By US Department of Labor - L-15-04-14-A.569, Public Domain, Link

A Second Step Towards Secession

It took Biden less than a week in office to provoke thoughts of secession in the provinces. This is clear from the reactions to his ban on oil production on federal land. The Ute tribe of indigenous Indians have filed a protest against the ban, pointing out that oil production on federal land is how the tribe finances its activities. Others are less vocal, but no less desperate. Many communities depend on oil production on federal land for their existence. But without the leverage of tribal autonomy, most of these communities have no options but to comply or defy the ban.

Rural America is typically Republican, and therefore not particularly loyal to Biden. Many believe him to be an usurper, and his ban on activities at the periphery of his domain must be seen by many as proof positive that he is no friend of the people. Given the choice between suicide or going dark, many will seek ways to continue oil production through legal trickery. As a first step, they are likely to consult the local sheriff. Will the sheriff enforce the dictates from Washington DC?

It is the sheriffs that are tasked with the day to day handling of law and order, so it's of vital importance that they comply with orders from above. However, sheriffs are elected locally. Their main concern is therefore to serve the community. Taking orders from above is secondary. Seeing wholesale destruction of their local community, sheriffs will be inclined towards alternative solutions.

The sheriffs can turn a blind eye to oil production. They can allow miss-labeling and other trickery. There's a whole range of possibilities available to them, some of which are capable of boosting the local economy. With oil production officially turned off, no taxes need being paid to Washington. Played properly, the sheriff's office can keep oil production going while simultaneously receiving various support measures from Washington. The economic incentive for trickery and fraud is significant.

This means that Washington DC cannot rely on sheriffs to uphold Biden's ban on oil production. It must be done by federal agents in corporation with federal law enforcement. In case of irregularities, the national guard must be called in to arrest the sheriff. But Biden has already made himself unpopular with the national guard. They may not act very effectively on behalf of Washington. They too may decide to report back that all is well without actually doing anything.

The net result of this may be that Washington DC gets feedback from the periphery that conflicts with reality. They may end up subsidizing the non-compliant while hurting the compliant, further accelerating the trend towards micro-secession.

Federal land

By Bureau of Land Management - http://wilderness.org/blm-lands, Public Domain, Link

Crushed Again by China?

Geo-politics is a zero sum game. The point is not to be better off in absolute terms, but to be better off in relative terms. The winner doesn't have to be better off. All that matters is to be less badly off than the opponent, which explains why war is a popular tool in this respect. It also explains the rational behind the Wuhan flu. The pandemic has created misery all over the world, including China. But because China managed the situation better than other countries, it's now better off in relative terms. The flu has thus strengthened China's position as a global power.

With world hegemony likely to be China's ultimate goal, the next logical step after weakening its opponents would be to strengthen its grip on world trade by making its currency stronger. Doing this would hurt Chinese speculators, but that's irrelevant if it hurts foreigners even more. Especially since local consumers will benefit at the expense of foreign ones if the local currency was to rise. From a geo-political viewpoint, the gamble must look tempting.

The game-plan would be as follows:

1. Strengthen the Yuan by withdrawing liquidity
2. Use the stronger Yuan to buy scarce resources
3. Encourage local consumption by lowering taxes

The result of this will be higher interest rates in China, which will crush Chinese speculators. But foreigners will not be much affected because the increased value of the Yuan will offset much of the fall in prices of Chinese financial assets. If local consumption picks up, the assets may even continue up in value relative to foreign assets. There will be a rush of capital heading for China, propping up the markets as well as the Chinese consumer. The immediate effect will therefore be crushed Chinese speculators, happy foreign speculators, and happy Chinese consumers.

But foreign consumers will be less than pleased. Chinese goods, as well as raw materials of all kinds, will go up in price. There will be rapid price inflation outside China, and the only way to escape it will be to own Yuan, gold or raw materials. The average man in the street will suffer, and so will the dollar, the main target of the strategy.

With the Yuan suddenly the strongest of all currencies, the dollar will be sold together with dollar denominated assets. Not only will the dollar go down relative to the Yuan, dollar denominated stocks and bonds will go down as well.

Artificially strengthening the Yuan will do a lot of damage. But the damage will be greater outside China than inside, and for this reason, it's likely to be China's next step in their dirty war. It's therefore worth noting that China has now taken the first tentative steps down this road. If they don't reverse direction soon, we're likely to see stock market crashes and out of control price inflation all over the world, most severe in the US and least severe in China. Just like the flu, the misery will start in China, but China will be the least affected in the end.

Xi Jinping

By Palácio do Planalto - https://www.flickr.com/photos/palaciodoplanalto/47945730807/, CC BY 2.0, Link

World's Best Place to Live

A few years back, when Norway had been ranked by the UN as the world's best place to live for the fifth year running, a funny thing happened. A bunch of Indian nationals landed in Norway in the middle of winter, ready to live the good life. However, they were ill prepared for the cold and the dark, and they knew no Norwegian. They had little savings, so they couldn't find a place to live for more than a few days, and without any skills of note, they could find no job. Desperate to avoid starvation and the freezing cold, they turned to the authorities who could do nothing more than send them back to India.

Clearly, Norway was not the best place in the world to live for the hopeful Indians. The UN had deceived them with their simplistic measure. The Indians were much better off in India than they were in Norway. However, this doesn't mean that Norway might be the best place to live for some people. There are plenty of good things to be said about Norway. It has a wonderful culture of trust. The standard of living is generally high. It's a great place for winter sports. For people with the right set of skills, a love for harsh wintery weather, and a reasonable fluency in Norwegian, Norway is as close to heaven as it's possible to get. But the number of people who fit this description is not very big. For the vast majority of us, Norway is not the best place to live.

The measures used by the UN were not very helpful for the Indians, and are just as useless for everybody else, because they don't apply to individuals. They don't even apply to individual Norwegians. There's a great number of miserable and frustrated Norwegians who are just as confused about the UN categorization as were the Indians, and the reason for this is apparent when we look into the measures used by the UN.

Until recently, the UN listed longevity, duration of schooling and gross average earnings as their only criteria for determining how good a place is to live in. The fact that Norwegian schools are notoriously slow at teaching kids stuff is therefore a plus, as is a natural tendency towards longevity and a high minimum wage. But moving to Norway does nothing to increase our longevity or extend our hours wasted at school, nor does it guarantee a job. We don't get any of the supposed benefits by moving to Norway. They apply only to those who live there for the entirety of their lives.

Once the UN added carbon footprint as one of their measures to determine how good a country is to live in, Norway fell several notches from the top, which goes to show how arbitrary the UN ranking is. It's useless nonsense, and only fools would use it to determine what place may be best for them.

Another useless index is the happiness indicator, where people are asked to rank their happiness from high to low. It's naturally skewed by culture. It's considered impolite in Scandinavian countries to rank oneself as unhappy, while the opposite is true in Latin countries. Misery is elevated to an art form in places like Portugal, so much so that there's an entire cultural scene dedicated to it, including their tradition of Fado songs. No matter how well things go for individuals in Portugal, they will hesitate to rank themselves much above misery, while things must be pretty desperate in Norway before people rank themselves miserable.

Complicating things even more is the fact that individual preferences vary. Some love winter sports, while others prefer a warm and dry climate. Law and order rank high for some while others enjoy a bit of chaos. Individual circumstances are also of importance. Wage earners have different preferences to social security recipients or rentiers. All of this must be considered before we can reasonably rank nations up against each other. However, this doesn't mean that we can't be somewhat scientific about it. While we all have personal preferences and circumstances, we all want to get as much out of our situation as we can. The list of things to look for is therefore the same for all, only the weighting varies.

As a rentier, I value low taxes and low cost of living. I also like long summers that are not too hot, and short winters with few cold days. I enjoy a bit of predictable chaos as opposed to strict law and order. I want to feel safe, but not so safe that it borders on oppression.

Using the above measures, Portugal comes out very well, so I'm happy to live in Porto. However, if I was a well qualified engineer with the intention to live form my labour, I would prefer Germany or Denmark, where salaries are the highest when measured against purchasing power. If I were to live off of my social security benefits, I would by necessity have had to stay in Norway so as not to disqualify, but I would have tried my utmost to get to Portugal with my benefits intact for the reasons stated above.

But for the vast majority of people, being close to family and friends trump all other concerns. Living abroad is out of the question. For them, there's no place like home, and no measure of any kind will make them think otherwise.

Downtown Porto

By ho visto nina volare from Italy - Portogallo 2007, CC BY-SA 2.0, Link

Talk of the Devil

There used to be a time when people were careful about the words they used, especially those related to bad things. Words had magic powers. Talk of the devil, and he would appear. Curse somebody with a disease of some sort, and that someone might very well get infected.

No-one today is much bothered about this, and as a consequence, people talk eagerly about the pandemic as if we've been hit by the plague. However, there are no piles of bodies in the streets, there are no mass graves and there's hardly anyone under the age of 80 dying of the flu, which gives me an eerie feeling that God may have a little surprise up his sleeve. With all this talk of a pandemic, God may give us one just to let us know what a real one looks like. Better still, he may choose to spread it through a vaccine. That would be in line with his other tricks.

God has a tendency to poke his finger in the eye of those who try to do his work, and it would be very much in line with his previous tricks to direct his message through some man made disaster.

Tower of Babel

By Pieter Bruegel the Elder - Levels adjusted from File:Pieter_Bruegel_the_Elder_-_The_Tower_of_Babel_(Vienna)_-_Google_Art_Project.jpg, originally from Google Art Project., Public Domain, Link