Author: s4k

Thoughts on the CHF Trade

We are currently long the Swiss Franc (CHF). See here. Below is an up to date chart of the CHF from the breakout point.
This trade will most likely not play out as expected. In my experience, when a breakout occurs it goes right to its target. It never looks back. Below is a H&S top trade in cocoa from late 2016.

Notice how clean the break was in Cocoa just like the CHF. However, cocoa didn’t linger around the breakout point. It started its trend to its destination. The fact that CHF is not trending to its target is the first hint this trade will be a dud.
So what should be done about this?
Nothing. I traded per my plan. After I execute my plan all I can do is sit and wait.

Earnings Up

Almost all of the S&P500 companies have reported their Q4 results. Operating earnings are up over 20% from last year. For the past 8 years buying the dip has been an excellent payoff. Corrections will come. Fear will push some out. As of right now I am still buying the dips. One day the bears will be correct. They have been wrong for 8 years.

Ramaphosa Sets the Tone

Ramaphosa wants to redistribute land from whites in South Africa to blacks. We know what these policies will do. It was tried over and over in the 20th century with the same results. Zimbabwe tried it in the 21st century. Take a look at the Zimbabwean Dollar VS USD to know the future of South Africa.

I wrote about this here and here. This philosophy will bleed over into the mining industry in SA. Buy platinum. Sit and wait. If you live in South Africa, black or white, you should begin planning your exit strategy.

Steel and Aluminum Tariffs

Trump is pushing for steel and aluminum tariffs as soon as next week.

The new tariffs will impose 25% tax on steel and 10% tax on aluminum. Trump doesn’t understand trade. He doesn’t understand comparative advantage. He never read Frederick Bastiat . Last year he decided to slap tariffs on lumber from Canada. We are all now paying for it.

Lumber is at an all time high. For the record, the US is by far the largest producer of lumber and plywood.
So what countries are likely to retaliate with their own tariffs?
China is the largest producer of aluminum with 53.8% of the world production.
The worlds largest producer of iron ore are Australia with 37.3% of world production, Brazil with 19.4%, and China with 11.9%. Most of the US imports of iron ore come from Brazil and Canada.
Since the USA is one of the largest exporter of nearly all food products, we can pretty much see where this is going.

Rationalization of Mass Murder

The book, “Ordinary Men”, is a story about the Reserve Police Battalion 101 and the final solution in Poland. Thousands of Jewish men, women, children and infants were murdered. The book is dark and depressing.
At Józefów, Major Trapp made an offer for men to step forward who wanted to excuse themselves from the atrocities they were about to commit. Out of five hundred men only twelve stepped forward. Why only twelve? Later reflections indicate there was no time to think. It was all too sudden. Additionally, no one wanted to abandon their comrades.
The rationalization given by a thirty-five-year old metal worker is astonishing:

“I made the effort, and it was possible for me, to shoot only children. It so happened that the mothers led the children by the hand. My neighbor then shot the mother and I shot the child that belonged to her, because I reasoned with myself that after all without its mother the child could not live any longer. It was supposed to be, so to speak, soothing to my conscience to release children unable to live without their mothers.”

The author points out that the German word for “release” also means to “redeem” or “save” when used in a religious sense.
The people who committed the mass murder at Józefów were not sadist. The men of Reserve Police Battalion 101 were metalworkers, barbers, salesmen, etc. The book details the physical and mental anguish these men suffered for the rest of their lives. It also gives insight into the psychology of man.
It is wrong to say every citizen in Nazi Germany was pure evil. We all like to think we would have been Oskar Schindler. We would have hid Anne Frank and put our entire family at risk. Statistically, you would have not been those people.

Powell Testifies

Jerome Powell gave his first testimony before the House Financial Services Committee. Only the first 30 minutes is worth watching.

I watch these closely  to get hints about what the fed might do. As he spoke the dollar and treasury yields jumped and stocks fell. The market interpreted his comments as hawkish. The new word is there might be four rate hikes this year instead of three.
However, he said nothing that was not already detailed in the monetary policy report published on February 23rd. The monetary policy report praised the Taylor Rule. From the report:

Economists have analyzed many monetary policy rules, including the well-known Taylor (1993) rule as well as other rules that will be discussed later: the “balanced approach” rule, the “adjusted Taylor (1993)” rule, the “price level” rule, and the “first difference” rule (figure A).2 These policy rules generally embody the three key principles of good monetary policy noted earlier.

I don’t believe Powell  is going to do anything that might surprise the market.

The Danger of Owning Bonds

A traditional investment advisor would advise an individual to put 20% to 40% of your money into bonds. The bond market is not a safe place to be at the moment. If you must own bonds, concentrate on shorter durations. The fundamentals for owning any bonds are just not their. The risk/reward ratio is terrible.
Treasury Bond Yields:

Corporate Bond Yields:

Yield and spread on agency mortgage-backed securities:
In the long term, all bonds and any derivatives based on bonds, are going to suffer.
However, I don’t plan to short bonds because I don’t believe the bond bull is dead. I don’t plan to go long bonds because there is no fundamental reason to own them. The only reason to go long bonds, at this point, is because investors around the world think they are a safe investment. They are very wrong. But until the psychology of the market changes, the best action is to stay away. The bond bears have been around for 10 years. From the above charts, you can see they have done nothing but lose money year after year.
The original widow-maker was shorting Japanese Government Bonds (JGB). No matter how much debt Japan racked up, JGB’s continued to rally from 1990 all the way up to present day. It has been almost 30 years since 1990. I have no intention of making the same mistake predecessors made.