GCap #2: What the Hell Just Happened?

In case you’re having a hard time spotting it, I’ve taken the liberty of plotting out that last bull market and the shortest ever bear market above.

If you download the image and then hit Cmd-+ repeatedly, and put your cursor right at the tip of the arrow you’ll clearly see the New Bull https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpget.

As I write this section it is Easter Friday, one day after the US Federal Reserve announced it would start buying junk bonds which induced a kind of mini-meltdown in me.

This is not the way free markets are supposed to work. If a company over-leverages it, it gets worked out amongst creditors, not bailed out by an entity that can print currency out of thin air.

The whole thing made me question my plans for one of my TFSAs, where I had placed some capital for the express purpose of hedging on the short side.

So far I’d done ok with PUTs on JNK and even (get this) DUST. My idea there was because 3X ETFs are so toxic, no matter what their orientation was, you could do ok buying long dated, ATM PUTs on any spike in the underlying. (The logic was that the time decay on the option was slower than the ETF decay when the latter was levered 3X and recalculated daily)

It worked for awhile, until DUST got absolutely destroyed last month, even when gold was tanking.

That was that, DUST and NUGT are 3X no more, and were converted to 2X on April 1st. It was good while it lasted.

To my larger point: is it rational to go short the market when the US Fed as well as every Central Bank in the world is hellbent on printing as much money as it takes to make you wrong?

And yet… I was journaling my angst and frustration around all this just to clear my thoughts and I remembered what happened in 2007… when I pretty well picked the top and bought a pile of 2 year LEAPs on the QQQ’s, the SPYs and the DJIA.

Trade of the century, right?

Wrong.

The Fed once again stepped in for what looked like a stick save and ignited a Christmas Rally, in a fit of revulsion and disgust, very similar, albeit not as intense as what I’m feeling now….. I covered my shorts with a minor gain.

“Don’t fight the Fed”… was what I was muttering to myself as I staggered away from the trade…..

We all know what happened next.

So the question I’m asking myself now is “Am I making the same mistake as 2007, and my fatigue in fighting the Fed is a sign they’ll soon lose control?”

I don’t know the answer to that. Maybe. Maybe not.

However, In 2007 I didn’t know about Pascal’s Wager, but today I do….. when I do a Pascal’s Wager type grid about “shorting everything” vs “long precious metals” I get something like this:

It just seems like being long precious metals (which I am already, mind you), covers a wider swath of probability vs trying to short against the might of the world’s central banks.

Besides, if  they really are serious that they’ll do “whatever it takes” to prevent a financial meltdown, even if they do lose control, I think that is more likely to be inflationary, even hyperinflationary. And if that’s the case, stocks will still go up anyway.

I really do harbour a kind of hero worship for short-sellers and daydream about “wouldn’t it be cool to do that”. But the “know thyself” sort of reality check clearly shows that I just don’t have the perseverance and pain tolerance for it.

Yesterday my longtime friend and mentor Sieg Pedde sent me this presentation on silver and when I think about all this, and also realize I’m probably underweight on silver anyway, I may just change plans on that “Short only” account I had setup and just back up the truck on silver. YOLO.

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