Tough Market

Inflation to Deflation?

Those two posts sum it up:

Got out of GBTC a bit better than break even.

Well, well we got to play the hands the dealer gives us. 2022 / 2023 will probably be difficult, but the sun will shine again and then we bank. The bigger the crash, the better the performance after the crash, so no worries!

Performance YTD of my long-short book:

In Euro terms I am up 7.3% as of this morning.

Took out 30k out of the account for living, so with taxes I earned about as much what we need for living. All good for a very difficult market.

I will ride my short, long book further, no reason to change right now since I have no idea where this market wants to go.

Risk Management:

I want you to look at XLRE, UTIL and PPH as typical exposures in an inflation or deflation regime:

See that crash in 2020 of the “defensive” exposures?

My point is, there is no hiding in a deep deflation regime. Without shorts offsetting your long book (no matter how defensive) you will have monster drawdowns in a deep deflation regime.

Also, ton of traders now want to hop long into UTIL etc. Doable, but be aware, that when things get really bad, that will not help you. In a deep deflation regime, everything gets sold hard. Those exposures have a great run just before the market turns for a crash (look at the 2020 performance, see above!!!). Not saying we are crashing here, just be aware of what can happen!

Same model as above with a 25% Short on the Russel 2000:

25% XLRE, 25% XLU, 25% PPH + a 25% Short on IWM (or take RWM if you cannot short). —>

As you can see the short helps in an inflation / deflation regime. I know 5% ann. is not much, but it’s better than losing your shirt! This is not the time to make big money, this is the time to stay in business.

But also, the model gets (in relative terms!) crushed in a goldilocks and reflation regime. So those defensives + an IWM Short are really only for an inflation and a deflation regime.

Just so we remember, what are those regimes:

• Goldilocks: Rate of Change (ROC) GDP up, ROC Inflation down —> High Beta mid-caps

• Reflation: both up —> High Beta big caps (FANG stuff…)

• Inflation (read stagflation): ROC GDP down, ROC Inflation up —> “Defensives” (with a short in the port, my best guess is a short on IWM)

• Deflation: both down —> “Defensives” (with a short in the port, my best guess is a short on IWM).

42Macro.com will give you a great idea where we are with a nice nearcasting process.

But be aware: ETFs are only for investors, the big money is in underlying stocks in above factor exposures (high beta, defensives etc.). But it is totally cool to trade in ETFs first and learn to trade with a small part of your port. Or stay with ETFs just because you do not want to invest a ton of time. You decide!

O.k., going to visit a friend in Wiesbaden and taking the day off.

Next week the whole family will visit London, to drink some tea and stuff :-)

Good luck!

Disclaimer: For educational purpose only. Not investment advice. Seek professional advice from a financial advisor before making any investing decisions.