CEO.CA Chairman's Briefing

Foreword

It is my pleasure to share three short stories that I wrote based on things I have seen in Vancouver. I draw on the highbrow culture at the Sprott Natural Resource Symposium and other events in the mining finance community, and the lowbrow culture at The Cambie hostel on the edge of the Downtown East Side. These imaginary stories twist the best and worst from these different places together into a thread that I hope will interest, educate, and inspire you.

I, myself, am inspired to share these stories by Doug Casey. For years, I have watched him on stage sketching the arc of an epic story that he wanted to tell. Now, I have a pre-release copy of the first novel in that series. The shift from his explicitly economic and political books to a novel allows him to hide the same principles in the actions and beliefs of his characters, and to explores how events can unfold based on his world view.

Although I maybe a simple second-hand dealer in ideas, I am working hard to explore stories that are somewhat exotic: rags to riches, obscure financial contracts, poorly formed personal world views. These short stories present several variations on a theme for your enjoyment.

@Newton
July 31, 2016
Vancouver BC

The B-Boy

She was from Vancouver. Alex Burrows. Her name always caught the attention of the locals, but the tourists never seemed to get the reference. Like all of her friends, she worked at a server in a restaurant that seemed fancy if you just listened to the hosts and read the menu but didn’t look to closely. The food was good, but she had been spoiled by 'Chef's Table' on Netflix and a distant relative who worked at Blue Hill Farm. Now that was the food industry, she thought to herself.

It was 10PM on a Saturday night in July 2015 and she was lying on the hard concrete of the skating rink in UBC Robson Square. She had one leg up and over, twisting her spine up to her shoulders. Her hands were stretched out at her sides, pinning her to the hard, smooth ground. Her friends had just finished buffing part of the concrete as she reached over and clicked play on the music. It was time for a dance battle. Her crew was getting ready to travel to Seattle to perform at a folk music festival. She was happy.

That night she met someone who gave her a thumb drive full of recordings. They were from a conference at Hotel Georgia and they were almost unwatchable. Strange people speaking to a dead crowd about obscure business deals. This would never pass for crowd management in here world, but she got caught up in the recordings anyway. She had taken a bunch of classes on financial derivatives as part of her math degree and had done well in them.

She didn’t know much about mining, but she heard one person give a speech that made sense to her. It was another young woman, going on about a new bull market in gold stocks. Alex thought that she made a convincing argument and started looking into it herself.

Since she had studied options, the first place Alex looked was the Montreal Exchange. They didn’t have any of the companies she heard about in the recordings, but that was OK. They seemed sketchy, for the most part. These companies on Montreal were the real deal. Household names, like Goldcorp or Teck Cominco. At least, they sounded like household names. Maybe not in her household, but somewhere.

She contacted one of the organizers from the recordings. She got all kinds of colour on the history of the big companies with options on Montreal. Many of them started like the little ones at the conference. "Cool," she thought "there might be more to this than I realized."

It took her a while to figure out what she wanted to do, and longer still to actually do it. But she did it and it changed her life forever.

On July 29, 2015, Alex opened a Tax Free Savings Account with options trading at a discount broker. She deposited ten thousand dollars into the account, three quarters from her savings and the rest borrowed from the bank. On the first day that she was allowed to trade, she put out bids worth her whole account.  She bid on call options for several different gold mining companies with all different kinds of expiry dates and strike prices. Ten thousand dollars’ worth of bids on day one. The fees would be huge. Some bids get filled on the first day, but most didn’t. Hey bids would stay alive until she cancelled them or February 2016, whichever came first.

Her first set of bids were for call options on five companies with many different combinations of strike prices and expiry dates. Some of her bids were at the midpoint of the spread, but most were layered below the market. She tried to do round sizing, usually ten contracts. Each position ranged in cost from ten dollars to one thousand dollars.

She bid on some contracts at one penny, the lowest possible price. Most of them were very illiquid because the strikes were deeply out of the money. She was the only bid on some.

She understood the math and the risk. She would miss the ten grand if all the options expired worthless, but it would not leave her in a big hole. She worked hard to stay out of debt. She didn’t use any margin from the broker.

She knew what could happen to a portfolio like the one she was trying to build if there was a new bull market in gold stocks.  She decided she wouldn’t change anything until her bids expired or calls that she owned started to near expiry. She had to resell all the options prior to expiry because she didn’t have any additional capital to exercise them. She talked things over with the broker and it all seemed pretty straightforward to her. Very unconventional from the broker's perspective, but straightforward nonetheless.

She told some of her friends what she was doing and they were interested. It was the first time any of them had done any saving, really. Let alone speculation. Living in Vancouver was tough and none of them were keen to waste money on another one of her wild ideas.  They all still had sand stuck in custom costumes they had bought for burning man.

Her first options started to expire in September 2015. She lost twenty-five percent across four trades that had cost her fifteen hundred dollars to put on. She rolled the proceeds into bids that were far below the market for calls with long expiries and strikes deep out of the money.

By January 2016, half of her original capital had been deployed, expired, and re-deployed into new bids for similar options. Maybe one quarter of her original capital was still in cash, and one quarter was in live contracts. The brokerage told her that her account was worth six grand. "Great, a forty percent loss in four months." She told herself "I knew this could happen, but it still sucks."

She was getting more comfortable at getting in and out of her positions. She was developing a feel for the markets. The covered call writers seemed to be able to sniff her out and loved to trade with her. One day, she randomly got a partial fill at one penny for a January 2018 call on a gold mining ETF at a strike price that was double the current levels. She understood why people sold optionality that cheaply, but she was happy to be a buyer.

In January 2016, global markets fell of a cliff. The financial news barely conveyed the full extent of the drama. She got some sense of it by listening to Real Vision TV, but only after it had come and gone. She got the clearest sense for how bad things had gotten when she saw that all of her bids had been filled in one week late in the month. She had no cash left in her account, just thousands of call options on gold miners with all kinds of expiry dates and deep out of the money strike prices. She lost almost 90% on the calls that expired in January, but she diligently redeployed the capital into new bids for other calls. At the start of February, the broker told her that her account was worth thirty-eight hundred dollars. She told one of her friends from the crew and they had a fight about it. She stopped going to practices.

Alex stayed the course and then something weird started to happen. The stock market went up. A lot. Some of her gold stocks doubled in March. She barely noticed until she went to close the expiring positions and roll the money. Apparently the account was worth twelve thousand at the end of March. Wait, what? Even with the bad pricing the broker used, she was up huge in one month. She told herself to be calm and started going back to dance practices with her crew.

Before she knew it, it was July 2016. She had a ticket to the conference and was even organizing a short performance by her dance crew there. The day before the conference started, she made offers to sell all of her positions. Some at midpoint, some just above the bid, and some way above the other offers. They were all good till cancelled.

Over the month of August, she closed all of her positions. She got great pricing as the gold stocks gapped higher. On September 1, 2016, her account was worth five hundred and fifty thousand dollars. The gains were tax free. She didn’t quite know what to do with herself. 

The Prostitute

Just another hot summer night. She walked out of an alley into Victory Square, pulling on her jacket and adjusting her hair as she walked. She went into the public washroom and disappeared from view.

"It's still early," she told herself. Her iPhone lit up and showed that it was 11:12PM. She thought of her son. She had a bag with her that said Happy Birthday on the side. She gave him a gift in that bag just last week, but now it had other things in it. Several pairs of underwear. Wet wipes. Makeup. A regular streetwalker's toolkit. She wished she could work legally in a brothel.

It was another hazy night. She tried to forget most of it, but the stacks of money hidden in her apartment wouldn’t let her. She had been working independently for six months now, and things were getting dangerous. She had over two hundred thousand dollars cash hidden around her home. She couldn’t take it to the bank.

The public washroom was trashed. It had been for a long time. She knew stories behind most of the writing on the walls, but this night there was something new on the mirror. A sticker of the letter "B" with a dollar sign through it. She snapped a photo of it to look at later. She loved the way graffiti communicated secret stories about the people who worked the streets. She closed the phone and put it back in her bag. She saw that her other two phones were flashing. As she hoped, this was just a quick pit stop before she would back out again. She made five thousand dollars that night.

A few days later, she showed the picture from the washroom to her younger cousin. He was a weirdo, more comfortable with computers than people. He recognized the logo immediately: bitcoin. The one, the only… Well, not really, he explained it all to her in a jumbled mess of words and ideas. She said thanks and carefully removed herself from his company, then went and read about it herself. She could hardly believe what she found.

In an instant, she was at her cousin's door again. "Please help me buy some bitcoin," she said. He didn’t believe her when she told him how much. He believed it when she showed him some of the cash. He didn’t ask any questions; he knew his family was crazy.

Her cousin helped her get into the weird, dark part of the internet where you can buy two hundred and fifty thousand dollars worth of bitcoin with cash. She used part of her personal line of credit to get it to an even number. She worked out a deal for five payments over a seven-month period. Everything went smoothly and she ended up with a silly number of bitcoins, then things started getting interesting.

She had been watching the news more and tricking less since she started this crazy adventure. And then she stopped completely. She spent her nights watching bitcoin prices and learning. Before long, she had an account with a gold vaulting company that would let her trade bitcoin for currencies and metals. It was based in Switzerland. She jumped in with both feet.

By the time she started trading her bitcoins, their value had tripled in Canadian dollars. She didn’t really know what to do. She was rich but couldn’t touch any of the money. It was almost the exact opposite problem as what started her down this path.

The first currency she traded into was the US dollar. She went to Switzerland and picked up a briefcase full of big faced hundreds, then arranged for them to be sent to a local bank in Central America. She went back home, picked up her son, and then met up with her money. Although she had only a fraction of her money with her, she was rich in this new country. She lived there quietly for a year while she figured out how to get the rest of the money back into Canada legally. This was getting evermore difficult because bitcoin prices kept going up. By the time she figured out how to do it, she had two million dollars Canadian. It took her another two years to get the money safely back into Canada.

You might see her now, sitting quietly at a coffee shop looking out onto Victory Square first thing in the morning. She has a simple cappuccino and stares out the window at the public washrooms, trying to make sense of it all before taking her son to primary school. Her name is Anna.  

The Scrapper

There were lots of others who looked just like him. Sad, broken, and desperate for money. They walked for hours around the downtown core, collecting cans and surviving in alleyways. It was not pretty but much safer than his adventures collecting scrap metal in the Dominican Republic. For all his difficulties, he had an interesting life. If only he could remember more of it.

It was just another cold, rainy, grey day when he first saw it: a box of books lying in a puddle. Pretty normal around here, but he stopped to look anyway. When he saw that there where multiple copies of a few books by the same author, he got interested. He started looking closely. "Investment biker… guy drives around the world on a motorbike… No way." Images of his own bike trips flashed back to his mind as he looked at the next book. "Hot commodities, eh?" As a scrapper, he had a soft spot for commodities.

He picked up the books and put them in his cart. He figured he had a week to read them before they were stolen. It worked kind of like a street library. He headed to Dr. Sun Yat Sen Gardens and started reading the books first thing in the morning. He read for four hours before he realized he hadn't slept. He lay down on the dirt across from the garden and used the books as a pillow.

When he woke up, there was someone else camping nearby. The person offered him some drugs and then told him about a shelter where they were helping people get bank accounts. He hadn't filed taxes in years. He wondered if they would let him open an account.

He went to the shelter and successfully opened a bank account. They had a low bar for identity verification, probably because they didn’t expect these people to actually use the accounts, he thought to himself. He asked about trading commodities and they told him he shouldn’t gamble, but the bank did have discount brokerage services. He was surprised how cheap it was to trade some of the contracts that Jim Rogers wrote about in his book. He may have been homeless, but he had cash flow. He figured he probably spent one hundred thousand dollars on drugs in the past year. He was still addicted, but was over it. He wanted his life back.

It took him twenty days to save up five thousand dollars in the bank account. He worked hard because he was excited. He transferred it into the brokerage and tried to buy a futures contract. They wouldn’t let him because his account was too small. He had the initial margin, but they wanted at least ten thousand in the account to let him trade futures. It took him forty-five days to earn the extra five thousand. It was harder this time.

When he got the money into the account, he put on his first trade. He bought one LME Zinc Futures for three months out. Great, he thought, let's get it going. He went back out onto the street and collected more cans. Somehow, he still had the books and read them extra carefully that day. They were getting torn up, but still worked at providing shape to his hopes and dreams.

He waited a week to go back to the brokers. When he showed up they got upset. "We tried to contact you," they said. "We had to close the position for a loss when you didn’t meet the increase in margin that we required." He was shocked. The price had moved against him and they closed him out, even though he would in profit if he had stayed in the position. He made sure that his next trades had no margin at all.

He kept collecting scrap metal and increasing his position in the futures. He made an arrangement with the brokers where they rolled the contracts at expiry. He lost some money each time they rolled things, but he built up a 5 contract position with no margin by the end of the first year. It was quite a nice little stake for a guy sleeping in the park and collecting cans in the city.

On the one-year anniversary of opening his account, he went into the brokerage again. Things were tense. The guys he knew don’t work there anymore. They barely let him stay more than thirty seconds, given his appearance and smell. He found out that there was a financial crisis going on. The price of everything was collapsing. He couldn’t find anyone who would give him any information on his accounts. He left in disgust.

Months later, he was wandering around and saw that the brokerage had opened a new location. His brokerage. He went in and introduced himself politely, with plans to cause a really bad scene once he got past the receptionists. This time, they let him in and even sit down in someone's office. The person was new, young. She pulled up his file, furrowed her brow, and looked at him sideways.

"Excuse me, sir." She started politely. "Did you know that the value of your account is approximately four hundred thousand dollars? It looks like we have been rolling a position in futures contracts for you through the crisis and it has done quite well." He didn’t quite believe her. She didn’t believe him, either. He started to tell her the whole story when there was a knock at the door. He recognized the man on the other side of the glass and he started to cry softly to himself while the brokers figured out what the hell was going on.