the daily dirtnap vol 11 no 29 - 

Just to show you how lame the Coast Guard Academy was, one of the things we used to do was “Drop Stuff Night.” But we didn’t say “stuff.” There was one section in B annex that had a stairwell that was five stories, so people used to take their old junk and drop it down the stairwell all the way to the bottom. Huge fun. It was actually a nice break from being miserable. I remember some guy dropped his whole stereo down there.

The reason I am thinking of dropping stuff down a stairwell is because I continue to be obsessed with commodities, things you can actually drop. I was about 8 months early to this trade, but have the potential to be a lot bigger. Let’s just tackle some of the issues surrounding commodities.

Why have commodities performed so poorly? Honestly, it is partially because financial assets have performed so well. Typically, when financial assets are doing well, hard assets are doing poorly, and vice versa. Nobody needs anything like corn or gold when they are getting thousands of percent returns on FANG, or when the bond market is still holding onto its gains from a 30+ year bull market.

Philosophically speaking, betting on commodities is a bet against human ingenuity. Shorting commodities is betting that people are smart and they will always figure out how to bring more supply online. Look at this in terms of crop yields around the world—all-time highs. Look at this with oil--we are producing more than ever. It’s kind of hard to be bullish on commodities unless you think that there will be some sort of disruption, probably because of politics. Do commodities make a good inflation hedge and/or diversifier, as the conventional wisdom suggests?

I think commodities make a good inflation hedge over the very long term— if you held a basket of commodities over thirty years and inflation was running close to ten percent, I think you would be happy with the results. I think people look at commodities on a short term basis and get chopped up in market swings and sort of lose sight of the inflation hedge benefits.

They make an excellent diversifier--they will smooth out the volatility of your portfolio. Lately, they have smoothed out the volatility to the downside, but things will get better soon.

So how do you trade or “invest” in commodities? Depends who you are—for most people I would suggest allocating a percentage of your portfolio to commodities and leaving it alone--and that means leaving it alone even if it performs poorly. It will work over time. Keep in mind that commodities are part of risk parity strategies, so it’s not like this is some kind of voodoo.

If you want to invest tactically, then you’re a trader, and that’s a whole different story.

If you asked me to look across the commodity landscape and pick what I liked best, it would be gold. Literally, just this morning I saw that central banks are buying lots of gold. Sam Zell is buying lots of gold. You can try to fade this if you want, but it’s not going to work out for you There is a blinding display of gold catalysts: MMT, wealth taxes, inflation picking up, chronic undersupply (peak gold), and M&A/consolidation. Things really cannot get much more bullish for gold.

We are at the stage right now that people think the commodity explosion of 2008 was pretty silly. It was a bubble. In hindsight, every bubble looks silly. I was talking recently to my friend Mike, who is sort of an expert on tech bubbles. Ever notice that everything in tech started out as a bubble, blew up, then spent the next 20 years actually developing the technology? It happened with the internet. It happened with 3D printing. It will happen with crypto someday. Yes, crypto will be a viable technology, but it will take 20 years to figure it out.

Maybe the same was true with commodities? A big bubble that will have an even bigger echo 20 years later? It seems to be what the gold chart implies.

Remember, commodities go lower on human ingenuity. I want to get short human ingenuity.


One of my favorite Rod Stewart songs (and videos).

Obsession doesn’t really capture it. There have been a few times in my career where people have been infatuated with an asset class. If you can predict when this happens, you get rich. If you identify it belatedly, you get poor. Last year we watched people pile into crypto (which crashed) and cannabis (which might be crashing). Now, the folks that got into crypto in 2013, hats off to you. It was very prescient. Or at least, people were willing to take a risk with a small amount of money in case it turned out to be something good.

Bitcoin and gold have a few things in common, namely, that they are call options, though gold really does not seem like a call option. But it is.

Bitcoin went 1000x or whatever. Gold isn’t going to go 1000x, but it might go 10x, which would surprise a lot of people. And even if it does go 10x, you are going to be pretty miserable otherwise, so it is just a hedge.

Sorry to be spending so much time on this, but foresee an infatuation phase coming. The key this time will be to get out in time. Because when people fall out of love with something, it is ugly.

Every bubble has a fundamental basis. Every bubble starts off making sense. Besides, the bitcoin bugs need someplace to put their money. Maybe someday they will decide to go low-tech and invest in gold.

InsideETFs 2019

I want to thanks the folks at InsideETFs for inviting me back once again, to speak, and to play music.

I can’t tell you how many of these conferences I’ve been to over the years. I will say that I’m not as recognizable

as I used to be—I’m just not that active in the ETF “industry” as before. And my ETF days were a long time ago. Still, every year I come, people make me feel welcome, and it is good to reconnect with everyone.

As for the music, it was a blast. Played my deep progressive downtempo stuff. I put the link in the email.

The opening tracks are especially wonderful. Thanks to Inside ETFs for another great conference.

What I Remember About 2000

What I remember about 2000 was that everyone was deliriously happy. I have never seen people that optimistic since, and I will never see people that optimistic ever again. Even last year, 2018, with FANG and bitcoin, wasn’t even close to being that optimistic.

In 2000, anything was possible. Sure, today we are on the brink of curing cancer, flying cars, all that nonsense, but it doesn’t seem like anything is possible. Attaining these things seems quite hard.

I also remember that it was quite decadent back then. I tried to capture that decadence in ATEOTW. I think I succeeded. For lack of a better word, the world we live in today is a lot more puritanical, with regards to everything, except for pot.

I remember getting into cabs and cabbies giving me options trading advice.

I remember every single billboard was for a dot com.

I remember Coast Guard folks day-trading in their cubicles.

I remember cubicles.

I remember bull market movies like Jerry Maguire. (There is some wisdom in Jerry Maguire if you look for it).

I remember people having gross amounts of money.

I remember thinking that this was the top of not just the financial markets, but all of civilization.

Narrator: “he was right.”

The top of the dot com bubble got me interested in the Kondratieff stuff. I haven’t looked at that in a while. All this talk of MMT and wealth taxes has me thinking about it again. Throw the Fourth Turning stuff in with Kondratieff and you have some really good deterministic history.

I was 25 when Y2K hit. If 70 years is a long wave, I am unlikely to experience this a second time. Which makes me sad.

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