An Orgy of Speculation

Jared Dillian



I may not be good for much, but I am good for detecting a peak of speculative activity.

As of the end of last week, we were there.

Let me give you some data points.

Look what happens when you cut retail trading commissions to zero:


Source: @Garth_Friesen


Of course, just the fact that Morgan Stanley is buying E*TRADE, a discount brokerage (that offers trades with zero commissions) was probably a sign of the top.

Next, we have a group of folks on Reddit who were coordinating manipulating stock prices higher through naked call buying. They did it with TSLA, and they’re doing it with MSFT and a bunch of smaller stocks. It’s incredible.



Of course, naked call buying was at an all-time high, according to Jason Goepfert at SentimenTrader.



Source: SentimenTrader



This is highly unusual.

AAPL was rolling over, according to Helene Meisler and her hand-drawn charts:


Source: @hmeisler


Of course, there is no more powerful contrary indicator than an Economist cover:




I mean, the timing on this just does not get any better.

The dollar has had a heck of a run:




While worryingly, bond yields are making all-time lows:





And gold is making fresh highs, things you don’t usually see at the top:





Meanwhile, we’re headed into an election where someone who is really bad for the economy and the stock market has a real chance at becoming president. I have spent the last 4 weeks arguing with my older subscribers, who believe there is no chance that Bernie will become president. I assure you that the chance is not zero.

So that’s where we are.

Again, if you have an 80/20 portfolio here (or a 100/0 portfolio), your exposure to equities is TOO HIGH. It should be much lower. But then I would be repeating myself, because I say that all the time.

Who knows: maybe you were lucky enough to de-risk on the highs.

I have not spent much time talking about stocks in the last few years because the stock market has made little sense, mostly because of the presence of price-insensitive buying. Indexing, buybacks, and short volatility. Price-insensitive buying is still around—for the time being. I don’t know what gets it to stop, but nothing goes on forever.

This is where we are.

Where We’re Going

It’s been easy to see where the bond market is going. I’ve had plenty of pushback on that in the last 12 months, and here we are, talking about pegging the yield curve. Regardless of what the economy does, the push for easier monetary policy and lower interest rates is relentless—especially in an election year.

I still maintain that we have not yet made the business cycle obsolete. Extended bull markets lead to periods of overinvestment and malinvestment. This speculation and froth must be worked off. It’s possible that you can work off an overbought condition by going sideways, but probably not in this case.

Risky assets pretty much went vertical. People have been burned so many times calling a top, that nobody wants to call a top, which means that this is probably the best time to call a top.

I don’t talk about this a lot, because I am very much a set-it-and-forget-it type of investor. But there are a handful of times in your life, maybe just two or three, where you could be at a big inflection point in the market, and it’s worth adjusting the asset allocation a little bit.

Heresy, I know. I haven’t done the research on this, but I suspect that timely shifts in asset allocation can make a big difference in performance over the years. You don’t have to top-tick things, you just have to get it in the ballpark.

Yes, I am a pessimist. Yes, I tend to believe that the worst possible thing always happens. For sure, the worst possible thing this time would be pretty bad. A recession before the election, with Bernie Sanders getting elected as a result. I’m pretty sure nobody had that in their investment outlook at the end of last year.

And no, I’m not worried about the coronavirus. I mean, I am, but it’s a one-time hit to global GDP, not something we’re going to be dealing with on an ongoing basis. But in the interim, we’ve reached full panic mode on the coronavirus.

What’s happened over the last 10 years has pretty much been the best-case scenario. Isn’t it reasonable to expect that at some point we might get the worst-case scenario?

I’m bearish on stocks for the first time since 2017. Of course, things can always get more ridiculous, but I think we’re in the ballpark.

History Shows Gold’s Rally May Only Just Be Getting Started

By Elena Mazneva, Ranjeetha Pakiam, and Justina Vasquez



- Holdings in bullion-backed ETFs remain low versus total assets


- Gold is a ‘resilient ballast’ in recessions, BlackRock says



Even with gold at seven-year highs, there’s still room for more gains if history is anything to go by.

Prices have surged this year as haven-seeking investors pour in. Markets have been shaken by worries that the coronavirus outbreak will cripple global growth, coupled with expectations for looser monetary policy around the world. Assets in bullion-backed exchange-traded funds are at the highest ever and money managers are holding a near-record bullish bet.

Yet gold remains a relatively small percentage of portfolios by historic standards. And as investors assess the virus threat to the world’s biggest economies, it’s worth remembering that the metal’s haven qualities are especially evident during recessionary periods.

Here are four charts that show why gold’s still got room to run.

ETF Holdings

After an unprecedented 25 straight days of inflows, the total value of gold held by exchange-traded funds tracked by Bloomberg is closing in on the record of over $144 billion reached in 2012. But while bullion holdings have jumped this year, they’re still relatively low as a proportion of total ETF assets.

“There is room for further demand -- particularly on the ETF side,” said Benjamin Jones, senior multi-asset strategist at State Street Corp.

Fewer than 10% of investors own gold and the metal probably makes up less than 2% of portfolios on average, according to Peter Grosskopf, chief executive officer of Sprott Inc., a money manager that specializes in precious metals.

“Investor participation in gold is still anemic,” Grosskopf said. He argues that investors should have at least 5% of their assets in gold as a form of insurance. “Even a small move in this direction would have the effect of squeezing a relatively smaller market much, much higher.”

Recession Threat

Gold will get a real chance to show off its haven credentials if the virus outbreak transforms into a pandemic. In that scenario, Oxford Economics estimates a cost of $1.1 trillion to global GDP, with both the U.S. and euro-zone economies suffering recessions in the first half of 2020.


“With coronavirus outbreaks reigniting fears of recession, it is worth noting gold has proved to be a resilient ballast in the last three recessions,” said Chris Dhanraj, head of U.S. iShares Investment Strategy at BlackRock Inc.

Stacking Up

A comparison of gold prices versus a range of other assets suggests that the metal may still be some way from becoming overpriced, said Michael Hsueh, a strategist at Deutsche Bank AG.


A Gold Bullion Dealer As Bitcoin's Nouveau Riche Run To The Metal As Cryptocurrency Crashes


While gold is now quite expensive compared with copper or oil, the ratios remain below their historic peaks.

Gold’s nominal peak would be about $2,700 in today’s U.S. dollars, Hsueh said. There’s likely “quite a fair share of investors who are looking for a pullback just so that they could buy.”

Mixed Messages

Gold’s 14-day relative strength index briefly moved above 70 this week, which typically suggests securities are overbought and poised for a decline.



But a closer look at the past few years suggests that the RSI isn’t such a reliable indicator for gold. On several occasions, the metal continued rising or held at elevated levels even after the index breached the 85 mark.

There’s always a risk during periods of turmoil that investors sell gold as a last resort, which happened for a period during the 2008 financial crisis.

Still, even if gold’s gains stall, that doesn’t mean the trend has to turn bearish, said Gary Christie, head of North American Research at Trading Central. At times, when the RSI dipped back to levels near 50, it was followed by a renewed price rally, he said.

“The long-term picture is good because momentum and trend indicators are still bullish,” he said.


Can Supply Chains Survive the Coronavirus? China, the U.S. and Germany Are Key

Whether the infectious disease spreads to other countries that make hard-to-replace products may be the acid test of its impact on global manufacturing this year

By Nathaniel Taplin


Workers sanitizing a market in South Korea, the country hardest-hit by the coronavirus epidemic outside of China. / Photo: kim hong-ji/Reuters .



This is the second column in a five part Heard on the Street series about the market and economic impact of the coronavirus epidemic.

Investors are used to the cliché about butterfly wings in Brazil and tornadoes in Texas.

It turns out that the butterfly—or bat, to be strictly accurate—was actually in China. Where the tornado will end is the big unknown.

The spread of new pneumonia-causing coronavirus probably originating in bats has shut down much of China. Companies as diverse as Apple, Hyundai Motorand Indian drugmakers are suddenly finding that parts from the world’s factory are unavailable, and the epidemic continues to spread rapidly in Korea, Japan and even Italy. The first crisis test of the complex global supply chains favored by multinationals since the 1990s could be here.

Disasters have disrupted Asian supply chains before, but there’s no real analog for the virus now spreading world-wide. When severe acute respiratory syndrome, or SARS, emerged from China in 2003, it infected just 10% as many people, and China’s weight in global exports is twice what it was then.

Today’s intricate global supply chains are also a relatively recent development, and certainly didn’t exist in 1918, when the “Spanish flu” pandemic devastated many countries around the world.

Amid all the unknowns for global manufacturing, one certainty is that timing will matter a lot.

If China can’t contain the epidemic within the next few weeks and get back to work, the risk of serious damage to local suppliers—and worse, shortages of Chinese parts abroad—will rise sharply. A recent survey found that about two-thirds of Chinese small and medium-size businesses had less than three months of cash on hand; nearly 40% had a month or less.



The ripple effect in industries like autos has so far been worst in nearby countries including Korea and Japan, where manufacturers are used to short delivery times and lower inventories rather than a month-long trip across the Pacific for parts. But if China’s shutdown stretches from one month into two, the damage to overseas customers will be more widespread.

Under any scenario, the worst-hit industries will be those like automobiles and electronics with specialized components whose supply chain is clustered in one country or a small group of countries. China is the world’s largest exporter but in 2014 still only accounted for about 8% of such “risky” hard-to-replace products, according to researchers at the International Monetary Fund. The U.S. and Germany both clocked in at 13%. What happens in those countries may end up being the real acid test for global supply chains.
Worryingly, some pharmaceutical products and medical devices are in the risky category, raising the possibility that drug production gums up just as global demand for pharmaceuticals to combat the virus leaps. A raw material needed to make paracetamol, the common fever and pain reducer, has become scarce in India in recent weeks as Chinese supply dried up, according to a Financial Times report. India is among the largest pharmaceutical exporters globally.

Multinationals in China are taking a wait-and-see approach. An early February survey by the American Chamber of Commerce in Shanghai found that half of respondents weren’t considering a change to their China strategy, while 40% said it was too early to tell. Investors who only weeks ago were salivating over the prospect of a global rebound now find themselves in the same boat.

‘Wild Capitalism’ in Venezuela

By: Allison Fedirka


In a development that would have been unheard of just a few years ago, the government in Caracas is slowly and quietly loosening its control over the Venezuelan economy. Markets are opening, regulations are being relaxed, and foreign countries are participating in its flailing state oil company.

Various Venezuelan media have dubbed this unexpected period of transition “wild capitalism” and “chaotic capitalism,” but whichever name sticks, the strategy of the government is clear: adapt or die.

It’s a fairly pragmatic response to the actions of the U.S., which hoped that economic pressure, widespread public protests and international support would bring an end to the Maduro administration. Instead, Caracas has simply become more creative and resourceful as it seeks to remain in power – this time by integrating its informal economy with its formal one.

Economic Pressure

For nearly 20 years, the United States has opposed the Venezuelan government on political and security grounds. But Washington grew more impatient as the Venezuelan economy tanked, thanks largely to low oil prices, high social welfare spending and economic mismanagement.

The social instability that followed was a perfect opportunity for the U.S. to tackle what it saw as a security threat head on to try to facilitate regime change. It employed a strategy of heavy economic pressure for three reasons.

First, U.S. military intervention in Latin America is risky, unpopular and historically counterproductive. Second, the strategy corresponds with a broader shift in national strategy away from military action as the force to bring about change. Third, the U.S. is the largest economy in the world and formerly Venezuela’s single biggest customer, so changes in trade patterns would disrupt the Venezuelan economy.

Initially, things went according to plan. Increasingly heavy sanctions aggravated the underlying weaknesses of the country’s economy. Working conditions and quality of life went from bad to worse for the vast majority of Venezuelans as hyperinflation, power outages and food shortages became commonplace.

The economy has contracted for the past six years, losing roughly two-thirds of its gross domestic product from 2013 to 2019, according to the International Monetary Fund. Projections for 2020 remain bleak as GDP is expected to contract by another 10 percent.

Emigration – particularly among oil industry experts – was a problem even during the Chavez administration, but economic decay over the past two years has accelerated the trend. As of this year, an estimated 4.7 million people – out of a population of 28.4 million – have fled the country.

New Asylum Claims by Venezuelans Worldwide


Washington also enacted a political strategy of supporting Maduro’s enemies to capitalize on public discontent and usher in a new government, culminating with Juan Guaido, the president of the opposition-led National Assembly, declaring himself the president in 2019. For a brief moment, it seemed that pressures were aligning such that the U.S. would deliver the intended results.

Except it didn’t. Economic restrictions and lack of availability of goods expanded a robust parallel market that became essential for procurement of basic public goods. Before the U.S. levied its sanctions, economic hardship taught Venezuelans the value of acquiring and saving strong foreign currency, namely the U.S. dollar.

Those who could established bank accounts in the U.S. Meanwhile, early expatriate Venezuelans, many of whom were educated and/or wealthy enough to find work abroad, provided a steady flow of U.S. dollars directly to their fellow Venezuelans. Indeed, remittances to Venezuela have risen sharply since 2016, totaling an estimated $3.7 billion-$4 billion in 2019, according to Ecoanalisis. (The increase owes to both the number of transactions and value of transactions.)

According to a Consultores 21 survey, some 40 percent of the population has received remittances at some point in time and another 32 percent receive remittances on a regular basis. When government restrictions made it harder to get or use U.S. dollars, more informal or electronic means were employed to get dollars into the country. This rendered the local bolivar essentially worthless as bartering and foreign currencies have become the preferred choice for commercial transactions.

Remittances to Venezuela

Rather than fight the dollarization of the economy, the Maduro government embraced it. It relented on some currency controls and allowed a freer circulation of dollars because doing so would help to normalize the economy.

After all, a recent Ecoanalitica report estimated that over half of the country’s transactions occur in U.S. dollars and that there are likely more dollars circulating in the country than bolivares. Changes in fiscal policy now allow for some purchases of foreign currency with a 25 percent value-added tax.

This allows for fees and goods to be purchased and sold in foreign currency on a larger scale, making them more accessible to those with foreign currency. Businesses have also resorted to dollar-denominated transactions.

Over the past few months, banks have begun to offer custodial services for holding billions of U.S. dollars and euros in cash for businesses that want to avoid ties with the government and thus evade sanctions. This may not be much help to those without access to dollars, but it has lowered inflation in the dollar-denominated economy while giving more access to more people for basic goods.

The Maduro government has eased off other areas of the economy too. It has let imports in and lifted restrictions on certain exports. Goods can now be shipped out of Cabello Port in Carabobo without the requisite red tape. Price controls have also been lifted on many goods, and companies have been allowed to invest what small funds they have.

But the most notable changes pertain to state-run oil company PDVSA. The lack of funds to repair dilapidated equipment, improve production and support business operations like refining has led PDVSA to look for support from foreign oil players, particularly Rosneft, to conduct its business. The government is also in talks with Spain’s Repsol and Italy’s ENI on how to partner or take a share in the company in exchange for capital and assistance in a scheme of virtual privatization.

Saving Face

All these measures demand a certain political flexibility to mitigate whatever risks they could pose, considering they fly in the face of Maduro’s previous policies. By allowing for reform, he has tacitly admitted that those policies have failed.

Caracas has made sure to sell the changes without losing face. In some cases it downplayed them. In others, such as dollarizing the economy, it simply passively allowed it to happen. The government has also attempted to employ traditional revolutionary rhetoric when publicly speaking of the changes, framing them as measures necessary to help the poor in Venezuela and respond to economic attacks. (The regime’s roots are buried deep in Hugo Chavez’s legacy; echoing him lends Maduro some legitimacy.)

Still, Venezuela is long past the point where it can downplay or ignore its plight. When Maduro opened the judiciary session this year, he acknowledged that the U.S. isn’t entirely to blame for everything wrong in the country – a pretty significant rhetorical departure for him – adding that more work was needed to transform the country. He received a standing ovation.

But Maduro still has to tread carefully. He shares a delicate balance of power with Diosdado Cabello, the head of the Constituent Assembly (the pro-government legislature) and current #2 in the governing PSUV party, and Vladimir Padrino Lopez, the minister of defense. (Economic liberalization would be particularly galling to a dyed-in-the-wool Chavista such as Cabello.) There are also two competing legislatures that would be involved in whatever economic change is made into law.

Which is to say that Maduro’s hold on power is still precarious. “Wild capitalism” hasn’t solved any problems – things are still very expensive, and not everyone benefits from access to foreign currency – and Maduro risks alienating his supporters by seemingly turning his back on the legacy of Chavismo.

This means he is still vulnerable to losing power and opening a path for a more moderate Chavista to step in, rather than someone like Guaido who marked a complete departure from the regime. This is the opposite of what the U.S. had in mind.

Trump unbound

Donald Trump is acquitted by the Senate, adored by his supporters and wholly unrepentant




IN ANNOUNCING her decision to vote to acquit Donald Trump this week, Susan Collins said she believed the president had learned a “pretty big lesson” from his impeachment. When next tempted to extort a foreign leader to frame a political rival, the senator from Maine predicted, he would be “much more cautious”.

Another view is that, having established Congress’s inability to restrain him, because of the tribalism of Republicans such as Ms Collins, Mr Trump may feel even more emboldened to disregard any rule or convention that stands in the way of his interests. His third state-of-the-union address, delivered to a packed House chamber on the eve of his acquittal on February 4th, offered evidence for that.

Unlike Bill Clinton, who expressed contrition during his mid-impeachment SOTU speech, Mr Trump did not mention his Ukraine scheme or Senate trial it occasioned—which ended in his acquittal on partisan lines the next day: Mitt Romney was the only Republican who voted to convict. Yet he had already repudiated Ms Collins, telling journalists he had nothing to learn, because his approach to President Volodymyr Zelensky was “perfect”. And his SOTU performance underlined that he truly believes this.

For most of American history, the annual presidential report to Congress was delivered by letter, because of Thomas Jefferson’s fear that a live address might seem too kingly. Yet an elected despot, with fawning courtiers and freedom to mingle personal and public interests at will, is what Mr Trump aspires to be. It is what he maintains, in his claim to unbridled executive power and attacks on institutions that would constrain him, it means to be president. On the eve of his party’s final capitulation to Trumpism, his last pre-election SOTU was an enactment of that unAmerican fantasy.

As he entered the chamber, Republicans jostled to shout praise in his ear, touch him, ask him to sign their clothing. At least it was familiar: Democrats drooled over Barack Obama too. The SOTU had become a partisan performance, watched by a president’s supporters and ignored by almost everyone else, before Mr Trump was elected. Yet no recent president has demanded, and received, the fealty that has become a cover for his rule-breaking.

Woodrow Wilson restored the in-person SOTU address with a view to humanising the presidency. Mr Trump uses it to suggest his precedence over not only his party, but all three branches of the government. He snubbed the Democratic Speaker of the House, Nancy Pelosi, refusing to shake her hand (she later responded by ripping up a copy of his speech).

He boasted of his efforts to politicise the judiciary, by nominating the “187 new federal judges” his followers are counting on to pass judgments they like. (The smirks of his two Supreme Court appointees, Neil Gorsuch and Brett Kavanaugh, after he named them, probably did more to incite Democratic countermeasures than their elevations.)

Ronald Reagan started the tradition of inviting common folk as SOTU guests to express his modesty and empathy. Mr Trump uses his invitees as props to display beneficence and power.

He conferred a surprise scholarship on a poor fourth-grader from Philadelphia, sitting in the gallery.

He shocked a service wife by producing her husband, an army sergeant deployed to Afghanistan. He asked his wife Melania to fasten the Presidential Medal of Freedom—then and there!—around the neck of the talk-radio megastar, Rush Limbaugh, cancer-stricken and weeping besides her. Such boons owe less to reality TV than to Medieval kingship.

To what does Mr Trump owe his hold on his supporters? Some Trump defenders urge critics to look beyond the president’s excesses to his achievements. As he noted in his address, the economy is strong. Yet if his record were half as good as his defenders say, why does he misrepresent it so extremely?

He claims endless things that are demonstrably false—to have vanquished ISIS though it is resurgent; to have cut the cost of prescription drugs though they have soared; to be guaranteeing health-insurance provisions his administration is suing to dismantle. If his supporters were primarily drawn to Mr Trump by his record, they might be expected to discern the facts from the nonsense; most know he is not honest.

Yet, for the sake of political argument at least, they seem to accept whatever he claims. And in so doing they cede Mr Trump a power no other American president has claimed: over truth itself.

The real reason Republicans are so solidly behind Mr Trump is his genius at needling their political resentments and fears—against the liberal media, socialist Democrats, “illegal aliens”. Political scientists call this negative partisanship, and Mr Trump’s SOTU address was a masterclass in it. In the climax of its second half, he mentioned the word “alien” four times; also “socialist takeover”, “brutal rape”, “terror” and “evil”.

The frightful language of his partisanship (which he learned from Mr Limbaugh, a fellow disseminator of the racist “birther” slur against the first black president) has helped drive his supporters’ increasing loyalty. Republicans are either scared by the fears he stirs; or having ridden along thus far with Mr Trump’s chauvinism it has become too hard for them to acknowledge. It is no wonder few deserted him over the relatively remote matter of his leaning on Mr Zelensky.

UnAmerican activities

Republicans such as Ms Collins say an election is the only proper means of holding Mr Trump to account. Yet in the grip of their partisan affiliations, few voters will recall Mr Trump’s Ukraine scam next November—and if he wins re-election, will he have a licence to repeat it? Exonerated by the Senate, he may even do worse before then. He has fresh grudges to settle and political cover to do so.

Mr Trump’s sometimes comical strangeness long made the fears of despotism he stirred seem overblown. But think of authoritarianism as a corrosive process, not a dictatorial end-state, and they no longer do. He has never looked more threatening to American democracy. And thanks to Senate Republicans, with one laudable exception, it has never looked more vulnerable to him.