white mountain weekly march 29th, 2018 - pinecone macro · 2019-11-26 · inflation fears should...

WHITE MOUNTAIN WEEKLY MARCH 29TH, 2018

www.pineconemacro.com @pineconemacro [email protected] 1

Welcome to the first White Mountain Weekly. My name is Chase

Taylor and I am a trader and macro strategist currently living in Southern California. Most of you probably know me as Pinecone

Macro from twitter and from my website pineconemacro.com. I sincerely hope you will enjoy this letter each week and will send me

feedback, especially when it is critical of my thinking and analysis. Before we begin, I just wanted to address the name of my letter.

I obviously have a fascination with pinecones and coniferous forests.

This started with my reading of Mark Spitznagel’s brilliant book The Dao of Capital, where he outlines the “strategy” of coniferous trees

and the genius use of the pinecone to fulfill this strategy on the tactical level. If you have not read the book and find this odd, you

should go and read it now – but not to worry, I plan to weave in some of the lessons we can all learn from trees in this letter each

week. The White Mountains in California are home to the oldest living species on the planet – the bristlecone pine (pinus longaeva).

Some of these trees are over 5,000 years old. I admire the resilience

of bristlecones in the harsh conditions of the White Mountains where it is often the only plant species able to thrive. We are talking

about a tree that is content to grow ever so slowly in cold, heat, dry soil, high winds, short growing seasons, and shallow alkaline soil

made of limestone, sandstone, or quartzite. More to come later on the bristlecone but let’s hit the markets.



Most of my writing over the past year has been about bonds, with

my thoughts on inflation and the bond market taking up most of my twitter feed and my writing. I am a firm bond bear for the coming

months and years but certainly see a rally developing. Below is a chart of the 10 year yield. As you can see I was incredibly fortunate

with the timing of my short. With that said as I write this the 10 year yield looks to be breaking down with a retest of the support

area taking place. I am buying some TLT here in order to hedge my shorts and to add some yield to my portfolio. If bonds were to rally

near the trendline I would sell TLT and likely add to shorts expecting a new leg higher in yields. To me this looks like a technical rally

based on stock market fears, positioning and sentiment in bonds, and the fading of the inflation and trade war fears. Inflation fears

should calm down for a while but they will be back.

My thoughts on inflation are somewhat based on a similar story as

1966 held and I would like to share an old newspaper clipping from that time period. This is from the LA Times (Sep 15, 1966)



It is interesting to note that the article more or less suggests that the

President should not worry about inflation and that he is merely trying to keep from needlessly provoking a recession or depression

by not fighting inflation. The article quotes President Johnson as saying the US would not buy price stability at the expense of growth.

Will President Trump and the Fed buy price stability at the expense of growth? Not to mention at the expense of keeping real rates low

and assisting with the over indebted and over levered system. I doubt it and this is why I think we could see inflation that runs

hotter than consensus expects over the next few years. Nobody seemed to expect a destructive inflation in 1966 and the same is

true now in my opinion. The writer referred to inflation fears as “sensationalized” and “propaganda.” As it turned out the US was on

the cusp of the most destructive inflation since at least the 1800s and the most destructive outside of large scale war on US soil in

American history. I will continue to revisit this time period through the newspapers as I find it instructive.

I first approached this idea thanks to the great Hugh Hendry and an

interview he did on Real Vision in June of 2017. He also underscored the fact that bonds may not be the shock absorber they

have been over the past generation when a shock occurs in financial markets and I could not agree more. This is an idea that is not

considered deeply enough in the investing world. I think the size of bond allocations in portfolios will be the largest driver in the coming

pension/retirement crisis in the US. Bonds are starting to build a rally, but so far this year the bond market is not acting as that

shock absorber we have come to know and love for the past generation - the shock absorber most portfolios are constructed

around. Below is a great chart from a recent Bloomberg View article by Scott Dorf. If this trend continues, managers can either accept

this risk and allow underperformance or they can recognize the changing paradigm and sell some bonds, further hurting the bond

market and creating a damaging reflexivity in bonds. Perhaps the Fed could stop this by buying all of the bonds – but at what price?

https://www.bloomberg.com/view/articles/2018-03-26/the-bear-market-in-bonds-will-only-gain-steam

https://www.bloomberg.com/view/articles/2018-03-26/the-bear-market-in-bonds-will-only-gain-steam



It is interesting to note that during this period of rates rising and not

being great shock absorbers – Chinese bonds are performing better as the Chinese bond market grows and gains global acceptance

while the currency does the same. As Luke Gromen has covered so well, the Chinese now have an oil futures contract traded in yuan.

All of this together is quite intriguing. This chart is from @Sunchartist via twitter.



If I am right about an inflationary period starting and bonds not

being the best way to hedge – what will be? Thanks to a great EVA from the great folks at Evergreen Gavekal I have some great charts

to show us how we could shift portfolios.

I recently posted a chart of the GLD/TLT ratio on twitter as a loose

way to track this important ratio. Check out the charts on the next page.

https://gallery.mailchimp.com/7372687636bfa669f0a51ec26/files/504f66e0-9f08-4154-89cd-854985c1bc77/EVA_3.2.18.pdf

https://gallery.mailchimp.com/7372687636bfa669f0a51ec26/files/504f66e0-9f08-4154-89cd-854985c1bc77/EVA_3.2.18.pdf



Below is the weekly chart of gold to bonds. We saw a trend break in

the summer of 2016 and a three year base that broke out at the beginning of this year. Perhaps we retest these lines but the change

looks clear to me.

Also worth noting is the same chart on a daily where you can see the 200 day moving average now gaining steam with an upward trend.



What about gold itself right now? We broke the down trend from

2011 but have been stuck around the $1350 area and stuck on this neckline of a truly massive inverse head and shoulders pattern.

Currently the 200 week moving average is flat and we are near the neckline and the up and down trendlines – so a critical juncture. I

expect gold to break this neckline and explode to $1700 over the next couple years but I am currently flat. I want a weekly close

above the neckline before I get long gold futures and mining stocks.

Another way to potentially play this is to go long silver. Speculators are extremely short and sentiment is poor and the chart has been

asleep for months. There is not a clear potential breakout like there is in gold but silver is absolutely worth watching moving forward.

The last trade I want to cover this week is the EURUSD. I have been

short for a few weeks, getting whipped around and currently about even money. Outside of being long USDTRY most of my shots at

dollar strength of course have been a fool’s errand.



We have a couple levels that could be trouble for yet another market

that has very skewed positioning and sentiment. As you can see there is a down trendline that looms large as well as a strong

horizontal area and a steep up trendline that could soon break. I could see a fall down near the top of the 2+ year horizontal channel.

To wrap up my first letter, I want to return to the bristlecone pine.

The bristlecone can live for thousands of years despite incredibly slow growth. The tree also dies an incredibly slow death, often by

soil erosion that exposes the tree’s vitally important roots. As investors we should mimic the bristlecone’s adaptations that make it

so successful and long living. The tree has thought of most everything and developed a system to overcome environmental

challenges. All but soil erosion. You could argue that our modern portfolios are well adapted, long living portfolios, built for the long

haul. We live in the age of big data, the back test, quants, Sharpe ratios, and “all weather” portfolios. Well the bristlecone is the



ultimate all weather organism – yet the tree still has that damn blind

spot of exposing its roots every few thousand years. This problem is so slow to form that it is difficult to notice or adapt and it may take

thousands of years to adapt, if it ever does.

In my mind an inflation shift after forty years is our version of soil erosion. Our investing roots have worked for so long and our roots

(think bonds in our case) have been so trustworthy that we naturally feel as though we can ignore our roots and focus on other areas. We

can focus on FANG’s P/E, and Donald Trump, and Chinese data, and CAPE ratios, and which factors back test well over the past

cycle or two. We are focused on our needles and our cones and our branches and even the temperature and wind to make certain we

are in the best possible position to survive. We should focus on all of these factors, but we must never ignore our roots. Just because

bonds have been a steady performer and shock absorber for every investor under 60 years old does not mean we should ignore them

and count them as a sure fire portfolio cornerstone. Unfortunately for the bristlecone there is not much the tree can do about the soil

eroding over hundreds or thousands of years from around its roots – but as investors, we can keep a close eye on our portfolios without

assuming that the roots are always strong and healthy. Inflation stands ready to erode the roots of portfolios people depend on and

we owe it to ourselves to view this asset class through the lens of all of history, not just the past four decades.

Below is a cool graphic about the bristlecone from Inyo National

Forest. The tree grows where other trees cannot and will not. As investors we tend to grow where the rest of the trees grow and hope

to get some of the same nutrients. We all love Tencent and India and view ourselves as contrarian. The real success, even the most long

lived success is sometimes where nobody else is willing to go. If the longest living trees on the planet go where nobody else will, why are

we afraid to invest there?

I hope you enjoyed this week’s letter.



“Look back in memory and consider when you ever had a fixed plan, how few days have passed as you had intended, when you were ever at your own disposal, when your face ever wore its natural expression, when your mind was ever unperturbed, what work you have achieved in so long a life, how many have robbed you of life when you were not aware of what you were losing, how much was taken up in useless sorrow, in foolish joy, in greedy desire, in the allurements of society, how little of yourself was left to you; you will perceive that you are dying before your season!”

― Seneca, On the Shortness of Life

white mountain weekly march 29th, 2018 - pinecone macro · 2019-11-26 · inflation fears should...

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