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On Staying Liquid…

On Staying Liquid…

Via AdventuresInCapitalism.com,

Investing is a game of keeping powder dry and waiting for layups. So many investors…

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This article was originally published by Zero Hedge
On Staying Liquid...

Via AdventuresInCapitalism.com,

Investing is a game of keeping powder dry and waiting for layups. So many investors miss this lesson. They stay fully invested in middling situations for various reasons - often mental. Who cares if it is at 90% of fair value?? Recycle your capital. Why are you in a business with deteriorating numbers?? Recycle your capital. So what if it’s cheap, there’s no catalyst?? Recycle your capital. Maybe your capital isn’t precious to you—mine is quite precious to me.

As I’ve matured as an investor, I’ve become less patient with capital that’s earning low returns. This is because I know there’s always another, better story, just waiting to break out onto the scene. I know all too well that there’s an opportunity cost to missing that story. More importantly, experience also tells me that the far bigger and often unspoken cost, is the frictional cost of blasting out of something mediocre at the wrong time to urgently free up capital for that better opportunity.

I like to cycle through my positions and recognize when an idea or theme has matured and needs harvesting. No need to squeeze the last bit of toothpaste out—the middle of the move is good enough for me. More importantly, I recognize when an idea is mediocre and when it’s better to just sit in cash, even if it means that I won’t produce much in the way of performance for a few months, or even a few quarters. The value of instant flexibility is just too valuable.

Over the last few days of August, I pivoted from negligible uranium exposure to a position maximum. Having swung large exposures around for two decades, I’m certainly used to rapidly pivoting. What surprised me, was my ability to max out uranium without making any sales to fund it. Instead, I had the liquidity just sitting there for the opportunity. I didn’t need to figure out how to pay for it. I didn’t need to whack bids in something illiquid to find the room. I simply had the room and I’m talking about a position maximum as well.

Looking back on my career, a younger version of myself wouldn’t have been able to pivot as quickly. I would have had a worse basis in a rapidly ramping position because I would have struggled to figure out which positions to sacrifice. In a fast market, a few days of hesitation are the difference between catching the inflection and paying up dearly for a security in motion. Remember, as an inflection investor, my returns come from catching the inflection right at the inflection point—where I’m taking the least risk as minimal forward expectations are priced in. In a highly competitive stock market, inflecting sectors move explosively—as witnessed by uranium. Speed is my ally, as I want to get my position on as soon as I recognize the change in thesis—paying up and taking offers, is often simply buying tomorrow’s open.

Having just pivoted faster and with less slippage than I can remember, I feel a need to remind everyone that liquidity will be increasingly valuable going forward. Sure, we’re in “Project Zimbabwe” and there’s a temptation to stay maximally long. However, the big money will come from playing my buddy, Kevin Muir’s, “series of rolling bubbles.” Identify the bubble, get there with as much capital as you can free up and ride the multi-bagger before recycling your capital and doing it all over again. Far too much of the market’s mental capital is tied to “forever compounders” when it’s obvious that governments will be increasingly arbitrary with their regulations. It’s only a matter of time before these businesses are also in the crossfire. Besides, most of these businesses are horribly overvalued and over-owned by the indexes.

Fortunately, for inflection investors, we’re in the greatest market environment imaginable. As governments screw up their economies, fixated on fighting germs, inflation, unemployment, social unrest and all the side-effects of government stupidity, the number of future potential crises will only metastasize. Governmental reactions to the fallout from their own meddling will only set more trends in motion. These are the sorts of short-term trends that have explosive outcomes as governments are both malevolent and price insensitive. They’ll both restrict supply while accelerating the demand side. This is the greatest market imaginable if you simply read the news and use a dollop of common sense.

This isn’t a market for grinding out nickels. This isn’t a market for “compounders” that kick along a few percent better than the market. This is a market for taking big swings at explosive trends and keeping spare capital tied up in Event-Driven strategies until the next trend comes along. Surprisingly, I repeatedly see friends screwing around with assets that are going nowhere, tying up their capital when there are much better things to focus on. Then, when a great trend comes along, they’re restricted to a few hundred basis points for a position, when they should be swinging at it with a few thousand.

We all know what the weakest positions in our portfolios are. They’re the stocks we’re limping forward for a few more months for tax reasons, or the stocks where liquidity is crappy and no one wants to pay the spread to exit, or where we want $20 while it’s trading at $19, or where some promised catalyst has been pushed back yet another year. Want me to continue? We all have excuses to keep bad positions around. Every few months, I purge those positions. Otherwise, they build up, like used-up sneakers in my closet. Sure, if I held these positions, I’d have squeezed a few more dollars from them, but I would have missed uranium—which looks to be downright parabolic. I would have missed a bunch of other great plays. Every few months there’s another great set-up. Keeping flexible and keeping liquid while keeping fully invested during “Project Zimbabwe” has been a challenge for me. I know I’m sacrificing returns at times to be able to hit themes hard when they’re ready. Sometimes, nothing comes along for a few months and I wonder if I’m missing out on too much upside—then uranium comes along and I remember why I de-gross and wait for the layups. Fortunately, big returns right out of the inflection, more than make up for what I give up by staying slightly less invested.

There’s no perfect middle-ground. Either you want to be able to swing hard at great trades and max them out, or you’re going to hold onto sad losers. Do you want to be able to pivot into an insanity trend like uranium when it breaks to 5-year highs? Or do you want to squeak out 10% on a stock that’s going nowhere? I know where I stand…

*  *  *

Disclosure: Funds that I control are long various uranium related entities.

If you enjoyed this post, subscribe for more at http://www.adventuresincapitalism.com

Tyler Durden Tue, 09/14/2021 - 10:15

Economics

All Eyes On Inventory

You’ve heard of the virtuous circle in the economy. Risk taking leads to spending/investment/hiring, which then leads to more spending/investment/hiring….

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You’ve heard of the virtuous circle in the economy. Risk taking leads to spending/investment/hiring, which then leads to more spending/investment/hiring. Recovery, in other words.

In the old days of the 20th century, quite a lot of the circle was rounded out by the inventory cycle. Both recession and recovery would depend upon how much additional product floated up and down the supply chain. Deflation, too.

On the contraction side, demand might fall off a bit for whatever reason(s), retailers getting stuck with a small inventory overhang. If they think it more than temporary, or don’t have the internal cash to finance it, the retail level scales back pushing inventory to wholesalers who then cut orders from producers.

Serious enough, producers begin to cut back their own activities, maybe to the point of forgoing new hires, perhaps laying off some workers already employed. Whatever necessary to equalize reduced order flow with cost structure and input utility.

When those layoffs hit, almost certainly it cuts further into demand (unemployed workers are far more careful and constrained consumers), more inventory stuck at retailers and wholesalers, then even fewer orders for producers who must sharpen their payroll axe all over again. This vicious cycle is what used to make up the balance of any recession.

But what if inventory first accumulates for other reasons?

It may be a different look to the cycle, though not necessarily an entirely different outcome. Suppose retailers (outside of automobiles) grow concerned about supply availability or shipping times. They might naturally react by boosting their current order flow if only to increase their chances some product makes it through the clogged shipping channels.

As that increased order flow unrelated to demand continues to move back through the supply chain, it probably would only make the transportation issues that much worse. It’s already a mess, and because it’s already a mess the entire supply chain tries to stuff more goods through it rather than less, rather than giving the system some time and space to work out enough kinks.

This, of course, would probably convince retailers to do it all over again, ordering even more they don’t need now or in the near future, now more desperate to try and raise their chances of receiving anything. More trouble for the shippers and so on.

Having intentionally over-ordered, and then over-ordered again (and again?), this time what happens when the logistics get more sorted out and then deliveries rather than trickle through come pouring out? This is the cyclical question for early 2022, not the unemployment rate.

Some companies have said they are ready, and have confidently declared how they will be able to manage holding such excessive levels of product. Maybe they can. But what happens to orders down at the lower reaches? Having received all this extra inventory, retailers and wholesalers aren’t going to keep double and triple ordering.

Before even getting to demand considerations, the orders are going to drop and producers are going to become less busy. The inventory glut having been forwarded up to the retail level, maybe wholesale, it will have to be worked down over time.

This is where demand comes into it. If demand stays as robust as some might currently assume, it might not take that much time to normalize inventory, then get past the whole issue and imbalance with nothing much lost.

And if demand isn’t as good, then we’re right back into the 20th century again.

The way the supply bottlenecks of 2021 have worked out, there is going to be an inventory overhang at some point. When it does come about and how bad it will be, that’s really the demand question. There seems to be quite a bit of optimism about it, to the point of complacency while corporate CEO’s bark in the media instead about all the massive inflation they plan on throwing your way.

Inflation today (therefore not inflation) but potentially too many goods tomorrow. However the inventory cycle manifests, the one thing each would have in common is its trough – disinflationary at the least.



Manufacturing PMI’s, for what it’s worth, remain elevated as if the upward segment of that unusual cycle remains relatively intact (note: ISM for September won’t be released for another week). With ships still stacking up on the US West Coast, this makes sense. Regardless of current levels of demand, these supply problems would only feed the imbalance for another month.

IHS Markit’s manufacturing index retreated again for the flash September 2021 estimate, but it remains above 60 therefore still in the post-2008 stratosphere. At 60.5 in the latest update, it is down, though, for the second month in a row since hitting the high of 63.4 back in July. And the index was 62.6 back in May, meaning it’s been four months treading.

It is the services side which has materially declined, leading many to assume it must be due to delta COVID if goods flow is largely uninterrupted at the same time. Markit’s services PMI dropped to 54.4 in September from 55.1 in August, while its employment component fell back to just 50.

This meant the composite, accounting for both manufacturing and services, declined to a very similar 54.5. Using this measure as a guide for possible GDP in Q3, that’s working down to a very disappointing 3% or less which might otherwise raise suspicions when it comes to the sustainability of demand.


If this more serious setback really is pandemic-related, then thinking it a temporary one might keep up the order flow as well as the logistical nightmare. Then the artificial inventory cycle gets even more artificial.

It could very well be that manufacturing remains high because of inventory and not because current potential weakness is only about delta.

Should it turn out to be unrelated, or only somewhat attributable to renewed disease measures, then inventory stops being a pesky annoyance of shipping bottlenecks and potentially starts being more like its old self. While that wouldn’t necessarily mean recession in early 2022, even a substantial downturn (chances would have it globally synchronized) having yet fully recovered from the last two would be enough trouble.

 

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Economics

This Has To Be A Mistake

This Has To Be A Mistake

While we were digging through the data for today’s household net worth report we stumbled upon something that seem…

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This Has To Be A Mistake

While we were digging through the data for today's household net worth report we stumbled upon something that seem beyond ridiculous: the ratio of Household Net Worth to Disposable Net Income. At 786% in the latest quarter, the chart at first appears to be a mistake but we triple checked it, and... well, here it is.

The latest, all-time high print is an increase from 698% in Q1 and also represents the biggest quarterly increase in history!

This number is so ridiculous, it is almost 50% higher than the long-term average of 540%. More importantly, it means that the total net worth number we reported earlier today, which in Q2 hit a record high of $142 trillion, is massively inflated on the back of what is obviously the biggest asset bubble on record.

It also means that if one were to strip away the asset bubble, and net worth was purely a reasonable function of disposable income, then total net worth worth be haircut by 31%, or some $43 trillion, which incidentally, is equivalent to the net worth of the top 1% of US society...

... and which as we showed earlier today is a record 32% of total household net worth.

As an aside, the fact that the top 1% have gained $10 trillion in wealth since the covid pandemic outbreak, is probably just a coincidence, and yet...

As for the chart which clearly has to be a mistake, we are sad to report that it isn't, and as politicians of both the Democrat and Republican party pretend to fight for the common man, all they are doing is enabling and accelerating the greatest wealth transfer in the world but not for nothing: they too want to be in the top 1%.

Tyler Durden Thu, 09/23/2021 - 22:00
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Economics

“Culture As An Asset”

#CKStrong Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground…

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#CKStrong

Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground balls.

This is usually a sign of the endgame for markets, i.e,, the precursor to a bear market. Think the “Great Beanie Baby Bubble” of 1999.

In general, there are two types of assets,

  1. They can be rare—gold bars, diamonds, houses on Victoria Peak, bottles of 1982 Pétrus, Van Gogh paintings, stamps, beanie babies, or baseball cards or
  2. They can generate cash flows over time  – GaveKal

Creating An Illusion Of Scarcity

Scarcity relative to the money stock is what its all about now, folks. 

It probably won’t be long before the Fed has to bailout the baseball card market, no?

Full disclosure,  I do own a Mike Trout rookie card

Given the extreme valuations of all most all asset classes, coupled with the massive amount of money in the global financial system, markets are now really stretching, looking for, and actually attempting to create scarcity as a useful delusion to justify, rationalize, and drive speculation. 

Maybe I will start collecting poop as an “anthropological asset,” put it the blockchain and super charge the price ramp by snapping a few pictures of each sample, converting them to NFTs to load up to the internet.

Then again, maybe all this is signaling the start of a big, big inflation cycle and the markets are looking to get out of cash and protect their purchasing power.   But that’s too rational.  

Can you believe what markets have become, folks?   It is hard to see clearly when everybody is making money. 

 

 

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