Pod: If the Strait is still shut...

0:00Hi, this is the squirrel coming to you on the early afternoon of Monday, the 23rd of March, Melbourne time. No regular pod this week, because the weekend note was really way too visual for audio. But instead, I've got a recording of the Sunday show, which we recorded about five hours ago, which Benny and I recorded about five hours ago, really relevant, very topical for how markets are coming into this week. Anyway, enjoy the show. Catch you for a regular pod next week and squirrel out. Hey, we're live and welcome to another Unmissable Sunday show. We might have a few sort of curious extra visitors this evening, Benny. If you name a show, Adult Swim, the porn community is probably in here in droves. Evening buddy. Well, yeah, evening boss. I think the Adult Swim thing came from my earlier a week I tweeted a post when gold was

1:04down five or six percent in one day. And my Z7s are getting smoked, you know, the gilts are getting smoked, the bare flat nerves on, the, you know, there's nothing going that is, if you were like, hey, I'm mad, there's no edges, there's, and the S and P wasn't going down fast enough for your foot store. So you're, that's why we titled the show Adult Swim. There you go. So those expecting your clothes, sorry to disappoint, we're going to talk about markets. To be honest, given, given, given all of the noise over the weekend, I was, you know, this, this open doesn't look too hairy. Like they tried, they tried to take it one way, right? Like the oil opened up at one, or WT open at one on one on one on five and, you know, the spools open down 50 beps and they're kind of reversed it. I mean, you know, I don't know, again, it's kind of like the same as last weekend. It's like, did it escalate?

2:04I saw Trump's little ultimatum and then their response, but like, yeah, how much are we putting into that? You know, like, like you need to see actual infrastructure get destroyed to be like, it's escalated. Like I think the real thing that we just talked about yesterday earlier today was, you certainly see the desalination plans getting hit again, like in any kind of size. That's where you know that like, it's going to a different level. I, I think, I think it's easier than that, right? You just ask yourself the question, every single day, is the straight of her moves open or not? And if it's not, you sell some more stuff, right? And the original title of this show was going to be trim and, trim and, trim and hedge the tail, or trim and, trim and buy a tail, right? Not a rodent tail, but a tail hedge. But the, I mean, I, I, I think that, yeah, I mean, yeah, we can talk about escalation options and they're horrific, but the, but ultimately the, the gun is pointed at the

3:08temple of the global economy with the straitful moves closed right now. And that's, that's really all that matters. And I mean, I think every day that this current situation continues is like a decay in an option, basically. I think that's the way to think about it. It's like, yeah, like everyone's aware of it, but like you can't really price it in. It's like, hey, one more day went off. I lost a little bit of theta and that's the way to think about it. And then there's the point where you can have this like really go against you pretty badly where, you know, we have stockpiles right now. The world's okay, but like, there is a point here, if this goes to June, if this goes to July, like, you know, the world's going to get really ugly, really fast, basically. I, June, July is a disaster, right? That's global, that's global recession time, right? I mean, I think they should take, you might have, you might have the big D coming up. Yeah. So, I think there you go.

4:09We only do bees in the show. No, but I think the point is, if you own risk assets, every day that this straight remains closed, you've got to sell some more, right? You've got to sell some more. And we'll talk a bit about what you do to protect yourself, but what if it all blows over and it's all, well, one, there's going to be some serious damage anyway just from what's already happened, but to, you know, there are options, but I think, you know, my mantra is keep reaching for the stack of pink tickets until it's clear that the straight is open. And I think that's what we've seen. I mean, I think if you look at the tape, I think that, like, people have not panicked, right? Like, I mean, obviously, they panicked for oil, but like, you know, but here we go. Like, I put this together, the, the spoozane sheep, like, basically, they're not, they're not. And I've been seeing this for a long time, and I feel like I'm like Mugato in Zoolander where I've been taking crazy pills, like, basically, you know, the trailing 12 months,

5:14S&P 500 was up, I've had like 28 times. Now, we've corrected to 25 times, but you look at those red circles. You have one point in those circles where you're like bullish on, right? 2003. And, and, you know, that could just be a roll off situation of why that is what it was, because you were getting the recession and then you roll off and it looked expensive because the S&P was on recessionary earnings in 02. But like, I don't know, look, look at, oh, look at 21, you know, like, this is not like what you want, because if you're like, hey, man, I got to buy the dip. Well, 25 times, Robert, you know, we're old school and we're old guys. Like, in my, in my estimation, like, I'm 16 times bit, you know, like, and, and maybe I'll never get that bid, you know, but like, like, that is a bit, that is a bit of a fancy stink, stink bid, but, you know, I mean, just, just, just the mean reversions to

6:1420, right? 21. Yeah, just to 20, just to 20, you know, without any hit to earnings, which is what everyone wants to talk about. They want to talk about cash flows and growth and bubble, but like, if you had straight earnings, which I think last year's earnings were 252, okay, well, then, you know, if you go 20 times, you're, I mean, 20 times, you're 5,000, yeah, you're back at the liberation lows, basically, and so, you know, when you think about, I'll give you what's going on here is a lot worse than a bit of fighting talk about trade wars, right? Yeah, I mean, I was a permanent scar tissue from this, right? This is a different situation completely than last year, like, like last year, this was Trump's manifestation. He wanted to put a global tax on the world, Rupert and everybody else in the rest of the world are like, F you, you're crazy, the market was like, whatever, and the market was chill

7:18until mid March, you know, like, and then, and then slowly, like, got up to liberation day in early April, and then we would blew up, but that was his call. This is not his call now, and, you know, I think that's the key thing is that, like, there's an asymmetry here. I think the US is clearly winning, and like, you know, but like, does that mean it's all working? What's winning? I mean, listen, I don't want to spend too much time talking about geopolitics, right? Because I don't think, no, I agree, I agree. I don't, I think, I think winning looks very different from, from, from the perspective of which side of the golf you're sitting on, right? Yeah, I guess I'm saying the US, from the US perspective, not necessarily from the global, and I know we have a global listenership. I just, I just get a, winning is the Straits of Hormuz open period. That's it for me. So that's the, that's the, that's the, that's the, that's the, that's the, like, right, right? In an open yet, right? Nope. So you can bomb Iran into the middle ages, but if the straits still shut, this, this crisis

8:20is, is, is, is Nova. Right. And, and the message is, for all the time that the strait is, strait is shut, you should be selling risk assets in my view. Yeah. And I think that's what we're seeing. We're seeing, like, basically, 50 bibs down, 1% down, you know, at one point on Friday, it was 2% down, but we're not seeing, like, you know, 5, 10, you know, a craziness, like COVID, but like, that's the real situation, which is why conventional hedging tools like puts are not working for you, right? Well, that's why we called it adult swim because there's no hedging that's working. There's, like, and again, I, you know, I created that, that application on the proplexity computer, like, should you trade or not? And mathematically, like, came up with no, it's a hard no. And I've been saying that on all media spots and on our show, they're like, I don't know, I haven't been trading a lot with, I bought oil, like, when they try to feed it the first time and then after the threat allegedly, the treasury sold it or whoever was selling oil that Monday, but like, you know, it just hasn't been a great trading environment.

9:28You can sell the rips, basically, like, that's the only thing you can do right now. And then the worry of that and which we'll get into later is, oh, well, what if this thing abates and then you get your Facebook talk? Because I think that's what most people are worried about, have low-lingly condition to buy the dip and not participate at the market rips, you know? So like, everyone's trying to be complacent in essence. Well, we've got a solution for that at the end, but let's run through some of the rest of your slides here, Benny. Yeah, this was a buddy from my, I'm going to chat with a bunch of grad school buddies and he sent this over and I was like, okay, this is interesting. So, you know, the 70s, you know, the US went from being an energy, like, exporter to an energy importer and they would pay any price in the 70s, right? And then so, remember, the 70s, you had minorities and women coming into the workplace, you had the boomers, like, going into the workplace, like, it was a great time for America

10:32from a demographic standpoint. And so kind of like the inflation we saw in 2022 was the function of, oh, hey, you know, we, we, we, we stood alone for barrens and rent for barrens and we sent people checks and so people could spend it. Well, we're not there yet. And so this was a kind of an interesting thing of like, where does it really hurt? You know, because we all think in nominal terms, but we all know nominal 2026 dollars are not the same as 2020 as that as 20 or 2000 as 1973, right, Rupert? Yeah, no, I'm just, I'm just wondering, you know, how to, how to read this chart, right? Um, I mean, my, my thinking is, it's, it's basically the gas, gas at the pump needs to triple before it's a, it's, it's, it's real pain in terms of US consumers, because I'd be a seller of that.

11:33I think, I think a double, I think a double for the US, but that's the thing. That's why the S and P's probably holding up because the US is relatively better set up for this situation. There's only three countries in the world that are really set up to handle this Brazil, Russia and the United States, because they have food, they have energy, they have water. Like, but like, if you're an importer of energy, you're in a bad spot because, you know, here's the other thing I was talking to a friend, our friend of the show Tom Roderick this weekend, you know, the Europeans got caught off and as did Benny, just to be clear on the rates thing, but the rate hike idea is so stupid, but for everybody else, they might have to do it, because their effects can go down. So they have to try and protect their currency so that it doesn't actually make energy even more expensive, you know what I mean? And we saw that in a way to be fair. Well, let's, let's, let's start with, let's start with the US curve here and, um, you know, listen, that that has been, that has been a truly brutal forever flat over the last,

12:38over the last three weeks, um, yeah, your, your, your, your co-host got his ass handed to him, you know, it's funny, I laughed about it that I put the, the milk carton out right before this thing just absolutely blew up in my face and, you messed with the market goals, you guys, you messed with the market gods, you had that coming, play with the bull you might get the horn, but like, look, yeah, there's been a massive, bear flat and this is the US curve, but like, if you go to Europe, it's even more insane. Like, and I think there's pretty much ubiquitous, including yours truly, who had the steeper on in some way or another or, you know, basically like long the front end, short the, the seven to 10 area, and that pretty much has blown out completely. Like the 10, you know, the seven to 10 area has been pretty chill for the last week or so, but the front end is clearly like a de-leveraging moment. Well, listen, let's, let's run through

13:40sort of investors by type and try and figure out who has, who has, who has flattened risk, right? So you can imagine sort of exy long short pod shops, right? They've taken their risk right down, right? And you saw that with the reversal of lots of popular sort of facts of pairs over and that happened pretty quickly after the missile started raining, right? How much real money has really moved? How much, how much, how much hedging do we think has happened? You know, how much, um, re hedging is being done post triple witching, right? I, I, I, it's not clear to me, um, where the various buckets of money are sitting right now. I think all I can, all I can see is, is, is, is serious complacency, right? When I, I, I, I go back to right at the beginning of of the year when I said to you, listen, I really don't like risk much at all at the moment because, you know, I'm making money on my longs and my hedges. That's not supposed to happen. Something,

14:45something weird is going on. And, you know, I was, I was, I was in the process of starting to sell stuff reasonably aggressively by the second week of February, right? And that was, with, with a pin else that was still rising. Um, and that was well ahead of the war. I mean, we talked about, we talked about on the show when we were looking at like the IWM seven up seven percent by week two of January, um, the margin markets. And we're like, okay, let's, let's annualize these returns, right? Like, if you end, I mean, it was just, it returns are so absurd. It was like, this is the best sell signal there is. Like, I don't give a fuck what you say. Like that, when you have, you know, uh, the 100 percent, we're annualized returns in small caps in EM. Like, that just tells you what you need to know basically. Yeah. Run, forest, run. Indeed. Which is a good, it's just a good insight. And so, um, you know, yeah, so talking of good, good insights. Um,

15:51I mean, it was, it was almost perfect, but you, um, you, you, you prompted me and you did it yourself to move from the, um, the March 27 sofas into the December 27 sofas. Um, the best trade of the lot would have been to go out of them. I could really take a proper victory lap. But yeah, like, I, it's fun to be clear, be clear, only hindsight capsule did the spread. We just, we just saved ourselves. It is all on save, but you can see there, right? Like, it's, uh, 30 bips difference. And, and the real problem with that is, and this is a teaching moment for how to trade sofa futures or, you know, like, that when you're going to get something like this, because last year, the Z5s, I moved from the Z6s to the Z5s and then you had the same kind of dynamic where I was like, Oh, we'll be cutting by the end of the year and obviously we didn't, and you can have permanent capital loss. Whereas like, the Z7s, we can sit there and we have whatever, uh, two years, so whatever, 16 meetings, um, and yeah, I guess if Jay Paul stayed in the

16:58year, you only have 10, 10 live meetings outside of the Jay Paul regime, but like, look at that. Like, that is an unbelief. It was literally right the day before that started moving the other way. And still the red line is the Z7s, which have taken pain. And I have my, you know, no one's happy with me. And I got a lot of condolences coming in that my badgers lost this weekend in the first round. And oh, sorry about the Z7. So, you know, not, not that fun. You guys can all like laugh at Benny, but like, you gots to put your chin out there, right? Yeah, I mean, that's kind of it, right? Like, I'm also like, that's the price you pay when you tell people what you're doing. So absolutely. Absolutely. So what else have we got here? And I think go to the next one. Oh, sorry. Oh, yeah. And like, we talked about a little bit last week. So I'm not going to drone on about it, but like, the swap spreads just richening this much. Like, it's a real issue.

17:59Like, and I think it's just like, people need to understand because so many people don't trade swaps or don't like deal with that market, which is like kind of the real market for interest rates and leverage. Like, this is the levered market right here. It's the way I would think of this. Like, this is just just put this, what it means for people outside of institutional world, the with real money in the market. It just, it just means that, you know, money is really tight even for the big boys, right? 100%. That's why Rupert, that's why I got Rupert here to like, just translate basically. And that is right. It's the cost of leverage and the money is getting expensive for everybody, including the guys who have big money. Yeah. That's true. And then you finally won. And then this was, this was a funny one though, because Tom called me this weekend and we were talking. And yeah, this, this is, this is, this is the UK 230 shake, well, effectively, the, the, the, the flattening of what was the steepener. Yeah, exactly, exactly. And like,

19:03this is Rupert's home country. And we talked about the guilt with Tom when he was on the show, but like, that is a move right there. Like, the, the flattening that just happened probably cost the number of guys their jobs is what my, I would guess. Like, there was a lot of, that's, look, I mean, again, just, you know, Rupert will tell you, he loves the trend following. So, look at that trend from, you know, what was it? 23, 24, like, that's a night. The guys were printing cash on that. Well, it's quite funny. I mean, the, when, when our buddy Kevin Mule went to London last year, he said the most popular trade amongst sort of people in the city, right? So not retail investors, but, you know, PA trades for professionals in London was to be long, the, the long dated guilt, right? Because you earn your tax free on your capital gains on, on guilt investments

20:03on the UK tax system. So this was, you know, you know, this was, this was mentally a one-way bet for everyone in their PA right now. And that, that, that, that had an unruly unwind last week. As they always do, Rupert, I mean, remember, we started, we became friends and started talking in the beginning of 24. And we started getting on that yen, yen, peso, carry trade. And that had unbelievable unwind. So, carry trades always have this where leverage, you know, carry. Well, I'm honest, this was, this was, this was sort of, this was, this is PA retail. These people were just long only the long bond, right? They weren't, they weren't, they weren't funding it with yen, right? But, I mean, yeah, it's, you know, that, that, that is a violent unwind of risk. Yeah, exactly. And so I just, you know, we don't need to talk about guilt too much. I just, I, I wanted to make sure everyone knew that, like, as much violence as there was in the rates market in the US, the Europeans, it was, it was absurd. Like, like, all time are absurd. And like, you

21:10know, if you don't pay attention to those markets, I get it. Like, but like, oh my god, it was, it was an armageddon type of situation. Okay. Well, listen, I mean, we get, for those, those sort of made it to the end and actually looks at what most of you have. I, you know, if I'm, you know, for, for folk that are, that are like me selling assets, and I'm less worried about some face ripper of a rally on a sort of immediate cessation of violence type scenario, right? I think it's a lot more complex than that. As, as I, as I, as I, as I sell more and more and stuff every week, you know, I've got plenty of people coming to me. Go, well, listen, you know, I got left behind it. I got, I got left behind at COVID. I got left behind after liberation week. I really can't afford to have, have that happen again. You know, what, what should I do? And, you know, just to, to get personal for a second, you know, you know, down here in Australia,

22:14yeah, we're not entirely sure that we've got enough jet fuel in Australia to get us through the end of April. I'm supposed to be going up to Asia at the end of April and I'm thinking about booking multiple flights because I reckon that by the time we get there, you know, we're going to be sitting, we're going to be in a situation where they're, they're canceling sort of 50% of flights out there. Remember, we, we live at the end of the earth and so when planes arrive, they don't have any, any gas left in the tank for the return leg. So, you know, unless, unless you can source fuel in Australia, you're not flying to Australia because otherwise you've, you've got a lot of metal that stuck in, stuck in Australia and airport. It's a good, it's a good thing you're a podcaster and a, and a new, a successful newsletter writer that you don't have to move as much. That is when you're, yeah, well, yeah, those, those days, those days are gladly over. The, you know, the 10 flights a week phase of my life was,

23:16not something that I really miss. But, you know, essentially, until, until I bought a whole load of agricultural commodities with Nico at the beginning of last week, you know, my, my portfolio was up to, you know, almost 50% cash gold and hedges, right? Now, gold obviously had a really rough week last week. I mean, before we go on to the, on to the, the FOMO hedge idea, Benny, any, any thought somewhere we can feel confident, you know, adding back gold. I think the selling's done here. It was a pretty violent move last week and even more violent with the miners. You know, it's funny because, you know, my pit and tweet is that I got, I tried to get everybody bullish a gold through two or three years ago. And like, I love gold. I bought gold 100 ounce physical bar in 2003 for $380. Praving gold is hard. Like, because the, the dynamics that drive gold sometimes real rates matter. Sometimes it doesn't matter. Sometimes it's just

24:20trust in like, but then, you know, if you remember, oh, eight gold went down pretty hard during the deleverging and then had resumed the move higher. I would guess that like, you just want to be like slowly accumulating gold on a buy bet on a dip like this, because I do think that like everything's setting up. The governments are going to print money to try and deal with this because auditions are linear. Ultimately, it's break it down even more simply, right? Last week, there were more sellers and buyers. Now, that is, that is not supposed to be a fissitious statement. I think that you've got surplus nations in the Gulf that have, you know, have got to sell stuff to pay for stuff because, you know, the cash, the cash has stopped flowing again. Back, the straits are closed, right? So I think, I think, I think you had, you probably, you probably had some sovereign selling there. Plus, you know, leverage on wind as well. But, you know, I think,

25:21you know, if we do get down to the 4,000 announced level, where are we opening up tonight? I don't open right now. GC gold futures. 4,500. Yeah. We're still, we're still, we're still, we're still quite a long way away. But, you know, I think, I think, you know, just by, just, just through price, my gold waiting in my B2 portfolio has, has, has dropped, you know, quite significantly since the beginning of the year. I haven't sold an ounce. But, you know, I'd, I'd be interested in topping that back up to sort of a high, high single digit percentage number if we got anywhere near 4,000. Anyway, that's probably the final idea. What's up? Back to the final idea. That's probably right. I think that's probably right. Like, I think, again, like, I don't want to, like, say anything about levels, like, oh, dude, people are going to buy whatever it's just like, if you, if you didn't, you want it on gold, you kind of relate to it. Like, now's your time to,

26:26like, deal with the deleveraging. And like, you got to buy when people are selling, you know, it's not comfortable because you're going to probably lose money on a nominal basis first before you make money. But like, often in really good trades, that's what you have to do. You know, you need to supply the best trades, the best trades feel horrible. I was talking about this in my, in my note yesterday. And, and we've talked about this before, you know, my, and we're actually, we should, we should talk about it. And, you know, I don't have an isda. So my, my credit hedge is via this product we've talked about, SJB, which is, it's not nearly as convex as your trade in, in high yield CDS. But I view it as cash plus a kicker in the end, in the end. And my game plan has always been that the point at which we do get a blowout in credit's press, I'm going to do 180 and flip into an up tiered HYG. Yeah. Maybe, maybe a double digit yield to maturity. Thank you.

27:32Yeah. Yeah. Yeah. I mean, that, that historic is, and as I've always said, when the time comes, it's going to feel like the last thing on earth that you want to do, right? And another thing that I and another thing that I would never want to advocate people doing generally is buying airlines. So let's talk about, let's talk about this idea. If you are, if you are, if you are like me selling, selling long risk assets and, and you, you know, have the fear of missing out on the other side, a couple of tweets that's going to send the spools up, you know, 150 points. I'll tell you what's going to go up a lot more than 150 points. These bloody airlines, right? I mean, this is a bit of a, this is a bit of a COVID redux play, but, you know, if you're selling long assets that you're kind of, you know, hating, hating having to do, well, think about, think about a tale in the airlines. I mean,

28:36you've seen the airline sector lose about 30% of market cap in the last few weeks, right? Now, that could, that could, that's, that's, you know, you could see jets, which is the airline ETF in the US. It's mainly US airlines, but it's got some international ones as well. The more exotic of you would be looking at some of the, the net energy importers and flag carriers around the world who have really been smoked by, by, by, by, by, by the events of the last few weeks. I'm not, I'm not advocating buying this stuff out, right? But you can buy a, a, a June, a June $30 call on jets, which is, and that, that strikes below where it was pre, pre, the, pre the turn. You can buy that, you can buy that for pennies at, at 37 implied vol, which is really, really not expensive. No, no, no, no, for what we're talking about, right?

29:36Like we're, we're saying, hey, what just happened in the last three weeks and spending like first broadcast right from the war zone is that oil's gone from 70 bucks, 65 bucks to 100. The S&P's got to hit some, but the airlines have actually gotten dunked on, and now airline prices are ripping higher. And it's not ripping high, and this is to go back what we were talking about about how oil going up is deflationary. Well, you know, people aren't just going to fly as much, you know? Like, yeah, Rupert's got some money. He was a, you know, a successful guy, but like, not everyone can just buy multiple flights. And, and, you know, like, there's just a problem when the price goes up. And so airlines are basically the epicent, it is actually kind of funny, Rupert you break around, but it's like, we're in COVID again, but it's like the opposite side, instead of demand, it's the supply side, like it's like basically demand goes to zero is COVID, and this is the supply gets shot. Do you remember with every piece of vaccine use, people were

30:37reaching for the cruise liners and for the airlines, right? It's, it's, it's, it's, it's the same thing, right? And so, so, so the takeaway is sell risk assets every single day, the straights full mues are still closed. And if you've got FOMO by some teeny calls on airlines, right? I think that's right. I mean, yeah, yeah, expect them to go to option heaven, right? But that's your, that's your sleep at night around FOMO. And that's our, that's our little gift to you guys for sticking around to the end of like that's the probably the optimal strategy for equity, especially, you know, most people are equity people, like that is the way you should do it. Like, hey, you you know, this administration thinks they've won. Like, you know, I've gotten data points that think so be done within two weeks. We'll see. There's the asymmetry. Who knows? Like, but the point is is the market wants to rally. It's oversold, and it's, it's, it's oversold in the worst way of like

31:40every day is down a little bit, because it's not down that much. And, and so, you know, basically, if your biggest worry is, oh, I'm going to underperform if the market rips. Well, this is the exact way you, you, you, you replace it, right, Robert? Yeah, absolutely. I just want to say that anyone that, that joined the live stream for porn and stayed for the call options on jets, you know, you deserve a medal. But I think that brings us to an end for another unmissable, um, Sunday show. Yes, let's do it live. We're out later, guys. Bye, guys.