Mad Hedge Bitcoin Letter
September 23, 2021
Fiat Lux
Featured Trade:
(DIFFERENT WAYS TO PLAY CRYPTO)
(BTC), (GBTC), (GLD), (AAPL)
Posts
One might postulate that the price of bitcoin and Chinese housing has no relevant correlation with each other.
Think again!
Granted, Chinese citizens aren’t denominating their mortgages in bitcoin to snap their ritzy Shanghai townhouses overlooking the Bund.
I don’t mean that.
But Bitcoin is an asset just like stocks, bonds, and commodities and is exposed to one-off events that shake out the financial system.
What’s brewing in the Middle Kingdom?
Chinese biggest property builder Evergrande teeters on the brink of financial devastation.
Add it up, Chinese bank deposits are $35 Trillion, more than 2x the US.
Would any Chinese financial crisis lead to an epic flight to fiat alternatives?
Does nobody recognize that this is a planned liquidity drain of the property market in China by the CCP?
All escape "exits" have already been shut. You can't even buy paper gold in China either - forget Bitcoin!
So I don’t believe that the potential disorderly selling of Chinese flats or the bust of a major property developer would end up boosting the price of Bitcoin because the Chinese government has made it abundantly clear that bitcoin is a red line for its citizens.
If there is a 20% dip in Chinese property prices — Chinese would believe that’s a once-in-a-century buy the dip type of event.
That doesn’t mean that some won’t try to sell on the down low and get their money out of China through hell or high water.
Some certainly will — China made it clear they didn’t want their citizens investing in overseas assets — I know of the odd millionaire spinning out a random credit card to put a down payment on a house in Vancouver.
What this does scream is policy error big time — an overtightening that could result in a hard landing that is ruinous for global growth.
That would be the worst-case scenario and I would put that at 10%.
Why is this company systemically important?
Evergrande was once China’s darling real estate developer. Now, it is gagging on debt.
It was founded in 1997 by Xu Jiayin. It has completed around 1,300 commercials, residential and infrastructure projects and supposedly employs upwards of 200,000 people.
The company’s success came because it was aligned perfectly for the parabolic boom in real estate that has been driven by the last two decades of staggering Chinese growth, growth for a country that is unparalleled in all of modern human history.
The tragedy in all this is that 1.5 million Chinese have put deposits down on homes that haven’t been built and this is more often than not their entire life savings.
Most likely, it is them who will hold the bag and lose their deposit.
Better them than me.
For a soft landing to happen, the Chinese government must pull out all the bells and whistles.
Even though I categorize this as a quasi-gray swan, opposed to a solid black swan, it is highly likely that it won’t spill over into the broader market, and if we do get a large bitcoin dip, bitcoin buyers finally are gifted a cheaper price to enter bitcoin.
These opportunities are few and far between recently, at least in 2021, and I can guarantee that MicroStrategy CEO Michael Saylor is already ginning up his next bitcoin purchase usually done with his own company's corporate paper.
Limiting the fallout will be easily done if the Chinese government flood the right channels with liquidity, plugging the holes before they become unpluggable kinda like our own debt ceiling mess.
The larger issue is to ponder — is this the tip of the iceberg?
The silence and a lack of major actions from policymakers is making everyone nervous, but most likely they are sorting it out behind the scenes.
The response so far has been largely limited to the People’s Bank of China, which injected a net 90 billion yuan into the banking system. It added another 100 billion yuan on Saturday.
Evergrande has been mired in $300 billion worth of liabilities, more than any other property developer in the world. It’s a beast in China’s high-yield dollar bond market, accounting for about 16% of outstanding notes.
A lackluster response to an already expensive market could be costly, with real estate accounting for 40% of household assets in China. Data last week showed home sales by value slumped 20% in August from a year earlier, the biggest drop since the onset of the coronavirus early last year.
Isolating Evergrande is almost a point of emphasis for the Chinese Communist Party and the mission is to harangue them as a scapegoat for sky-high property prices.
They are the fall guy.
This is more of a political show than anything else — a show of power — letting the world know that this economic pain is nothing to even bat an eyelid about.
Bitcoin, perceived as a riskier asset along the risk curve, is not immune from a sell-off and a flight to safety has taken prices down around 10%.
I have full faith in the Chinese government and its authority to nip this in the bud, and around the $40,000 level, the price of Bitcoin should offer resistance.
If Bitcoin holds $40,000 and a resolution to this is announced, expect a 10% surge in Bitcoin prices.
This should not be treated as anything more than a standard 5% equity drop that is equivalent to a 10% crypto drop in prices.
Book some of those gaudy profits you made in the first half of the year to drop your cost basis while deploying capital at lower levels.
THE AFTERMATH OF GOLD MINING IS DEVASTATING
Global Market Comments
September 10, 2021
Fiat Lux
Featured Trade:
(SEPTEMBER 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (PLTR), (TSLA), (FCX), (PYPL), (TAN), (FSLR), (SPWR), (GBTC),
(ETHE), (BRKB), (USO), (UNG), (HD), (IBM), (SQ), (AA), (UBER), (UROY)
Below please find subscribers’ Q&A for the September 8 Mad Hedge Fund Trader Global Strategy Webinar broadcast from the safety of Silicon Valley.
Q: Do you think we’ll see the under $130 in the United States Treasury Bond Fund (TLT) before January 2022?
A: I don’t think so; I think we could go below $140, maybe below $135. But $130 would be a brand new low in the move and would be a stretch. We basically lost 4 months on this trade due to the countertrend rally, which just ended. I would come out of your (TLT) $130-$135 vertical bear put spreads right here while they still have time value, but keep the $135-$ 140s, the $140-$145’s, and especially the $150-$155’s. The idea was that you just keep averaging up and up until the market turns, and then you make back any loss. We move into accelerated time decay on those deep out of the money put spreads in December, so I would take the money and then offset it with the gains you made in those positions.
Q: Does Palantir (PLTR) look like it’ll hit $100 by year-end?
A: No, the stock has been dead, and management has not been doing anything to promote it. We did get a move up to $45 but it failed. It’s still a great long-term idea as they are growing at 50% a year. Also, they did buy $50 million worth of gold bars as a hedge. But as a short-term trader, Palantir isn’t working. If you have an options position on that I would probably get out of it or roll it forward to 2023.
Q: PayPal (PYPL) is fluctuating up and down with Bitcoin. Do you like PayPal?
A: Absolutely, but it obviously is being dragged down by Bitcoin. It is a temporary down move caused by a one-time-only event in El Salvador. Buy the dip in PayPal. It is a leader in the whole move into a digital financial system.
Q: When is Freeport McMoRan (FCX) likely to move up?
A: As soon as we shift out of the tech trade into the domestic recovery trade, which could be in weeks or months at the latest. We’ll switch from one side of the barbell to the other.
Q: Where do you see Tesla (TSLA)?
A: It keeps going up, so my guess is we top $800 by the end of the year, and maybe $850. The big news here is that Tesla has gone into the chip business, making its own chips in-house which is easy for them to do in Silicon Valley. But it does make them the first global car maker that is also a chip maker, and therefore the stock deserves a higher premium. The stock went up $30 on the news and is great for all Tesla holders. I hope you have the 2023 LEAPS.
Q: Too late to buy Tesla LEAPS?
A: Unless you’re really deep in the money, with something like a $600-$650; but the return on that will only be about 50% in 2 years.
Q: The Biden administration just set a goal of 45% solar by the end of 2050. Which solar stock should I buy here?
A: The problem with solar is as soon as Biden started winning primaries, every solar stock took off like a rocket, figuring he’d win, which he did. All of them went up 6-fold or more as a result of that, then gave up one-third of their gains and are now moving sideways. So if you look at the charts, the classic one to buy here is the Invesco Solar ETF (TAN), a basked of the top solar companies. All of these peaked in February and have been doing sideways “time” corrections since then, which means they eventually want to go higher. The other two that have charts that look like they’re finally starting to break out to the upside are First Solar (FSLR) and SunPower (SPWR) after 8 months of consolidation.
Q: Why is the second half of September almost always bad? Is it due to institutional repositioning?
A: Not really, the cash comes into the market at certain times of the year, like end of the year, beginning of the year, and end of each quarter. September seems like the month where they kind of just run out of money. But there's actually also a historical reason for that. For most of American history, we had an agricultural economy. Farmers were more than half the population, and the period of maximum distress for farmers is September, where they put all the money into seed and fertilizer and labor into the field, but they haven't harvested it yet. So, traditionally, they always did a lot of borrowing in September, which caused a cash squeeze and interest rate spike, and a stock market panic as a result. So that's the history behind weak Septembers and Octobers. Once the farmers get the crops in and sell them, that resolves the cash squeeze, interest rates fall, and it’s straight up for stocks for the rest of the year most of the time.
Q: SPACs (Special Purpose Acquisition Companies) seem to be losing interest. Do you recommend any or stay away?
A: Stay away—they’re all rip-offs and are simply a means by which managers can increase their fees from 2% to 20%. That's what they did with virtually all of them. This will end in tears.
Q: What's your feeling about satellite internet phone service replacing current internet cell service in the future?
A: It’s in the future, but it may be 10 years off in the future. If it happens sooner, it’s because Elon Musk was able to deliver cheap rocket service. He already has 20,000 satellites in the sky for his own Starlink global cell phone service for internet access.
Q: How does one buy a Bitcoin stock?
A: Well first of all, I highly recommend you buy the Mad Hedge Bitcoin Letter, which you can get in our store. But there's also the Greyscale Bitcoin Trust (GBTC) which allows you to buy a Bitcoin proxy very easily. I’ll even honor the discounted $995 price for my Bitcoin Letter for another day by clicking here.
Q: Is Warren Buffet and his value philosophy something I should be following, or is he outdated?
A: I have to say, buying stocks cheap with high cash flow will never go out of style. Currently, Warren’s big holdings are domestic industrials, banks, and Apple. All of those look like they will do well moving forward. Buffet’s Berkshire Hathaway (BRKB) has a built-in barbell element to it and is the subject of one of our LEAPS recommendations which has already been hugely successful.
Q: Is Home Depot (HD) at $330 a bargain?
A: Well, we just had a selloff and it bounced hard, and now we’re waiting for the domestic post delta recovery. It's hard to imagine both Home Depot and Lowes not doing well in this scenario.
Q: What will happen to tech when interest rates rise?
A: My bet is they go sideways to down small until you get another peak in interest rates (the next peak will be at 1.76% in the ten year US Treasury bond, the 2021 high) and once you hit that, then tech will take off like a rocket again, and in the meantime, you play the domestics while interest rates are rising. That is the game and will continue to be the game for a couple of years.
Q: Should I buy IBM (IBM) on a turnaround story?
A: No, I've been waiting for IBM to turn around for 10 years. They just don’t seem to get it. What they do is whenever a division starts to make money, they sell it and get cash like they did with the PC division and this year with its infrastructure business called Kyndryl. So, they’re not leaving any growth for the actual IBM holders.
Q: Do you like Square (SQ) at $256?
A: Yes, and that would be a great 2023 LEAPS candidate. All of the digital settlement payment systems are going to do well in the Bitcoin future. They also own quite a lot of Bitcoin. They are leading the charge into a digitized financial system.
Q: What’s a good Ethereum ETF?
A: The Greyscale Ethereum Trust (ETHE) is just the ticket.
Q: So you avoid energy, meaning oil and gas?
A: Yes, alternative energy we like, but it’s had an enormous run already so after a 7-month time correction it’s probably safe to get into solar. Traditional oil and gas (USO) is in a long-term secular bear market that started 13 years ago and will eventually go to zero. Last year’s visit to negative futures prices is just a start. Since 2020, the energy market weighting has gone from 15% to 2%.
Q: Is Natural Gas the only rational core fuel for the grid?
A: No, natural gas (UNG) still produces carbon even though it’s only half the amount of oil. This all gets replaced by solar in the next ten years. That’s why I tell people to stay away from energy like the plague. Would you rather buy natural gas at $4.50/btu or get solar electricity for free? Those are basically going to be the choices in ten years.
Q: Who is the biggest Aluminum producer?
A: Alcoa (AA) which we are a buyer on dips. By the way, if we do have to build 200,000 miles of long-distance transmission lines to cover the electrification of the US energy supply, all of that has to be made of aluminum. You don't use copper for long distances, you use aluminum (aluminum for you Brits).
Q: Would you buy Uber (UBER) at $40 today?
A: Probably, yes; it had a nice 40% correction. However, you are buying into the battle over gig workers—whether they should be treated as full-time or part-time workers. That is going to be a continuing drag on the stock until they win.
Q: What do you think of meme stocks?
A: You're better off buying a lottery ticket. Even with a low payoff, you get a 1:10 chance of winning on a $1 lottery ticket. Meme stocks could double or go to zero with no warning whatsoever—there’s no logic to this market at all.
Q: What do you think of Uranium?
A: Three words come to mind: Chernobyl, Fukushima, and Three Mile Island. I think uranium's time has passed, even though China is building a hundred nuclear power plants. It’s just too expensive to compete against solar on a large scale and impossible to insure. If you still like Uranium though, the Uranium Royalty Corp. (UROY) has had a nice pop recently. But the issue is that nuclear technologies can’t keep up with solar and digital. And they blow up.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
