May 28 Biweekly Strategy Webinar Q&A
Below please find subscribers’ Q&A for the May 28 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: What is share price dilution?
A: When a company issues new shares, it dilutes the existing shareholders. So, if you owned 10% of the company before, and somebody does a 10% dilution, then you only own 9% of the company afterwards. Dilutions are usually bad for share prices, because it means everybody owns a little bit less. More shares mean lower prices. Companies do it to raise capital, and clearly, MicroStrategy (MSTR) was using the Las Vegas crypto conference as a means to promote the new issue, which they will then use to buy more Bitcoin. Just to show you how insane their business model is: they’re paying 10% to borrow money—10% guaranteed dividend on the new preferred stock—and using it to buy zero-yielding Bitcoin. So to me, that makes it a Ponzi scheme and the short of the century, and that’s why I put on a double short position, but I was too quick to also go back in on the long side. So, live and learn. Occasionally, you get snake bit.
Q: Down days for stocks have not resulted in flight to safety bids on bonds. Do you see this trend continuing?
A: Yes, I do. That is happening because of the “Sell America” trade; people are abandoning all their investments in America. Normally on a down day in the stock market, you get an up day in bonds. Now though, we’re getting down days in stocks and down days in bonds at the same time. That should not be happening, which means we are trading in a new paradigm now, and new paradigms can be very risky to trade because things don’t behave the way they have historically, and that’s really been going on all year. So get used to it. If you don’t like it, find another line of work, find another way to make money. 90-day T-bills are really good at a 4.4% risk free yield with deferred taxation.
Q: What about holding cash?
A: Whenever you own cash with a broker, you are taking on the credit risk of that broker. If the broker goes bankrupt, like MF Global did in 2011, it’ll take you 3 years to get your cash back. But if you own 90-day U.S. Treasury bills, you can order a bankrupt broker to just transfer your bills to another broker. So that’s why I always recommend 90-day T-bills over cash holdings or money market funds in brokers. This is what every hedge fund does.
Q: Why is the U.S. Stock market lagging the German DAX Index?
A: It’s not because Germany has suddenly taken the lead in technology.
You always want to invest in the country that is stimulating their economy, borrowing to stimulate their economy, and increasing their national debt, because that much of that money ends up in the stock market. We’re doing the opposite here in the US, slowing the economy and reducing the national debt. We are slowing down our economy with higher taxes and higher prices through the tariffs. So that explains a US market that is down YTD and a German market that is up 40%. They are also recovering from a 15-year oversold position. Basically, all the money in the world went into the U.S. markets since the great financial crisis of 2008-9, and now everyone’s overweight the United States, and all of a sudden, it’s not such a great place to invest, so that is what’s happening.
Q: Are there any strong transport companies that could take advantage of the tariff confusion?
A: The answer is no. Transports is one of the worst things to own in a recession because things stop moving. You’ll see when we get to the transport section that the charts are bearing that out. Look at (UPS), (UNP), and (FDX). The only area I know where there’s been a sudden burst of business is shipping containers from China. With the tariffs on again and off again, shippers have responded to the huge swings in their business from zero to enormous demand, as people try to ship in these little time slots that they’re getting. They’re getting enormous demand for containers to get to the U.S. during these 30, 60, or 90-day windows that have opened up.
Q: Is the Fed going to lower interest rates soon?
A: No, they are not. I doubt they will lower interest rates this year and may not even do it for a year until the new Fed governor is appointed, because the primary fear of the Fed right now is inflation caused by tariffs. As long as tariffs are on the front burner, there aren’t going be any interest rate cuts.
Q: Should I sell in May and go away?
A: Yes, sounds like a great idea to me. That’s why I’m 60% short.
Q: How about put spreads in the iShares 20+ Year Treasury Bond ETF (TLT)?
A: Too late. You really only want to do put spreads if by some miracle we get a rally like this year’s highs, like $94 for the (TLT), which is where we were really at only about a month ago; then, yes, that would be a great idea. Down here at $85, no thank you. Buying low, selling high, that’s my new trading strategy. I’m thinking of patenting the idea. It’s a revolutionary new concept.
Q: Are 90-day US Treasury bills tax-free?
A: No, they are not— they are taxed as ordinary income when they mature. Only municipal bonds are tax-free. Those are issued by your local town, county, and state.
Q: Is gold going to rise to $3,500 in the next year?
A: My target for this year is $4,000. Over the next 2 years, it’s $5,000. It really is the only flight to safety asset out there that is still working. Bonds no longer work, and the U.S. Dollar no longer works.
Q: Why is the Statue of Liberty in jail?
A: Because we are running such huge deficits.
Q: When and why will foreigners buy our bonds again?
A: When all current government policies are reversed—when we end the trade wars and confidence in the U.S. dollar is restored, and we stop engaging in economic warfare against our trading partners. One of the reasons Europeans are pulling money back out of the U.S. isthat they’re moving out of a depreciating currency into an appreciating currency—the Euro. So, that is a big incentive for Europeans to take their money home.
Q: What are the odds of revaluing the U.S. gold reserve to a higher price than the current $34 an ounce that it is currently valued at?
A: I have no idea. This is what Franklin Roosevelt did to help end the Great Depression in the 1930s. He revalued the US gold holdings from $28 to $34 and used the extra money created to feed people and launch thousands of stimulus projects across the US. You see them in every American city, and I hike on the High Sierra trails built back then all the time. If Roosevelt hadn’t done that, five million Americans would have starved to death. It is possible that the present government will sell gold reserves in order to finance tax cuts for the wealthy. A revaluation to today’s gold market price of $3,347 per troy ounce from $34 would increase the value of the Treasury’s gold holding 98 times from $8.9 billion to $872 billion. So, that can’t be ruled out. Please don’t give them the idea. No one is starving today.
Q: What are the chances that the U.S. goes back onto the gold standard?
A: We went off the gold standard in 1934 because the growth of the global economy was limited by the growth of gold supplies. In fact, global gold supplies are shrinking as we run out of productive mines, and that is why the price is going up. So, if you’re looking to cause another Great Depression, that would be a good way to do it, going back on the gold standard. I mention this because one of the candidates for Fed Governor next year is Judy Shelton, who wants to put the U.S. back on the gold standard. She was voted down by the Senate last time they tried to appoint he to a Fed position. Having been a gold trader myself for 55 years, I’m familiar with all of these gold arguments. That is why we use paper money instead of gold-backed money. You can print all the paper money you want, but the average cost of mining new gold, I think, is around $1,600/ounce and rising fast. So, that greatly limits your supply.
Q: Did Nixon take the U.S. off the gold standard?
A: It was actually a two-step process. Franklin Delano Roosevelt banned the private ownership of gold in 1934, and then Nixon took us off the gold standard completely in 1972. That led to an 80% decline in the U.S. dollar against European currencies. I was a currency and gold trader in those days, so I remember those that well—gold went from $34 to $900. That was a great trading market, and most people my age (there are a few of us left) cut their teeth on trading currencies and gold. There were a lot of currencies to trade before the euro was created. You could do things like go long Italian lyra, short Danish mortgages, and all kinds of stuff, so all that business is now gone.
Q: Why hasn’t silver (SLV) broken out yet?
A: The answer is, silver is much more tied to the economy than is gold, because there’s a lot of demand from jewelry, which nobody buys in recessions. Solar, which is losing its subsidies, and also central banks, don’t buy silver for reserves—they buy gold. I’m sure someone out there will run out there and say, “But wait, the Bank of Botswana owns a ton of silver.” Sure, but it’s not a major central bank play, and they’re a major part of the argument to buy gold.
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 12 years are there in all their glory.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
