Unless you’ve been living under a rock, you would have noticed this years bearish and volatile performance for most risk assets. For me and my copy-traders, we have taken a relatively small loss of about 3 %. Compared to most major asset classes, I find that acceptable, but my intention was of course to do better!
My macro expectations for 2022 was simply put, inflationary and risk off. I was right in that regard, but some major trades failed anyway, and some worked out well.
The plan was to be long inflation assets and short growth. Overall that thesis was correct, but I could have done a better job implementing it. The bear market rally in the summer did for example cost us a lot, as I did not cover enough to dodge the temporary rip upwards. On a positive note, I am quite pleased with the overall performance of my equity shorts, VIX-trading and long bet on oil and gas.
Performance
As stated above, I lost approximately 3 % in 2022. A few details will be presented in the section below. My recession call of February followed by a firm change of assets and asset allocation, served us well as most long-only portfolios have lost a lot this year. The following assets year-to-date performances should highlight the difficulty for most investors in 2022.
- S&P-500 – 20 %
- Nasdaq – 33 %
- TLT – 32 %
- Gold + 1 %
- Bitcoin -64 %
- Ethereum – 67 %
What I am most pleased about, is the fact that I have managed to pivot between risk-on and risk-off with decent accuracy. I could have done a much better job dodging the counter trend moves, but overall I am content with the results. Below you will find my portfolio stats for its entire history.
A few trade details
Our equity short positions did good. I have traded in and out of them several times, and most of the positions did well. For example, the leveraged short SQQQ have realized a 15 % gain while the crypto shorts Microstrategy, Coinbase and Silvergate did 10 %, 10 % and 37 %. Our core sector-, high yield-, European- and Asian-shorts have also worked out quite well.
I did expect volatility to increase, so I have held several positions in short term futures for volatility, VXX. Those did good, resulting in a gain of almost 14 %. The problem with our volatility assets was the market makers, Flowtraders and Virtu Financial. Those businesses have historically done well in volatile markets, though not this time. As of now, we are holding a loss of 27 % in both equities. As both companies earn a lot of money, and trades attractive on most value indicators, I have chosen to hold them for a while longer. I do however accept that the purpose of the trade was not met. It was supposed to dampen the effect of volatility – it did not!
Our gold assets delivered similarly to the overall portfolio. Silver did very bad, with the metal itself being down approximately 15 % and the Pan American Silver miner was almost cut in half. I do however remain bullish precious metals and may add to the position if the momentum increases.
Our commodity assets are a mixed bag this year. Energy have been great when it comes to oil and gas, while the uranium trades would have been better if I had booked some gains earlier on. The worst performer was of course the Russia index ETF! I do not know how much I can expect to get back from that mistake.
I also failed a trade in the 20-year US treasuries ETF TLT. I did expect the growth slow down to result in lower long-term rates. That didn’t work out, and I had to pull the plug on that one. The loss was approximately 9 %.
Expectations for 2023
I do not have good news, and I am sorry for it. I do expect the US real GDP (adjusted for inflation) to decline to negative 2-3 % for both Q1 and Q2. This is a consequence of though comparisons year over year, and the growth slowing due to tighter monetary policy, inflation and of course the recent elevated interest rate. The central bankers are tightening into a slow down! It is obvious, and the yield curve is screaming recession at this point.
It is however not obvious what will happen with certain commodities as energy is a major input to almost everything. There is a lack of energy investments globally, and that creates problems everywhere.
If we are to return to the pre-pandemic normal, we do not have enough energy according to several analysts. China may open soon, but they may close again soon too as their constant lockdowns have kept them from gaining exposure to the virus. As I believe most people have realized by now, the most effective defence against covid is previous infection. China have had almost no exposure to the virus, something that may be troublesome for CCP going forward, considering recent protests and all.
If China wants to hurt the West, they should re-open their economy , and start big infrastructure spending, pushing up demand of all commodities like they did during the GFC. That would hurt the West as inflation would suddenly spike – again, resulting in even tighter energy supply, putting Europe in an even more difficult situation than they are already in. If China opens – and stays open, buying Asian equities while continuing to short western growth stocks seems prudent.
Due to the uncertainty of China, I am less sure about the global macro picture than I was at this point last year. If they do not fully open, I believe inflation will drop quite fast, maybe as much as being halved by the end of the summer of next year. Due to this uncertainty, I have reduced my commodity positions.
The volatility of inflation
Historically inflation have been quite volatile, and we have had two inflationary episodes since the great depression. As the debt to GDP ratio today is at a comparable level as during the WW2 era, I find the 1940’s inflation a better guide than the 1970’s inflation. As the graph below show, in 1941 og 1942, we had 10 % and 9 % inflation followed by three years of moderate 2,5 % inflation. Then it exploded up again, something I have no trouble anticipating will happen this time around as well. I believe the coming recession will kill the inflation for now. Then I believe the politicians will ignite it again, trying to revive the economy. Of course this depends on China, as stated earlier.
They can’t continue to ramp up interest rate either, as debt service cost eventually will bite them hard. During the 1940’s, they had high inflation and low rates. This was how they reduced the 120 % debt to GDP of the post WW2 era to 35 % in the 1980’s. During that time, government bonds were called, “certificate of confiscation”, as inflation took away the government bonds nominal gains, and then some!
Crypto assets
The whole crypto asset space is too volatile and too uncertain as of now. I will skip writing about it this time, as I do not believe there is any good risk reward trade to be had until we have dealt with the recession and the crypto exchange trust being vaporized. I would like to see a cleanse of scammers and bad business ideas. We had so many issues this year, FTX being the most horrible scam I have ever heard about!
I will however keep tracking the crypto market using my algorithms as a thermometer. I am still bullish long term, but I will not let that confuse my current macro thesis. It is the particular setup that matter, not whatever bullish narrative one may extrapolate far into the future. When growth is slowing together with tightening monetary policies, no one in their right mind should speculate on crypto. This is not about narrative. It is a fact!
Conclusion
I do expect inflation to drop and the academic types to declare victory as “transitory” finally materialize. The recession will break inflation’s back while the conflict of the West and East continues. If China fully opens, inflation may return with a vengeance, making it very difficult for policymakers in the West. My intentions are to go long commodities if this happens! I believe growth assets like technology and consumer discretionary will continue to struggle in this environment as inflation will force central bankers to tighten even further.
As the recession is playing out, shorting growth and junk bonds seems obvious. Holding some precious metals makes sense too, especially with gold volatility as low as now while the asset itself makes higher lows! I do believe Asian equities may be ripe for a long soon, but I will be careful with China. I do not want to hold another “cancelled” market. Russia is enough!
Energy could move massively in either directions. Long term I am very bullish. Short term I am neutral to bearish.
I wish all of you the best for the coming new year and thank you for reading.