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## On Being Greedy When Others Are Fearful….##

January 22, 2018 by James Whelan

A few weeks ago I put out a very simple note flagging the commodities space as our preferred area based on the following reasons:
1. USD weakness = commodity strength;
2. Copper strength = global bullishness = good for commodities;
3. Commodity Index is at a historic discount to the US index;
4. Commodity ownership = inflation hedge

All of this was done even before any mention of China and every weekend we take pause to consider if anything in our reasoning has changed.
It hasn’t. So we’ll keep going with it. In the interim China has shown that it’s still doing the thing that China always does. Accumulating diversified miners has been working and we will continue to favour that trade until the fundamental reasons for doing so change.

Now here’s the chart everyone’s been looking at this weekend and it’s found that beautiful place in being both bullish and scary at the same time.

We did it!

The US market has now set a record for the longest daily streak without a 5% pullback. That’s impressive no matter which way you look at it. Also a little scary if you see how far above the average it is and what usually happens after a sustained run.
I’m firmly of the belief that we are in a “melt-up” situation in the US with every last cent of value being squeezed out of markets.
The reduction in free money by Central Banks around the world & the Fed unwinding their balance sheet are both game changers.
However if I’ve learnt anything it’s that it’s easier to be bullish so instead of trying to time a correction just make the most out of the good days and keep an eye on the door for when the music stops.


There’s a very smart fellow that I follow by the name of Callum Thomas of and he produces some very good macro insight via easy to read charts. Simple people like myself require pretty pictures and this one above goes in part to helping my point about the US being a little stretched.
However, a P/E ratio is just a ratio and if there’s been a stretch of the “P” then it’s only because there’s expectation of the “E” catching up eventually.
My question is what sector is going to get the biggest lift in earnings over the coming year?
Putting it simply the freest of free kicks is based on the well known adage that banks & insurers usually do better in a rising rate environment. We’re still long US & Italian banks and again, will continue to be until it stops being a great idea.
Related: Everyone’s talking about US treasury yields and why should I be any different?

Courtesy @sunchartist

The above chart is a great display of just how significant this bond selloff is. (Remember bond yield & price travel in opposite directions)
The downtrending channel (Green line) that goes back to 1987 has been broken. I don’t have the desire to go into treasury yield in too much depth on a stinking hot Monday but with regards to its union with inflation please take a look at this below from IG’s Chris Weston.
He’s talking about maybe the USD being a potential buy here on impending rate differentials between our two countries. The 5 year “breakevens” (a great way to guage inflation expectations) is properly breaking up, as seen on the lower half of the chart. (FYI the upper half is 10 year ‘real’ treasury yields.)

Can you believe inflation is actually a ‘thing’ again? Ridiculous!

Thanks Chris.

Lithium: What Just Happened?

Now onto something troubling that happened late last week regarding a deal struck between monster lithium producer SQM & the Chilean government allowing SQM to quadruple their production there. The lithium market’s in a bit of a panic but there’s a few of us calmly taking a moment to look at what it all means.
I couldn’t sum it up better than an article on The Lithium Spot over the weekend that put it all into perspective. Anyone with an interest in lithium (which should be “all of you”) needs to read this ASAP before continuing to panic. 
Put simply (or “TLDR* as the kids are calling it), SQM can’t just flick a switch and flood the market with more lithium, and if they could why would they? They’d only be shooting themselves in the foot by doing so.
*Too Long Didn’t Read

Finally, there was a false alarm in Hawaii regarding a nuclear missile being launched in their direction.
That’s not the worst part.
The menu selection at the alert centre was so badly designed that the button for “this is a drill, everything’s cool” IS RIGHT NEXT TO THE “hide under your desk this is not a drill” button.
That’s also not the worst part.
The worst part is an Associated Press photo of the alert centre was dug up from July last year containing the password for the system. See below.
In years people will write books about this time we’re living in and none of them will truly be able to capture it.

As usual, Business Insider were all over it. Link here

Stay safe & all the best,

James Whelan & the VFS Global Macro Fund
Level 30 Australia Square, 264 George Street, Sydney NSW 2000
t +1300 220 360  | m +61 407 958 036 |



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