By Bradley Parkes FCSI, P.Geo
January 2019
For 2019 the distribution dates of the quarterly newsletter will be the following:
January, May, Aug and November.
Blog posts and previous editions can be found at http://www.economisms.com/blog/
Quarter 3, 2018 Investment Ideas
These ideas are not investment recommendations but just a model to track whether the ideas have proven worthy of the time you spend reading this report.
USD – DLR.To/UUP.US
Gold – GLD.US
Quarterly Results
These ideas are not investment recommendations but just a model to track whether the ideas have proven worthy of the time you spend reading this report.
Idea | Opening July 1, 2018 | Closing Jan 11, 2019 | Return (in CAD) | Return (in USD) |
UUP.US | $USD 25.11 | $USD 25.36 | 1.00% | |
DLR.TO | $CAD 13.13 | $CAD 13.35 | 1.64% | |
GLD.US | $USD 117.46 | $USD 121.80 | 4.56% | 3.69% |
Total Q3 &Q4 Return* | 3.10% | 2.35% |
*Assuming an equal weighting of each investment and bought at the open of the period and sold at the close of the period.
^^ Stopped out at the maximum mandatory -15% loss.
Results from Inception

The above chart shows the return on $1 invested since inception vs. various benchmarks in both CAD and USD. The portfolio returns represent investing and reallocation of assets to new ideas only at the beginning of the quarter. This is the buy and hold return.
Results
In the Q3/18 report I had indicated the next report would be released in early October. However, as October approached it appeared that it would be an interesting month and so I decided to wait and see before writing this missive. As Jesse Livermore was famously quoted, and I paraphrase, it is in the sitting that generates the return. Based on my view of what his transpiring sitting seemed to be the correct choice of action. Society has tried very hard to condition this view from us, but doing nothing is one of our options.
October has a history of being a volatile month and with the recession call made in the Q3/2018 I expected the volatility to be on the higher side. I have marked to market the portfolio as of the end of the first full trading week of January. I believe the ideas presented in this edition have are not near the end of their usefulness. Timing is less important than exposure.
This report is an analysis of global macro-economic trends. The only way to track the analysis of these trends is through investment ideas. These are not investment recommendations but ideas on the trends I believe that are developing in the world.
The way portfolio ideas will be evaluated is by acting as if we closed out each idea at the end of the quarter and either move on or re-enter. Each idea should have a maximum 15% loss on weekly closing basis. A portfolio idea should be abandoned and sold if it declines 15% because it was wrong. My discount broker charges me $9.99/trade so transaction costs should not alter the returns too much. The reason we close out each quarter is that I never want to be able to claim that “I sold that six weeks ago at the peak before it declined” because only liars sell at tops and buy at bottoms. Each one of my ideas should be good for at least a quarter and likely longer. Should the idea still have merit we will re-enter the idea at the beginning of the next quarter.
The portfolio returned 3.1% CAD
in Q3 and Q4, following a 2.37% CAD return in Q1/2018. The returns in USD were -2.35%
following -4.03% US return in Q4/17. In the time period since the idea portfolio
was initiated the return has been 20.5% CAD and 17.5% in USD. Over that period
the TSX has lost 0.9%, the S&P500 has risen 22.9% and the DOW has returned
33.0%. Indexing has been a better idea than active management. There have been
a number of articles on passive indexing being the next bubble and whether
these returns can continue. However, the portfolio in Canadian Dollars has
outperformed the TSX index by 20% and the USD portfolio is catching on the
S&P500. I expect by the end of 2019 this gap to have closed. This portfolio
is a quarterly hold idea generator with the goal of generating a real return by
participating in medium to long term trends and so timing is less important
than exposure. The results are hypothetical and not investment advice or proof
of success.
New Ideas (bolded) and Re-entered (not bolded) trades:
Idea |
USD – DLR.TO/UUP.US |
Gold – GLD.US |
Gold Stocks – GDX.US/XGD.TO |
This quarter I have included both CAD and USD denominated ideas (when available). If one were of the opinion the USD will strengthen, Canadian investors should investigate the USD denominated option and vice versa for US investors if they believe the CAD will strengthen vs. the USD. If one is ambivalent on the currencies and believe they will be range bound choosing the ETF in the local currency to eliminate currency risk.
These ideas are not investment recommendations but just a model to track whether the ideas have proven worthy of the time you spend reading this report.
Viewpoint
Last month I stated:
“This quarter the report is going to be a little different than it has been in the past. Previous reports included macro ideas and ways to invest in these ideas. As you can see from the first few pages of the report I only have two ideas and they are contrary to each other. The reason for this is my spidey sense in tingling. Back in 2005, I had the same feeling. I read a lot and sometimes I feel I learn things by osmosis. This learning by osmosis sometimes leads to strong intuitions towards issues I don’t quite understand.
Psychology Today has published a number of articles on when you should listen to your gut and trust your instincts. Humans developed intuition as a survival method. Those who had better intuition may have not lead their tribe into a predators trap. This would have passed on the genes of those who had better intuition skills more often than those who did not. Over time society began to refer to intuition as listening to your gut. The human stomach is referred to as the enteric nervous system. It is located in the tissue lining the esophagus, stomach, small intestine and colon. This network of neurons and neurotransmitters send messages similar to how the brain has. The stomach actually has a larger network of these signal senders than the spine and is only second to the brain. Doctors refer to the gut as the second brain. This is what produces butterflies and gut feelings.
Why am I a going into anatomy in an investment newsletter? It is because I have a gut feeling. It is the same feeling I had in 2005. That year I wrote a paper entitled “The Case for a Global Recession in 2006”. The recession began in December 2007. I admit I was early. I was also young and yet to understand the famous quote by Rudi Dornbusch:
“In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”
Nevertheless heading my recommendation would have missed the final rally year but saved a good deal of stress and portfolio damage. I do not know if I will be as early this time. As I have gotten older I have learned patience. This gut feeling began ticking a little while ago. The ideas in this newsletter have focused on late cycle ideas…
I believe the synchronized global growth, which is currently breaking down, is a sign that the end of this expansion is near.”
My view of recession is still the thesis I am following. I am not a believer in the Great Man view of history and believe the upcoming recession has nothing to do with Donald Trump. I do believe Trump, as a real estate developer, is aware that recessions tend to happen every decade and is trying to delay the recession and find a scape goat. Multiple tax cuts are an attempt to juice the economy and push the recession to the future. Fed Chair Jerome Powell is the scape goat. Ultimately, Trump will not be able to change the inevitable.
I think it is too late to be in stocks. Back in the very first edition, May 2015, of this publication I wrote:
“[the] DJIA are likely going to peak at a level considered obscene…DJIA = 22,000. This trade is the breakdown of European socialism and will violate cheap/expensive market metrics as money flees to where it seems “safe”. It may not seem rational.”
At the time the DJIA was trading at just below the 18,000 level. By the Oct 2016 report I moved the upper range of where I thought the DJIA would peak to 25,000 writing:
“the S&P500 and DJIA are likely going to peak at a level considered obscene…DJIA = 22,000-25,000. This trade is the breakdown of European socialism and will violate cheap/expensive market metrics as money flees to where it seems “safe”. It may not seem rational but capital tends to flee the battlefield for safe harbours.”
Fleeing the US indices before the ultimate peak has caused the portfolio to lag the indices, however, times of transition is the environment I believe that will allow the idea portfolio to catch up. Remember it always looks the best at the top.
Interesting Charts
The following is a collection of charts I found interesting and all have to do with interest rates.

Interest rates are near the bottom of the range for an almost 700 year period and below anything seen in the last 150 years.

The degree of tightening by the FED is still below the level where on average a recession starts. However, it is above a few tightening cycles.

The global yield curve has inverted.

Review of 2018 Guesses and How They Apply to 2019
In my January 2018 Outlook I wrote the following
“Recessions tend to start after the index has fallen from new highs. This condition has not occurred yet. The business cycle is late stage but I do not expect 2018 to be the recession year.
… This is the stage where commodities outperform. Recently there has been a lot of talk about a “Melt Up” in equity prices before the crash. I am sympathetic to this view. I believe the expectation for US tax cuts will create the sentiment to push equity prices to unsustainable levels. I believe the tax cuts will under deliver and the eventual realization of this will be one of the causes of the next decline.
This stage of the business cycle and the synchronized growth should push oil to $75-80/barrel by year end. Last year oil finished at $60/barrel, $2 below my year in forecast. You can see my charts in this post. The post also identified a $74/bbl target. Elevated oil prices is one requirement for the next recession….
The second requirement is rising rates. As the chart above shows rates and oil prices rise together into recessions. I think the FED will raise rates 3-4 times in 2018. This along with oil should set the stage for the 2019-2020 recession….The US dollar was expected to rally last year. It fooled many people including myself. It appears the USD is at the end of its up cycle.”
In analysis of the above forecast the expectation that 2018 would not be a recession year was accurate. It also appears the view that the business cycle is a late stage is on the mark.
Early in the year commodities did outperform the S&P500, but by mid-year significant underperformance began.

The market also did begin a decline in 2018, whether it has to do with the realization that the tax cuts under delivered is unknown. I believe the decline in stocks is a leading indicator of future weaker economic growth. The old “the stock market leads the economy by 6-9 months maxim”. I think that commodities peaking in mid-2018 also support that the business cycle has moved to past the peak. The outlook for a 2019 recession found in the Q3/2018 report is still the way I am viewing current events.
West Texas Oil did reach $74 and failed to break that region three times. That price is significant as it was the level oil broke down from on the OPEC Thanksgiving decision in 2014. At that point I became bearish on oil (see here). A significant factor in my thinking is I believe oil is still working off the excess of the 2001-2009 bull market and 2009 bubble.
Oil prices (all closing prices) began 2001 at $18.20/bbl and finished the run at $139.69/bbl, price multiplied 6.67 times. Oil then crashed to $31.10/bbl by late 2008. The next rally took oil to a high of $113.03/bbl, an increase of 2.63 times. This price peak was approximately 80% of the previous high. James Montier discussed the idea of echo bubbles in his edition on behavioural finance. He determined the echo bubbles reach about 70% of the previous high. To me 80% is not too far out of the realm to suggest the 2008-2014 period was an echo bubble. After the collapse in price in 2014 oil bottomed at $29.90/bbl and rallied to $75.37, an increase of 1.52 times. This peak is approximately 67% of the previous high, another echo bubble bounce. Of note each up cycle has been shorter while the down cycle longer. By the end of 2019 or in early 2020 the price of oil could be below $25/bbl. This down trend will likely last longer than the previous one.

The following chart is from @HK55 on twitter. I made a slight alteration because I don’t agree with his timing, but I do agree with the general chart. If it proves correct it does suggest the 2022 period on will be a final large bull market for oil. I still subscribe to the view of Phil Verleger about 3 booms in oil from 2000 to 2030 (I hope I am remembering his view correctly) followed by the final transition to electricity.

The expected inflation did not materialize as for two years in a row I got the direction of the USD wrong. It’s a 50/50 chance I and I got it wrong both years. That’s inexcusable. I plan to stick with my view because third times a charm? The late cycle of the business cycle developed faster than I expected and the USD strength came earlier than I believed. I will discuss this further in the next two sections. In the short term it appears that USD liquidity has increased enough to warrant a decline.

As well as on the chart the USD has broken down from an ascending triangle pattern and its relative strength vs the currency basket has been weaker. For now this does not seem to be a topic of discussion.

I think there will be 2 rate increases in 2019, less than the expected 3. In the past I have shown how oil and rates rise together into recessions. I think oil has peaked and now rates will peak next. I think by mid-year 2019 it will be obvious that the economy cannot support any more rate increases.


Weakness can be seen construction materials which are making lower highs and lower lows.

As well as in the hotel sector. The occupancy rate, RevPAR and Average Daily Rate have all peaked for the cycle – so far.

The stock to bond ratio and equity recession model are flashing warning signs.


Not all indicators are negative. Korean exports have surged early in 2019. Korea is one of the most open countries in the world and its exports are looked upon as a barometer for global trade.

The leading indicator to coincident indicator ratio has also not shown the peak it normally does prior to recessions.

In addition port activity and trucking rates hare still trending higher.


In the end 2018 was not too different than I expected. I certainly did not call the peaks and bottoms with any accuracy or really any effort. The portfolio had a positive return (from the Dec 31/18 to the Jan 10/19 close) in CAD of 5.5% vs 7.8% decline for the TSX and decline of 1.77% in the USD portfolio vs. a decline of 2.92% on the S&P500 and 2.9% decline on the DJIA.
For now the plan is to attempt to break even and play defense and prepare for the 2019-2021 recession. This one will be the opposite of the last. I will go into this topic further in the next two sections.

A Little Back Ground
Why do I think gold and the USD will rally together when they are normally inversely correlated? In short, the change in trade policy by the US does not support the post Bretton Woods monetary system, or the dollar standard. This system was designed for the US to export dollars and then have them recycled through the Treasury in the form of the US selling debt. The Dollar Standard requires the US to run trade deficits and budget deficits for the system to work.
Under the gold standard, gold exchange standard and Bretton Woods, debt could be extinguished. What do I mean by this? Convertibility. This is not to say these monetary systems were superior to the Dollar Standard. Standard of living has expanded dramatically around the globe under the Dollar Standard. However, under the Dollar Standard debt cannot be extinguished, it just transferred. Let us work through an example.
Dollars are born when the Treasury issues debt. This means that the dollars are liabilities of the US Government. This money enters the economy and is transferred around. If you owe me $10 and pay me with a USD you transfer the liability the government has with you to me. If I pay for some goods, I transfer this liability to another and so on. When the dollar was linked to gold one could go convert that dollar into gold and that dollar was taken out of circulation. A debt was extinguished.
Under the Dollar Standard as long as the US is exporting dollars to the globe and running a budget deficit there is no dollar shortage. This is because every other currency orbits the USD like planets in our solar system and their currencies are liabilities as well. Essentially, this system accumulates debt to produce assets and transfers liabilities from one to the next.
When Trump turned the US towards protectionist policies by focusing on eliminating the trade deficit he is attempting to slow the export of dollars. This is creating a shortage of dollars in international markets causing the USD to rally against other nation’s currencies. As the dollar rises in value, the USD denominated debt held by foreign nations becomes more difficult to service and this puts a further bid under the dollar.
What is happening is that the monetary system is working its way down Exeter’s inverted pyramid.

In the end there will be a global debt Jubilee and a repricing downwards of the USD, by international agreement, and/or an official repricing higher of gold. The new system will likely be digital and cashless, which will create a large black market for dollars and gold. Regardless, the next system will require a way to extinguish debt. Currency cannot be a liability that cannot be extinguished to have a long term functioning monetary system.
Idea Portfolio
In the last edition I wrote the following and I believe it to still be valid:
I would like to deal with a little housekeeping before we get into the idea portfolio. Risk management is going to be key going forward. It is time to tighten up the stops on any trades. Usually I give my ideas a wide berth of 15% but for this stage in the market cycle the stops should only be 5%. The idea behind the macro call for this report is just a hedge. The goal is to not to win but to not lose. There will be a time to profit from the change in the cycle and it is possible this caution will miss out on some gains but it is better to be cautious at turning points than expect to be able to get out at the top.
1). US Dollar
Although I believed that the USD will decline a small amount in 2019, for the Canadian Dollar portfolio this does not matter much as I expect the CAD to decline more.
As discussed in the above sections as we work down Exeter’s pyramid I believe the last two assets rallying will be gold and the USD. So while it may decline, this will be the dry powder needed for bottom.


The two charts above are trying to tell the same story. The growth rate of the global monetary base is declining and for one measure already negative. The global economy suffers tough spots when this happens and that is usually positive for the USD.
2). Gold
The gold-dollar barbell is for two purposes. A hedge/dry powder and to own the last two assets that will rally together as the monetary system reaches the bottom of the pyramid. It is counterintuitive that the two will rally together as the common correlation is negative, but in certain periods correlations cease to work. These periods of positive correlation tend to happen for a short period in recessions. I discussed this with one of the more interesting people I follow on Twitter, @SantiagoAuFund, and who has presented his USD Milkshake theory wide and far, and we both seem to hold this view while coming from different starting points.


3). Gold Stocks
Gold stocks will prove if the theory is correct. Gold stocks are just a derivative of the commodity. They are terrible investments and poor businesses. However, if my theory is correct they will experience a bull market that should be explosive and short.
Gold stocks are attempting to break out versus the price of gold.

While the junior more speculative gold stocks are attempting to break out against the major producers.

It is possible this is just a seasonal trade like in 2016, but I
think this is related to my above discussed theory.
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