Birkoa Newsletter 5 (market updates)
Dear Birkoa LPs:
Wanted to communicate about a few things happening in the markets since my last communication.
During the last email newsletter dated July 4, I had stated something to the effect that oil is expected to keep going higher with jitters expected along the way. Little did I know that it'd crash 9% and 4% in 2 consecutive days that followed on July 5 and July 6, reaching as low as $96/barrel from $111/barrel on Monday July 4. But given that this leg down was not congruent with my thesis and the structural supply-side issues and at capacity constraints on the ground, instead of panicking or liquidating my positioning, I doubled down on all oil-related positions by an average of 20%. Since I did that on Wednesday, crude oil has recovered some of its losses and is at $104/barrel as of this writing.
Crude oil by nature is a volatile commodity so far commodities go - possibly the most volatile. It sometimes moves like a cryptocurrency and there are days when I look like a complete idiot especially when the markets turn gloomy on recession concerns, since recession would lead to lower demand for all economic activity including oil. As someone who's called a recession in early and is seemingly positioned for it, how I could be bullish on oil? The answer lies in the physical markets component of oil, which is different from its financial markets aspect. The latter is the only factor for security assets like stocks, dependent solely on future expectations. But for a commodity that serves a purpose on the ground outside of just being traded in financial exchanges, there is a physical markets component that's important to delineate. It is that distinction along with continuing inflation expectations leading to eventual stagflation that leads to my bullishness on crude oil until it reaches $140-150/barrel. Here are a couple of LinkedIn posts from Tuesday/Wednesday referring to interviews by Goldman's Head of Commodities Research & Bank of Montreal's head of Oil and Gas Equity Research expanding on the above point -
As you can note from the above, while it's great that I brought more oil and energy stocks at the seeming bottom on Wednesday, there's still a long way to go. The fact of the matter is that the geopolitics of oil is so acutely risky that if I were Russia and were to apply game theory to decide strategy (I studied game theory in graduate school which is where I did my thesis work on therefore I know a little bit about designing games and the concept of how incentives dictate games construction as well as outcomes), I'd remove 5M barrels/day from circulation leading to oil reaching as high as $380/barrel. This was the analysis done by JP Morgan as a tail risk scenario last Saturday (I had referred to this during the July 4 newsletter!), and given the way the G7 countries are trying to squeeze Russia with illegal and non-jurisdictional measures like a Russian oil price cap, oil that they don't even buy, it's looking more and more like a non-tail risk event.
In other words, the way Iook at it, given the supply side issues and China's demand picture still controlled, compounded with geopolitical risks, oil's physical markets component is signaling at capacity and will remain so for the foreseeable future. Thus, even though there could be occasional pullbacks due to extreme recession worries emanating from the financial markets component of crude oil markets, eventually the reality on the ground will have to take over, leading to an effective arbitrage. I was able to take advantage of this arbitrage this time around and will be on the lookout in the future too.
In China, there was this past week once again more flareups re: new COVID cases in response to which their government instituted mandatory vaccination programs. Due to the news of it breaking, some of the Chinese equities have pulled back from their highs and I scooped on some of them as well, taking advantage of the dip-buying opportunity. Thus far, they seem to be generally going in the right direction, but as you are well aware, I'm expecting to make 50-200% per position over the next 1-2 years. There could be flareups along the way but Chinese equities, especially tech, seems like the place to be even by popular accounts. I of course, have been advocating for this since before it was popular. I also bought some non-ADR Chinese equities directly from the Hong Kong Stock Exchange, paying in HKD. An added benefit being the extreme Dollar strength which is temporary, that that could lead to additional Dollar gains on top of the actual equity investment.
Crypto this week seems to indeed come off their lows and doesn't seem to be any more bothered with further liquidation events or collapse within its ecosystem. This week Voyager, another crypto lender, collapsed and filed for bankruptcy, but Bitcoin and Ether not only remained stable but seem to be on a steady path up. This is consistent with my earlier comment from this past Monday's email that the worst of crypto selloff seems to be over. Right now as I write this, we're doing quite nicely on the path to recovery on crypto, which still accounts for all the losses of our fund since we're comfortably positive on the more mobile, non-crypto part of our portfolio.
Finally, on a surprising note, Palladium is inches away from breaking even having recovered a lot of the ground this week. This was one of the few non-crypto positions that was negative; seems to be on the right path now.
I hope this illumination was helpful.
Thank you.
Sincerely,
Pranjit Kalita
Chief Investment Officer