Birkoa Newsletter 7 (mid-August market updates)

Dear Birkoa LPs:

After a long time, a week to cheer about! Not just in terms of net PnL but the macro picture moving more per Birkoa's worldview and strategy. The past couple of weeks saw a major escalation of military exercises in the South China Sea and the world coming to the brink of another war - except this time between the two superpowers U.S. and China. As suggested by Birkoa strategy, that's a high likelihood event at the end of the long-term debt cycle, which is where we are at the moment. While war was averted this time around, the threat of a cold war will linger for years to come, and at the end, there's no difference in terms of effect on the world's geopolitical bipolarity, supply chain balkanization and resulting supply-shock laden inflation that'll continue to debilitate U.S. economy for the rest of this stagflationary decade. It is quite something to see completely unthinkable things play out per the mechanics of macroeconomics and politics.

If my job had been just to "call things", I'd have worked for Henry Kissinger or a D.C.-based strategy firm. I still have to take the knowledge of these things happening and APPLY it to generate great risk-adjusted returns in an unpredictable environment. The latter part is much more difficult than a mere follow-on to the former, but is absolutely important to not be allowed to run amuck delatched when things don't go well straight out of the gates. That requires an insane amount of time spent going back to the drawing board, constant self-reevaluation and self-doubt, and doubling down on effort. In a weird way, that was the hand I was dealt with straight out of the gates, and the only reason I even bring it up is because now I truly believe that the worst is behind us and the portfolio's recovery process was stronger than ever this week! 

Last newsletter, I presented a script that I wrote which ran different target prices for the roughly 4 components of our portfolio - commodities (energy + palladium), crypto and China equities. As of right now, I've hit the price targets for 2 out of 4, including for Palladium, which had suffered a major leg down immediately following my position. Same thing with energy and crude oil, albeit at a much lower underlying price this week than earlier thought possible, which leaves huge potential on the upside. Crypto has been on an impressive move up in recent weeks, especially ethereum. At this rate, we're going to recoup the crypto losses much sooner than originally anticipated. China equities, although off their lows, is the lone remaining element of the portfolio that's weak at the moment. But as suggested earlier, so long as we stomach the associated volatility, in the end, the results will be immense for the portfolio as a whole, as laid out within the last newsletter using various scenarios.

Here is the way things stand today for each of the 4 portfolio components (I urge you to have the previous week's newsletter containing the individual target prices ready for a side-by-side comparison) - 

1. Crude Oil - Crude oil had been going lower for the past 5+ weeks from its peak at $125/barrel to all the way down to $87, and has been hovering around $90 for a week-and-half. As described in previous newsletters, especially as it pertains to the supply-side, nothing fundamental has changed and thereby oil's price target of $125+ is still a real possibility, which is why I'm going to hold on. Moreover, just because the price of the underlying commodity has gone down doesn't mean that our individual positions are down. All our oil positions are currently in the green, which means that when the underlying goes further up, we make more returns on them than previously anticipated. Third, let's not forget that the demand-side of the equation is not only holding up, but the probability that it'll unilaterally bring down the price of oil doesn't seem to be borne out by previous moments in history (one such moment is described in this interview on CNBC). Demand for oil might actually rise towards the end of the year, not least due to the fact that Russian gas vacuums in Europe have increased the demand for crude oil as replacement sources for their daily energy needs. Our oil positions are intended to be until at least mid-2023.

I had increased our oil exposure when oil was pulling back about a month ago in order to benefit from the dips. Overall, that could be the reason we're positive on this asset with a lower underlying and am confident of accentuating our profits once all is said and done. I shall be on the lookout for any abnormal price action going forward, but at the very least, have been quite encouraged by the capability of oil to hold up. Moreover, the latest climate bill signed by the administration will immensely benefit conventional big-Oil companies like Exxon and Chevron, which we're invested in via the energy select ETF. 

2. Palladium - Palladium is around $2250/ounce as of this writing, and the price target on Palladium is $3000/ounce. I had purchased it when it was $2000/ounce back in early May and continued to remain bullish on it as it scaled all the way down to $1600 at one point. Dollar's unnatural strength, which is now subsiding, might have been the main reason for this precious metal's slide down. Gold and Silver, two other precious metals, also were affected by Dollar's strength but haven't recovered like Palladium. I think that's ultimately due to the latter's industrial utility within catalytic converters of vehicles and the supply-side crunch emanating out of Russian sanctions. This is why I continue to remain bullish on Palladium.

3. Cryptocurrencies - Cryptocurrencies have had an impressive recovery since their bottoms were hit about a couple of months ago. Since then, Ethereum is up over 100% and Bitcoin around 50%. This past weekend Ethereum briefly touched $2025 after flirting with $2000 for a while and Bitcoin crossed $25000. It's nice to see that each time a psychological barrier is touched or crossed that the floor keeps moving up, which is a behavior expected to continue. Incredibly bullish on this sector. The correlation with U.S. equities has continued to go down and crypto is behaving more like a macro asset, which is another positive for us.

As alluded to during the previous newsletter, in order to benefit from the crypto "winter", I had bought a Fidelity ETF which is 85-90% correlated to crypto prices. That position has shown especially large dividends the past 2 weeks, as it has benefitted from the recovery in prices of Ethereum and Bitcoin. Expected to keep doing well in the upcoming weeks. Just like anything else, the road to +45% on this position within <2 months was anything but a straight line, thus further illustrating the virtue of not trading in this business (see image below).

4. Chinese Equities - If there's one component of our portfolio that's left more to be desired even in the way of recovery than outright gains, it's this one. Over the past few weeks, multiple news-driven knee-jerk reactions to things such as threats of delisting from U.S. public markets, fines adjudged by Chinese authorities, Ant Financial divestment by Jack Ma, etc., all led to violent and negative price movements. I was very busy strategically and continuously buying these securities - both in the U.S. and in Hong Kong as a hedge, sometimes for the same company, during this time. While there's ways to go, once again, like other elements of the portfolio, no fundamental change warrants any shift of strategy here. Some of the dip-buying has in fact proven positive already, given that most of them are off their recent lows, but they're nowhere near where I want them to be. 

Last week-and-half, the world came tantalizingly close to yet another war - this time in the South China Sea over Taiwan. While by no means is that threat over, it was heartening to see Chinese equities largely hold up when the fear gauge was at its highest during Nancy Pelosi's visit to Taiwan. Overall, the Chinese economy will only get better from the hole it was in due to draconian COVID restrictions following the upcoming CCP Congress in the fall, where Xi Xinping is expected to get his vaunted 3rd term (likely be the turning point away from those restrictive policies). There's only upside from here, and when that happens, we'll hit the individual positions' price targets described during last newsletter, anywhere from 50-200% returns. I'm very much looking forward to that, although I am fully aware that things could be choppy at times.

Finally, the current portfolio aside, I've been studying the semiconductor space with the intention to fully get into it and benefit off of potential supply side disruptions when China does attack Taiwan. I just think that right now, there's still a leg down more to go hence I haven't participated in it yet. But I'll be watching very carefully.

If there are any questions, please do not hesitate. I hope the detail herein is sufficiently informative. I'd have written this newsletter earlier but I was very sick due to COVID the past week, so please excuse my delay in sending this across.

Sincerely,

Pranjit Kalita
Chief Investment Officer