Portfolio Dec-22

December 08, 2022 All posts

Short BTC

FTX, DCG, Genesis – the music has stopped. All crypto valuations were fueled by the easy money policies, which are gone for now.

Short MANA

Leveraged play (lower liquidity token) on crypto short. In addition, the chart below depicts Decentraland’s unique active wallets (UAW):

It is a ghost town as far as unique users willing to transact in MANA are concerned.


Cash is not trash.


There are strong arguments to be made that the US is headed into a recession and that inflation is subsiding.

At the same time, the Fed is performing QT. UK was also performing QT until the recent blowup in the UK gilt market:

There are concerns of drying liquidity and the US Treasury is considering buybacks. However it is not clear when.

RRP can help with liquidity issues, but those are primarily MMFs parking their money. MMFs buy near-term instruments. So the money from RRP are not going to flow into long dated bonds.

93% of the Treasury securities held by the foreign holders are in T-Bonds & Notes. Japan for instance started selling its Treasuries in order to defend the sliding yen:

It seems like the long duration Treasuries are the least liquid?

Morgan Stanley in a research note said that off-the-run liquidity is most impaired in U.S. 10-year notes, followed by 20-year and 30-year bonds, as well as five-year notes. – source

Buying long dated bonds seems like a no brainer? If we have a recession and inflation decreases, bonds will go up. However if inflation persists, the Fed will continue to tighten, worsening the liquidity and thus forcing the Treasury to eventually start buying the least liquid off-the-run Treasuries which are mostly long duration bonds – bonds will go up. Bonds can only go up?

NOTE: IDTL has 0.07% expense ratio, compared to TLTs 0.15%.


SPY PUTs (short S&P 500) is inline with the IDTL (20+Y US Treasuries) allocation. The reason for it is exactly the same – expectation of a recession in the US and the rest of the world. Whilst the price multiple has contracted significantly indicating that we are not in a mania territory anymore, earnings multiple is still overoptimistic. Concretely, there is about 9% earnings growth forecasted for S&P 500 companies. I think that number is going to get revised down multiple times, because of an impending recession. All forecasts beyond one quarter are just a bullish bias projected into the future. So we can expect only that the market is correctly valued at one quarter forward earnings.

Why am I bearish for 2023?

I was already bearish in 2022 when it comes to the US equities due to following reasons:

  1. The price multiple was at all time high.
  2. At the same time the Fed was preparing to tighten.
  3. Margin debt (leverage) growth was decreasing at the pace seen just before the dot-com and 2008 crashes.

For 2023 I am still bearish, because whilst the price multiple has contracted to its historic median value (~15), the earnings multiple has not yet compressed.

Why earnings multiple about to compress?

Central banks (CBs) especially the Fed are a large control nodes in a complex system. Their are similar to a PID controllers, which exert a certain amount of force, collect the errors (by observing what happened) and adjust their actions accordingly:

During the pandemic, CBs overstimulated and together with WFH helped households to accumulate lots of savings:

So whilst the supply side took a beating, the demand side were put on steroids. That resulted in a highest inflation (overshooting) since the 1970s:

In order to combat that the US Fed and many other CBs across the world [because they were late] began to tighten at the fastest pace seen in a modern financial history:

At the moment inflation is beginning to subside, but I doubt the next stop is 2%. Given the severity of the error correcting action, we are probably going to undershoot and have a deflation. Most of the Fed’s tightening cycles end with recessions:

Things are already blowing up not just in the less stable markets like crypto (1, 2), but also G7 countries, like UK or Japan. There are also numerous indicators that point to a slowing economy. First, employment situation in the US is deteriorating (at least according to the household survey):

Second, if we look at the composite PMI both for Germany and the US, they are both below 50 and in a clear downtrend, which is a sign of contraction:

China is also in the same boat. Also note how the US economic contraction tends to lag behind China’s:

UK is already officially in a recession since the middle of November.


Another elephant in the room is oil. Oil is important because it is positively correlated with CPI. Price of oil was already recovering due to reopening of the economy, then it spiked when Russia invaded Ukraine. Since then its price has been artificially supressed by a number of factors:

  1. The US released oil from the strategic reserve. The last batch of which has been sold in November.
  2. China being in a perpetual lockdown mode for more than a year.
  3. Recently, G7 countries also decided to impose a cap for the Russian oil at \$60 per barrel. This is going to be implemented by insurance companies insuring Russian contracts with \(\leq $60\) oil price. However, there are doubts that this is going to work.

If the price cap fails, the price will go where the markets think it should be. If China opens, the demand for oil will increase again. If Saudi Arabia decides to cut their production even more, the supply will decrease. So we have a situation where unless there is an actual recession in the world, the supressed oil price is point up, which is going to increase the inflation. As a result, inflation is going to get even more entranched in the expectations, making the job of CBs even harder and requiring even tighter financial conditions.