Central Banks Can't Raise Rates Without Breaking Something: Harris Kupperman
Harris Kupperman has offered up his most recent investor letter for Q2 2023, which I am happy to bring to my readers.
Harris Kupperman has offered up his most recent investor letter for Q2 2023, which I am happy to bring to my readers.
Harris is the founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection. Mr. Kupperman is also the chief adventurer at Adventures in Capitalism, a website that details his investments and travels.
Harris is one of my favorite Twitter follows and I find his opinions - especially on macro and commodities - to be extremely resourceful. I’m certain my readers will find the same. I was excited when he offered up his latest thoughts to Fringe Finance.
Market Views
As far as markets go, sometimes it feels like I can read the script, and have a clairvoyant view of what is about to transpire. Other times, it’s rather murky. The past few quarters have been murkier than normal. To me, the end-point appears clear; an energy crisis, an inflationary crisis, a fiscal crisis, and many other crises all intertwined and feeding upon each other. However, we are a wealthy country and have plenty of resources to forestall the inevitable. This is why in my opinion market doomers have been incorrect, sometimes for decades, when calling for an inflationary collapse. While the outcome is clear, the path to get there isn’t always clear.
When in doubt, I cut exposure and await an obvious signal. Especially when risks seem elevated, and opportunities seem reduced, as they are today.
The great thing about investing is that you are never forced to do much of anything. Instead, you can wait for a layup and only deploy capital when the outlook is clear. Given the many crosscurrents currently, it does seem that now is a time to have less exposure.
I remain convinced that my “Project Zimbabwe” scenario is inevitable, but I also know that there will be sharp and brief panics along the way. I genuinely worry that we’re nearing the precipice of one such panic, potentially caused by a detonation of the government bond market. As a result, I have a strong preference for excess liquidity to purchase distressed securities should there be a maelstrom.
I refuse to believe that the world’s Central Bankers can raise rates like they have, without breaking something. More likely, they’ll succeed in breaking many things, including potentially themselves. Markets tend to move in waves. While I believe that oil and uranium, our two largest sector weightings, have likely bottomed from their recent down-cycle and are now back on the ascent, other equities that we track are far closer to the peaks of their cycle ranges. I hope to purchase the bottom of these ranges at some point in the future. Until then, I’m content to sit with less exposure and simply wait for a big fat pitch.
That said, during the quarter we did deploy capital into new themes such as aerospace, aerospace metals, Argentina, and a few select smaller equity situations. We also increased the size of our offshore energy positions. To fund these purchases, we sold down our exposure in the Brent Oil ETF (BNO – USA). While I believe that oil will go much higher in the future, we used the proceeds of the BNO sale to purchase other securities that will hopefully show more torque to the price of oil, while diversifying our exposure.
I’m very much of the view that there’s nothing wrong with taking a small loss on a position, to buy something that’s declined a lot more. We should always be cycling into the cheapest securities with the strongest tailwinds, even if losses are booked to achieve this. Roughly speaking, this was our experience with BNO, where we lost just over one percent of the Master Fund during BNO’s multi-month holding period, but were able to add to our sizable positions in Valaris (VAL – USA) and Tidewater (TDW – USA) during their much more severe pullbacks, and near their nadir. We were also able to initiate a new position in YPF (YPF – USA) which is an Argentine oil producer, that should benefit both from higher oil prices, along with what I believe will be likely changes to the ruling party in Argentina following elections in Q4. While it was frustrating to take a small loss on BNO, the ability to deploy capital laterally into other oil-exposed equities with possibly more upside potential, felt like a way to optimize the portfolio. To date, recent trading performance proves out this view.