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One Eyed Deer Blog - 28th September 2023

Updated: Oct 9, 2023


We continue to watch the US ten year bond rate as it pushes on the 4.30% level. Back in October/November when bond markets around the world were at similar levels, the warnings were ringing loudly of national pension plans being insolvent. The silence here is deafening.

Our core thesis remains that forty years of monetary policy malpractice cannot be unwound easily. Central Banks are adopting a position firmly behind the curve as they try to engineer their hallowed soft landing, a euphemistic term for slow motion default. Current amounts of debt will never be able to be repaid and must be inflated away. This of course can only end in hyperinflation, but the narrative of being completely in control will persist until the toys are taken away.

Businesses whose success was predicated on low-interest-rates-forever continue to hover around call option valuations as they wait for their turn to be delisted. The most recent squeeze has been driven by cash-rich megacaps and a quick look at NDX against ARKK paints this picture clearly.

Against a backdrop of entrenched, deliberate inflation I expect bond markets to continue to be under pressure. I see the current reduction in the Fed balance sheet as hoarding ammunition ahead of a colossal monetisation program as the market pushes headline rates through 4.3% to 5%, then 6%.

Net interest costs for good businesses will continue to be positive as they earn decent returns on their cash. Taking positions in major indices is not black and white as they remain internally bifurcated into the haves and have nots. With earnings and sales multiples generally extreme when compared to bond rates though, the short side is our call, particularly post-squeeze and with positioning across the board now long.

Gold remains my favourite idea in a world where you may as well hold any collection of hard assets that aren’t backed by debt. Gold miners are under inflationary cost pressure like any other business, so are refusing to run even with gold in most currencies continuing to break to new highs. This will change dramatically when USD gold breaks for real. Accumulate the miners.

Keep in mind that gold is influenced by real rates, not nominal rates. Nominal rates are scaring people at the moment, but if one focuses on those nominal rates being deliberately and structurally held below inflation, then it emerges that we are in a structurally negative real rate regime.

As bonds continue to fade with the growing realisation that time is their greatest enemy gold will come to life as CBs print shocking volumes of new cash to keep a floor under the retirement pool.

Gold vs Silver subplot

The gold silver ratio (GSR) is currently above 80. It is a very reliable sell above 85 and we have entered at that level. I would recommend a structural position with targets of 65, but carry trade-able allocations to trade the 85-78 range. When gold really runs you will want silver for the beta. A multiyear run in gold could push the GSR sub 50.

What flavour would you like your inflation?

We believe that stagflation is the most likely end game, as growth seems a big ask when consumers the world over are out of savings and at max credit card balances. Energy, food and services will continue to push higher as retail goods find the going a little stickier. Flagship TVs are being discounted at launch, and phone fatigue is real.

Equity indices will be drawn between being an alternative to the fading fiat currencies and their lofty valuations and lack of growth, but ultimately stagflation is a beast that kills everything except metals and commodities.

Structural Bank Trauma – hold to maturity?

Banks are now data managers. I think they will be competing with Apple. Good luck with that. Retail deposit holders are fast realising that they don’t need savings in a bank and are running to money market funds at unprecedented rates. Western banks are about to feel enormous pressure on their funding and will continue to fail as they are forced to sell their bond portfolios to pay withdrawals. Refusing to mark bond holdings to market, and instead claiming they will hold to maturity is, at best, folly, is certainly poor practice, and at worst, criminal. Anyone doing this, bank, pension fund, insurance company, is in line for the slaughterhouse and will not be spared.

It’s currently the fashion to suggest that JP Morgan will simply gobble them up for cents in the dollar, but all bank problems always become too big for trite solutions. Shorting banks is a trade paved with hedge fund traders’ bodies, and KRE has suffered a lot already, but I would run short with a tightish stop.


It seems right now that the market thinks NVDA is the only company that will benefit from AI (Edit: add Telsa now). Yes, they have printed some impressive earnings, but it reeks of a bowling ball being pushed through a hose. Of course there will be benefits and fortunes made, but the hype-tail is wagging the dog right now and NVDA could easily fill a gap in it’s chart down to $360..and still be a good story.

The AI space seems to be hotly competitive, so the road will be littered with failed start ups and dead end ideas. I am not resourced enough to pick the winners. Perhaps I should just ask ChatGPT.

Trade/Position Summary

One-eyed deer: Gold and gold miners

Runner up: GSR sell mid 80s, own commodities

Honourable mentions: Short banks, Fade equity indices, Sell VIX puts

Chart lab

Four decades of training..

An entire generation (or even two) of market participants have been trained to believe that interest rates only go lower over time. The last year of complete destruction of this trend has almost everyone involved wondering what to do.

I have seen predictions that rates will “normalise” again soon, by which the pundit means rates will get back to what they believe to be normal levels of 2-3%. Our contention is that rates are indeed normalising right now, to a “normal” level of 5-6%.

How far do you want to push the risk premium?

NDX (orange) vs inverted rates.

Weekly gold

The current weekly gold chart could be the most constructive chart I have ever seen.

The most analogous period I can find is around 2005; The way the short MA is glancing off the longer, the threat of taking out the last high from a few years back, the resurgence after being 5-6 years in the doldrums. Predictions from this formation could be considered a little extreme to believably print here, but you should be thinking in multiples rather than percentages.

Where is the fear?

The VIX index may have a couple of points downside potential, but a program of collecting premium from 12-13 strike puts is a very good idea for those comfortable with that type of profile.

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