Sendero 2020


Dear Reader,

The other day I found a diary entry from about twenty years ago and was surprised and amused that the pattern of my life had remained remarkably consistent over the ensuing years.  In particular the things I wanted to improve on: exercising more, drinking a bit less, being more attentive to family, and more tolerant upon encountering faults in others.

Which leads me to believe that while we all evolve during our lifetimes - the natural result of learning to cope with the steady chaos of existence on this rock hurtling through the cosmos - we are each born with a unique operating system, coded into our distinct DNA, that persists pretty much no matter what.

In that regard, I’ve always tried to do right, to be helpful, and to be of service to others. That attitude served me well in business and in my personal life, so I’m happy I was born with it versus an operating system based on, say, a sense of entitlement or grasping greed.

In my increasingly long experience, people who chase money, almost never make money.

There’s a whole industry built around a class of individuals labelled as “Opportunity Seekers” - individuals who are easily convinced that with minimal effort, working at home in their pajamas,  hundreds of thousands of dollars will drop into their laps each year.

While there are exceptions to every rule, in my view making serious money involves a passion for the idea behind the proposition, a passion sufficient to drive you to create the best possible product and to work countless hours to bring it to fruition.

I guess the same could be said for life. While people chase after all sort of quick fixes for less than satisfactory lives, success in life invariably involves actively dreaming about the life you want, and then passionately taking the specific steps needed to accomplish those dreams.

Sitting on your butt will get you nothing but hemorrhoids.

Something to consider for the New Year.

Reviewing the first draft of this episode of Sendero, what follows is a bit more like a diary entry, with photos, rather than offering a cohesive theme. Though at the end I do talk a bit about politics, investment markets and the overall economy and provide some insights that may prove helpful as you consider the year ahead.

As I write, I'm listening to the lively rock classic, Roundabout by Yes.

Hope you enjoy it, and the edition.

Sendero 2020

Personally, it was a very full year, highlighted by several cabalgatas, the multi-day horse back rides into the Andes I am passionate about.

Among the best things about a cabalgata is that they allow one to disconnect almost entirely from modernity. They are physically challenging, and involve the near constant risk inherent when riding through tough terrain on tough horses.

The rewards are hours of leisurely conversation and belly laughs with fellow horsemen as we navigate through some of the most spectacular scenery on the planet, followed by meals cooked on fires under a blanket of stars free from light pollution.  

On the road to Angastaco, November 2019


These rides are always enriched by crossing paths with people who live much as their ancestors did 100 years ago. Or, more.

The first photo here is of Moina, who lives mostly alone with her scrawny goats and chickens in a remote puesto (loosely translated as ‘outpost’) on the route we take North. Even though she only rarely receives visitors, she is the boss of her own life, and noticeably content.

As is typical when we pass his particular puesto, on a ride North to Angostaco this November we dismounted, shared our meager lunch and swapped stories for an hour before saddling up again to continue to our final destination for the day, another six hours in the saddle. Moina’s happy for the company, and we’re happy to take a break from the midday sun.

Moira's Puesto


This next photo is of Senor Delmirio, the dapper father of Pequeno, a friend and gaucho who often accompanies me on my cabalgatas. We stayed with Delmirio and his girlfriend for two and a half days this past October.

Their stone-age collection of huts are planted on the side of a mountain an eight hour ride from Cafayate, at the top of a difficult and dangerous trail. There is next to nothing in the arid mountains where they live with their herd of goats, not even readily accessible water.

On our last night at Delmirio’s we broke out some extreme altitude grappa we’ve been experimenting with and we got pleasantly buzzed while I pestered him with questions about life off the grid.

Senor Delmirio

The only sign of modernity in these remote outposts is a single solar panel which powers a light or two, and maybe a radio. Other than that, everything other than perhaps some utensils and maybe a small plastic water tank, are handmade, including the cobbled-together mud and stick shacks they live in.

In something of a Luddite’s dream, these stalwarts literally live off the land, and the herd of goats that provide milk, meat and the leather which Delmirio expertly fashions into bridles, reins and lassos to be sold in Cafayate when he travels there every few months.

While it is a simple life, I can assure you it is also a very hard one and only the most resilient need apply. The average back-to-the earth type might last a couple of weeks before fleeing back to civilization, if the pumas didn't eat them first.

But you don’t need to spend days in the saddle to see interesting sites in the area. The photo here was from a gaucho festival we stumbled upon while taking a recent Sunday drive.

Gaucho Festival, Corrientes Argentina


Since we’re still on the general theme of horses and such, in an act of probable folly, my friend, business partner and fellow horseman Agustin Lanus and I bought a mule to help carry the cargo on our cabalgatas. His name is “Cumpa” which translates into “buddy” or, actually, more like “comrade”.

Since Cumpa joined the menagerie (which now also includes seven cats, two dogs and three horses) I have learned a lot about mules. For example, they live longer, are much stronger, and are much smarter than either horses or donkeys they are spawned from.

Mule for Sale


Reflecting the latter trait, when we bought Cumpa (the photo here was taken during the negotiation, that’s the former owner) he was easy going and friendly, ergo the name. But then we had to take a blood sample for a health test, which ultimately required tying his neck to a sturdy post, then lassoing his back legs and holding on for dear life while the vet stuck the syringe in.  

Cumpa has yet to forgive me, and so now getting a halter on him requires taking an active risk.  When I mentioned this to a local friend who had advised me against buying a mule in the first place, he commented dryly that he’ll be happy to sign the cast I’ll have on my leg after Cumpa kicks me.

So, there’s that to keep me on my toes going into the new year.

Since I’m on the topic of hobbies, I would be remiss if I didn’t mention that I played a fair amount of golf over the year.  Though late to the game, I have come to love it, as every shot involves trying to accomplish a clear goal which, when achieved, delivers immediate gratification. Sometimes celebrated with a bit of cavorting around pumping one’s fist.

Anything that can evoke that sort of energy and happiness can only be to the good.

Much to my surprise, my wife took up the grand old game as well, and shows a natural talent, so we can now pass pleasant hours chasing balls around the excellent local course.

One of the golf highlights of the year was a tournament I sponsored for the course workers at La Estancia de Cafayate, where we live. It started as a friendly challenge but quickly blossomed into a full blown tournament with a mix of 36 workers and property owners.

It’s remarkable how well many of the workers play, when golf didn’t arrive in the valley until ten years ago. Even the gauchos have taken it up, practicing regularly after they get off work in the afternoon.

Much to my surprise, my team ended up winning, which we celebrated with a delicious asado washed down with our Bad Brothers wines.

We’ll be doing it again in 2020.

And the winner is... 

Business

On the business front, our new RiskHedge disruptive investment research business is going well, as is Mauldin Economics, of which I am also a partner.  Both businesses are built around high-level research teams who, on behalf of our clients, tirelessly analyze specific sectors for new opportunities, and risks.

These are complex times for investors, and frankly I don’t know how any individual, almost no matter how smart or well-educated in the art and science of investing, can beat the odds without professional help.

Speaking of odds, against all odds -- because of the sheer scale of the competition (not to mention the challenge of doing business in Argentina) -- both our Agustin Lanus Wines line of extreme altitude wines, and our restaurant are doing well.

We are now shipping our wines to the US, China, Peru, Brazil and the United Kingdom.  And we have just finished building a vineyard at over 2,400 meters above sea level in a stunningly beautiful but very remote micro-climate in the upper Calchaqui valley.

If you’ve nothing better to do, type “Luracatao, Salta, Argentina” into Google Maps and select the satellite view to see approximately where our vineyard is located.

Working so remotely takes a tremendous amount of work and passion, but the quality of the grapes grown at extreme altitude, and the resulting wine, make it all worth the effort.

Agustin Lanus Wines New Vineyard Under Construction

So, 2019 was a good year, full of challenges and things to keep the mind and body active. Which, as I think you’ll agree, gets increasingly important as one ages.

Politics

We watched from afar with no small amount of head-scratching as the Democrats in the US unilaterally proceeded with the impeachment of President Trump.

It seems abundantly clear there was no crime committed, except perhaps by the Biden family, the patron of which even went on record that while VP he threatened to withhold US aid if the the Ukrainian government failed to fire the then prosecutor investigating the company his son was ‘working’ for.

Which begs a couple of questions:

  1. Who was behind the Trump/Ukraine narrative? After all, it was obvious that any investigation would trigger a closer look at the Bidens’ activities in that country. Given that, I can only assume it was someone who didn’t want Biden to win the Democratic nomination, and wasn't anyone connected to the Trump organization.
  2. Why did Biden go on record bragging about his threatening the Ukraine over the investigation into the company his son was working for?

In that regard, my theory has to do with a technique called “inoculation” favored by criminal defense lawyers. It involves acknowledging their client's crime up-front, thereby dampening the inevitable prosecutorial hammer blow.

“Esteemed members of the jury, in the days that follow you will hear the prosecutor claim that my client slapped the reporter’s butt as he ran by in a marathon. And, there’s no question that he did. Why there’s even video evidence. But what the prosecutor won’t tell you, and can’t, because he wasn’t there, was that the act was entirely unintentional, something we will prove.”

Biden may be many things, but you don’t end up at the very top of the USG power pyramid without being a conniving and reasonably intelligent individual. Biden wouldn’t have to be a genius to realize that during his presidential run his son’s relationship with the Ukrainian gas company was going to come to light. Ergo the inoculation.

And it worked. After all, if he was guilty, why would he go out of his way to publicly reveal his role in suppressing the prosecution?

It’s a very effective persuasive technique and so even though Biden’s crime is out there for all to see, he is continues to get a free pass. Oh, and he’s not Trump, so the media will no do nothing to wrong-foot him.

In any event, I will be shocked to my core if Trump doesn’t win in 2020.  His popularity is ahead of Obama’s at the same time in their respective presidencies, and the Democrats are increasingly seen to be willing to throw their own party and the country under the bus in order to get at Trump.

For more on that theme, see the last edition of Sendero.

Meanwhile, back in Argentina

There is a widely told story about an English couple who searched the world over for paradise on earth, finally finding it in on idyllic island free from modern problems where they happily settled in to enjoy their golden years.

Unfortunately, the island turned out to be the Malvinas/Falklands - shortly thereafter to be the centerpiece of the UK/Argentina war.

In a similar light, for many years now we've been very content living ensconced among the vines in our sun-soaked paradise in the middle of nowhere Argentina, happy to watch the madness unfolding in the ‘first’ world from back row seats.

Unfortunately, the latest round of presidential elections in Argentina has turned the country on its head. You may have heard about the results by now, but the long and the ugly of it is that a political operative by the name of Alberto Fernandez was put forward as the presidential candidate by the former president, the much-indicted Cristina Fernandez - who ran as Vice-President -- and they won.

It's hard to convey the impact this had on just shy of half of the population: the half which comprise the working middle class and the business community. It would be as if Trump were defeated in 2020 by a raging communist. For example, Elizabeth Warren.

The reasons for the defeat of the now former president, businessman Mauricio Macri, are multitudinous, but mainly revolve around the fact that as president he was a gradualist.

He came out of the gate fairly strongly, but confronted by thick layers of deep state sludge, and resisted by the masses of poor who had been trained by previous socialist regimes to flap their paddles like seals for government fish, he started to compromise and in the end was almost entirely ineffective.

I guess he figured that when he won his second term, and so couldn’t run again, he could finally push forward with the desperately needed reforms to open the economy and trigger a miracle such as enjoyed in the modern era by the populations of China and South Korea, among others.

Alas, it was not to be and so our adopted country is headed down a very dark alley.

Already the new government is imposing new taxes on the sputtering productive corners of the economy - including a 75% increase in property taxes on the farmers, plus added export taxes.

I read an analysis yesterday showing that, once the new taxes kick in, the government will make $654 per hectare of planted soy beans, while the farmer will lose $32.  That can’t end well.

The government also has slapped a 30% tax on all tourist expenditures in the country.

You know, because one wouldn’t want to encourage an influx of tourists with their much needed hard currencies, right?

In short, the new government is racing to once again embrace all the bad ideas that have kept the country in the dumpster for almost a century now.

So, what’s next?

My view on the topic may be a bit controversial, but I think that given that the current policies are likely to take the country straight down the path to becoming the next Venezuela, and given that the 40% who voted for Macri truly detest Cristina and her puppet - I think we could see something akin to the recent dismissal of Evo Morales as president of Bolivia.

Speaking of Morales, no sooner had he been given the boot then the new Argentinean government offered him asylum. Why would they do that? Bolivia is an important trading partner, and by inviting Morales to take up residency the Argentine government alienates that government, as well as the US and Brazil, both of which had condemned Morales’ corrupt regime.

The answer is that the slums around Buenos Aires offers a formidable voting block, and those slums have a high percentage of Bolivian economic refugees which the new government is trying to keep in their pocket. Which is ironic, because it was Morales’ leftist government policies that contributed so much to their financial misery.

Before this show is over, we'll see Argentina once again default on it’s international debt, with inflation at 100%, an increase in crime in the major cities, riots in the streets, etc., etc.

Which is why I think the odds are fairly high that the nation state will fail and the military will step in. If that happens, one can only hope the new team will choose to decisively deviate from the always ill-fated socialist path that has held back one of the most prospective economies in the world for decades.

Speaking personally, I can only hope we chose our geography well. Thanks to its many fine wineries and the tourism that flows through, our adopted home of Cafayate is economically successful despite its isolation. Hopefully that will help it to remain a bastion of calm in the troubles ahead.

However, in this world one can’t take anything as permanent, so it behooves us to keep a close eye as things devolve.

Investments

In the May 26 edition of this missive, I made what turned out to be a solid call that, based on my analysis that there was nothing to be gained by an escalation in the trade war between the US and China, and so tempers would cool.

In that edition, I mentioned two ETFs, the Ishares MSCI China ETF (MCHI) comprised of China’s top companies, and the ProShares Ultra Semiconductor ETF (USD). At the time of writing the fears of a collapse in US/China trade were high, and both ETFs had sold off hard.

In the seven months since the publishing date, MCHI has risen 18%, and USD has risen over 80%.

Of course, if all my trade ideas were as successful I’d be flying private.

So, what appears to be a solid trade for 2020?

While I wouldn’t term them as high conviction - more like, pretty strong conviction - I like oil/gas and gold.

Here’s a one year chart of Chesapeake Energy (CHK) one of my favorite trading sardines in the energy patch. As you can see, it sold off a lot over the past year, and that was after a waterfall slide from close to $7.00 three years ago. As I write, it’s trading at 83 cents.

Chesapeake Energy (CHK) One Year Chart


Stepping up to the sector level, here’s a look at the 3 year chart of XDE, an ETF consisting of a broad basket of energy companies.

XDE Energy ETF Three Year Chart 


As you can see, the trend has been down for a long time now.

While alternative energy has made large strides over the past decade, US government subsidies are being dialed back - and without those subsidies, many of the alternatives are simply not feasible.

Furthermore, unless and until the world wakes up to the distinct advantages of nuclear, carbon based fuels are an absolute requirement in order to keep the lights on.

So, a bet on a return to that reality, seems a pretty good bet.

As far as gold is concerned, I have been underweight in that market for a long time. Yet, a look at the three year chart for GDX, the popular large cap gold stock index, shows surprising strength.

GDX Index of Large Gold Stocks


Given that the average investor doesn’t know about gold, and doesn’t want to know about gold, the support has to be institutional: large funds and governments.

And for good reason as the world is currently operating under the assumption that debt is money, and even better, it is money that will never have to be paid back.

Here’s the chart of the US federal deficit. It’s going in the wrong direction, with another trillion dollar deficit posted in 2019.

US Federal Government Deficit


And the US, while the unfortunate leader when it comes to debt, is not alone. Here’s a snapshot of overall world debt situation.


Of course, the madness of crowds can continue quite a while, until it doesn’t. At which point gold and related investments will do a moonshot for the ages.

Regardless, one of the more interesting aspects of gold’s recent strength is that the US dollar has had a wonderful run over the last decade. Historically, gold moves in an opposite direction from the US dollar, yet this time around it has been more than holding its own. The trend of a strong US dollar can’t last indefinitely, and when it does crack, the spring under gold will release.

If nothing else, now would seem a good time to at least top off a 15% portfolio allocation to gold.

The Economy

As to the big picture, real personal income in the US continues to rise, always a good sign.

Real Personal Income


More importantly, the cost of servicing household debt as a percentage of disposable income has fallen to the lowest level in modern history. By all accounts, sales during the holiday shopping season in 2019 were the highest in history, and this chart explains why.

Household Debt Servicing as a Percentage of Disposable Personal Income


Of course, things can turn on a dime, and the debt monster could raise it’s terrifying head at any time. But one can’t invest based on the fear of black swans so, as far as I’m concerned, it’s steady as she goes.

Which, for most people, translates into putting the bulk of one’s stock market money into a low cost Vanguard S&P 500 fund, leaving some smallish percentage for gold and for speculations.

Bonds are also a worthwhile component for your portfolio, for the simple reason that, given the scale of the debt, interest rates really can’t rise very much without destroying the world. Given the historically long expansion phase the US economy has experienced, the next big move for the economy is likely to be down, in which case bonds will do very well.

Again, I don’t see that correction coming any time soon, but a rotating portfolio of different maturity bonds offers downside protection, and some income.

A Quick Trip to the US, and Back Again

For the holidays this year, I intended on remaining in Cafayate, but certain members of the family guilted me into returning to Vermont lest I be forever known as as a Grinch.

And so I made the 24 hour trip from the sunny south to the frozen north, though only for ten days.

While it has been lovely hanging with the family, and spending time with my increasingly small circle of friends here, I can only shake my head when pondering that I spent over thirty winters here. The sun, if it comes up, comes up around 8:00 am and by 4:30 pm night is already taking hold.

It’s cold and, thanks to slipper roads, dangerous outside.

On the plus side, it’s a great place to take a nap, and conducive to sleeping in, something I rarely do down South.

And the culinary change is nice - sushi, good pizza, hamburgers, etc.  Foods you just don't get in a small pueblo in Argentina.

However, it will be with no regret that I hop on the plane back to Argentina tomorrow morning.

As I haven't even packed, I'll wrap things upon, apologizing if this year-end edition of Sendero has been a bit ‘light” and if there are typos and grammatical errors as I am the sole writer and proof-reader.

While it becomes a platitude this time of year, I sincerely wish you all have a wonderful, and fulfilling, 2020.

Make it a great one!

David








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