2013 Counterintuitive Investment Theme #1: Betting on Paulson (?)

Thesis: Paulson & co’s failed trades in the last few years have tended to perform remarkably well in subsequent years. LST believes short Europe and/or long gold miners may present compelling reward vs. risk at some point in 2013 (if not now). So:

(1) Betting against Europe - Short a basket of EUR, short European sovereign bonds, and long European CDS.

(2) Betting on Gold Miners - The majors and the juniors, e.g. AU, NG, GFI (without loss of generality).

LST will likely do more work (it’s still in idea generation/evaluation stage, granted LST sometimes adheres to the “trade first, analyze later” philosophy a la Soros), possibly updating this post. Let’s examine the case against (1) and (2) (LST prefers the dialectic/socratic approach, rather than the more traditional b-school model where you start with your ‘case for’):

Case against / Counterarguments

(1) Why bet against Europe?

• Europe is structurally flawed, but the problems are known, priced in.
• Eurozone has stabilized, low rates are buying time for at risk countries such as Spain to solve its structural problems, e.g. employment.
• The markets seem to respond favorably to incremental actions by the ECB.
• The banking sector has been stabilizing, the systemic risk indicators are all pointing to calm.

(2) Why bet on gold miners?

• The smart macro money is short or looking to short gold (their models say so!), confidence appears to be rising, as the Fed is giving some hope that QE and other “extraordinary” interventions will slow, if not start to reverse. The reflation trade in reverse…
• Inflation in labor, fuel, etc. would not be good for margins.
• “The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation.” (Hugh Hendry)

LST wonders if the EUR USD needs to go higher - say 1.40 - before it’s time to short Europe. Similarly, LST wonders if gold needs to see a more meaningful correction (with similar pain in the miners) before going long gold miners.

Deconstructing the case against/counterarguments - LST is not sure yet, needs to gather more information, and think this through more. Having said that, LST likes the short Europe idea as LST can’t recall the last time Europe dominated the headlines.