Its Payback Time

There is no free lunch with money printing.  The MMT supporters had their time to shine in 2020 while crude went negative amidst the biggest Fed QE + Rona stimmy fest double barrel bazooka ever.  They thought all the money spew wouldn't result in inflation.  They felt invincible.  They were right for a few months.  Gradually, and then suddenly, they've been completely wrong.  Team Transitory along with their MMT cousins have quietly slinked off in the corner, never mentioning that phrase again, for fear of ridicule. 

Inflation is a monetary phenomena.  Its not about temporary blips like supply chain problems or war, its about the supply of money chasing a fixed amount of goods and services. I am sure Powell and all the economists would disagree with me, but they are paid whether they are right or wrong, comfy in their ivory towers.  When I'm wrong, I feel the pain right away in the form of losses.  When they're wrong, they find something convenient to blame (supply chains, Putin, China lockdowns, etc.) or nonchalantly sweep it under the rug. 

People tend to overcomplicate things, or just parrot the media, who blame everything on supply chains for the inflation.  It all comes down to the money.  The US has been the most aggressive nation for both fiscal and monetary stimulus since 2020.  They doused everything with a firehose of liquidity and free money, and thought of themselves as heroes.  And they've ended up with the highest inflation among all the  developed nations.  Powell was revered as a great central banker who saved the financial world with his QE bazooka.  All he did was kick off the biggest bubble in US financial market history, even worse than Greenspan, and waited 2 years to start undoing what he started.  Even the ever late to tighten Greenspan took back the fall 1998 rate cuts with rate hikes 12 months later.  

Mr. Transitory, Jerome Powell, has managed to be about as bad as Bazooka Ben Bernanke, the Time Man of the Year, a guy who delayed normalization and rate hikes to the next chairman, so the shit didn't hit the fan on his watch.  Doves are celebrated.  Hawks are criticized.  That's the world that central bankers live in, and they are incentivized to print at the slightest sign of economic weakness.  Its the easy way out.  And they've abused the printing press resulting in what will be a long period of inflation, that will confound the deflationistas, who are still stuck in the 1980 to 2020 mindset of falling yields, regardless of the fundamentals.

This time, unlike the 1980-2019 time period, the budget deficit is now a significant % of GDP, which is inflationary, especially when the Fed is so willing to provide the funding for all that pork.  You need a proportional increase in production to compensate for the increase in money, otherwise, prices will rise.  With the dollar as the reserve currency, that exorbitant privilege has kept inflation lower than it would have been otherwise, but there are limits.  Eventually, foreign nations will see that the US government is doing its best to debase the dollar, and will be much less willing to finance their debt at low interest rates, leaving the Fed to be the main buyer.  That eventually erodes trust in the US dollar, which looks like the king now, but it looked like that in 2000 as well.  And by 2008, it looked like the euro had overtaken it as the EURUSD rate went from parity to 1.58. 

Right now, there is no concern about the dollar because of its relative strength vs. the euro, yen, and most foreign currencies.  But watch what happens when Powell makes his dovish pivot, which is a matter of if, not when.  That's when you will see the confidence start to disappear.  Its not while they are tightening, because the market over projects the rate hiking path and overrate the Fed's inflation fighting credibility.  Powell has no credibility on inflation.  He's folded quickly to pressure before.  He's been too late to hike.  He's all but told you that he won't try to shock the market to get ahead of the inflation curve.  And the bond market initially liked, but then thought about it, and didn't like the lack of backbone and inflation fighting that Powell communicated.  

The bond market is starting to see the writing on the wall, that inflation will remain sticky, and would prefer the Fed rip off the band-aid, instead of pulling it off slowly and methodically, trying to make it hurt as little as possible.  In other words, Powell is a pansy.  He will placate the market at the first signs of real stress, and we're much closer to that point than people realize.  It would not surprise me if he made a pivot to being data dependent once he gets the Fed funds rate up to 2.0%.  Being data dependent = watching the S&P 500.  If the SPX stabilizes or goes up, he could sneak in an extra 25 bps, if not, no rate hike.  Most likely scenario, after he gets to 2.0%, he will freeze if the stock market follows the post bubble pattern of Nikkei 1990, Shanghai 2007, Nasdaq 2000.  Freezing rate hikes at 2.0% with the economy heading south and inflation staying high = guarantee stagflation.  And my bet is that Powell will choose a guarantee slow burn stagflation to a fast burning painful deep recession with inflation back towards 2%.  

Just a weak weak market.  Another brutal selloff on Monday. It looks like it wants to test 3950 to see if there are buyers there before heading north.  May do a little dip buying if we see 3950-3970 levels Tuesday, for a short term trade.  I see a potential strong bounce this week after the CPI numbers come out and the 10/30 year auctions are behind us, but I don't expect a significant rally until you get to deeper value levels.  Ultimately I think we have to get down to the 3600-3700 level before tempting the value buyers and getting a real sustained counter trend move.  

I have little confidence in buying the dips in this market.  I have all the confidence in the world in shorting the rips.  This feels just like a repeat of 2000, with the same levels of heavy equity positioning.  That bear market lasted over 2 years.  We're only 4 months into this bear market.  We've got a long way to go. 

A Walk Back through Time (2000-2021)

I've been thinking about how this bubble will play out and while history doesn't repeat, it does rhyme.  As the years go by, the more I realize that you can't lose the forest for the trees.  One can get so caught up in the day to day news flow and price action, and miss the big picture.  Let's look at the current market and compare it to the past from the perspective of 5 big picture items:  1. Monetary and fiscal policy  2. Macroeconomic fundamentals ex. goverment policy  3.  Stock market valuations 4. Bond yields  5. Investor psychology and behavior 

I know some people will disagree that this is a stock market bubble, but I assume most readers of this blog will agree that its either a bubble or a very richly valued market.  So with that bubble assumption, let's go from 2000 to 2021, to compare the situation at the start of that year versus now (Advantage = more bullish in that year.) 

2019-2021: Not too many similarities there.  

2018:   

1. Powell was more hawkish then than he will be in 2022.  Fiscal policy was also loose in 2018 with the Trump tax cuts and now with all the residual savings from the bazooka Covid pork barrel in 2020 and 2021, and probably Build Pork Bigger package coming in 2022.  Advantage 2022. 

2. Macro fundmentals marginally better than now, more global growth in 2018 due to faster growing China.  Inflation and commodity prices were lower.  Advantage 2018.

3. Valuations were much cheaper in 2018.  Lot more froth in 2022, retail and institutional investors much more heavily invested in equities.  Advantage 2018.  

4. Bond yields at 2.50% 10 year and rising.  10 year yields around 1.7% now and rising.  Counterintuitively, unlike what you hear on CNBC and the TINA theory, higher bond yields imply cheaper valued bonds, with more potential upside, and thus providing a better hedge for equities.  Advantage 2018. 

5. Investors much more complacent and much more belief in the Fed put and much more "they will not let it crash" thinking now than back in 2018.  Much higher equity inflows over the past year than in 2018.  Retail investors were much less interested in stocks and less invested than they are now.  Advantage 2018.  

2018 looks more bullish than 2022 on 4 out of the 5 categories.  

2016-2017:  Not too many similarities, 2017 had a Fed that was starting a tightening cycle but SPX was not technically overextended after mediocre years in 2015 and 2016. 

2015:  

1. Fed had finished tapering, but would embark on a mindboggling 12 month pause of doing nothing but jawboning with finally the first rate hike in December 2015.  No fiscal stimulus, it was still the budget conscious years, with the Tea Party having a heavy influence on the Republicans and Obama not very bold with government spending. Advantage 2022.  

2. Macro fundamentals better in 2015, even as China was slowing down, as the organic growth rate (population + productivity growth) was higher in US and Europe, as well as the emerging markets.  Advantage 2015.  

3. Valuations were much cheaper in 2015.  No contest.  Advantage 2015.

4. Bond yields at 2.17% 10 year and falling.  Higher yields than now and curve was steeper thus more upside for the long bond than now.  Advantage 2015.  

5. Scars from 2008 still there, retail investors didn't have much interest in equities, most of the interest was institutional.  Most fund flows went to bonds and relatively small equity inflows.  Advantage 2015.  

2015 looks more bullish than 2022 on 4 out of the 5 categories.  

2008-2014:  Fed was stuck on zero rates with no signals for rate hikes.  Valuations much lower, and SPX was not overextended.  No similarities to now.  

2007:  

1. Fed was done with the rate hiking cycle, but was not ready to start a rate cutting cycle yet.  Fiscal policy was limited and passive.  Advantage 2022.  

2. Macro fundamentals arguably worse in 2007 considering it was the pre QE era and before the start of financial repression.  Economy was more susceptible to a recession due to the housing bubble and higher household debt as percentage of GDP in both US and Europe.  Commodity prices were much higher (inflation adjusted). Advantage 2022.

3. Valuations were much cheaper in 2007.  Advantage 2007.  

4. Bond yields at 4.70% 10 year.  Much better hedge for equities than now.  No contest.  Advantage 2007.

5. Scars from 2000-2002 dotcom bust still there, public was much more interested in real estate than equities.  Much lower household allocation towards equities than now.  Advantage 2007.  

2007 looks more bullish than 2022 on 3 out of 5 categories.  

2004-2006:  Stock market was still well off of all time highs set in 2000, not much investor enthusiasm, SPX was not overextended.  

2001-2003:  SPX was in a bear market, totally different environment. 

2000:  

1.  Fed had just started a rate hiking cycle, but most only expected 2-3 more hikes.  More hikes expected now.  US was running a budget surplus!  No contest.  Advantage 2022.  

2.  More organic growth (younger population, higher population growth rate, higher productivity growth) in all the developed markets and in China.  No contest.  Advantage 2000. 

3.  Valuations were extremely high in 2000.  But from a potential earnings growth perspective, cheaper than in 2022.  Advantage 2000.

4.  Bond yields at 6.50% 10 year.  A totally different world in fixed income where yields were much higher than inflation.  Extremely good positive real yield hedge for equities.  No contest.  Advantage 2000.

5.  After the great bull market from 1982 to 1999, equities were the most popular they've ever been in US stock market history.  Rampant speculation in internet stocks.   Early 2021 comes close, but can't match that speculative fervor.  Household allocations to equities are similar to now.  Overall investment sentiment was more bullish in 2000.  Advantage 2022.   

2000 looks more bullish than 2022 on 3 out 5 categories. 

Since 2000, there are 4 years that somewhat resemble the investing environment in 2022 (2000, 2007, 2015, 2018).   They are all less bearish than 2022.  All 4 of those years had a greater than 12.5% down move in SPX.  2 of the 4 lead to bear markets.  

Objectively looking at those 4 years, 2000 and 2018 seem to be the most similar to the current market.  2000 from an investor sentiment/equity allocation/valuations perspective, 2018 from a Fed/fiscal policy/macro environment perspective.  Get ready for a waterfall decline in 2022 of at least 600 SPX points, and a good chance at a start of a new bear market.  

On the current market, covered the remaining index short and neutral on the market.  Would not surprise me if it either went to 4800 or 4600 from here within the next 2 weeks.  Now I am a buyer of dips down towards 4600.  Not interested in shorting until we make 1. new all time highs and 2. It is February or March.  Done with shorting for January. 

Crypto Creep

Like mission creep, similar things happen in the investment world, where initially a product is thought of as one thing, but then as the price advances, new things are attributed to the product, giving it 'superpowers'.  Cryptocurrencies are a perfect example of a new investment, hard to value, with questionable fundamentals, that is initially treated like complete speculation, like Beanie Babies, like tulips, but as it goes higher and higher, and the uptrend shows more staying power, you get more and more believers.  

1) In the beginning, its the geeks and the paranoid idealists who view cryptos as an alternative currency that takes power away from governments and decouples money from the State.

2) Then you had the 15 minute macro experts who suddenly thinks blockchain is the next big technology and therefore makes bitcoin a good investment. The logic isn't questioned, its just repeated.

3) Next, you had the first big wave of speculators who see bitcoin going up, see others investing in it, and start piling in (2017-2018).  Its still considered a fringe asset among institutions, and not something that most consider as part of a balanced portfolio. 

4) After the Fed and US government goes bonkers and floods liquidity everywhere in 2020, speculation catches fire.  Suddenly, the markets go from fear of deflation, to fear of excessive money printing which gives bitcoin the digital gold label.  It is now considered an inflation hedge, a hedge against the devaluation of the dollar.  

5) Bitcoin goes parabolic and assorted coins trading for sub pennies are heavily pumped and start going up huge, and pump and dump scams show up.  Crypto mania is everywhere, hedge funds and institutions are getting involved, an ETF is made, with more in the works.  Shells of deadbeat small cap companies change their business to crypto mining, "defi", NFTs, or another crypto related buzzword that's hot among lotto retail speculators.  

Cryptocurrencies are the perfect asset class for those looking for juice and to get rich quick.  They can rationalize their investments with simple Fed brrr memes and by believing that institutions will begin to add them into their portfolios.  The most important aspect is the juice.  If bitcoin didn't have explosive price moves, the retail speculators wouldn't be playing it.  When you don't have a lot of money, 10% a year in stocks just won't make you rich.  

It is the mentality of the times.  That's why you are seeing such explosive growth in call option volumes since the summer of 2020.  And most of the volume isn't even in the monthly options, they are crowding into the weeklies, the ones with the most gamma/$ premium.  The riskiest and cheapest options that decay the fastest but provide the most bang for the buck.  Its a full blown lotto mentality in the financial markets.  

It would be nice if these bouts of mass speculation in high beta names and call options were a precise timing tool, but unfortunately, they are a better tool for timing tops in those names than in the broader market.  What is happening is probably the last speculative wave of this bubble that precedes the final top in the SPX, with a lead of 3 to 6 months. 

One thing to watch is the rates market.  5 year yields are trading at another 52 week high, and the market is back to pricing in more than 2 rate hikes in 2022.  The hot CPI number wasn't shrugged off by the bond market this time, like it has been so many times this year.  Part of that is because 10 yr yields went down to the 1.40-1.42% support area, the day before the CPI, and also the terrible 30 year auction afterwards.  But an additional factor which is being underestimated is the sudden concern about inflation from Biden.  And Manchin.  Politicians are getting more concerned about inflation and less about employment.  Political winds are shifting, and they will affect Fed actions in 2022.  

I thought that the Fed would be slow to act to hike in 2022, but I am beginning to change that view, based on the politics.  Its a midterm year, and while a lot of people love it when asset prices keep going up, there are more people who don't like to see gas, food, and rent going up.  If commodity prices keep surging higher in 2022, like I expect, that's going to put Powell (probably renominated soon) under more pressure to raise rates.  Still don't expect him to speed up the taper or hike until after tapering is over (June), but he's probably hiking at the very next meeting in July.  It doesn't matter if Powell hikes in July or September, because in either case, I don't see him hiking in early November, a few days ahead of the midterm election.  Not necessarily because of the politics behind it, but because the market will probably have a steep drop before that meeting.  So the most likely scenario is a July or Sep. hike, pause and then second hike in Dec., as long as you haven't entered a bear market by then, which is a possibility.  Its either lights out after the first hike or after the second one, in my view.  I don't see this level of optimism, the super bubble valuations, the extreme overweight in US stocks among investors to be able to continue more than a year from now.

I have sold most of my SPX long, still have a some left that I wasn't able to get out of at good levels so I am holding and looking to dump next week on a bounce.  The first 2% dip after such a strong run is usually bought, and the recent highs are often retested.  It looks like the first dip is over, and likely to see a reflexive bounce and another call buying frenzy early next week as we go back towards all time highs.  The times to fear a big parabolic rise is after months of a rising market, which isn't the case now.  That September/October correction purged the positioning enough that this market probably won't crash back down after a big advance like a January 2018 or even a September 2020. 

The New Gilded Age

It takes money to make money.  Capital is more valuable than labor.  Labor is just not that valuable when there such an excess supply.  You can argue that there is an excess of cheap capital, but most people cannot access that cheap capital.  Banks lend money to people with collateral, people who have money, not people who need money.

We are living in an age where managing your money is much more important to wealth creation than having a good job.  Most jobs just don't pay enough to allow for a lot of savings.  Not many people get wealthy anymore from saving part of their salary.  Interest rates are too low and wages haven't kept up with inflation.  

The lower and middle class is in a difficult situation, where most labor is becoming less and less valued.  In order to raise money to buy a house or a nice car, or just to keep up with their friends who brag about making 500% in 2020, they are resorting to rampant speculation, lotto tickets like YOLO calls, buying volatile and overvalued meme stocks, EV bubble stocks, and arguably worthless cryptocurrencies.  

They are starting to feel some pain, as the big move higher in those momo stocks earlier this year have all been given back, even as the SPX keeps going higher and higher.  They will probably feel more pain in the years to come if they insist on having diamond hands.  I'll have the paper hands to live to fight another day when I am wrong than stubborn diamond hands that take you out of the game with 1 bad investment. 

The sudden explosion in stock and crypto investing among retail changes the dynamics of this bubble.  Even a mere 2 years ago, you didn't have too many newer investors looking to put money into EV, biotech, big cap tech stocks, or crypto.  Now it seems more unusual to find someone who doesn't have money in those assets.  

A popping of this bubble will now have devastating effects on the economy.  Unlike a few years ago, now almost everyone has jumped into the pool, with the latest people being the ones who are putting blood money in there, less wealthy individuals who are buying the worst companies following message board advice, following the herd.  When this bubble pops, there will be blood. 

What's so sad about this environment is that a lot of these newer investors, who are in some of the worst stock investments imaginable, are completely delusional, while the assets that are most likely to appreciate in value over the next 5 years in the US is housing, making it even harder for them to buy a house after their portfolios get crushed when this bubble pops.

I hear talk about the US housing market being red hot, a lack of supply, houses selling within days of being listed, selling for above listed prices, etc.  Many see this and think this is another bubble like 2005-2006.  They think it will end badly like 2008.  What I see is smart investors, selling overvalued stocks, getting liquid, and putting some of that money in a better investment to protect against inflation, which is real estate.  

So after the dust settles from this giant bubble, the rich will get richer, and the poor will get poorer.  

The supply demand fundamentals are much more favorable for US real estate than US stocks.  You are not seeing much new supply coming on to the market, and if you've seen how homebuilders build new houses in the US these days, with tiny front and back yards, houses right next to each other, then you can see why existing home prices would go much higher.  And these newer homes are way out in the suburbs, making a commute to downtown a nightmare.  Whether it be lumber shortages, lack of housing permits, or lack of desirable land to build houses, you are not seeing much increase in supply coming on line. 

On the other hand, in the stock market, the demand for speculative stocks, is being met with tons of supply, in money losing companies doing IPOs or getting bought by SPACs.

All of this is very reminiscent of 1999, when the stock market was in a raging bull market, a bubble was getting closer to its peak, and real estate prices were also going up, as the economy was booming.  After the dotcom bubble popped in 2000, real estate prices held steady despite the recession in 2001-2002.  And then you saw a huge increase in house prices during the recovery from 2003 to 2006.  

On the market.  After the volatility of the last 2 weeks, SPX is back near 4200 and getting boring again.  Trading some individual stocks but staying away from index trading. 

The ARK Bubble

You might not notice looking at the SPX or the Nasdaq, but there is a huge bubble going on.  It is showing up a bit in the Russell 2000, but not to the extent that you saw it like in the Nasdaq in 2000.  The speculative fervor has moved on from AAPL, AMZN, GOOG, FB, MSFT, to an even more overvalued group of almost everything in the ARK ETFs (ARKK, ARKG, ARKQ, ARKF, ARKW), the largest holding being TSLA.  Its not as if ARKK is just holding a few stocks, it hold 52 stocks with none of them with a weighting greater than 10%.  It is a broad representation of the mid to large cap speculative space.  Add in ARKG, ARKQ, ARKF, and ARKW to round out to various other sectors and you have a good representation of a newer version of the 1999-2000 dotcom bubble. 

The divergence between the S&P 500 and ARKK are reminiscent of the divergence between the SPX and Nasdaq in 1999-2000.   

The above chart shows Nasdaq vs SPY from late 98 to the top in March 2000.  

And let's not forget the smaller cap stocks like a BNGO, GEVO, BLNK, or UAVS not represented in those ARK ETFs that are up between 500 to 1500% over the past few months.  Oh, and also the SPACs, which aren't in any of those ETFs.  

The US stock market has turned into a giant, crowded casino, with the players euphroric over their winnings and looking to bet more.  Of course, the main source of funds for these rampant gamblers is the US government, via the continuous stimulus and unemployment checks that are pumping up the stock market but not doing so much for the real economy.  

It is a state sponsored bubble, with one stimulus package after another.  The US is debasing its currency to feed a stock market bubble of gigantic proportions.  Of course, all under the pretext of the Rona, the greatest excuse ever made for pork spending and handouts.  

And the Fed has such a huge rear view mirror that whatever happened in the economy a few months ago is what they use to determine monetary policy.  They have no foresight, no vision, its pump a bubble if the economy is weak, and when the economy is recovering, keeping putting more air in the bubble, until its so obvious that the economy is too hot, and then do something minor to pretend like they want to cool it down.  

It is tough to fight a bubble like this when the Fed has its heads in the sand regarding inflation and financial stability.  Its as if Greenspan years of the stock bubble in the late 1990s to 2000 and the real estate bubble from 2004 to 2007 are anomalies, something the Fed could do nothing about.  

All this bubble will do is exacerbate wealth inequality even more, as its the newbie retail investors that are the most fervent buyers of the hot garbage being passed off as ESG investing.  Lots of wealth will be transferred from retail and late to the game institutions to SPAC sponsors (20% cut for finding steaming hot turds loved by retail), corporate insiders who cash out during the bubble, and corporations wise enough to sell as much of their ridiculously overvalued stock　as they can．

Then you will have minted a fresh new batch of bitter bagholders who are too stubborn and hard headed to realize that they bought stock in a company that will just bleed all that cash they raised and never make a profit.  

It looks like you had a fair amount of "scared" money that was waiting for the all-clear from a riot free inauguration before buying more stocks, even if they had to pay up to do so.  In the stock market, with certainty comes a higher price tag

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My initial plan to short around 3800 at the beginnig of the year is thrown out the window.  Market is just too strong, the stimulus that is coming is just too big.  If $600 stimulus checks to the bubble heads can cause this much buying, imagine what an increase in unemployment payouts and a $1400 stimulus check will do.  Plus the perfect storm of a re-opening of the economy after the vaccine rollout along with the wealth effect and you have the makings of the hottest economy since the late 90s.

I don't recommend shorting this market unless you reach totally egregious overbought levels in SPX.  And if you look at the SPX over the last 2 months, it has gone up ~200 points, a bit less than 6%, which is a lot, but not so much that a selloff is imminent. Considering how much investing fervor there is, it can continue at that pace for a few more months.  

I think its going higher, but I don't want to buy unless you get a washout and stop run to clear out some of the bold speculators buying calls and penny stocks that go up 100% a week.  It probably comes sometime in the next 2 months, and I want to have a lot of dry powder to be able to buy the dip aggressively instead of defensively.  With that comes missing out on potential upside if the bubble keeps getting bigger without any significant pullbacks along the way.  

I don't mind missing out on more upside since this market is already so overvalued so remaining on the sidelines, playing some individual stocks here and there, but not too big.  

If the SPX does squeeze even higher from here towards 3900-3920 area by next week, I will probably put on a small short. 

Adjusting to the Insanity

This isn't an easy market to trade from the short side.  Even during the craziness of the EV parabolic rise in November or the biotechs in December, the pumpers still dumped a decent amount.  Starting from late December, the pumpers just didn't dump.  They went up, had a very small pullback, based, and blasted off again.  And these blast off moves aren't off of small up moves.  Some of these stocks were already up 300% in a month, and then it would go up another 150-200% in a few days.  

These are breathtaking moves, no wonder the retail investors are in a frenzy, because most of the ones driving these stocks higher aren't used to winning so much.  Its like the casino gambler who is on a hot streak, winning over and over again, completely different than what would normally happen to him.  That feeling of euphoria you get at a casino as you win on almost all of your bets is what these retail traders trading these $1 and $2 stocks are feeling now.

This probably keeps these retail traders in the markets for the long term, turning into post bubble bagholders, but that's a bridge to cross in the future.  That will be bring on another set of opportunties later.

With the insanity of the parabolic rise of so many of these crappy, speculative penny stocks, on top of the multi billion institutional darlings have made it tough to hang on for longer term shorts.  There are so many names right now that are grossly overextended and ripe for a sharp pullback that it is hard to choose the right ones.  I am sure most of them will all go back down together, as they mostly went up together.  The plan for swing trades is to stay away from the heavily institution owned pumpers (PLUG, FCEL) and focus on the heavily retail owned pumpers (BNGO, FTFT, etc). 

With the coming $2000 stimmy checks coming soon, I am sure a lot of that money will pour into these crappy stocks.  Rumors are that the Biden stimulus package will be $2T, which is absurd, since its on top of the already $1T spent just in the December stimulus bill that passed.  And I am almost completely sure that even if the economy gets hot, there will be no desire or ability to raise taxes.  With just a 50-50 split in the Senate, its highly doubtful that all Democrats will be on board for a tax increase, especially since some of the moderates will vote down any meaningful tax hike. 

So most of the Rona stimulus will end up in pork pet projects solely for the benefit of campaign donors and those with politiical connections.   It is a huge transfer of wealth from every holder of US dollar assets (not taxpayer, since none of this will be paid for with taxes) whose dollar holdings will be debased through money printing to fatten up the leeches in Washington DC. 

The reason gold is not keeping up with all the other weak dollar plays (energy/commodity plays, foreign stocks, bitcoin, etc) is because it has gone up quite a bit over the past 2 years due to the Fed rate cuts and QE.  And gold which used to primarily be an inflation trade (from 1970s to 2000s) is now mostly a monetary stimulus trade.  Monetary stimulus doesn't really help the economy much, but it does help boost gold, but fiscal stimulus actually will boost the economy, albeit a sugar high from stimmy cash raining down on Main St. and partially due to the pork trickle down effect.  And a hot economy leads to so many winners that gold ends up going out of favor, even with rising inflation.  

Bitcoin is basically a high beta play on a weakening dollar + rising stock market, so its more of a fiscal stimulus trade than a monetary stimulus trade.  Also, with so much retail involved in bitcoin, a lot of stimulus cash will end up going into further bitcoin speculation.  

It is no longer Rona stimulus.  These pork filled stimulus packages are now Russell 2000, SPAC, and Bitcoin stimulus packages.  

Biden will be announcing his pork package today.  It is rumored to be around $2 trillion, so anything less will be a disappointment.  I am sure when the dust settles, it will be even bigger than forecast as more pet projects get added on in order to win votes.  

We're getting close to a good short opportunity, have been waiting for that one last push higher to all time highs before going into an SPX short.  Thought there would be a run up to the Biden stimulus announcement, but the bitcoin correction's contagion effect kep the stock market in check this week.  So not easy to short here, although I still may take on a very small starter short position with plans on adding higher if we get that extra push higher after inauguration.  Not that exciting to short here, you almost need a perfect pitch to get short this market profitably so being careful. 

Pork: No Pain All Gain

Biden is going to give them what they want.  More pork.  More money from heaven.  Infrastructure.  Probably even some student debt cancellation.  Looks like Kamala is the one in charge, Biden is just the puppet.  The moderate puppet, palatable for the masses, doing whatever Kamala wants.  Pork is now called stimulus.  In the old days, they would just call it deficit spending on whatever pet projects politicians wanted to fund.  The euphemism is stimulus. 

Why work in 2021 when you can just stay unemployed, collect unemployment checks,  and daytrade the latest hot stocks and bitcoin with the gov't handouts.  Where are they going to find the workers to do infrastructure? Mexico?  Guatemala?  El Salvador? Sure won't find them in the US.  I guess that's what the immigration bill will be for.  To find people who actually are looking to work.  

If the Fed doesn't increase QE, there will be a revolt in the bond market with how much issuance is coming down the pike.   I am sure the chirping dove Powell will find an excuse to ignore or deny the higher inflation and give the bond market what it wants.   At least until it's so obvious that economy is too hot and he'll announce a turtle taper, would probably take 20 years to get to zero purchases, and probably won't even get started before he caves to the market again in the coming taper tantrum.  
 
This taper tantrum will be so much worse than the one in 2013, when stocks were actually fairly valued on a historical basis.  I know the excuses about why this time is different, that bond yields were never this low when valuations were cheaper, and that the Fed has your back.  But that is a bogus excuse when Europe and Japan have even lower yields and their stock markets are still way below those in the US over the past year.  
 
In the end,  after Powell caves again, the Fed will be printing the money to pay for the stimulus.  US government doesn't need taxes when you have the Fed covering the tab.  No Pain All Gain.

No wonder bitcoin is going through the roof.  And stocks are surging higher.  And dollar is weak.  With this kind of profligate fiscal and monetary policy, the US is daring the market to selloff the dollar as much as it wants.  Of course, Yellen will repeat her strong dollar policy.  

The US has become an absolute joke.  And its not as if Republicans are any different than Democrats.  They spend almost as much and cut taxes as well.  And demand low rates from the Fed.  

The US fiscal and monetary policy has become a mix of Argentina and Zimbabwe.   Who knows where this will lead in the long run when the world's reserve currency turns to toilet paper.  It won't be pretty once the hangover kicks in.   Sure, everything will be higher in price, including stocks.   For the politicians, if the SPX keeps going up, its all ok. Zimbabwe's stock market is through the roof over the past 10 years as well.  

Bottom line, US is now an MMT country following in Zimbabwe's footsteps, with high inflation (will be denied by Fed) coming, and most of the population too dumb to realize it.  

A commodity bull market in the 2020s will make the 2000s bull market look like child's play.
 
Yesterday we got the big bitcoin correction , down over 20% to 32K, is that the buy of a lifetime?   LOL.  Still waiting to see more excitement and complacency showing up in put/call ratios and news flow.  Could come with Biden's big bazooka stimulus announcement on Thursday, or after the inauguration, when riot risk is over.   

On the individual stock front, the greed and froth is reaching astronomical levels.  The pumps are hardly dumping and retail investors are feeling invincible.  When it gets this hot, it doesn't last for long.

Melting Up

 The markets are super hot.  Bitcoin going supernova parabolic.  SPX making all time highs day after day, Russell 2000 surging higher to shatter all time highs.  TSLA relentless marching higher breaking 800 with ease.  EV stocks ramping higher again with their related SPAC bros coming along.  Biotech staying hot.  This is the hottest market since 2000.  January 2018 isn't even close.  

The parabolic moves increase my confidence that we are a bit closer to the peak of this bubble than I thought a few days ago.   Still a few months away from the peak, but the enthusiasm and fervor to speculate is front loading some of the bubble gains.  

I was thinking about a short at SPX 3800 but the sheer strength of the buying on Wednesday and Thursday after the Georgia runoff and shrugging off the "scary" riots kept me from pulling the trigger.  And we have another gap up this morning.  Wednesday close at all time highs, but well off intraday highs due to the riots was a buying opportunity!  It once again proves that what you see in the news that triggers fear in a subset of investors usually doesn't last.  Riots, protests, civil unrest don't matter.  What matters now is stimulus.  PORK stimulus.  

It is a tricky time for those unwilling to ride the bubble higher, its a bit too early to aggressively short, although tactical shorts at over optimistic moments and after a parabolic rise are ok opportunities, but the better opportunities are buying SPX and Russell 2000 dips on short term stop hunts and shakeouts of weak hands.  

That is why I would only short this market at half my normal position size during those tactical opportunities, but would be willing to go full size on decent size dips in the indices.  

It is clear that Russell 2000 will be outperforming the SPX during this final blowoff phase of the bubble, which should last into the late spring/early summer. With a 50-50 Senate and Dem VP, you have enough votes to pass another big fiscal stimulus package, stimulus checks, infrastructure, and all the goodies that the market wants.  But not enough votes to pass any kind of tax increase or extra regulation that are unpopular among non-Democrats.  So the best of both worlds for stocks, and a nightmare for bonds.  

The market immediately sniffed this out on Wednesday, selling off Treasuries aggressively and the 10 year finally breaking above 1%.  The weakness in Treasuries will be with us for a while, the economy should be roaring by the summer as all the savings and wealth effect from the stock market will drive consumer spending through the roof, along with the re-opening of the economy.   

This will be the hottest economy since 2000.  Hotter than the real estate bubble in 2006-2007, and hotter than the tax cut boost in 2017-2018.  That expectation is fueling the move into the Russell 2000, which have the most economically sensitive names in the market. 

When all is said and done, after the bubble, there will be an immense transfer of wealth from one group of investors to another.  

No need to try to hit home runs now, just play for singles until the truly great opportunities arise later this year.  There will be plenty of chances to hit home runs on the other side of the mountain.  

I am holding off on the short for now, but next week, a potential gamma squeeze higher in the indices ahead of opex Friday, Jan. 15 could provide a premium short entry point to fade this super hot market.  Just watching and waiting until then.

Omen for 2021: Bitcoin Bubble

On November 23, I wrote about the EV bubble and how that was a sign of a massive bull market top in 2021.  At the time, the EV stocks were going parabolic, and since then, they have consolidated their gains, a few making new highs, but most are way below those November highs.  

After that, we've had rolling speculative waves, going from biotech to renewable energy plays and most recently bitcoin.  Most bitcoin investors consider it an alternative currency and a store of value, but regularly throw out ridiculous price targets like $100K, $500K, $1M.   I remember back in 2011-2012 when institutional investors, with a straight face, said that gold would go to $5000.  And not in 30 years, but more like 3 to 5 years.  And the thing is they said it matter of factly, not with a lot of enthusiasm, but more as if it was a fait accompli.  Gold went from 1300 to 1900 in 2011, and was still hovering around 1600 to 1800 in 2012, before the big downturn in 2013.  

Does this chart look like an alternative currency to you?  Something that is stable, that will maintain its value?  It looks more like a speculative plaything to me.  A momentum stock.  Value is in the eye of the beholder type of asset.  Like gold.  Like a piece of art.  Like a Beanie Baby.  All of those assets have no cash flows supporting its value.  

From 1995-1999, there was a huge Beanie Babies bubble.  It was a sign of the animal spirits of the time.  

The thing is that those who make the most money off of things like bitcoin and Beanie Babies are the true believers, because they hold on during the parabolic rise.  But the true believers are also the ones who lose the most money as they hold on during the post bubble crash.  Very few can ride the bubble most of the way to the top and get out before the big down move lower.  

I actually think bitcoin will go significantly higher than current prices, but do not believe it will go to $100K like a lot of these bitcoin believers.   I recognize its a bubble, a sign of the times, when SPX is in a big bull market and speculative fever is rampant.  

Bitcoin has some value as a money laundering tool and way to get around capital controls in many countries, but that value is limited, because if that becomes widespread, then governments will do whatever it takes to undermine bitcoin, making it illegal to own. 

What has sustained the value of gold through history was that aside from being used to back fiat currency, it had value as jewelry.  

In order for bitcoin to sustain its value over the long term, it can't just be based on speculative investors inflows.  There has to be a real world use for it, and the only use I can imagine is for underground transactions that are illegal and if it becomes widespread, could cause governments to outlaw bitcoin.

We are off to a strong start in 2021.  Big gap ups in gold, oil, and stocks.  Probably a bit more upside and then I expect a choppy consolidation for SPX from this week's highs (3790-3800?) down to 3630-3650 for the rest of the month. 

SPAC Boom

When the ducks are quacking, Wall Street comes to feed them.  And they are happily feeding them.

That chart was made 3 weeks ago, showing 208 SPAC IPOs YTD, it is 248 now.  so 40 SPAC IPOs have come out during that time.  Those 3 weeks, had more SPAC IPOs than any year from 2009 to 2017!   That is an average of 1 SPAC IPO per trading day in 2020, with the vast majority coming in the 2nd half.  

And why are they excited to buy these IPOs?  Here is the IPO performance over the past 10 years vs. the S&P 500.  The outperformance in 2020 is 1999-esque. 

And these SPACs, with their "blank checks", have to buy something to justify their existence.  And when you have so many SPACs competing to buy up companies that are the most popular on Wall Street, that probably means one thing:  overpaying for a lot of horrible EV related companies.   The counterargument could be that they could just not find a suitable company to buy so they'll return the money to investors if they can't find anything worth it.  Are you kidding me?  They'll buy any two-bit EV company, even if its run out of a garage.   Just like in 1999, when you have a sector that is suddenly hot and in demand by investors, supply is created one way or the other.  Either through SPAC acquisitions (now) or IPOs (1999).  

The important thing to remember about an IPO boom is not the amount of supply created by the initial issuance of shares, but the torrent of lockup expirations that happen 90-180 days later, bringing out even more supply than the initial wave of shares.  

Eventually, the hot demand for these EV and ESG names ends up creating a lot of bad supply, as in overpriced, hyped up, and unprofitable concept stocks that always sound great when there is no pressure to be profitable because all the revenue is supposed to be generated 3 to 5 years in the future, when supposedly everyone will be buying EVs and dumping their gasoline/diesel powered cars in a firesale to used car dealers. 

This EV boom is in many ways more ridiculous that the dotcom boom in 1998-2000.  At least with the internet, it was actually a disruptive technology that had a huge effect on businesses.  But EVs?  Really?  Are people's lives really going to change because they have an electric car instead of an ordinary gas powered one?  With the internet, the imagination could run wild with all the possibilities, and yet, not that many companies benefited.  With something far less consequential as EVs, its hard to imagine it changing much of anything. 

Electrics cars are a solution seeking out a problem that doesn't exist.  Last time I checked, electricity was mainly generated by burning coal and natural gas, and those create greenhouse gases just like burning gasoline and diesel.  Energy efficiencies are similar when you consider that while battery powered cars are more efficient than internal combustion engines, a lot of energy is lost in the converting coal/natural gas/renewables into electricity.  And the additional electricity demand from EVs will be mostly coming from coal, which is the cheapest, most abundant, and dirtiest.  So no, its not going to have much of an effect on greenhouse gases.

The parallels with the dotcom boom and the EV boom are eerily similar.  After a long bull market, that lasted 18 years (1982-2000) and at least 12 years (2009-2021?), investors throw caution to the wind and start to speculate like crazy on the latest hot technology.  This ends up creating a lot of IPOs to supply the demand.  From 1998 to 2000, IPOs were considered guaranteed big money profits for those who could get in at the offering price, as the IPO pops on the first day were huge and IPOs outperformed the broader market. 

And the speculation eventually spilled over to biotech and semiconductors in the later stages of the bubble in early 2000.  Recently, biotech stocks have been on fire, especially the speculative small cap names that retail investors are heavily involved with.  Semiconductor stocks have also done very well this year, and have easily  outperformed the Nasdaq composite over the past 3 months: 

The only question is what stage of the bubble are we in, using the 1998-2000 comparison.  Well we are definitely past the December 1998 stage when internet stocks were the new stock market favorites and IPOs were just starting to ramp up hot and heavy.  But I don't think we are at the December 1999 stage when almost all the people I knew who were investing were over the top bullish, Fed was tightening, and economy was roaring at the time.  

The Rona has probably extended this bubble by 12+ months because it just resulted in a flood of liquidity, as M2 has gone parabolic, with the combination of a Fed spewing tons of liquidity which is being spent by the government in the form of monster stimulus packages.  So I think we're probably in the middle of 1999 stage of this bubble, which probably means that there is still another 6 to 9 more months of this craziness before we hit the peak.  That timing coincides with the 180 day lockup expiration supply that should all come around the summer/fall of next year.  It should also coincide with the peak of the vaccine distribution and opening up of the economy, which will bring a euphoria of economic optimism along with a very overextended stock market.  

The crowd is already quite optimistic as it is, but when most of the Rona worries go to the rear view mirror, and investors start to talk more about pent up demand and excess savings, that would probably result in the irrational exuberance that would be the bell ringing at the top.  Until then, bulls have the edge. 

Omen for 2021: the EV Bubble

I will be doing a series of blog posts in the coming months detailing signs which are an omen for a monster bull market top in 2021.  Today we'll talk a little bit about the EV bubble. 

My favorite gauge of retail investor behavior, the EV stocks, are melting up.  Bitcoin has been on fire, another retail favorite.  Speculation is about as rampant as I've ever seen since the dotcom bubble.  The EV stocks are the new internet stocks.  It doesn't matter how trashy the business model is, or how self-serving the corporate governance is, retail can't get enough of these stocks. If Robinhood were releasing their investor holdings data like they used to, I am sure that the top of the recent additions list would be all EV stocks.  

I am starting to do some deeper research into this electric vehicle sector, and my first impression is that the hype is much bigger than the actual potential earnings for these companies.  The barriers to entry for this sector is extremely low, and it is already quickly being commoditized by cheaper producers from China.  There is very little IP involved, and it actually seems like its easier to develop and manufacture electric vehicles than ordinary gasoline/diesel powered cars.  

The valuations for some of these stocks, the most obvious being TSLA, but includes a bunch of questionable Chinese EV names, like NIO, LI, XPEV, just to name a few of the larger ones.  At these levels, I am almost sure they will be at much lower prices 12 months from now, but will they be at lower prices 3 months from now?  I am not so sure about that, which is why I haven't put on any long term short positions yet, but these overvalued levels are definitely getting me interested in doing the research to pick which ones look the worst, although they all look like horrible investments from just doing basic research.  

It looks like we are building a gigantic Frankenstein with retail now believing they are invincible, along with the hedge funds, as they ravenously buy stocks at the highest valuations since the peak of the dotcom bubble.  In the meantime, China has managed to export a bunch of crappy IPOs with big time valuations in the hottest sector of them all, collecting huge amounts of USD from both institutional and retail investors.  China just may come out on top after this bubble bursts, having collected hard currency for worthless shares in what are basically wealth transfer schemes, from retail to corporate management. Same thing happened with most of the internet stocks in 2000.   

Just look up Naveen Jain of Infospace to see what a corporate predator looks like, feeding the retail ducks when they quack. 

I must admit, I didn't have enough experience to take advantage of all the opportunities on the downside after the dotcom bubble burst, in 2000.  But in 2021, I have a strong feeling that I will be given a second chance to short at the beginning of an extended bear market which will confound and demoralize late coming investors for years to come.  

One by one, the signs of a classic extended bull market top are beginning to show.  The pieces of the puzzle are coming together.  It is fascinating to see that human nature really doesn't change, no matter what the new technology is, or what the economy looks like.  Greed always rears its ugly head at the worst possible time after years and years of conditioning to buy stocks, TINA (there is no alternative), and full faith and trust in the Fed, to the extent that we've never seen before.  

The Fed created this field of dreams, and if they build it, they will come.  And they are coming fast and furious.  

Still expecting a pullback down towards the SPX 3500-3520 level, but this market is taking its time consolidating and digesting all the "good news".  My spidey senses are tingling and sensing a sharp one day selloff looming.  Don't want to short, just because of the seasonal bullish tendencies around Thanksgiving holidays, but starting next week, after the holiday is behind us, I could see a back to reality and a reduction in the froth that has built up over the last 3 weeks.