Are all Good News in?

Markets only top when there’s no one left to enter it.

I wasn’t trading in 1987 (I was 5) or 2000, but for me it feels we’re getting closer to a tipping point.

COVID came and screwed up the folks at bottom of the wealth pyramid and that turbo-charged populism. The K-shaped Recovery will become clearer as days go by.

Without any debate COVID gave governments the free pass on huge fiscal deficits. MMT went from “WTF?” to “here it is” in weeks.

But such stimulus to the masses will be used for short-term consumption, replacing lost income, but in many cases increasing the income of many. It won’t be used for investments materially. Little of it was used for long-term productivity growth. But the deficits are on public balance sheets. And they are massive.

And the wealthier, with low marginal propensity to consume, accrued all these stimulus checks: larger businesses, shareholders of such businesses, the acceleration of tech, digital services adoption (Netflix streaming x AMC movie theaters), etc. Some data and surveys, suggest some of this stimulus went out into stocks, especially in the US. And now we’re seeing lots of financial asset supply, via IPOs and SPACs, debt issuance, which came to the market in record pace, pushing some items to sky high valuations very quickly.

Story Stocks went to the moon and made investing look rather easy. See Tesla for a story, with articles on WSJ touting average joes who turned a few thousand $ into millions. Or GameStop or bankrupt Hertz, AMC.

And crypto: $ trillion dollar market value, even though mostly don’t provide a stream of cash flow or service flows (fiat currencies in theory provide a stream of future public services). The supply of crypto might be limited within a token realm (Bitcoin or Ethereum), but new different crypto-assets come to the market every day, mostly without use cases yet. I hear there are over 7,000 different tokens out there.

Bitcoin: Some companies like Tesla are moving some of their cash into XBT. Tesla is even accepting XBT as payment AND stated they won’t convert those XBTs received into USD — I wonder if they’ll convince their suppliers to also receive XBT as payment for car parts. Even my brother, a musician, tripled some of his cash through XBT. Dozens of my friends who are lawyers, programmers, engineers, veterinarians, now own crypto, stocks, equity funds. And I was mocked the other day by the founder of a Crypto business who blasted over e-mail “You are nakeeeeeeed!” (of Crypto), then went on to say that any good money manager knew he/she had to own crypto on that date (25-Feb, XBT @ 51,000-52,000). [I had owned in the past, for clients, had to exit due to regulations. I still have exposure personally, but small now. Believe there’s lots of speculation in the realm]

Non-Fungible Tokens (NFTs): electronic art is going for tens of millions of dollars out there. Not that it doesn’t have value, really. But the stories are everywhere. Funds are being created to buy and hold NFTs. The issue is the speed of adoption, the velocity of rise in prices. NBA partnered with crypto-guys to issue short videos of basketball plays, like animated GIFs, as collectibles and there are some of these going for > $200k a piece (of bytes on a blockchain). The platform is negotiating millions of dollars per day.

$ARKK (Growth, Tech, Software): Big boom, crazy inflows into tech, next generation businesses, now a spectacular drop. ARKK saw over USD 16 bln in net inflows since Jan 2019, out of which 89% since June 2020. The recent speed of inflows, 50% since October, was so gigantic that ARK’s funds moved up so fast, taking valuations of invested companies higher as lots of these companies weren’t big enough to withstand so much buying without steep upward moves in prices. But here’s an interesting fact: Inflows stagnated as ARK’s ETF prices dropped nearly 30% from the high reached on 12-Feb of this year. Now avg price for these inflows is only ~2% from current price. That means that if there’s a slight drop from here this will have the avg investor with a loss, making them more sensitive to further drops. It means more vol and likely a steep liquidation in a illiquid vehicle. Bloodbath. I believe same will have to Crypto funds when the cycle turns. ARKK: it is happening. Crypto, as a whole, I believe will see something like 2017-2019 price action.

Fiscal: I don’t know anyone who believes the US Government won’t spend a lot of money, maintaining huge fiscal deficits.

So my Qs are:

– Have we reached maximum optimism with asset prices as there’s ample belief only Fed tightening causes market tops?
– Can stimulus seen in 2020+2021 be repeated without negative consequences? Markets are pricing in multi-year highs in inflation expectations and multi-decade lows in real interest rates for the US. Will american politicians be able to pull even more $ for Infrastructure WITHOUT the need for new revenue?
– Will the economic recovery be robust enough so as to NOT need the same level of fiscal stimulus we are seeing currently, thus justifying certain risk-asset valuations into 2H21 and 2022?
– Are we going to get a fiscal cliff of sorts in the coming 1-2 years relative to what was done in 2020-2021? Or the printing, at this size, will really go on?
– Have we reached the low in taxes or not? If we have, and Governments will now tilt towards helping the little guy, have corp profit margins peaked?
– Who else is left to enter the market if one of the narratives is that Growth, Story stocks had such a remarkable performance in 2020-2021 because inflows from retail, into funds and directly into the market, was just absolutely massive?
– Considering market valuations, can “Fed won’t tighten any time soon” be just the same as “Fed is tightening” in practice?
– What needs to happen from here for the Fed and Governments stimulate things further?

Yes, COVID recovery, with all vaccinations around the world, will help eco data growth numbers, adding to the trend in revenue, corporate profits and employment.

But what is the best piece of news that can come to your Bloomberg from here?

I sense that if risk aversion cracks current trends it will need A LOT MORE from policy makers to revert the very large vessel now stuck in the ‘Market’s Suez Canal’, onto a path higher.

I’m still biased lower in inflation starting 2H21, but Fiscal Stimulus directed towards the little guy surely is more effective in increasing money velocity, consumption, than more QE is (or lower yields). The issue is that when the mass consumes more it is easier to justify higher realized inflation and higher inflation expectations. But in past periods of higher and rising inflation multiples didn’t fare as well as when disinflation was ongoing.

Very, very thoughtful days. Watching market price reactions to good and bad news. Bull markets grow on good and bad news and Bear Markets happen despite good news.


Feel free to get in touch. I will surely answer you when I find some time. A brief introduction would be welcomed.