Do cryptokitties belong in your portfolio?

Happy Friday!

This week sucked and I’m guessing many investors will want to know why, so here’s my take…

Congress wants to pass a $1.9 trillion stimulus package that is not needed. The economy is growing (just look at the monster ISM Manufacturing report this week), and over 50% of the country might have some level of immunity to COVID already. It’s hard to look at the future for the U.S. economy and see it as anything other than white hot.

Stimulus means new debt issuances, and since last week’s debt auction didn’t go so well, there are concerns that (1) there may not be as much demand for U.S. debt as anticipated and (2) inflation could explode higher and force the Fed to raise rates sooner than expected. 

I think rates began rising weeks ago as a risk on trade from bonds to stocks. This ignited convexity hedging last week (after the poor Treasury auction), and the spike in the 10-year was misinterpreted as an indication that stocks are doomed because of inflation. Yesterday, Jay Powell basically eluded to rising inflation in his forecast, and stocks began selling almost immediately after he uttered these words.

While there will likely be inflation from the combination of a rising economy, a money supply up 26%, and a crazy amount of stimulus coming our way, it doesn’t imply that the Fed will raise rates… yet. They have stated repeatedly that their focus has shifted from inflation to unemployment, and if so, we would likely need to see a major change to unemployment before inflation regained the pole position.

That is, unless the Fed were to reverse course, which is probably why traders freaked out this week. They seem to think that rising inflation is going to force the Fed’s hand, but I don’t buy it. At least not for a few more years.

And if the Fed does stay firm, what do investors do in a world where bonds offer little returns, cash earns nothing, the economy is booming because COVID is ending/over, and stimulus checks are falling from the sky? I think owning stocks makes a lot of sense.

Another stated reason why stocks sold off is because the 10-year rate is used to discount cash flows of companies. The idea is that as this rate rises, future cash flows of companies are worth less. This is technically true, but I doubt it’s the reason why people are selling. I also don’t see how the 10-year can rise much higher without the Fed raising short-term rates, which leads me to believe that this has been an over-correction.

But that doesn’t mean it’s over either. I’ve discussed ad nauseum that the next few years are not going to be fun, and this could be our first real test of 2021. Even if I am right and the market recovers, there’s going to be more of these. 

Lastly, don’t forget that a10-year Treasury yield at 1.5% compared to Japan’s or Europe’s 10-year looks pretty good right now (see chart below). My guess is this could inspire foreign buyers to step in and bid the 10-year Treasury yield down from here too. But that’s purely speculation and suggested as nothing more than food for thought.

Source: Darwin Asset Management

Ok now this is important. If you learned anything at all from the commentary above and you want to retain it for future use, then for the love of God do not read anything below. I’m serious. This is the type of commentary that will only make you dumber. 

If you are still reading this, don’t say I didn’t warn you.

Ok here we go.

Early Monday morning, I clicked on this link to read about an art collector who paid like $67k for some piece of art and sold it a few months later for $6.6 million. The surprising twist to this story was that this “artwork” is actually nothing more than a 10-second video clip that could have been watched for free online. 

Welcome to the world of nonfungible tokens. If you want a primer, here you go. The concept and technology is fascinating, and there’s no question that its application will become more mainstream over time (although I have no idea how).

What is so shocking about NFTs is how they are being used today, which is to facilitate the purchase of digital art and ownership of 3 second video clips of LeBron dunking (again something that can be viewed on YouTube presumably for free). The sums being paid are equally staggering. We are talking millions in transactions that have exploded just this year:

Speaking of transactions… I’ve always had a morbid curiosity for what it feels like to hit rock bottom, and I got pretty close when my research landed me on the doorstep of CryptoKitties. These are digital kittens that are unique and can be purchased as pets and for breeding (don’t ask). The market for these is apparently en fuego. People are paying crazy money for digital cats.

A few days later, a colleague sent me this:

I don’t even know what this is, but it costs $2 million. 

Some clients have even asked about NFTs and why they are making waves. The only way I can explain this rationally is by reminding them that:

  1. This is what happens when you screw with interest rates
  2. And then dump trillions into Americans’ bank accounts
  3. And force people to work/live at home for too long

Enjoy the weekend…