As discussed for over a year now, you can’t increase the money supply by 25%, send people checks in the mail, tell them to stay at home for months, and not expect inflation.
Take the last three months and we are running at an annualized inflation rate of 7.2%. That’s really high, but I don’t think anyone believes it is going to stay up here for long (except maybe those who sold this week).
My guess, and it’s nothing more than a guess, is that there are a lot of people out there who were looking for a reason to sell and used this lame excuse to pull the trigger.
If so, I find trading like this to be myopic and risky (market timing is a tough business), so we pretty much ignored it. But we aren’t ignoring inflation.
In fact, if clients ask what we are doing about it, you can say that we/you did something about it months ago. Well, now it’s here, and although most portfolios were likely down this week (because everything was down this week), we feel prepared for secular inflation (not 7%+ but 3.0%+ is more likely).
Furthermore, don’t forget that there are a lot of people who own stocks right now that don’t want to own stocks. But they don’t have a choice because cash is trash and bonds aren’t much better. The Fed has forced people up the risk curve (much like after the financial crisis) and they are scared. This amplifies the impact of uncertainty and is likely fueling some of the acceleration we’re seeing in vol spikes (the VIX on Wednesday was wild).
Let’s analogize this scenario for further clarity. It’s no different than what happened last year to hedge fund managers. They hate spending time with their families (some people don’t like stocks), but when their office buildings were shut down (Fed sent rates to zero and eviscerated expected returns in cash and bonds), they had to go home and play with their kids (conservative investors being forced into equities). This made hf managers very uncomfortable (conservative investors don’t like volatility), and they have been looking for any excuse under the sun to get out of their house (conservative investors and traders looking around for any excuse to sell stocks).
I’ve said since November that this new bull market was going to suck. It’s not enjoyable to get whipsawed like this, and clients are surely worried, but this is the price one must pay if they want to position themselves for the types of returns that stocks have delivered for the past half century.
Ok now on to some fun stuff…
There’s a new crypto out called Shiba Inu (SHIB), which is meant to be a parody of Dogecoin. In case you don’t remember, Dogecoin (Doge) is a parody of bitcoin.
Doge is worth more than several companies in the S&P 500, and now SHIB is worth $26 billion. Matt Levine at Bloomberg wrote about it a few times this week and was kind enough to provide a link to SHIB’s “woof paper.”
Stories like these make me question if the SEC will ever green light a crypto ETF when billions are getting funneled into parodies of the very thing trying to get approved. They’ve been denying requests for years, so how can this possibly help?
Furthermore, the SEC issued a warning this week to mutual funds to be careful about using bitcoin futures. I don’t ever bet on the outcome of a government decision, but I get the sense that the SEC won’t do it this year.
That being said, Eric Balchunas is Bloomberg’s resident expert on ETFs. He even wrote a book a few years ago on how ETFs work and their role in asset management (highly recommend reading it). He was interviewed this week by a colleague and believes I’m wrong and that we are at the precipice of the first bitcoin ETF gaining approval.
I hope he’s right because I can’t wait for the stories to flood the media of everyday investors losing their retirement funds because they traded these things. And not because I’m negative on crypto and/or retirees. I’m a fan of both, but if these do get approved, I’d suggest using them in asset allocation rather than day trade them. Because all these billionaire crypto disciples got rich by holding, not trading. Don’t forget that.
Moving along, here’s an article that firmly supports reason #835 why I don’t swim in the ocean.
And finally, back when I worked on the sell side, I used to publish the “SNOB Report” to my clients. SNOB stood for Sorrentino’s Never Off Base, and I’d use it to review restaurants, hotels, and other fun stuff like where to source proper crocodile skin for the wainscoting in your G650 lavatory.
It was wildly unpopular with my bosses, but my hedge fund and institutional clients seemed to enjoy them. It also kept me from taking a swan dive off the 34th floor due to the unrelenting boredom of that job.
Anyway, I dedicated one issue to the frustration of playing billiards on a yacht (there’s a story here). This awarded me a long convo/scolding with the head of equity research.
But I stood firm with my conclusion – that it’s nearly impossible to confidently masse for the win when angular momentum is working against you. Management thought I was just trying to be funny, but to the contrary, the missive was meant to be more of a tragedy. I even ended by saying:
“It’s sad to think that human ingenuity lacks the grit to solve such a harrowing first world problem in my lifetime.”
Fast forward to today, and I’ve got stellar news to report. Bugatti did it. Yes, that car company popular with over-levered celebrities has created a pool table that stays level on a yacht. And it looks AMAZING.
Enjoy the weekend…
Mike on Markets 