How much longer with FOMO obey?

There’s a story out there that Stalin once ripped off the feathers of a chicken and then threw it some food. The chicken was in a lot of pain but still followed Stalin around. The apparent lesson he was teaching his troops was that a dictator can do anything he wants to “the people,” so long as the people believe he is the source of their survival.

Fast forward to today and replace Stalin with Elon Musk and “the people” with “FOMO investors,” and it pretty much explains what’s going on with cryptocurrencies. Allow me to explain.

Elon has proven more than once that he can manipulate Tesla’s stock in a way that would send any other CEO of a publicly traded company to jail. He literally can do whatever he wants. Like the time when he used Tesla to buy Solar City. This was another one of his companies being run by his cousin at the time, and it was failing. So, he decided to merge the two together, which created an almost unquantifiable conflict of interest.

But nobody cared. Sure, there were a few shareholder suits, but those went nowhere.

He doesn’t need to be a genius to realize that if the Feds issue a hall pass for manipulating regulated securities, then they really don’t care about stuff that’s unregulated – like crypto. That’s why his foray into bitcoin and dogecoin make total sense. This playbook is almost risk-free for him:

Step 1: Authorize Tesla to buy $1.5 billion in Bitcoin in January, and then wait for the price to soar higher as FOMO jumps in

Step 2: Sell Tesla’s bitcoin position (and anything he owns personally) to lock in massive profits by transferring wealth from FOMO to Tesla/him

Step 3: Tell the world that Tesla no longer believes in crypto three months later because bitcoin is bad for the environment.

Step 4: Wait for bitcoin to crash and repeat Step 1.

It’s brilliant. Why screw around with capital markets for a fresh cash injection when all you need to do is take a few bong hits, tweet something debatably funny, and then reach into the pockets of your loyal minions and take their digital wallets?

That’s way cheaper than paying bankers to place new debt, and Tesla won’t have to dilute its existing shareholders for the 286th time.

Well, this week China said that transacting in crypto is no longer allowed. This assumingly caused the crypto selloff until something peculiar happened Wednesday morning. Bitcoin caught a bid at $30,000, and I simply must assume the source of this liquidity was Step 4.

The question now becomes what will FOMO do? Will they champion this move and continue to follow blindly, or will FOMO finally turn on him?

And speaking of crypto, while this week may seem extraordinary, the chart below shows that 30%+ drops in bitcoin and Ethereum happen quite regularly. In fact, the average drawdown for bitcoin is over 30% and over 44% for Ethereum. WOW!

Two thoughts here:

  1. This sort of vol has to weigh on U.S. regulators. Think about the politics of green lighting stuff like crypto ETFs. How do politicians handle the blowback when stories of retirees losing everything start making headlines?
  2. Those who can stomach this ride are getting paid. Bloomberg reports that the Sharpe ratio (return divided by volatility to show how much return being generated per unit of “risk) is double that of the S&P 500.

None of this is an endorsement either way on crypto. Just some observations.

Lastly, the CDC dropping the mask mandate (sort of) is good for the economy because legal teams are closer to allowing commerce to get back to normal. If/when OSHA gives a thumbs up, we’ll see even more economic activity as corporations worry less about workers suing them.

But it’s not going to be a light switch like some seem to be predicting. Economic activity has picked up a lot in Texas and Florida but not as much where strict mandates remain in place. Many of these geographies happen to coincide with large economic centers like California, Chicago, and New York.

For example, having lived out in California for two years now, I can say with confidence that there’s a 0.02% chance the Bay Area drops masks anytime soon. Masks out here have become underwear. Those who aren’t wearing one get strange looks from bystanders and cops get called (yes this does happen).

People wear masks to walk dogs, drive cars, and hang out on the beach. A few weeks ago, I even took a picture of a guy wearing a mask in a kayak by himself at least 50 yards away from the pier in downtown SF. It’s become a lot like living in this:

(Bonus points for anyone who can name the movie. And don’t pull a Lance Armstrong either. No googling!)

My point here is not to rip on masks. Opinions don’t matter when it comes to investing anyway. It’s more to signify that a lot of this stuff has become a religion in parts of the country, and nobody wants to hear their religion is no longer needed.

Therefore, I don’t expect an even economic expansion nationwide and curious what the unintended consequences will be (both good and bad) as we return to normal.

Enjoy the weekend…