Best trade ever?

Happy Friday!

This week revisits an economic model that I’ve found to be effective with clients. Also it’s an opportunity to ridicule economists (two birds, one stone). As always, let me know if you’d like a copy.

Much to discuss…

First Trust publishes great charts.

The chart below is from First Trust and it’s top tier. It visualizes the effect of inflation on the dollar since 1980. 

From the start of 1980, the purchasing power of a dollar fell more than 70% by the end of 2021. It’s a reminder to our clients that inflation MUST be considered in any investment. Those sitting in cash should especially take notice.

We are not in a recession.

The headlines around 1Q 2022 GDP are creating a confusing picture. Real GDP, or GDP minus inflation, came in at -1.4%, but that in no way implies a recession. 

Dig deeper and the story changes. Consumer spending increased by 2.7% (annualized), business fixed investment soared 9.2%, and home building came in around 2.1%. Nothing about these numbers indicate recession.

So what happened? 

First, GDP dings the U.S. economy for importing more than exporting, and imports surged. The idea is that if Americans rely more on what the rest of the world sells than what is made here, then our economy should be penalized. I get why some think this way, but my view is that consumer and business spending is way more important to the economy than where goods originate from. Sure, it’s better to buy American from a GDP perspective, but that’s a distant second to actual spending.

Second, inventories slowed down. That means companies are buying less stuff to put on their shelves, which actually makes sense to me. Hoarding has been rampant over the last year, and that’s not real demand. So, this slowdown seems more of a normalization than any indication of customer demand falling apart.

Third, these numbers will get revised several more times before they get set in stone. Admittedly, this could go either way, but my point is that measuring GDP takes a long time, and there’s no reason to jump to conclusions just yet.

The bottom line is that the Fed is probably going to drive us into a recession at some point, but the odds of that happening in the next year-ish still seem pretty low. 

Seriously?

I didn’t see this one coming, but Fidelity is now allowing retirement savers to put up to 20% of a retirement account into bitcoin. I’m loving this move, but I’m not going to hold my breath either. 

First, the Labor Department regulates retirement plans, and if you think the SEC suffers from regulatory ineptitude, the Labor Department makes the SEC looks like a Blackstone-backed private company. 

Second, this 20% ceiling is aggressive. I’ve met enough degenerate gambler retirees to fill five lifetimes, and I don’t see this ending well when the next 70%+ drawdown decimates nest eggs.

But given what we’ve discussed in the past around the need for a new playbook (versus the 60/40 approach), anything that expands the investment universe for retirement funds should be viewed as progress. Kudos to Fidelity for taking the leap first.

He did it!

Back in January, I published my 2022 New Year’s resolutions, and here’s an excerpt:

Join The Elon Musk Fan Club

Without question, this is the toughest pill to swallow. But I’ve been mostly wrong about him, and here are three reasons for my mea culpa:

1.       He’s an animal: His most recent podcast with the Babylon Bee is a must see. Watch the entire interview, and if you don’t like the politics of the hosts (they lean very right), ignore them and remain focused on how hard this guy has worked, the risks he has taken, and where he came from. 

2.       He doesn’t give two ducks: Humiliating sitting senators on Twitter, telling the SEC’s enforcement division to pound sand, a driving out of California with two middle fingers in the air months before selling over $20 billion in stock commands respect.

3.       He steals from the poor and gives to the rich: I know this sounds harsh so let me explain. I’m referring to his ability to constantly raise new equity, dilute existing shareholders, and then watch his stock go up the next day. There’s zero chance that institutional buyers are behind this, so I have to assume people who shouldn’t be buying stocks are buying his stock. Having been in sales for most of my career, I respect whatever hypnotic trance he’s placed on his loyal subjects.

That being said, I’m still not buying a Tesla.

This could be one of the best-timed trades of my career. Going long Elon just months before he buys Twitter?!?! I should be trading for a hedge fund with calls like these. 

Anyway, I’ve mostly kept quiet about this story over the past several weeks because I didn’t want to jinx it. Now that there’s board approval, it’s likely to close (although not a slam dunk).

There are so many reasons why this is awesome (none of them are political so don’t get fired up just yet). First, I’ve said for years that Twitter is the VH-1 of social media. In that, it’s complete trash and if you spend too much time using it you’ll probably develop a rash. 

Extending this analogy further, Elon could be the penicillin this company has desperately needed. He’s said that he doesn’t care about the economics, but my guess is that’s not the case. He’s staked a lot of his net worth and convinced a consortium of lenders to put up billions in loans. I don’t see banks taking on this type of risk without some plan to profitability.

Second, Twitter has done nothing – zero – zilch – for its shareholders since its IPO. Check out the chart below. Prior to Elon’s offer, TWTR was trading below its IPO price back in 2013. Long-term shareholders should be kissing his feet right now for getting them back to even (ignoring inflation, cost of capital, etc.).

Third, the memes. They’ve been top tier lately. It’s hard to rank them, but here’s one that’s certainly in the top 5. I only expect these to get better as we get closer to closing.

Enjoy the weekend…