While the world's putative Illuminati gather in Davos, the S&P fails once more to escape its bear market structure. This in spite of some frisson over Netflix earnings and yet more bloodletting across Big Tech. Meanwhile Finance Twitter has begun to coalesce around a familiar narrative: over the next several years Emerging Market Equities will outperform the U.S. Thus we revisit one of our favorite topics. Will the emerging markets ever emerge? But this time, we turn to ChapGPT for help.And finally woebegone Bitcoin and Ethereum bounce back-ish. We discuss why, according to Alex Gurevich, if Bitcoin is Digital Gold then Ethereum is Digital Copper. 

Will the Emerging Markets ever Emerge? Part 14

This week with inflation cooling off and the Federal Reserve balance sheet unchanged, the S&P 500 stretched to near 4,000. But Jerome Powell has made it clear that no rally can long endure, not while unemployment hovers near 3.5%. For now the structure of this bear market remains intact. What's more we closed last week with Implied Volatility (VIX) revisiting a 52 week low. All this to say that with another week of earnings looming and a debt limit fiasco on the horizon, all signs point to more volatility in the week ahead. And just for fun, we entertain the idea of a Starlink IPO and whether or not it merits considering. 

January's Micro-Rally Explained

We're back after a hiatus worthy of European aristocracy!Tesla, the last great hope of technology optimists everywhere, has at last succumbed to the Great Duration Bubble. From incomprehensible over-valuation to soul crushing underperformance, the likes of Crypto, the ARK innovation fund, Meta and now Tesla have all been deflated in their turn. And why? The Federal Reserve. Once the sponsor of the greatest financial binge in modern history, now the author of the most bloodthirsty tightening cycle in the last 50 years. But there is still a case for Elon Musk's beleaguered automaker / robotmaker. Because in the end few companies possess its engineering prowess and its formidable capabilities in Artificial Intelligence. With that in mind we asked ChatGPT to explain what drove the speculative technology bubble of 2001 (below). Swap out the word "internet" here for any of the high technology assets of the last boom-and-bust, and we have a perfect encapsulation of this moment. Needless to say ChatGPT will take our jobs sooner or later. The tech bubble of 2001, also known as the dot-com bubble, was driven by a combination of factors, including:The widespread belief that the internet was revolutionizing the way businesses operated and that investing in internet-based companies was a sure way to make money.The availability of venture capital, which enabled many start-ups to get off the ground and go public, even if they had no profits or viable business models.The abundance of "irrational exuberance," or overoptimism, about the potential for internet-based companies to generate profits.The low interest rates at the time, which made it easy for people to borrow money and invest in the stock market.The lack of regulatory oversight, which allowed many internet companies to go public with little or no financial disclosure.

The Tesla bubble bursts & ChatGPT takes our jobs

The lurid collapse of FTX and with it Crytpo sentiment the world over bring to mind an old adage in high Finance. When the tide goes out, we find out who was really swimming naked. And it turns out, in the far off Bahamas, Sam Bankman-Fried was not only swimming naked. He was riding a jet ski that you paid for. What do we really mean? That in the end, the recent mania surrounding Crypto was only sustained by central bank policy. Put that much liquidity in the system, and the frontier of the risk curve, say a token like FTT, or any other crypto project with dubious innovation to recommend it, will rally. But drain liquidity, raise interest rates, crush institutional appetite, and an exchange collateralized only by the belief that Crypto was the future was bound to go bust. Say what you will about potential criminality. Bear and Lehman made the same mistake. Excessive leverage built on lofty valuations will always form dry grass for the next brushfire to carry out. In times like these, though, it is too easy to write off the whole space as trivial or deserving of its inevitable comeuppance. Every innovation is left for dead more than once. Even the internet was disparaged as little more than a cute version of the Fax machine. Until it became evident only in hindsight that it was just as consequential as the industrial revolution. In the end, it does force us to re-examine what projects actually have use cases, far off as they might seem. As ever, we discuss. 

FTX and the Crypto Winter

Last week, Jerome Powell took the mic. And with the mystic language of macroeconomic policy said the equivalent of: we can't stop, won't stop, murdering your equity portfolio until inflation improves. Makes sense. The last best hope of a near term pivot died there on the podium. Practically speaking, the Fed will be hawkish throughout 2023.And so the S&P 500 lurches onward in No Man's Land at ~3,770. Who will win the day into year-end? Bulls or Bears?

We Can't Stop, Won't Stop says the Fed

Earnings season began this week with mixed results. And if there are two companies that tell the story of these times, they are Snapchat (SNAP) and Schlumberger (SLB). Snapchat you surely know. Once the darling of young people sending ephemera to each other during lockdown, it is now little more than a glorified penny stock sent reeling from its soaring pandemic-era valuation. A dreadful year for tech, social media most of all, and another dreadful earnings call to mark its passing. Schlumberger on the other hand sounds like a retail outlet for elderly European equestrians. It is in fact an Oil company. And its star is on the rise. The so-called Great Rotation, from overvalued Tech to undervalued Commodity companies, continues. Which begs a recurring question of this podcast? Are we entering the Last Great Age of Oil? A final shortage that will send commodity prices soaring and with it the profits of the fallen Oil Giants? Or will a recession wipe demand off the board? For the purposes of investing, does it even make sense to chase the rally in Oil, or has the opportunity already passed? 

Earnings Season and the Last Great Age of Oil

This week inflation came in hot versus consensus. And while we have past the peak of so-called headline inflation, with energy costs abating somewhat, CORE inflation is still accelerating. Rent costs in particular are running wild. What does it all mean? As was, the Fed still has a data-driven license to hike rates with abandon. And in the equity markets, the price action around Thursday's print suggests traders have no conviction about the direction of travel in the S&P 500 over the medium term. They are only degenerately trading day to day moves. If we look then into the murky future, more downside feels more likely than not. Simply because there are no bullish catalysts to overcome the pall of Fed hawkishness. Patience remains the game. So with nothing to do but wait, we discuss Elon Musk's ongoing evolution into a movie character. You and I might pass the time watching TV or working out. Elon buys social platforms and tries to broker Putin-friendly peace deals. What does this portend for the future if technology entrepreneurs with unlimited wealth accrue supranational power? 

Inflation Week! Plus Elon is a Bond Villain

Every once in a while, we get to the point in financial markets where all that matters is...wait for it...you guessed it...BOND MARKET LIQUIDITY. In the simplest terms, there are not enough willing buyers to scoop up US treasuries. Or any government bond for that matter. Least of all, as was this week, British government debt. So dire did circumstances become in London that the Bank of England was forced to ease again and become the buyer of last resort. At the death, many pension funds were saved that otherwise would have gone out with the tide.But how did we come to this road? With the benefit of hindsight, or the foresight that very few had (like Joseph Wang), it all appears to be the work of quantitative tightening. With the Federal Reserve no longer buying treasuries with abandon, another buyer must emerge. But no such buyer exists, at least not at the margin or at least not at this scale. Tack on the global shortage of dollars needed by foreign central banks to service dollar denominated debt. And we get EPIC volatility.Some Finance Twitter experts like Lyn Alden have long argued that this dynamic is the real test for Central Banks. They might ideally like to keep tightening until inflation softens to 2%. But what might in the end trigger a pivot first is actually disorder in sovereign debt markets. The actual market that matters for all other markets. 

The Looming Sovereign Debt Crisis

This week the European energy crisis took center stage on Finance Twitter. Is this right and truly checkmate for Europe? With Vladimir Putin throttling natural gas, and no longer under the pretense of scheduled maintenance, what does the winter hold for, say, German Industry?  The Germans might have enough in storage to weather the cold, but what will prices look like for European citizens and businesses?All of this has led to massively negative sentiment. Erik Townsend of Macro Voices ended his podcast this week with a prediction that the world might be ending. Well, at the very least he said the Halcyon days of cheap energy and easy living for the West are done and that World War III is at hand. Which was also his way of saying that commodities will become exorbitantly expensive over the next decade. Back in North America, we revisit the topic of Fed Policy. Sure enough, inflation and unemployment are the watchwords. But what about credit market liquidity? If that seizes up, they might be forced to waffle earlier than inflation would otherwise allow. So we turn to credit spreads. 

The Resource Apocalypse?

With the eyes of Finance Twitter fixed on Jackson Hole, Jerome Powell coolly reminded the investing public that a pivot is not in the offing. And if there is no self evident pivot, then the fever dream that was this summer's bear market rally might right and truly be over.Of course no one really knows as yet whether we're actually in a bear market or a bull market. Such is the divide in opinion around the Fed's actual willingness or ability to remain hawkish. Inflation might be the dragon of our time, in need of slaying at all costs. But is that even possible at the pinnacle of a generational debt cycle? Can the debt burden even coexist with a properly hawkish Fed. Either way, volatility looks poised to increase. But will it be a garden variety oscillation higher, or a proper capitulation and puke that sends the VIX to 40? The fabled next leg down? We discuss.

No Pivot for You!

Last week, the Finance Twitter newsfeed produced an embarrassment of riches. Just to enumerate the highlights:Nancy Pelosi visited Taiwan and sent the CCP into a frenzy The jobs report blasted consensus, making way for more Fed hawkishnessAmazon bought Roomba, completing it's conquest of your homeMichael Saylor stepped down as CEO of Microstrat to work on Bitcoin full timeBlackRock announced it will now offer bitcoin trading for institutional clientsWhich of course bears not at all on the state of technicals. But it does appear that Friday's jobs report was the narrative capstone to a rally in the Nasdaq, that by all technical standards has reached very overbought levels. Is this the point of exhaustion, in the near term at least, for the counter rally?

Tail Risk in Taiwan

What do we make of this rally? Is it a 2005 Donovan McNabb pump fake? That is, a bear market rally? Or the beginning of a pivot to accommodative policy once more? On Wednesday Jerome Powell said, and didn't say, just enough to prolong a run up in risk assets into the weekly close. Why?In short, he didn't say anything that was incrementally hawkish. Crack the window open for those itching to go long, and in the short-run, they will pile in and duly vaporize short sellers. As ever, we resort to charts and lines to settle the case. And in the Nasdaq, we don't yet see a decisive break above the defined down channel that has dominated this year. Best guess? Bear Market Rally. But who can say? And is there a trade worth taking in this milieu? 

Bear Market Rally or Powell Pivot 2?

This week the Consumer Price Index, the inflation measure that now governs the market, came in higher than consensus at 9.1%. And yet the 10 year treasury yield didn't move. And the equity market chopped sideways.What do we make of this? According to the high priests of the bond market, we've priced in an even more hawkish Federal Reserve in the near term. And thereby a higher chance of a recession later on. In this milieu, the long bond ETF TLT might be forming a bottom. But still the game is patience. 

Inflation is the worst

For data visualization, please use the links below or follow us on Twitter @DegenerateBiz-----------------------------------------------------In the era of quantitative easing that has predominated since 2008, bad news is good news. And good news is bad news. Take for example GDP. The Atlanta Fed Nowcast has telegraphed we're already in a recession. Bad news for America, but good news for stocks badly in need of more Federal Reserve accommodation. On the other hand, Friday's jobs report shows ongoing strength in employment. Good news for America. Bad news for stocks, which remain vulnerable to the tightening cycle. And in the context of low unemployment, the Fed has yet more license to tighten. But on the doorstep of June's CPI print on Wednesday, we ask: what is actually priced in? 

In the stock market....good news is bad news

For data visualization, please use the links below or follow us on Twitter @DegenerateBiz-----------------------------------------------------While multiples have been smashed in the wake of this tightening cycle, the equity market may yet be vulnerable. Two things will govern the next quarter and beyond.1. The next inflation print. This above all else will govern Federal Reserve policy. When June CPI is published, will the fabled base effects kick in? Or will CPI prove sticky and persistent? Until it is clearly and sequentially down, all accommodative policy is gone.2. Corporate earnings. They may yet disappoint as costs rise and the economic environment worsens.All this to say, not a time to go long, but a time to raise cash.

The Sword of Damocles

For data visualization, please use the links below or follow us on Twitter @DegenerateBiz-----------------------------------------------------Since the Great Financial Crisis of 2008, it has never made sense to be bearish. Why? The so-called Fed put. The belief that, should financial markets ever wobble, the Federal Reserve would step in to allay concerns, prevent contagion and generally ensure the upward march of asset prices and collateral. That all worked in a regime of low-inflation.But what happens when inflation is persistent and material? Then the world's leading central bank can no longer afford to accommodate financial markets. And in the end, if asset prices have to go down, thereby destroying demand, then so be it. Which is to say that the Federal Reserve won't back stop this sell-off until inflation comes down in a clear and obvious way. And right now, it's difficult to say when that may be. So we raise cash, the least trash. 

Is The Fed Put Kaput?

The consumer price index, the flagship indicator of inflation, came in at 8.6% on Friday. Not only did this flout consensus of 8.3%, but it put down an emerging argument that inflation would soon begin a sequential decline. And thereby open the door for a return to the much worn, accommodative policy of the Federal Reserve. Not so fast. What was to blame? An outrageous run-up in energy prices driven by the Russia-Ukraine crisis, and beyond that, the persistent incapacitation of China's busiest port cities. It turns out inflation is sticky and difficult. What it does portend in the near term is more pain ahead for risk assets. Stocks, crypto, bonds. All must pay tribute to the most stubborn inflation and the prime directive of the Fed right now. To reign it in.

Cash is the least trash

For data visualization, please use the links below or follow us on Twitter @DegenerateBiz-----------------------------------------------------Technically, but for a moment on Friday, the S&P 500 entered a bear market. This according to the priestly record that marks the bull and bear runs of all market history. We now stand down ~19% from the peak in early January. Obviously, the superficial question heavy on our minds remains: is this the bottom? But more consequential is a broader mystery. How long will the Federal reserve remain hawkish, targeting the gremlins of inflation? Their resolve to see inflation tamed will dictate in the course of time how long this (now almost) bear market endures. For there can be no increase in asset prices without the easing that central banks provide.A clue might be found in the trajectory of 10 year US treasury rates. Is it possible that bond rates have finally tested resistance, near the high in 2018? And what might that portend for equities?

The Bear Market Cometh

For data visualization, please use the links below or follow us on Twitter @DegenerateBiz-----------------------------------------------------The pandemic era in the stock market felt like something new. A time when all the treasure of the West could be called into service, ensuring the endless march of untold riches, economic juice and asset prices. In short, anyone with a Robinhood account and the will to win could make money. But those were the halcyon days, the times of plenty. And every generation must in its turn learn the old lessons. It turns out, at the end of the Everything Bubble and in the cold clarity of hindsight, investing is still hard.  This week, with high inflation and financial tightening wrecking stock indices, the once darling Crypto complex Luna-Terra fell into the sea. The promise of algorithmic stable coins remains elusive. What comes next we ask in this newest Crypto winter?

And...it's gone: The Collapse of Luna

For data visualization, please use the links below or follow us on Twitter @DegenerateBiz-----------------------------------------------------With Netflix falling into the sea and the indices vaporizing, we beg the question. Is a repeat of 2018 finally at hand? We think it is. In late 2018, the Federal Reserve tightened financial conditions such that the S&P 500 sold off roughly 20% from peak to trough. But it was a turbulent road to the bottom. We explore what the next several weeks portend if history does rhyme. And what we intend to do with it.Plus, just for fun we wade into the machinations of Elon Musk's Twitter bid. And we realize slowly that we've actually become Elon bros. How did this happen?

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