Pulse of the Market - December 2021
This market has been compared to the 1999-2000 Tech Bubble by many. While there are plenty of pockets of euphoria, there are differences that need to be examined to understand the current market
Tech Bubble Flashbacks: Why the Fed Controls this Market’s Outcome
I have heard many people, mostly those that lived (and traded) through the Tech Bubble of 1999-2000, comparing this market to that euphoric market more than 20 years ago. While I agree there are plenty of pockets of euphoria in the current stock market and newly developed crypto market, the blanket comparison is lazy if you don’t contrast the market dynamics between the two time periods and understand the stock market’s history.
Low interest rates (10 year US Treasury)
Low interest rates are the live blood of risk on investing. Putting it another way, if interest rates are low, speculators can invest or gamble using cheap debt, and companies can reinvest into their business at a low cost of capital.
Looking the 10 year US Treasury chart, in the 1999-2000 bubble, the 10 year Treasury traded in a range of 5-6.5% and continually rose until the market bubble popped. In 2020-2021, the 10y UST has traded in a range of .5-2%.
This contrast has allowed companies to report substantial earnings growth and strong fundamentals if they were able to use cheap debt to their advantage, unlike 1999-2000 when people where buying Pets.com with no fundamentals….
Quantitative Easing (QE)
QE is form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.
This is chart is very simple to understand. The orange line is the Federal Reserves’ Balance sheet (aka money printing). The black line is the S&P 500 chart (or stock market index). As the government started to print infinite money to keep the economy from going into a depression after 2008 and then again in 2020, there was infinite money to invest in the stock market. What happens when they turn off the infinite money printer? I think it’s kind of obvious
I have warned about the looming taper several times, and even wrote in August, “In simpler terms, JPow is finally warning that the punch bowl at the party may be taken away soon and all the printing of money and purchasing of bonds might not be so dramatic anymore.” Here is JPOW leaving the party with the punchbowl…
Lastly, the 1999-2000 bubble did not have QE. That is a key difference between the two markets.
High Frequency Trading/ Volatility
Hight frequency trading (which use algorithms) allow for violent moves up or down in the short term, which makes it seem that the current market is very erratic. A perfect example is a rapid and aggressive short squeeze.
A great book to read to learn about the birth of high frequency trading (and how Wall St ripped off the average investor) is Flash Boys by Michael Lewis.
In 1999-2000, while moves were violent when the bubble got to its peak, there wasn’t zero commission trading, crypto markets running 24/7, hedge funds with unlimited money from the government making large/ concentrated bets, high frequency trading by quant funds or low interest rates/ QE.
With that being said, there are pockets of euphoria that are pronounced and obvious: NFTs, meme coins, electric vehicle companies with no revenue, etc. You can acknowledge these areas of the market without throwing your hands up and declaring the market is gonna crash (even though it very well might).
The Ghost of Michael Burry: Why Bears are Hated in Times of Euphoria
Bears, or investors that are betting against the market, are always hated in times of euphoria. Many investors see them as the “party poopers” or “doomsday preppers” waiting to pounce on fear and emotion. The most famous of them all, Michael Burry, has been in the news all this year, as he tweets ominous warnings and bets against the high fliers of 2021.
Burry is my favorite investor to follow for a variety of reasons. For one, he his quick to change his mind and zig when others zag. Back in 2020, when everyone pronounced retail stores like GameStop and Michaels dead, he was buying those companies in the hundreds of millions based on their fundamental value and lack of understanding by the general market. Burry was long on GameStop based on fundamentals and a need for a drastic change way back in 2019! As the famous line from the Big Short from Michael Burry goes, “I may be early but I ain’t wrong”
Burry Long Gamestop in 2019 (CNBC article)
Secondly, he is extremely convicted in his analysis and usually has very concentrated bets in his top holdings, while also using leverage with calls and puts to amplify his returns. Currently looking at his 13F filing, which shows his hedge fund’s positions as of Q3 2021, he has a Google ($GOOG) call option which makes up 11% of his portfolio, Tesla ($TSLA) put option (betting against Tesla), which makes up 35%, and CVS which makes up 40% of his portfolio. Go look at the CVS chart. He has done very well.
Lastly, he is extremely outspoken with his views. He doesn’t hide his beliefs or analysis, which is what every investor should do. An investor should always be looking for holes in their thesis and questioning market dynamics. An example of this is his tweet below calling out the SEC’s blatant disregard of politician’s alleged insider trading:
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