Pulse of the Market- May 2021
It has been another month in a volatile stock and crypto market. I want to discuss two things: The Dogecoin frenzy and the one-two lethal combo: tapering of bond purchases & rising interest rates
Dogecoin- How a Billionaire Controls Social Media
Feb 2021. Dogecoin was at 6 cents. A saw the memes all over the place and had a limit buy order for $500 because I thought it was funny but cancelled the buy order. I told myself, "I can’t really be this dumb and buy this joke of a coin since it’s even more of potential loss than betting black on roulette."
Well in the end, I made a 5k plus mistake given Dogecoins historic rise. What has occurred has been a frenzy pumped by one of the richest men in the world, Elon Musk. A proclaimed troll on Twitter, he’s been one of the only billionaires actively interacting with his shareholders for years through memes. But when Doge gained a bit of traction in 2017, then started another move in late 2020, Elon seized the moment to be the face of Dogecoin. To sum it up, Dogecoin is a movement that ultimately makes fun of established cryptocurrencies like Bitcoin and Ethereum.
In my opinion, Elon has a lust for acceptance. The attention feeds his ego. It’s the main reason many people, including me, just couldn’t pull the trigger on investing in Tesla. Elon provides unwanted exposure to volatility (usually downside in the short term). In a time of extreme information flow and high frequency trading, one tweet of his can move the stock price, which has nothing to do with fundamentals, just like Dogecoin. Maybe that's his goal, to have ultimate influence on something that has zero fundamental value. If he can control the younger generation through memes, he can really do anything cant he?
If you like memes, I will say Doge has some of the best memes on the Internet. Here are a couple of my favorites:
Doge on a rocket:
Doge on the $1 bill:
Elon holding Doge like in the Lion King:
Or my tweet below where I joked about my analysis on Dogecoin. If I would have bought here, I would have been up 250% before the SNL performance. The mistake almost writes itself.
For the Dogecoin army (maybe some of you reading), I have heard two pretty common arguments on Twitter that are completely illogical.
1) It's an affordable cryptocurrency: You can, and always have been, able to buy partial Bitcoin, Ethereum and other established crypto. The price is extremely low in these alternative, gambling coins to entice young investors to buy more since they think it is "cheap" compared to Bitcoin.
2) It’s just like Bitcoin but funny: No, it’s not. It has unlimited supply, no institutional ownership, and no halving cycle. Might as well say pies are just like cakes since they are both sweet.
Just like what happened with Doge during the SNL performance, being the one getting rug pulled without taking some profits makes the whole meme not fun. Think of it as being in Vegas on the roulette table. You can win two times in a row, like I did this month, but if you can’t walk away then Vegas wins. It’s the ones who can’t turn their paper winnings into real winnings who are the losers in the end, even if they bought Doge at a “low” price.
In the end the talking heads on CNBC are betting against a meme. Memes are powerful. They are the way the younger generation communicates, laughs, and even protests the establishment in the age of social media. It’s hard for the older generation to understand that a kid with a smartphone and some spare cash can get rich by one Elon musk tweet than most can imagine. 2021 almost seems wilder than 2020 with Dogecoin to the moon, GameStop evaporating Billions of short bets, and Bitcoin rising to 65k. Just don’t take this summary of Dogecoin as buying advice unless you like to bet black or red on roulette. In that case, have fun!
The One-Two Combo: Tapering and Rising Rates
It is very hard to listen to our economic leaders (the Federal Reserve and Treasury Dept.) when they are so vague in their jargon. However, recently (last 1-2 months), the wording of these two bodies has been more direct. First let's take a listen to Jerome Powell and his answer to an inflation question:
Powell clip:
Does the picture attached look like "transitory (not permanent) inflation" to you? If you have been buying lumber recently, I know your pockets are hurting. One of the key ways to stop "transitory inflation" from becoming real inflation, is to increase interest rates. Everyone in the stock market knows it but no one knows when JPOW is actually going to enact his threat of finally raising rates. He mentions he wants the Fed funds rates to stay at 0-25 basis points, but can he really keep it that low with the skyrocketing of prices and M2 supply? Who really knows anymore. I am just laying out what I am seeing. Lastly, Consumer price index (CPI) data came in on May 12th. It was not good with much higher than expected price increases across the board. Please note the attached graph is slightly old but lumber prices are still insane.
See https://www.cnbc.com/2021/05/12/consumer-price-index-april-2021.html
2) Next, we heard from Treasury Secretary, Janet Yellen. She has been repeating words such as "frothy" and phrases such as "we may need to increase rates due to overheating of the economy". Let's take a listen to one of her very recent Q&As where she back tracked her earlier comments:
Yellen Clip:
July 31st warning: https://thehill.com/policy/finance/552391-yellen-says-measures-to-avoid-default-could-run-out-by-summer
Yellen basically set a timer of July 31st for when the government will reconsider their historic buying of bonds (around $120B a month). If the government decides to taper bond purchases, or reduce quantitative easing, interest rates will rise. Like I said back in March, interest rates rising doesn't bode well for the stock market (in the short term) but allows for the controlling of inflation after the Fed's insane move to increase M2 supply by a historic rate. Yellen hinted on "gradually increasing rates" to stop an overheating economy then immediately back tracked.
And to top if all off, legendary contrarian investor Michael Burry disclosed on May 17th in his 13F fund filing he was short Tesla (40% of his fund) in puts options while also short $TLT (ETF that tracks the 20 year treasury bond) and long $TBT calls (2x inverse $TLT or 2x inverse 20 year treasury). He is betting on rising rates/ inflation. I think he is right. If you want to learn more about his somewhat complex, highly levered inflation bet, here is an excellent video that goes into detail:
Conclusion
Crypto is here to stay (yes even after the massive downward move, which historically is pretty common), given the Federal Reserve's excessive printing of money (increasing M2 money supply), purchasing of bonds, and institutional flow into established cryptocurrencies. The Fed/ Treasury consistent use of the f-word (frothy), the t-word (tapering) and the phrase "increase rates due to overheating of the economy" is all I need to hear to be on my toes and ready for the inevitable tapering of QE and interest rate hike. Just don't FOMO (fear of missing out) into these coins after parabolic moves, especially the alternative, Ponzi scheme coins. You will thank yourself for being patient later given most don't remember winter of 2017. Again Dogecoin is literally roulette. But honestly, better than buying lottery tickets.
** Update from last month: Cathie Wood, the portfolio manager of the growth ETF, ARKK (who has destroyed the S&P 500 since 2017) confirmed on CNBC that the legend himself, Bill Hwang of Archegos, seeded her initial fund back in 2014. I am glad she cant YOLO like Bill with margin, total return swaps since she runs an ETF. Most people don't even realize she can't "blow up" like Bill because she runs an ETF. Plenty of hot takes and tin foil hats after the news broke.
See clip:
Best regards,
Pulse of the Market- May 2021
If you want to learn more about crypto Goldman Sachs released a very detailed report (with historical data) on the asset class). See the tweet and corresponding thread: https://twitter.com/krugermacro/status/1395884451549356037?s=20