QOTD = Quote of the Day
I’ d like to think that this is the beginning of the end of Big Tech as we know it. I think this is another example that when you have algorithms that are profit-driven, and these algorithms are different, and figure out the tribalism, and dividing us, is very profitable. And it ends up in an overrun or a seizure of the U.S. Capitol. – Prof. Scott Galloway, NYU
June 1, 2020
The Conversation: When I Knew America Was In Deep Shit
In early February, I drove to San Diego to attend a trade show. I stayed overnight in the beautiful beach town of San Clemente, the home of President Richard Nixon’s Western White House.
I awoke on Super Bowl Sunday and headed down to the ocean to grab some breakfast before driving down to San Diego to pick up my good friend and colleague at the airport and to prepare to watch my 49ers give an ass-kicking to the Chiefs. Wrong!
Bear Coast Coffee
I had been pretty bearish on the market at the time and thought how appropriate it was to eat at the Bear Coast Coffee. I do believe in omens, by the way. This was about two weeks before the market peaked on February 19th [and experienced the sharpest and quickest drop in history, falling 35.4 percent over the next 24 trading days before a multi-trillion-dollar bailout].
I snapped this picture and even thought about posting it while I was eating breakfast.
San Clemente, February 2, 2020
Clean & Pristine San Clemente
San Clemente wreaks of wealth (ranked 11th wealthiest city in the country), multi-million dollar ocean view homes, and I was very impressed by the clean and pristine character of the city. I thought what a great summer vacation spot for my daughter and me. Sat next to and had a great convo with a nice couple, who said their son commuted on the Amtrak to high school into Santa Ana. Great morning.
San Clemente, February 2, 2020
San Diego Convention Center
After nursing the wounds of the 49ers fourth-quarter collapse, we were about two days into the trade show when an elderly gentleman stopped in our booth and began to chat with my colleague.
Let’s call him Joe and my colleague Jim. After exchanging niceties, the conversation went something like this.
Joe: Can you believe what is happening to the world? The homeless are overrunning the country. Shitting in public. You can’t even walk in San Francisco now without stepping in human feces! Those god damn liberals can’t run anything. The homeless have even overrun my town of San Clemente. God damn it!
Jim (from back east): No, haven’t really thought about or noticed it.
[I found out later Joe’s net worth puts him in the Top 1 percent and couldn’t really confirm if he was a college graduate. I almost jumped in and told Joe he was full of shit and had been sniffing too much Faux News. I was primed for such a debate as I’ve had many similar Twitter debates with people making the same argument about San Francisco but have, you guessed it, never set foot in the town. Their perception was all painted by hard alt-right pundits.
In fact, I was in San Francisco just the prior week and snapped the following picture to use in my Twitter debates. If anyone can find a human turd in the photo, I will send you $1000. The same goes for the pictures of San Clemente. No photoshopping.
San Francisco, January 2020
Of course, every city has a homeless problem and San Francisco’s is more acute than most. But the problem is not as ubiquitous as Faux News portrays.
I also wanted to wrap Joe on the knuckles with the fact that the People’s Republic Of SF sports the most billionaires per capita by a factor 8x the second-highest, NYC, and the city has the highest rents in the nation, which might help explain, in part, its homeless problem. See our post here. I bit my tongue and kept quiet.]
The Bombshell
Then the convo turned very ugly.
Joe: My wife told me the other day she wanted to buy a gun. I said, “honey, why do you need a gun? I have several and we have a very good and expensive alarm system for the house. What’s up.” She told me, “I don’t want a gun for protection, I want one to shoot the liberals!”
WTF?
O.M.G!
I thought WTF is wrong with this guy? I am almost certain he was 100 percent serious. The dude is not a poor uneducated cracker from some “‘Podunk’ Town In The Middle Of Nowhere” He’s a one-percenter and lives in the 11th wealthiest city in the nation.
How could this be? Didn’t he realize he could just have been easily born a crack baby in Harlem if not for being born into the Lucky Sperm Club?
Whatever happened to the noblesse oblige practiced by the likes of the Kennedy clan and George H.W. Bush, the unwritten obligation of people of means to act honorably and generously to others of lesser means?
Right then and there, I realized the country was near a very ominous tipping point.
What Next?
If you think the instability in the American Street is going away anytime soon, think again.
There may be an ebb and flow of calm and violence but unless the underlying issues discussed above are addressed and mitigated the country has crossed the Rubicon into failed state territory.
Trump can continue to talk tough and even send the M1 tanks into the streets but it won’t make a damn bit of difference but to make matters worse.
It’s time to get to work and begin to really address the issues at their very core, America.
All of us united, even if the goal is to save what’s left of our own personal and selfish interests. The alternative is peril.
It was hilarious, no, sad actually, to see a piece last week by some market strategist mocking the “inflation truthers.” Kind of like “election truthers?”
Of course, he surely knows the one thing that can knock the markets on their ass and keep them down is accelerating inflation.
Guess what, folks? It’s here.
I just finished reading through at least 50 country PMIs (purchasing manager index) and almost all report accelerating inflation due to supply shocks and higher demand. It’s not just a weak dollar thingy.
A positive second derivative of prices will tie the Fed’s hands in rescuing the market for the umpteenth time, and this dude, no doubt realizes, his year-end bonus would suffer. Just sayin’.
Man, I dig Upton.
Call me a skeptic, because I am, and a contrarian, because I am. It’s my nature. I guess my mother didn’t love me enough.
Nevertheless, I just try to read and interpret the data and decipher the signs of the time.
Yes, we do know Perma bulls are born with a .725 batting average and they think they are geniuses, as markets naturally go up. Over the past 70 years, for example, the S&P has been in the red on annual basis for just 19 years.
It’s Why So Few Bears Own Park Avenue Apartments, or in the COVID era, so few islands off the coast of Nova Scotia.
A Clear Sign
The markets have once again become a social movement and everyone is now a genius.
I was lectured the other day by a friend, who said I knew nothing because I didn’t understand that millennials are taking their stimulus checks and buying Bitcoin. I tried to explain that was my point, then asked if he knew what a price-earnings ratio was or what is the stock market captialization to GDP.
He dismissed me and said something to the effect, “Nope, doesn’t matter, you’re an idiot.” Credibility is all about timing, baby, but timing is impossible,
I will also tell you my definition of success for a bear market call. It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market. That is to say, he will have saved money by being out, and also have reduced risk or volatility on the round trip. This definition of success absolutely does not include precise timing. (Predicting when a bubble breaks is not about valuation. All prior bubble markets have been extremely overvalued, as is this one. Overvaluation is a necessary but not sufficient condition for their bursting.) Calling the week, month, or quarter of the top is all but impossible. – Jeremy Grantham
I then tried to explain to him that markets don’t reflect a true fundamental reality because the government, via the Fed, has basically nationalized most of them through endless bailouts creating an alternative reality. I conveyed that my investment philosophy is to buy low and sell high.
We then had a debate over Tesla, the stock that is minting money for him. So he says.
He couldn’t distinguish between Tesla the car (we agreed the best in the world), and Tesla the stock.
Carol K. has pounded into me there are always some stocks that will make you money even in a big bad bear so I mentioned to him I do like Taiwan Semiconductor, which trades around 55x earnings, and probably the most important company in the world, rather than Telsa that trades at 1,680x.
He called tonight and wants to buy TSM. Not all was lost.
Our sense is he is not the only one out there listening to the financial equivalent of QAnon shamans.
It. Is. Coming. Folks!
How Shall It Come?
As you can see from the above global purchasing managers’ index, producers have to pay real money for real goods. No hedonic quality-price adjustments to distort real price deltas. Moreover, it’s kind of difficult for the managers to substitute hamburger for semiconductors when prices rise due to supply shocks and excess demand.
One reason why the Fed prefers the PCE deflator over the CPI, by the way. Allows for mo’ substitution and lower stated official inflation.
The Nightmare Before Christmas Bear Market
My best guess is that we are about to see a repeat of the 2018 Nightmare Before Christmas bear market, which I watched unfold from my hospital bed, by the way. The 10-year yield spiked 45 bps after breaking through some strong resistance, which was, as usual, initially ignored by the market. The market shamans argued higher interest rates are a good thing and a sign of a strong economy. Until they aren’t.
Stocks began to buckle in early October 2018 and ended up falling almost exactly 20 percent, bottoming intraday on Boxing Day, the day after Christmas. Then, only after Trump and Jim Cramer beat Jerome Powell over the head with an ugly stick for several weeks to ease up and bail out the market as Santa Claus bailed out of stocks. Gotta love the market socialists.
Rates Are Spiking
If you haven’t noticed, folks, the 10-year Note yield has more than doubled since August, up over 6o bps with valuations not exactly cheap, more than three standard deviations above their mean.
Wait, I thought the Fed was pegging the 10-year yield? 
U.S. Stock Market Valuation
Another Policy Mistake
It also looks like another stimulus check is in the mail when the Dems take control of the White House and Senate on January 20th. Any additional stimulus money should be specifically targeted to the leisure and hospitality sector, those people that have been hit hardest by COVID.
My sense is the Fed will begin to sweat razor blades as the economy shakes off this latest COVID surge. There is way too much stimulus in the economy, which will soon begin to overheat — though some sectors will remain weak — asset prices are out of control, and inflation is on the march higher.
You can’t print your way out of a supply shock without inflation, especially if there isn’t a credit contraction or problem in the banking sector.
Of course, a big downdraft in asset prices could tighten up financial conditions fairly rapidly, which is why we believe we are now in a binary economy, fluctuating between fears over inflation that sow the seeds of deflationary fears as asset markets sell-off. The Fed to rescue, inflation moves higher.
This wash, rinse, repeat cycle may soon be coming to an end, especially if the new administration doubles the capital gains tax on the plus $400k annual income crowd as they campaigned on.
Bid adieu to Goldilocks.
Poor Uncle Joe. He has inherited one huge mess but thank God it’s Joe.
At least the Orange Man won’t have his Twitter account to pop off from the peanut gallery or… Leavenworth.
As always, I reserve the right to be wrong.
Future Of GMM
On a personal note, we don’t know exactly the direction GMM is going to take. I am very busy with my other job and dealing with many personal issues. The website could look much different in a few months or fade into the sunset.
We are just waiting for Carol K.‘s health to get better.
After beating back a relapse of Ovarian Cancer with some intense chemo, she contracted pneumonia a few weeks ago and recently tested positive for COVID. She is now fighting a three-front war with a compromised immune system and yet still manages to post on this site on occasion. She is one tough lady.
Keep her in your thoughts and prayers.
She added so much to the Global Macro Monitor in 2020 with her excellent posts that made many of our readers a lot of money.
Carol and I have grown very close over the past year. She is not only my best friend but my soulmate. Godspeed, Carol K.!
As the stock market and the FOMO chasers remain unhinged from reality (3 standard deviations above mean valuations) about as much as the crowd we watched in horror invade the Capitol yesterday, it’s time to revert to a fundamental story that is consistent, logical, and will probably make you some money that you will be able to keep and bank over the medium-term. No, not Bitcoin.
It’s also an interesting story full of geopolitical intrigue. We will keep it short and sweet with some pictures.
Short Straight Of Hormuz
The U.S. didn’t import any Saudi crude last week for the first time in 35 years, a reversal from just months ago when the Kingdom threatened to upend the American energy industry by unleashing a tsunami of exports into a market decimated by the pandemic. – Bloomberg, Supply Lines
Long Taiwan Straight
Taiwan will become geopolitically important in a way that the Middle East never was. Modern semiconductor manufacturing is at least as important to the economy as oil was in the 1970s. But in the case of oil, at least it was available all over the world albeit at higher prices than in the Middle East. Imagine a world where oil only came from one country, and how important that country would have been for the last hundred years. That is what the world would look like if Intel cannot find its footing and continue to manufacture chips at the leading-edge here in America. Taiwan could become by far the most geopolitically important country in the history of the world. – themarket.ch
Taiwan Semiconductor
Taiwan Semi with 54 percent of the semiconductor foundry market share? Holy moly!
We know one smart person — well the smartest person in Carol K. – at GMM that owns a ton. TSM may be the most important company in the world.
Don’t do it, Chairman Xi.
Would China Invade Taiwan for TSMC? – The Diplomat
As we look to 2021 and the anticipated global economic recovery, we see continued interest in topics related to emerging business risks, digital transformation and cybersecurity. As a result, integrated risk management (IRM) topped our list in 2020.
We also continue to see increased interest in the wider adoption of digital technologies to support an employee base that is now physically separate due to stay-at-home mandates across the globe. Technologies such as smart spaces, digital risk management (DRM), secure access service edge (SASE) and zero trust network access (ZTNA) are emerging as critical needs in this new working environment. – Gartner
By Carol K.
Happy New Year, everyone! I hope everyone had a happy and relaxing holiday season – or as happy as can be in the midst of a global pandemic. I’ve been fighting a bout of pneumonia and was officially diagnosed with “The Covid” (as it’s known in my neck of the woods) last week. I am blessed in having access to a fantastic team of doctors and my family taking excellent care of me.
After the holiday hiatus, I was eagerly anticipating getting back to work in my home office this morning — markets are my passion, so it’s not really work. Things started out promising, the three major indices in the green in the pre-market. I messaged Gregor saying it appears we’re picking up where 2020 left off. I checked my Twitter feed an hour or so later to see what’s going on and BAM! …the Dow had dropped over 600 points, and the S&P 500 and Nasdaq were down by similar scary amounts. And you know what? I didn’t even go to CNBC to see why, because I’ve learned in my time managing my own portfolio that the “experts” rarely know why these drops occur.
Having experienced a few down days in my time managing my own and my family’s charitable foundation money, I’ve developed a set of guidelines which I sent out to a family member earlier today after she frantically texted asking what was going on in the stock market and how she should react. I thought I’d share my thoughts today with GMM readers as well.
CK’s Thoughts on Market Volatility
Try to have some liquid “dry powder,” funds that can be used to purchase stocks on your watchlist when a market selloff occurs.
There’s a clear pattern I’ve noticed over the years regarding market selloffs. I’ll retrace my observations here for our readers.
1. Fear sets in over some perceived threat (Dems taking the Senate, threat of a massive Covid resurgence threatening almost total shutdowns of the economy, Bitcoin collapse, Trump starting a war, runaway inflation or stagflation sets in, etc). Take your pick, it doesn’t matter which one if any, the narrative you select. Trust me on this.
2. Just about every stock in the market drops dramatically, regardless of the quality of the company, it’s fundamentals, what products or services it offers. Nothing matters, traders and many investors alike panic, and a massive selloff ensues. Fear-based selling begets more selling until the market eventually bottoms.
3. A few days will pass, the event or narrative in item #1 either happens or doesn’t happen. It doesn’t matter if it happens or doesn’t happen; trust me.
4. At some point, and probably sooner rather than later, the cream will start to rise to the top again. In 2021, the “cream” is high-quality, forward-looking companies in technology, the disruptive space, and of course, essential products and services, aka, consumer staples and healthcare.
5. Timing the absolute bottom is an exercise in futility, but once you’ve been through a few of these massive sell-offs, you begin to get a feel for when it could be an excellent time to start dipping your toes in the market waters and start buying a few shares at a time. With commission-free trading offered through most U.S. brokerages, buying in smaller lots is the smart way to buy.
6. Patience is critical here. It can be hard to hold on when you look at your portfolio and see a drop, whether it’s 2% or 20%. As the legendary Tom Petty (RIP) sang, “the waiting is the hardest part’. Investors and traders are warned not to “catch a falling knife,” but it’s also important not to wait too long on the sidelines until the rebound is clearly in play.
7. Remember this: stocks go up, and stocks go down; over the long run, the U.S. stock market has returned an average of 10% per year to those with the patience to stay invested at all times. It’s not a straight line up; indeed, it’s quite often a bumpy ride. Alas, at the end of the day, if you can’t stomach an occasional 10-20% drop, you probably shouldn’t be invested in the stock market. I hear money market funds are paying something like 0.03% APY…
8. Finally, to paraphrase Gregor: all of the above in the context that valuations are “very stretched” to begin the New Year, to say the least, and the market tends to regress to its mean valuation. That is exactly why I begin the year with a relatively large cash position. Many stocks are more overvalued than others and won’t generate the returns as others going forward. I honestly believe my focal areas of tech, particularly in disruptive innovation, and healthcare will greatly outperform due to their potential growth trajectories.
With the markets unmoored from historical reality (along with half the country, by the way) and valuations at historic and unprecedented extremes, it’s refreshing to see some things don’t change, such as the painful short squeeze taking place in the 50 most shorted stocks.
We don’t miss those days, not one bit. So painful to be caught in a nutcracking short squeeze.
Market valuations do not regress to their means until they do. And they will. Someday.
Our favorite stock market valuation metric — market capitalization to nominal GDP — has stocks currently almost 3 standard deviations above their mean valuation, and that even assumes a new era of valuations that began after 1996, where economic power shifted significantly in favor capital over labor.
Moreover, the average valuation for the stock market at the beginning of a new bull market is a market cap of 53.1 percent of GDP. The recent bull market, which began on March 23, 2020, initially started at 105.3% of GDP.
The momentum longs are minting money. This is so easy.
(click on chart for better clarity)
Nutcracker of A Short Squeeze
Global Macro Monitor 