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Positioning Counts

Yesterday was a historic day for technology stocks as blue chips firm such as ecommerce firm Amazon (AMZN) was up over 12% on the day.

It was a day to remember.

Even the marginal tech stocks did well like digital used car dealer Carvana (CVNA) which delivered almost 31% of performance in just one day.

I would boil down one of the greatest up days in tech stocks’ history to positioning.

Tech stocks have been crushed on almost every inflation report and when the October Consumer Price Index (CPI) dished us a 7.7% increase over last year and 0.4% increase over the prior month, tech stocks took off like a rocket.

We finally clawed one back for the tech companies.

That’s not to say we are in a deflationary environment – hardly so.

However, the bar has been set so unbelievably low at this point, that any measly beat of consensus was going to cause this type of explosive reaction.

The highly positive unintended result is that it offers investors an attractive entry point into tech stocks until the November CPI report in December where we play chicken yet again.

I fully expect dip buyers and portfolio managers chasing year-end performance to jump into this bear market rally until December 13^th.

Long term, the Central Bankers must be shaking their heads as this sets the stage for even more inflation as a cheaper dollar will bid up the price of commodities possibly delivering consumers higher oil prices and higher raw material costs next year.

That means higher iPhone costs and higher EV costs that get passed onto the guy or gal opposite the cashier's counter – the American consumer.

Other knock-on effects will mean higher gas prices for Uber, Lyft, and DoorDash drivers to deliver hot meals.

Celebrating a 7.7% inflation headline as a homerun is funny when we think about it, but that’s how negative positioning was going into yesterday.

The indexes for used cars and trucks, medical care, apparel, and airline fares all declined over the month.

Looking into individual aspects of the report, housing prices continued their climb, with the cost of shelter recording its largest month-on-month increase — 0.8% — since August 1990, while rising 6.9% from a year ago.

The food index increased 0.6%, down slightly from September's 0.8% increase.

I can easily see the shelter portion of inflation dropping for the November CPI report in December because shelter is a lagging indicator and my analysis earths reductions in rental listing prices and greater supply.

Therefore, shelter coming down would stoke yet another bull rush into New Year for tech stocks.

In a nutshell, short-term highly positive and long-term somewhat negative for tech stocks is how I would categorize this report.

At the end of the day, investors and traders scoff at the 5% Fed Funds rate as not a big deal and are weaponizing any scintilla of relative loosening to pile into the long side.

This is the problem when the smartest people in the world are convinced that the Fed will save the day if systemic contagion ever emerges and until then, keep bulldozing into the bull side on every modicum of perceived easing to the credit liquidity story.

It is basically a lift-off for tech stocks until December 13^th.

September 13, 2022

Bitcoin Letter

Mad Hedge Bitcoin Letter
September 13, 2022
Fiat Lux

Featured Trade:

(BITCOIN GETS DROPKICKED)
(BTC), (CPI)

Bitcoin Gets Dropkicked

Bitcoin Letter

The proof is in the pudding, and this is yet more evidence that it’s impossible to extinguish a forest fire with a bottle of water.

That’s the analogy I would like to trot out as another white-hot inflation number pierces the hearts of team transitory.

Inflation staying at 8.3% year over year is highly negative for the price of Bitcoin, cryptos, and risk assets in general.

Crypto was supposed to be the savior of inflation, but at the time of this writing, the price of Bitcoin (BTC) is down 6% this morning and underperforming the broader Nasdaq market by two times.

Everyone knew that inflation would still come in high, but the 8.3% is highly disappointing as the inflation naysayers had already started to spread the deflation narrative or that inflation has “peaked.”

We are currently stuck in a vicious feedback loop where elevated inflation cannot be contained with the current Central Bank policies.

A low Fed Funds rate of 2.5% cannot crack inflation over 8% and it’s killing the price of crypto and literally destroying the digital coin industry.

At these accommodative rates, the job market is holding up quite well which is what the Fed doesn’t want. Job seekers who lately have gotten cut from technology firms are reappearing with higher paying jobs and better benefits in different parts of the economy.

There is no hope for Bitcoin until the US Central Bank finally tames inflation.

The consumer price index (CPI) rose 8.3% in August from a year earlier, a mild slowdown from the 8.5% reported for July.

Gas prices came down, but other sectors offset those price decreases and caused overall inflation to remain elevated. Health insurance, for example, rose a blistering 24.3% year-over-year, the largest increase ever.

Food at home and rent prices were also one of the main drivers this month, up 13.5% and 15.8%, and services inflation rose above 6%.

The result of all this is that a Bitcoin reversal will be delayed as crypto investors wait for inflation to decrease.

I can’t imagine Bitcoin getting over the $25,000 per coin hump until there is more progress on the inflation front.

This is also negative for crypto infrastructure that is holding on for dear life until the next bull market comes.

Anything bullish in crypto has been effectively pushed back.

The inflation report means that US consumers will deal with a cost-of-living crisis longer than expected which will supersede any crisis in terms of what currency they want to store wealth in.

The larger risk is that the US Central Bank risks losing control of inflation completely as the negative feedback loop can accelerate to the downside which might force the Fed to raise rates to unprecedented levels.

It sure appears that this is morphing into a whack-a-mole phenomenon.

It’s clear that the Fed is being way too generous to equity holders by casually increasing rates at a pedestrian pace. If they lose control of inflation, Bitcoin could go to $10,000 per coin.

The fact is that the US Federal government is the biggest beneficiary of low-interest debt which is now about to touch $31 trillion.

The Fed is doing everything it can to not raise rates more than is needed because it makes servicing the debt and those interest payments too onerous.

The Fed will need to raise rates to keep the Federal government solvent if the risk of hyperinflation increases.

Ultimately, this new inflation report means that inflation will persist longer than expected which will cause the Fed to raise short-term rates faster and higher than expected.

Today was a sucker punch to Bitcoin – the digital is down and out for the time being.

November 11, 2021

Bitcoin Letter

Mad Hedge Bitcoin Letter
November 11, 2021
Fiat Lux

Featured Trade:

(BITCOIN HOARDERS AREN’T SELLING)
(BTC), (CPI)

Bitcoin Hoarders Aren't Selling

Bitcoin Letter

Bitcoin, lately, is resting and the good thing is it’s not too choppy.

It hit around $69,000 before retracing back to the mid-$60,000 levels and it’s just the sign of things to come.

We are at the tail end of the asset purchase program and many outsiders believe there will be an awkward transition.

That’s probably not the case.

We want it orderly which helps an inherently volatile asset like Bitcoin, and I believe that is what we will get.

The 6.2% CPI number sets the upper limit precedent and if later numbers come in at 4% or 5%, Bitcoin prices will react positively.

As the price of Bitcoin has persistently maintained its north of $60,000 status, the talking heads and diva hedge fund managers have stopped criticizing its existence.

It’s about time.

That is a massive victory and stamp of validation for the fledgling asset.

At a broader level, I believe the Fed is stuck between a rock and a hard place.

Each fork in the road gives Bitcoin a higher price and they know it and the only deal breaker is uncontrollable inflation that will trigger a run on the US dollar.

Conversely, if the Fed prints more money, that’s an unambiguous green light for higher bitcoin prices cut and dry.

The second choice assumes what the Fed has somewhat admitted, inflation is permanently transitory leading to even higher levels of inflation which erodes the faith in the abilities of the Central Bank which will send Bitcoin prices higher as well.

This “liquidity event” has become a buy the rumor and sell the news follow through with Bitcoin prices trailing off.

Many were caught off guard by the strength of the CPI number and even if Bitcoin is lower today, this high inflation data strengthens the case for Bitcoin as a perceived store-of-value asset in the long term.

Sometimes we need to move 1-step backward to go 2-steps forward.

Triggered risk aversion which was accompanied by a strong dollar and weakness across the top cryptos would not have happened with a more moderate inflation number.

The little threads of doubt that inflation would be temporary have been shredded and the market has fully absorbed that a profound paradigm shift in the global economy is underway.

Another knock-on effect is near-term economic growth forecasts are trending towards that of “stagflation” — a period of stagnant demand and high inflation.

There are a lot of moving parts here, and this does move up a wall of worry for investors and retail customers.

It becomes psychologically harder to deploy large sums of capital into an alternative investment, real estate, and other large investments in this precarious environment.

That is why we are still in the $60,000 range and haven’t broken either side of $70,000 or $50,000.

On another positive note, the supply of bitcoin on exchanges continues to dwindle, which could indicate a preference among investors to hold Bitcoin in wallets instead of making their coins available to trade on exchanges.

This dovetails quite accurately with my prognosis that the crypto market is currently in a sit-and-wait mode observing to see how things shake out.

Basically, the crypto hoarders, who own 63% of the total Bitcoin supply, aren’t selling.

This short-term consolidation in the mid-$60,000 could be short-lived as I believe once the market stomachs higher inflationary numbers and strong dollar behavior, we will be barreling right into debt ceiling talks in December triggering another leg up to the Bitcoin story.

At the main street level, retail traders representing the middle class and their case to hold Bitcoin strengthens.

Living costs are up crazy and it's broad-based.

Increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles are among the larger contributors.

The case has never been stronger for the average Joe to protect themselves by investing in crypto as a bulwark against central bank money printing.

Traders in the market for futures contracts on the Federal Reserve’s key interest rate now see a 38% chance of a rate hike in June 2022, up from 28% prior to the CPI report.

My bet is that an orderly march up in rates will decrease the rate of change in higher rates giving a pathway to higher Bitcoin prices.

Ultimately, this type of news would have meant a 20% selloff if it happened a year ago, the asset has matured so much that it’s taking the stronger dollar reaction in stride.

This is highly bullish for the price of Bitcoin signaling that it’s here to stay.

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