Degenerate Business School

Doubtless THE story of financial markets in 2023 has been the astonishing comeback of MegaTech. When rates went to zero during the pandemic, the explosion in Tech valuations made sense both in terms of mechanics and narrative. If discounted cash flows were governed by the 10-year rate, then companies like Apple became something like 100 year bounds. Look far enough into the future and it was hard to imagine how the likes of Apple, Amazon, Facebook and the like could fail. 

But then the Fed tightened, rates went parabolic and old man favorites like Exxon Mobil had a moment in the sun. Surely MegaTech couldn't flourish until the return of ZIRP! Unless of course a narrative could sweep away all talk of mundane calculations like discounted cash flow. Because Artificial Intelligence is the end of business history. Right?

Meanwhile out in the wilderness, buffeted all around by the winds of winter, Crypto has secretly grown up. This week Bitcoin was de facto legitimized by the SEC as the only investment grade asset in the whole ecosystem. In a way the Bitcoin Maxis were accidentally correct. No, Bitcoin won't sweep away the nation state, but it will be offered up by legitimate Wall Street firms. Like any good revolution, it has successfully been co-opted by the establishment. 

The Ancient Greeks used to say that Phobos, the God of Fear and Panic, ruled the battlefield. We might say the same of FOMO in the realm of financial markets. Even in the face of higher rates, an overblown debate about the debt ceiling and at least the theater of quantitative tightening, speculative fervor has returned once more to the American stock market. 

2021 promised a revolution in Blockchain technology, whatever that means. And now 2023 foretells the end of human intelligence for all time. AI, it is said, will solve every conceivable problem. And therefore any company attending to its rise will capture all future financial value. By now call buying on Nvidia is more fashionable than wearing Crocs to a Shawn Mendes concert. And by now we have learned that average retail investors like us are chumps if we think we can chase such a rally as this. 

But we must remember that all innovations, whether destined to change business history and our lives forever, must first be overrated in the short term. Before they are underrated in the long term. See the internet in 2000. 

Over the past year, the S&P is down just 4%. In the world of equity markets, that is essentially...nowhere...a nothing burger. This on the heels of the Fed's most aggressive hiking campaign in living memory, one that began last March. Doubtless there have been puzzling rallies and plunges in between, a banking crisis, the makings of a bond market catastrophe and the looming debt ceiling debacle. But in the bigger picture, how do we account for the relative strength of the equity market in the face of this uncertainty?

And here we return to our favorite topic of the year, the Fed Balance Sheet. Which, you may have guessed it, has shrunk just 4% in a year. Sift through all the divination that technicals provide and the market can neither correct nor break out without the gravity wave of top down QE or QT. Suffice it to say that bulls in this market are betting on just one thing. Not better earnings, or a better economic outlook than most are projecting. There is only one question worth asking. Will the Fed be forced back into QE and when. So go asset prices. 

In the end, if QE infinity is the way, Tesla might be worth a laughable amount. But Chipotle will cost $100 a meal. 

We spend a considerable amount of time on our silly little podcast agonizing over levels in the S&P 500. As we hover below 4,000, is the stock market overvalued or undervalued? Did the market bottom at 3,600 in October? Will this recession bring about the same relative decline as the Tech Bubble of 2001? 

But it bears reminding that levels are an illusion. Pop open a chart of the equity market over the last 20 years and you can't help but think the run-up is nonsensical. How could we not be on the precipice of an epic correction? A world gone irrational! But that chart is little more than an artifact of Central Bank largesse. Over time the Federal Reserve has accumulated the liabilities of the American Financial system. The practical consequence? The inflation of asset prices to previously unimaginable heights. 

We are left to wonder then, what will happen to the stock market over the next decade? Far be it from me to actually say. But as Michael Howell pointed out this week, we are witnessing in real time the de facto nationalization of American Banks. The unraveling of regional banking sets in motion the next play in the same endgame. Resolved to thwart any systemic crisis, the Fed and the Treasury will absorb for all time the liabilities of the American banking sector. And they will, as ever, monetize the ever increasing Federal debt. That means only one direction for the Federal Balance Sheet. Up again. And with it, asset prices...again. 

The halcyon days of quantitative easing made us all forget one simple truth. That in the annals of financial history, bank runs are numerous and inveterate. Like the coming of spring or another movie from the Marvel Cinematic Universe. 

Except that the Great Financial Crisis did in practice, if not in law, change the game for all time. There are now 4 unimpeachable megabanks enameled with Too-Big-Too-Fail status and unlimited deposit insurance. And there are all the other banks, to which depositors are merely unsecured lenders. But even then, The Fed and the Treasury are clothed in immense power, and can intervene in any financial calamity if they deem it to be systemically important. 

Thus, in the wake of even Silicon Valley Bank's collapse, they created the Bank Term Funding Program or BTFP. Do I really know what its provisions are? Of course not. I'm on Twitter too much to know the details.

But we must ask the question, is this just Quantitative Easing by another name? And in the end, do all crises lead to unlimited easing by one road or another? For there is one thing that the events of 2008 made impossible. The collapse of collateral anywhere in the West. 

We spend our days trying to guess which way financial markets will go, like medieval alchemists or broadcast news meteorologists. Is the bottom already in for the S&P and all degenerate risk assets? Where will rates go, and for how long? Is now the time to buy bonds? Does it even make sense to pick stocks?

But why struggle, when staring us in the face for the first time in our investing lives, is a risk free rate of 4.4%. Plumb any mutual fund money market account from Fidelity or Blackrock and you shall find a yield of just that. Mind you taxes and inflation will still mean we're losing money, but we'll lose it more slowly. 

Why? Because Jerome Powell has raised the Fed Funds rate. The 1 month treasury yield is now 4.68%. Just 1 year ago, that figure was a mere 0.05%. So why not just hang out and collect? We discuss. 

With the S&P dithering in no man's land, we speculate on the implications of ChatGPT and its inevitable imitators. Needless to say it will trivialize the entire profession of data science. But will it become the greatest business-to-business software service in the history of capitalism?

Next we discuss the re-emergence of short-dated options, and the potential consequences for market volatility.

Lastly we wonder whether or not the zombie corpse of Bitcoin and Crypto assets writ large are breaking correlations with the Nasdaq. And if they are, does it imply institutional interest? And is that interest a hedge against the very collapse of the sovereign debt bubble? 

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. 

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. 

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:

1. 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.
2. 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.
3. The abundance of "irrational exuberance," or overoptimism, about the potential for internet-based companies to generate profits.
4. The low interest rates at the time, which made it easy for people to borrow money and invest in the stock market.
5. The lack of regulatory oversight, which allowed many internet companies to go public with little or no financial disclosure.