Thu. Jan 20th, 2022


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Good morning. I bought a Christmas tree this weekend, which put me in a good mood. But the market does not seem to be full of holiday spirit. Someone, please email good news: robert.armstrong@ft.com and ethan.wu@ft.com.

The pain will stop when growth weakens

The last two weeks have been ugly. Five times the market tried to recover, and five times it failed:

The ugliness culminated in Friday’s messy trade, which killed Thursday’s rally attempt. The temptation was – initially – to attribute this latest defeat to a poor job report, as the report’s main number was a big miss. But the real problem, not just Friday, but since the market began to break down in the last week of November, is exactly the opposite. The economy is growing very well, and inflation is rising fast, so stricter policies are coming soon, just at the same time that fiscal support is winding down. This is bad for risk assets in general, and especially for more speculative risk assets, which depend on liquidity.

For now, the picture really seems that simple.

Under the heading number in the job report, as more and more people noticed as Friday progressed, was not only upward revision of previous months’ figures, but very strong results from the household survey, which showed a higher employment rate but a rising indicates participation rate. As Rick Reider of BlackRock pointed out, we are at 98 percent of pre-Covid private employment levels.

It all fits neatly with the Atlanta Fed’s GDP now measure which, surprisingly, approaches 10 per cent growth. And it fits equally nicely with the Federal Reserve chairman saying that when the Fed board meets this month, the acceleration of the decline will be on his agenda, which will make room for interest rate hikes to come sooner. “QE has left its welcome,” Reider says; Strategas Research says if the Fed had not said so firmly that there would be a slimming down, “it might have made sense to stop asset purchases together”.

This context explains, for example, small-cap stocks that have fallen into an official correction over the past month, and the more recent stock market crash in unprofitable long shots (The ARK Innovation ETF, down 17 percent in two weeks), of Bitcoin (also down 17 percent) and of meme shares (Gamestop and AMC both fell 30 percent).

There are many preliminary early signs that Omicron may not be able to cause serious illness, and that existing vaccines and boosters may be effective against it. If these faint (and very welcome) signals are confirmed, it will only increase the pressure on stocks. The market is in good news is bad news mode.

The last big piece of this puzzle is the yield curve, which is flattening out. It may seem strange that the economy is flourishing, policies are going to tighten and the long-term effects are going down. But if you assume that the economy will quickly return to its sluggish, pre-Covid state – the economy formerly known as “the new normal” – when extraordinary fiscal and monetary support is removed, the yield curve also makes sense.

It’s not that the Fed’s market expects to make a classic mistake and sharpen too much, which will push the economy into a recession. The market praised the Fed’s tightening cycle with a high of about 1.5 percent – which (like Randall Forsyth) pointed out this weekend in Barron’s) would mean real interest rates would most likely still be negative at that point. Instead, the market assumes that the economy’s underlying fundamentals are so weak that a shift from hyper-accommodating to merely highly-accommodating policies will be enough to bring inflation under control. The market may be delusional, but it is internally consistent.

Finally, the flatness of the yield curve neatly agrees with widespread perception that the economy is bad, about which we wrote last week. This was pointed out to us by our friends Ian Harnett and David Bowers of Absolute Strategy Research. They argue that the yield curve follows the extent to which consumers think the economic future will be better than the economic present. Here is their graph of the future expectations portion of the consumer sentiment survey, minus the current conditions portion, compiled against the 10-year-2-year yield curve. This is an intriguing fit:

Ian writes:

It seems that US consumers only see the current policy mix as a short-term stimulus. The biggest failure of the Fed / Treasury policy is that it has failed to raise long-term consumer expectations about the economic outlook. . . thus, the yield curve is not going to get steeper until either easing consumers’ current situational perceptions (which detracts from the two years) or significantly increasing longer-term expectations (which helps support the longer side of the curve).

It is logical and depressing.

Boy Band Coin

On Saturday, the FT had a story involving crypto, the South Korean boys’ group BTS, and their fan community, known as Army (“Adorable Representative MC for Youth”). These are bonkers. Here’s the timeline, as far as we can tell:

  • October:

    An anonymous user creates a BTS-themed cryptocurrency called Army Coin and it starts trading on the Singapore crypto exchange Bitget

    Bitget promotes Army Coin as a way for fans to help BTS idols focus less on money and “let them do what they want to do”

    BTS’s record company, Hybe, says Army Coin had no link with BTS and threatens to sue Bitget

  • November:

    Army Coin Bounces Between $ 1,000 and $ 78,000 in a Day

    Army Coin debuts on another exchange called CoinTiger, which trades around 10 cents (it now trades closer to 7 cents)

    Bitget cuts off service to Singapore users; the Monetary Authority of Singapore (MAS) already withdrew its approval of Bitget in July for reasons that are still unclear).

  • November / December:

    Bitget removes the MAS logo from its website, following a query from the FT

  • At a certain point:

    MAS suspends Bitget’s local operations (sources do not agree on timing)

There are a few things to note here.

First is that there are a lot of discount BTS goods, after which Hybe a zero tolerance policy. So simplistically, you can only think of Army Coin as fake BTS goods that happen to be digital. And just as there are official merchandise, so there will be official BTS NFTs.

Second, the thing all these items – self-loading BTS goods, Army Coin, the legitimate BTS NFTs – have in common is that they are all ways to turn hype into money. You buy merchandise or NFTs or meme tokens for the same reason: either you personally like the thing being represented, or you speculate that others will like it and you can sell at a profit. It is also what cryptocurrencies like Omicron currency, Shiba Inu currency and F – kElon coin. To what extent is this also true of, for example, Bitcoin or ethereum? Readers are invited to shout about this in the comments.

Third, the whole absurd story illustrates that crypto in its current form is not really decentralized. Crypto exchanges are centralized bottlenecks through which most crypto users gain access to the market. Singapore’s regulators did not like how Bitget did business, so they just shut it down in the country. Army Coin was forced to move to a duller market, where it traded at a much lower price, just like a knock-off boy-band T-shirt. The whole thing went down just like things do in the meat world. The true believing vision of crypto as a parallel digital system free from central authority is not happening yet.

Fourth, Hybe may have gone after Army coin merely to protect the BTS brand. Hybe might fear that some Army Coin proceeds would otherwise have flowed into the BTS NFT or non-virtual BTS products. In other words, is the demand for hype-based assets zero? How much does the entry of new cryptocurrencies drain the demand from existing ones? Important questions for those who are capturing the value of bitcoin at its finite offering. (Ethan Wu)

A good read

I’m going to miss Bob Dole. A nice tribute here. In a meeting that is off the record, I once asked the former leader of a great country why politics has become so ugly. He said it was because all the veterans of World War II, who knew what was really at stake, were gone.

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