Anyone watching (or trading) US equity markets might have noticed some (lets call it) optimistic price action in certain stocks, such as (but not limited to) AAPL, AMZN, PTON, ZM, and of course TSLA. Keen observers will also have noticed 9984 Softbank also ripping through new record highs.

At the same time, these stocks tend to sell off together – and I mean specifically these stocks -3% to -10% or more intraday, while the broader market is positive.

Its as if there’s some “Virus Immunity Tech Momentum ETF” out there, lumping in/outflows into one basket of select securities which move up and down in tandem. Well, there is: the individual retail investor.

Obviously I’m not literally saying that retail investors have ventured together and created an SEC approved listed ETF.

NOR DO I MEAN “ROBINHOOD RETAIL” ONLY – its so incredible how simple minded people are when equating millennials on this notion of “Robinhood = ALL US RETAIL FLOW.”

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*Side rant* See Q2 earnings from TD Ameritrade and Interactive Brokers just reported at time of this writing- TDAM new accounts EXCEEDED Q1’s record, daily trading volume +62% Q0Q and 4x YoY. ETRADE, SCHWAB will report similar. Fidelity, Vanguard, Merrill seeing more flows, more new accounts, more new assets added, and more growth in asset values as prices rise – so, yeah. “Robinhood only.” -no apologies for the rant, you’re welcome for the facts).

What I’m saying is that there is a market structure and mechanism that now exists, where individual investors engage in a form of social trading – unlike institutional investors who go out of their way to hide their flows, individuals convene together on social media, apps/platforms such as this, and even the brokerage platforms themselves offering social trading products, discuss/hype each other up on ideas, and then go into the markets to execute on those ideas. And they do so ACROSS ALL platforms, but in aggregate, act as one giant asset manager’s flows, which are front run by HFT , pushed alongside algos, and finally chased by the pathetic closet indexing, underperforming/overcharging institutional active managers (who are no longer managing market risk, they’re managing career risk). And if the retail “morning meeting” is taking profits on winners (virus themed momentum tech), profit taking becomes contagious for that day/morning session, and the “retail virus immunity momentum tech index” constituents sell off together, while the rest of SPX or even the Nasdaq trade positive.

How this relates to BTC:

You may have also noticed that somewhat surprisingly amidst this cross asset madness YTD- equities, rates/bonds/credit, fx, commodities volatility on a global scale, BTC has been dead flat. Not just relative to other asset classes, but actually dead flat- realized volatility drifting ever lower, with the exception of mid March “liquidate everything” mayhem, where USTs and gold were sold off for dollar liquidity, BTC obviously not immune. That said, BTC was only as volatile as other asset classes, and if not for those other asset classes, has been doing nothing.

Before BTC fundamentalists jump up and exclaim how this is proof that BTC is indeed a store of value and uncorrelated and all that (which my own views are “perhaps, lets see” and “uncorrelated fundamentally, correlated in short-med term price behavior, and its the latter that I/most care about), I’m going to unfortunately burst your bubble with a view I’ve had for some time.

The reason BTC is doing nothing, or- the reason TSLA call options are trading $15bn notional a day, is because they compete with each other for trading activity and capital in/outflows – and this is because they share the same source of capital and trading activity: individual retail. Agreed that BTC was (and arguably still is) retail driven, yes? And recent TSLA /tech rally has atypically large retail presence, which is indeed impacting the markets, also yes? So in a sense, bubble enthusiasm isn’t necessarily “zero sum,” but one at a time. There’s only so much capital to hype up the broader masses enough to bring Elon Musk’s net worth from #40 to ranking within reaching distance of Zuck, Gates and Bezos (RANKING, not nominal $, for now at least). Keep in mind, US retail is not the only retail out there. Japanese retail (particularly millennials & Gen X) are FAR more aggressive with their trading activity, and far more disposable dry powder than US millennials, plus a 2~10 year head start. Japanese retail kicked off the 2017 BTCJPY rally, luring in BTCUSD and BTCEUR millennials. And currently, Japanese retail is also long US equity ETFs (denominated in yen, so SPY listed in Tokyo outperforming SPY on NYSE), and of course, they’re long TSLA – they too can buy fractional shares.

If you look at this chart- BTC speculative bull interest used to trade in tandem with TSLA (which are both retail predominant flows, and neither TSLA nor BTC are some sort of SPX index heavyweight, correlated/correlating all things to it). But its been “abandoned” for momentum tech + TSLA call options, and it happened at a surface level obvious, but deeper dive interesting inflection point: TSLA breaking $1k. If anyone (human active traders) is to respond to “psychological levels” of round number resistance/support, its retail. BTC @ $10k & TSLA @ $1K were competing against each other as psycological levels, as they just so happened to match up in timing. And since July as TSLA broke clean through its $1k psychological (and actual level with a ton of delta hedging activity at/around the $1k strike) resistance for another +70% immediate upside, BTC remains absolutely flat, taking a nap just below $10k. BTCJPY also hovers around the ¥100,000 level YTD (a level that US traders of BTC need to not be so oblivious to – world may “revolve around the US” to some of you, but decentralized markets don’t and don’t care).

Conclusion: TSLA reports earnings after the bell tomorrow, and may be a catalyst for a major BTC upside move. TSLA Q2 earnings has an insane amount of focus (and capital) betting on one number: net profit/loss- as the belief is that should TSLA report its 4th consecutive quarter of net profit, they’ve now fulfilled the last requirement for S&P500 index inclusion and thus will be included, forcing billions of index tracking fund inflows.

I’m not going to speculate on what Tesla reports, I frankly don’t care. I will make 2 comments:

1) Optimistic fundamental scenario is certainly priced in- to what degree, who knows, but who is out there watching TSLA rally multiples YTD, and THEN buying after earnings confirm something? Clowns, that’s who. So there are likely no more buyers of TSLA fundamentals, which the stock price is FAR above anyway.

2) That leaves S&P inclusion catalyst. Just to be very clear: posting 4 Q’s of cumulative net profit is BARE MINIMUM ELIGIBILITY, not automatic inclusion. The index inclusion process is opaque, and involves non-tangible factors, hence there being a voting committee (opinions of humans, not black/white in/out based on numbers). And finally, its S&P500 , not 501. Need a dropout to replace. So this is not just a TSLA net profit vs loss in Q2 matter, its not even a Tesla matter alone. Again, I don’t care about any of this, I care only about the behavior of capital flows.

IF TSLA reports a profit, you can very well see outflows on profit taking. And if TSLA reports a net loss, pretty likely stock will tank. Either way, TSLA & US tech stocks have stolen away capital and interest in BTC around the world, as they share the same source of capital and interest. And the TSLA interest bubble may be over, regardless of results. BTC won’t automatically re-attract interest/flows. But if BTC (for whatever reason, TSLA outflows or otherwise) starts breaking meaningfully above $10k and starts jumping double digit % day after day, you will get a 2017 type of BTC rally on steroids. Conversely, if BTC starts rallying on its own, TSLA will get crushed as capital flows out of the stock and into crypto as the “next thing.”

Again, I’m not making a long or short call on anything, I’m just explaining the behavior of capital flows- which is ultimately what prices everything. Not earnings , not central bank printing, not ideology- capital flows and only capital flows. And it seems that capital has forgotten BTC for TSLA and US tech momentum, so being long BTC may prove to be a “short” Nasdaq position (ex the liquidate everything initial flows), but without losing money on nasdaq upside (as an actual short NDX would).

Stop looking at the asset, and where it “should” be. Wrong approach- capital flows and only capital flows decide where an asset should/will be. So therefore, turn around, and study the behavior of capital instead of the asset.

When all is said and done with monetary printing, consensus estimates for the size of the Fed’s balance sheet are upwards of $12 trillion, which would be a tripling in assets from Sept 2019, when the Fed’s balance sheet reduction abruptly turned course and began re-expanding as a crisis of liquidity in the overnight repo markets forced the Fed to intervene for the first time since the 2008 financial crisis.

I’m not a mathematician, nor a monetary policy expert, but I’m pretty sure that “unlimited” > $12tn, or whatever other arbitrary figure some forecaster is throwing out there and basing every outcome off of, as if:

1) Unprecedented worldwide shutdowns + staggered restarts of global supply & demand, with multitudes of differing fiscal and monetary policy responses and their respective efficacy, contingent on containing the spread of a still-rampant coronavirus pandemic + the discovery and mass-scale distribution of a non-existent vaccination, are in aggregate somehow forecastable.

2) The Fed & Treasury, who are now acting as a singular, coordinated entity, will then somehow exercise fiscal and monetary restraint, and turn the liquidity faucets off after this “$12 trillion” in accommodation – lest US creditors lose their full faith to credit the full faith and credit of the printing press.

So let’s all just agree that either way, our parents were wrong: money apparently DOES grow on trees, and central banks + governments are fully harvesting the $ € ¥ £ ___ printing orchard.

Focusing on the USD world reserve currency printing Federal Reserve’s actually implemented (& not merely announced and promised) policies, at time of this writing, the speed and scale of monetary easing is staggering.

For context:

Sept 2008 Lehman collapse ~ end of QE3 peak in Jan 2015, Chair Bernanke took the Fed’s balance sheet from $900 billion to $4.5 trillion, adding +$3.6 trillion in assets over 6 years. This was (and still is) huge, to say the least- so much so that at the time, some prominent figures in finance were calling for Bernanke’s arrest on charges of overreaching his mandate and perverting free market price discovery mechanisms.

Under current Fed Chair Powell, the size of the Fed balance sheet currently sits around $7 trillion, as the Fed made +$3.1 trillion in asset purchases– roughly the same amount as Bernanke had done. But instead of the 6 years it took Bernanke to expand the balance sheet by an amount equivalent to ~15% of GDP, Powell did so in 8 months– and is far from finished.

Though the re-expansion really began in late Sept ‘19 when the overnight repo market had a seizure in need of immediate liquidity, Powell’s Fed really hit the gas pedal in March of this year. In the past ~8 weeks, Fed balance sheet exploded from about $4 trillion to nearly $7 trillion. That works out to about $57 million in asset purchases per minute, or simply rounded off: $1 million per second.

When the Fed is purchasing financial assets at a rate of a million dollars per second- be they long term US Treasuries or bottom of the rating dumpster junk bonds, or extends dollar swap line after swap line to a growing list of central bank counterparts (invite to PBOC & Russia was lost in the mail), it creates new dollars out of thin air and adds it to the existing/ever growing dollar supply, as per below:

And the more supply increases, the less each unit of supply is worth.

Instead of measuring asset price performance in USD terms, which are two moving variables with ever expanding dollar supply, and seemingly ever expanding multiples on future cash flows against ever narrowing base of index constituents, measuring USD denominated assets priced in GOLD terms (“real” terms) provides a different / more accurate picture of SPX performance against a relative constant.

Since 2000, SPX in USD terms rallies and crashes within a longer term multi decade uptrend. But when SPX is measured in Gold terms, it reveals a very different prism and timeline of events:

• Post dot com & 9/11, Greenspan slashes rates to 1% (45 year lows), which stops the SPX /USD fall and starts the rally, while SPX/Gold stays flat during the US housing bubble- SPX/gold flatlined vs SPX/USD rally implies that SPX “growth” in 2000’s wasn’t due to any value creation, but rather, SPX was inflated against easy monetary policy and USD demonetization.

• SPX/gold stops holding flat and starts falling in ‘05, 2yrs ahead of the ‘07 SPX high, and continues falling through Bear Stearns and Lehman, through the March ‘09 SPX bottom to start the longest bull run in history.

• SPX / gold FINALLY finds its post ‘00 DOT COM BUBBLE BURST BOTTOM (which just continued into Lehman / ‘08 bottom) in AUGUST 2011, when the so called risk free US debt faced its first ever credit downgrade from the 2011 debt ceiling crisis. Once deficit reduction goal was established and debt ceiling raised, SPX / Gold finally finds bottom, 3 years after the SPX /USD pre rally bottom.

• SPX / Gold FINALLY gets back to flat from its ‘07 levels in Oct ‘18, 5 years behind SPX /USD’s recovery back to flat. And the moment SPX / Gold was back at breakeven levels in Oct ‘18, SPX and global risk assets experienced its most severe post crisis sell off as FOMC was on a seemingly autopilot rate hike + balance sheet reduction path, until Fed Chair Powell reverses hawkish course 180 degrees to dovish starting ‘19. Risk assets rally throughout ‘19, particularly in Q4 ‘19 as Fed started re-expanding its balance sheet to pump the repo market with liquidity, sending SPX /USD on an unconditional rally.

• But SPX in gold terms never recovered back since the Oct ‘18 back-to-flat → sell off, and continues downward till this day.

Conclusion:

SPX “growth” appreciation measured against a constant supply currency ( gold ) reveals the index has not actually grown, and furthermore, SPX price appreciation has been almost wholly dependent on easy monetary policy and USD printing. When policy is easy, USD assets rise. It’s only when fiscal and monetary restraint is exercised, or perceived to be exercised, does SPX perform in real terms (Aug 2011 debt ceiling crisis = SPX / Gold bottom, Fed balance sheet tightening = SPX / Gold rises).

Remember when the markets were in meltdown Dec’18, and Treasury Secretary Mnuchin made an unsolicited round of phone calls to CEOs of US banks to “check in” on liquidity – and then publicized the fact that such calls were made, and all is well, causing a further sell-off in bewildered markets?

At the time, while everyone was questioning the judgement of Treasury Sec for causing unnecessary panic (I never understood why talking heads go on TV to say “I don’t have an explanation), I theorized the following:

(Dec 2018): Mnuchin made calls to the bank CEOs asking about liquidity, and then publicized “all is well” – subsequently freaking markets out with consensus saying “why did/would do this?? Doesn’t he realize this causes more concern than calm??”

My theory: OF COURSE he knows that the US Treasury Secretary’s words can move markets- that was the objective: create a safe haven rush ahead of a record sized T-Bill auction during illiquid holiday markets to cap rising short end borrowing costs.

And it worked.

Equity markets were already beaten down, so nothing to lose there. But Treasury was issuing & rolling over short term bills at ever higher rates, with a record sized auction on < 6M debt coming at a time when the gov was shut down, trading week was shortened from Pres GHW Bush’s funeral, & primary dealers on the ski slopes rather than at their desks to bid. UST yields had been dropping for weeks prior at the long end, but front end yields were on a relentless surge higher as Powell seemed to be on unconditional rate hike mode, inverting the curve. So Mnuchin scares the market, flight for safety into US debt, and demand for yield caps yields on short dated paper just in time for the auction. Short end yield surge stopped, turned south, and hasn’t looked back since Mnuchin’s call.

Dec 2019 Update: 1 Year Later

On the anniversary of this “baffling” call/announcement, we now find ourselves actually in the midst of a liquidity crisis in the repo markets over the last quarter- so where’s Mnuchin been? It’s been 3 months, and not a word from the previously “concerned” Treasury Sec. Yes, I‘m quite aware that this repo mess is a Fed issue (though not exclusively Fed’s oversight jurisdiction, and definitely not unrelated the Treasury Dept’s actions on issuance, cash and collateral supply)- but at the very least, one would think that we’d have another round of “called the bank CEOs” announcements, no?

Well, then perhaps last Christmas, Mnuchin didn’t actually give a single F about “bank liquidity,” and short dated yields capping just in time for primary auctions was NOT just some nice coincidence?

1 year later, STILL sounds like insane conspiracy theory, I know. Market manipulation by THIS administration? And for non-nefarious causes (in this case, just trying to save the taxpayer money on interest expenses) – never. Let’s just stick to “I don’t know, but its definitely not that, that I know” – the good ol’ sell-side bank Chief Global Market Strategist value-add way.

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Another Previous TrumpTales from July ‘19: “Mysterious Mike Pence and the T-Bill Auction”

Remember week of July 4th 2019 when VP Mike Pence was on his way to New Hampshire, but last minute cancelled the event as Pence was suddenly called back to the White House in yet another personal aid making a widely publicized “nothing to see here” comment – sending markets risk-off?

(FROM JULY 2019):

Just to sum things up: nothing is done for “no reason.” I may very well be completely off on both theories. But I do find it to be curious that these sort of strangely publicized non-event events that turn markets risk off happen when yields start to move higher just as Treasury auctions for those very durations are scheduled, and issued over illiquid holiday weeks. I’m far from a conspiracy theorist, nor do I think what I’m saying is unreasonable to the extent that it could be labeled as tin-foil hat wearing nonsense. Either way, one thing I won’t accept is simply shoulder shrugging when the “inexplicable” occurs- the existence of an explanation is not contingent on consensus’ cognitive limitations.

My long-standing, and incredibly, STILL non-consensus China/Trade view: 

Consensus: China is not going to make a deal and hand Trump a win, they are waiting Trump out of office.

My view: China (as in Xi & CCP) absolutely wants a 2nd term for Trump- and will attempt to interfere in 2020 US elections to assist re-election (with/without Trump/anyone’s knowledge). Regardless of who occupies the WH in Jan 2021 and beyond, the CCP’s Western-capitalist electorate damaging economic agenda will finally be held to account, because this time, the voters are now keen. America/western liberal democracies will continue to press on China for unfair trade practices, decades of disobeying WTO rules, forced tech transfers & IP theft, state subsidies, FX manipulation & closed cap account, general rule of law- not to even get into human rights violations and territorial disputes. However, ANYBODY else (Dem, Rep) other than Trump will confront China by leveraging a coalition of US allies (EU, UK, Canada, Mexico, Japan, Korea etc) rather than go at it alone- and I literally mean alone- this is Beijing vs Donald Trump. Not an army of seasoned advisors across an array of departments from the world’s largest and most powerful economy, let alone a multinational coalition of developed economic adversaries – its just one guy who single handedly represents the entirety of United States. So as this day of economic reckoning had finally arrived (for real this time), if the choice is between a more “conventional” President with a similar economic mission vs Pres Trump, who constantly refers to President Xi as a “friend of mine” and seems to almost embrace authoritarianism, who is transactionally oriented and even hesitated signing the unanimously passed HK bill as he weighs implications of a trade deal, who despite tweets and sound bytes has shown to be an incredibly dovish Commander in Chief (even more so than some Dem candidates) which allows for China’s continued global ambitions without consequence particularly in the South China Sea and even if China were to greenlight a HK or Taiwan PLA conflict, who is dismantling global coalitions and pulling the US from leadership positions, inspiring ally nations to also turn inward… I think it’s clear that a President Trump has been a blessing for the CCP, who was already dealing with a massive credit bubble and economic contraction before Trump was even nominated- now allows the CCP to lower their “GDP figures” and point to Trump’s economic war, turning their pseudo-capitalist house of cards economic failures into nationalistic propaganda for the 1bn+ citizens — yes, Beijing’s choice is 4 more years of President Trump over anyone else, be it a President Warren, a President Biden, even a President Pence. And as they have such a preference, the CCP will undoubtedly interfere in the 2020 election process to ensure his re-election, whether it works or not, and whether Trump himself/anyone is aware of it or not. And no this is not a partisan political statement or rehashing Russia/2016 or Ukraine/2020- China has been proactively cyberattacking US companies and institutions for years, with far greater cyber capabilities than Russia- and should they get caught, apparently there are no repercussions.

Bottom line is- China is NOT “waiting out Trump and will be happy when he’s gone.” They are panicking what may happen if it’s anybody BUT Trump. Beijing is pro-Trump re-election, and, depending on polling and the state of the electorate’s affairs, will work publicly and behind the scenes in his favor as the election nears.