Thanks for reading my Diary today -- I hope it was value-added.

Tomorrow, I will be discussing, among other things:

* Why the changing market structure has contributed to the rip-your-face rally over the last 11 months.

* A conversation with my gardener's son. (Hint: Joe Kennedy's shoe shine-boy story).

* The improving outlook and opportunities for short sellers.

Enjoy your evening.

Be safe.

* A boom cycle may be on tap for the second half of 2021 as unprecedented stimulus (25% of GDP!!!) leads to higher interest rates, inflation and better growth

* There were mild recessions following the Korean and Vietnam wars - but the scale of the military expenditures during those times were only between 2%-4% of GDP

* But that boom will likely be short lived as the drying up of fiscal stimulus will likely lead to a bust within two years

* Even excessive monetary expansion may not save the US. economy as it is taking more and more liquidity to produce a unit of (GDP) production

* Bookmark this post!

Though this post is short and to the point, the broader consequences for the economy and for the stock market are great.

The anticipated cumulative injection of fiscal stimulus (including the proposed $1.9 trillion Biden stimulus package and the previous $2.2 trillion and $0.9 trillion packages) will total $5 trillion over the last 12 months. This represents almost 25% of the anticipated GDP of $21 trillion. 

As former Alliance Bernstein economist, Joe Carson, mentioned over the weekend - with the exception of World War II there has been nothing like this in history. Stimulus during World War I, in the Great Depression, and in the Great Decession of 2008-2009 didn't come close to the policy initiatives in reaction to Covid-19 - even though those periods had deeply depressed private sector activity. Today we are experiencing a rebounding manufacturing economy led by housing activity and higher home prices. 

This chart demonstrates how large the recent stimulus has been in an historic context:

At the same time the Federal Reserve's policy remains extremely aggressive and will be "as far as they eyes can see" - leading to  very hot real estate markets around the country, particularly in wealthy communities.

Bottom Line

To me, there is only one inescapable economic conclusion - inflation and interest rates are heading higher as better economic growth in the last half of 2021 is delivered by the unprecedented stimulus.  

Unfortunately the stimulus is in the form of mostly transfer payments and not in expansion of productivity or capacity.  

As I see it, the economic boom will be a sugar-based high and there is an almost inevitable bust cycle emerging by or in 2023 when the heady fiscal stimulus ends.     

Today's record stock prices belie a likely hard economic landing that may lie ahead. 

Some more signs of silliness (on Twitter):

"Give 'em the old razzle dazzle
Razzle Dazzle 'em
Give 'em an act with lots of flash in it
And the reaction will be passionate
Give 'em the old hocus pocus
Bead and feather 'em
How can they see with sequins in their eyes?"

- Chicago,Razzle Dazzle

Very few take ownership of their views. 

Especially on Wall Street these days... 

Case in point: Morgan Stanley's Mike Wilson who was confidently bearish in January 27th (on CNBC) and is now bullish (on CNBC). 

"Throw 'em a fake and a finagle
They'll never know you're just a bagel..."

I continued to add to my Facebook FB short this morning. 

My investment rationale, from Friday:

Feb 05, 2021 ' 08:12 AM EST DOUG KASS

Apple's New Privacy Policy Is Likely a Near Term Threat to Facebook

* I recently made a successful short trade in Facebook - covering for a profit

* I am back shorting again

Ahead of a future IOS upgrade, Apple's (AAPL) new privacy policy will likely have a meaningful impact on Facebook (FB) by requiring users to give their permission for apps to collect data about them.

Specifically, Apple will be adopting an "app tracking transparency" initiative which will allow the consumer to block companies and apps like Facebook to track their digital activity across other companies apps and websites. (See prompt above that will be seen by Apple users when an app asks permission to track your data.)

In support of this policy Apple made the following statement:

"We believe that this is a simple matter of standing up for our users. Users should know when their data is being collected and shared across other apps and websites - and they should have the choice to allow that or not. App Tracking Transparency in iOS 14 does not require Facebook to change its approach to tracking users and creating targeted advertising, it simply requires they give users a choice."

Obviously this has the potential for adversely impacting Facebook's advertising business.

Indeed, Facebook has take out full-page newspaper ads attacking Apple, claiming that the changes will "limit businesses" ability to run personalized ads and reach their customers effectively":

This fundamental change in privacy is a potential threat to Facebook's business and share price.

The recent share price rise in FB has provided short sellers another opportunity to reload on the short side - which I have.

Surprise #7 A Decline in the U.S. Dollar Spurs an Advance in Gold (to $3,000/oz) and a Ramp of +50% in Bitcoin (to $40,000) - But Silver Is the Big Winner as It Doubles to Over $50/oz - Over easy policy, excessive liquidity, higher inflation and a rapid rollout in the Covid-19 vaccine powers the prices of cryptocurrencies and precious metals higher. Silver, however, is the league leader as the rapidly rising demand for silver in industrial applications creates a supply crunch late in the year. Another challenge on the supply side for silver is that more than half of mined silver supply is a by-product of zinc, lead and copper mining, making it tough for miners to meet the surging excess proportional demand for silver. Precious metals and crypto currency prices peak in the third quarter.

- Kass Diary, 15 Surprises for 2021

I have added to my large exposure in (GLD) and SLV today. 

Despite the measurable differences in "market capitalization", I remain a believer that given the fiscal and monetary imprudence - by the world's political leaders and central bankers - and in the possible bitcoinization of precious metals. 

I still am of the view that the price of gold and silver will be headed higher - perhaps materially so!

"While many on the Street have discussed the prospects of this move for Tesla, this morning's news formalizes the strategy of Musk and Tesla diving into the deep end of the pool of bitcoin and crypto. From a stock perspective, as we have seen with Microstrategy (and Saylor), this move could put more momentum into shares of Tesla as more investors start to value the company's bitcoin/crypto exposure as part of the overall valuation. Ultimately, investors and other industry watchers will be watching this closely to see if other corporations follow the lead of Tesla on this crypto path or on the other hand does it remain a contained few names that make this strategic jump around bitcoin."
- Dan Ives, Wedbush 

As subscriber Thomas C noted (below), Wedbush's Ives thinks the $1.5 billion bitcoin purchase by Tesla (TSLA) can put more momentum into Tesla's shares and will allow investors to start valuing Tesla as a cryptocurrency play. 

I just don't understand this rationale. Frankly, its nonsense and not analysis. It has no basis on the numbers. 

Let me explain. 

Tesla has a market cap close to $900 billion. 

Tesla has "invested" only $1.5 billion into bitcoin. This represents one half of Tesla's net cash (gross cash of $19 billion less liabilities against the cash of $16 billion). 

If bitcoin triples, Tesla will have made about $3 billion in bitcoin - that represents a de minimum portion of Tesla's overall market capitalization. It's noise - it's a rounding error. 

Moreover, the size of Tesla's bitcoin investment/exposure and the historic volatility of the price of bitcoin could serve to muck up and produce large swings in Tesla's quarterly results even before backing out the impact of another "non-auto" factor (of regulatory credits). But perhaps that is Musk's strategy - to obscure operating and auto based results, and lack of profitability.

I am shorting more Tesla on the market's outsized reaction today -- $20 billion increase of market cap on an investment of $1.5 billion in bitcoin. 

More nonsense in a nonsensical market driven by liquidity and euphoria.

Thomas C

Tesla-Bitcoin shocker expected to add to momentum story both ways

Bitcoin (BTC-USD) is up 14.77% to 43,846 after this morning's disclosure that Tesla NASDAQ invested $1.5B in crypto and is moving to accept Bitcoin for payments.

Wedbush Securities analyst Dan Ives thinks investors will be watching to see if more major companies follow Tesla and also sees a potential positive impact on how the stock is evaluated.

"While many on the Street have discussed the prospects of this move for Tesla, this morning's news formalizes the strategy of Musk and Tesla diving into the deep end of the pool of bitcoin and crypto. From a stock perspective, as we have seen with Microstrategy (and Saylor), this move could put more momentum into shares of Tesla as more investors start to value the company's bitcoin/crypto exposure as part of the overall valuation. Ultimately, investors and other industry watchers will be watching this closely to see if other corporations follow the lead of Tesla on this crypto path or on the other hand does it remain a contained few names that make this strategic jump around bitcoin."

Wedbush has a bull case price target on Tesla of $1,250.

Shares of Tesla are up 2.55% premarket to $873.55. Earlier today,

Bernstein said it thought Tesla would pass on a major M&A deal.

* Peak SPAC?

SPAC Dream! 

* GameStop is not new. 

* Bezos doesn't have the time to be Amazon CEO anymore. 

* An unequal economic outlook.

The curves are plural: 

Curves continue to steepen and that is plural because it's happening around the world. Starting in Asia, the Japanese JGB 10 yr yield rose 1 bp to .07%, the highest since March 2020 and the 40 yr is matching the highest since March 2019, also up 1 bp to .71%. The Aussie 10 yr yield jumped by 7.5 bps to 1.27%, the highest since March 2020. Yields also rose in the rest of the region. In Europe, the 10 yr Gilt yield is up 19 bps over the past week to .51% today, the most also since March. The German bund yield is up for the 8th straight day to -.42%, the least negative early September. Yields elsewhere in the EU are also jumping. Shifting to the US, the 30 yr bond yield is kissing 2% at 1.99% for the 1st time since mid February when the fed funds rate was 1.75%. The 10 yr at 1.19% is matching the highest since late February.

Of course the rise in yields is being rationalized that it's in response to hopes for a better global economy in the quarters ahead as the vaccine rollout continues to ramp, we get another few trillion dollars of government spending and along with the rising inflation expectations associated with that along with the goods and commodity inflation we are currently seeing. The challenge though if this were to continue is what that means for valuations and a world that is swimming in debt and addicted to low rates. Also if it continues, how do central bankers respond, but if what they are rooting for is higher inflation, which they are, then they must accept the market reaction in higher long rates. If they don't want higher long rates, then don't root for higher inflation. It's that simple.

The Japanese 10 yr inflation breakeven is up 2.3 bps to .15%, not much but that is the highest in a year. The 5 yr 5 yr euro inflation swap is unchanged at just below the most since May 2019. The US 5 yr inflation breakeven is at the highest since April 2013 when WTI crude oil was trading at around $95 vs $57.5 today.

JAPANESE 10 yr INFLATION BREAKEVEN

5 yr 5 yr Euro Inflation Swap

US 5 yr INFLATION BREAKEVEN

The trade data out of Taiwan, a tech bellwether, continues to remain robust. Exports in January rose 37% y/o/y, well above the estimate of up 25%. Imports were higher by 30% y/o/y vs the forecast of up 24%. The caveat though is some of this activity was a rush to get stuff done before the Chinese Lunar New Year and we'll see some mean reversion in February. Tech related products, particularly semi's, led the way.

After the German factory order miss seen Friday for December, today they reported an in line industrial production figure when including the upward revision to November. Production was flat m/o/m after a 1.5% rise in the month prior. The Economy Ministry said "The outlook for the industrial sector continues to be subdued in light of the pandemic and the latest bottlenecks in the semiconductor industry. This is also suggested by weaker orders and damped sentiment among businesses." The lack of semi's is slowing down auto assembly lines everywhere and the country is dealing with selective shutdowns. The euro is down a touch along with general strength in the dollar across most currencies today.

As you can see from the update reprinted below, the GameStop carnival continued to be a factor in the market. A little bit more in the backdrop than it had been in the forefront when the movements were a bit sharper.

Most of the financial media was consumed by the Bezos announcement of stepping down and, his replacement and, what it might mean to both Amazon and their competitors. Would the Amazon earnings help the bulls to have a decent move on the upside?

The idea that Biden might get very close to his full Covid rescue package, 1.9 trillion, also was a boost for the bulls. They felt the payroll data would provide some urgency to the larger stimulus package. That seemed to be confirmed by a mild uptick in bond yields as the government deficit would thereby increase.

Action was generally good. The breadth of the market remained solid. The timing of the market is beginning to raise just a few questions. We will be headed into big holidays in China. So, we will look to see what the Asian markets do and whether they begin to impact what is happening here.

On the technicals, traders noted that the short-term seasonal patterns are looking for a possible top early to midweek or, at least, a pause.

Coming in this morning, the post-Super Bowl conversations around the coffee shops has outsized buzz for the five second Reddit commercial, which seemed to play into the financial medias delusion that the GameStop situation was, in fact, a retail rebellion, when several of us veteran cynics said along was a retail crowd being egged on by a few probably large hedge funds trying to cannibalize the other sharks who were overall short.

We will see what happens further but, so far, everything we read confirms what we said from the very beginning. The "retail rebellion" was a bit of a farce and an illusion that the financial media bought into much too readily.

This morning equity futures are moving higher yet again as reports flourish that Biden may trim parts of his stimulus package such as the $15 an hour minimum wage so that the bill better fits the image of budget reconciliation, which will allow it to pass or fail on a simple majority and, avoid any chance of filibuster.

That seems to be confirmed by yields, which are inching higher again (as they are apparently globally). If the yield on the ten year goes a bit further to, perhaps, 1.25, will that be a little bit of a signal for the market?

We think, as I say, the rally looks to continue in the morning. Keep an eye again on GameStop, only if it becomes smartly volatile. Small changes will make little difference in the general market.

So, we look like we are headed to extend the records in the averages on the upside. However, as we say, the seasonals indicate that the check engine light may go on so, we will be ready for the pause.

Impeachment begins tomorrow but, for now, it is being greeted by a yawn. It does not look to have a great many witnesses and, as of now, the odds books say the Democrats do not have the votes to convict Former President Trump.

So, lets focus on the market and, keep a wary eye on things like geo-politics. At any rate, stay safe.

Arthur

Tesla's (TSLA) market cap has risen by over $22 billion in pre-market trading on the news that the company has "invested" $1.5 billion in bitcoin. 

I understand the move higher in bitcoin - this morning - as this opens a whole new window on companies potentially using bitcoin as a cash alternative. I doubt that Tesla will be the last company to do this! 

This is occurring after the announcement that Tesla has quality issues in China resulting in a slightly lower share price in pre-market prior to the bitcoin announcement. 

It is getting weirder and weirder out there.

"You have to believe in your process. You have to believe in the things that you are doing to help the team win. I think you have to take the good with the bad."

- Tom Brady

Last night the Tampa Bay Buccaneer quarterback put an exclamation mark on his career - by winning his seventh Super Bowl he affirmed his "Greatest of All Time" designation by winning more Super Bowls than any franchise in the history of the NFL. 

By doing it with two franchises - New England and Tampa Bay - Brady demonstrated an ability to navigate at the highest level with different football programs - a rare feat. 

In the markets we face the challenges of changing tastes and popularities - and it is the rare money manager that captures excess returns in every market climate. Typically, for example, growth managers prosper in a market that favors "growthy" stocks while value managers lag, and vice versa. 

By the by, I bet heads on the coin toss, a subject I recently discussed in "Greed Breaks Things": 

"While some have elected to engage and have profited by "playing the game" of buying gewgaws, most will fall flat on their collective faces - much like in prior speculative eras of history. There will be a select few that manage to profit from the accelerated speculation that has characterized the market recently. But, "selected few" is the operating phrase. Many will lose most of their money as there is no "Fairytale Ending" to this period.

As it relates to those that suggest an explosion of speculation was unlikely to impact the broader markets - yesterday was an indication that the assertion might be sorely mistaken.

Indeed, as I have suggested, wanton speculation take the oxygen out of the room and, in some cases, when taken to the extreme, forces otherwise sober investors to be forced to liquidate their non speculative holdings to fend off losses on the short side. Moreover, supply typically expands.

Let me further explain my view of the current elevated level of speculation with the following logic.

The #1 highest volume prop bet for the Super Bowl is actually on the coin toss. Yes, its true, people want to bet the coin toss.

Even dumber, you have to bet $105 to win $100 on a 50/50 proposition.

That is, stated simply, moronic.

If you want to bet coin flips with someone and the odds are 50/50... well then just start flipping coins yourself and do it with a friend at even odds.

For those people that are scratching their heads about the stock market, and stocks like GME, well... when the element of people who are also inclined to bet $105 to try to win $100 on a coin flip are now fully playing games in the stock market, and they are aided and abetted by the Federal Reserve and SEC while doing so, whaddya expect?

Sometimes it can be wiser, maybe not "smarter", but wiser, just not to play the game.

I elect not to play the game for reasons mentioned in my Diary throughout the last few weeks and yesterday in "Don't Know Much About History."

Here was my tweet in which I announced my coin toss bet:

But I bet Kansas City!

Moving on...

* And Citigroup is my "Trade of the Week"

Bank stocks quickly rose from October to January but faltered a bit right after fourth quarter EPS releases - which were generally in-line to better than expectations. 

Tactically I sold off from very large to medium-sized my four major bank holdings into the January strength and then hedged all my bank holdings by shorting (XLF) . 

Shortly thereafter I covered XLF on the anticipated -10% sector weakness and then reloaded to very large-sized again at considerably lower prices than where I sold.

I now believe several factors suggest bank stocks will continue the recent strength in 2021: 

* Interest rates are rising - and net interest income and margins will expand dramatically, in part, reflecting the remarkable year over year low-cost bank industry deposit gains.

* The domestic economy should experience a vigorous second half recovery.

* Capital markets activity is robust and improving.

* Near record loan loss provisioning in 2020 may be reversed over the next 12-18 months.

* A generally favorable capital allocation backdrop - for accelerated share buybacks and dividend increases. Share repurchase activity will rise in the next few quarters - at current prices, they are EPS accretive. Meanwhile, dividends and dividend yields are rising.

* Bank valuations, against many other market sectors whose valuations and equities have been embraced, remain low. 

Citigroup ($62.58) is my Trade of the Week.

Danielle DiMartino Booth on the labor conflict: 

• The percentage of the unemployed out of work for 27 weeks or more hit 32.1% in October, and has risen every month to 39.5% in January; a year ago that share was 19.8%, four points higher than the postwar average of 15.9% and emblematic of the GFC's enduring scarring
• The current housing boom has pushed Real Estate Agent Payrolls near their heights from the mid-2000s housing bubble; Broker Payrolls have yet to catch up, but ballooning their ranks will not help the long-term unemployed given housing is not a productivity-enhancing sector
• Democrats have begun the budget reconciliation process for their proposed $1.9 trillion package; the real risk is that Washington's focus has already shifted to the Midterms, eliminating any political capital for passing additional legislation aimed at productive means

A gorgeous raven-haired, virtuous young girl in 17th century Exmoor, a remote area of Devon, England, is abducted by bandits who raise her as their own. Such was the setting for R.D. Blackmore's 1869 novel whose main character and title were one in the same - Lorna Doone. They say cooking is love made visible. Though no records establish the connection, this week does culminate with Valentine's Day. In that spirit, we're going with Emily Malloy being so inspired by Blackmore's popular romance that she cooked up a recipe for a melt in your mouth, buttery shortbread to express her love for her husband John before they emigrated from County Cork to Cook County where they opened a bakery. By 1891, the Chicagoans were entering their golden years. Prudent retirement planning in mind, John sold Emily's beloved Lorna Doone recipe to the F.A. Kennedy Steam Bakery, which itself had introduced the world to the Fig Newton.

That baker's subsequent merger with the New York Biscuit Company created the National Biscuit Company which today brings us, among those mentioned, Chips Ahoy, Nutter Butters and Oreos. Last Thursday, Nabisco announced after 63 years in operation, it was closing its Fair Lawn, New Jersey plant that bakes Lorna Doone and other brand names. About 600 positions will be lost. Of the company's three East Coast facilities, Atlanta will also close leaving only the Virginia plant open. As per the company of the closures, they "would have required significant investment to bring them to the modernized state required for the future."

No doubt, automation's presence is increasingly being felt in industrial America, a trend that preceded the massive demand and supply shocks inflicted by the coronavirus. Friday's January jobs data paint a picture of an economy that's been transformed in the space of 12 months. A year ago, the percentage of the unemployed out of work for 27 weeks or more was 19.8%, four percentage points higher than the postwar average of 15.9% and emblematic of the scarring that had endured more than 11 years after the Great Recession ended in June 2009.

Long term unemployment (27 weeks or longer, green and light blue bars combined) is a thorn in any central banker's or finance minister's side. It lowers potential growth as this cohort becomes less employable as a factor of time, stigmatized as their skills atrophy and resumes dust over. It's critical to appreciate how rare this type of drag has historically been on the U.S. labor force. Until the Great Recession, we'd not seen a reading north of 30%. The deep damage inflicted by the financial element of that episode, though, pushed long-term unemployment to 45.5% in April 2010.

As QI's Dr. Gates explains, "Long term unemployment is a unique indicator in that it is both a leading indicator, bottoming before recessions and a lagging indicator, topping after recoveries are underway. The COVID-19 shock has us on the precipice of another foray north of the 40% mark."

One of the distinctions of the era preceding the Great Recession was the dominant role residential real estate played in the job market. QI amiga Michelle Meyer is Chief U.S. Economist at Bank of America. But back then, she was an up-and-comer at the bank who made her bones as a housing expert. By her calculations, at the peak of the housing boom, four in ten U.S. workers were either directly or indirectly employed in residential real estate.

The rapidity with which housing has roared back reminded us of Michelle's work way back when. It's more than the exodus to the exurbs. The Federal Reserve's mortgage-backed securities machine has pushed mortgage rates to record lows and Fannie Mae and Freddie Mac have given new meaning to expedited underwriting with automated appraisal waivers that negate the need for warm bodies to verify values. (That's a good thing as living and breathing appraisers are struggling to assign values as high as the prices buyers are willing to pay.)

No surprise, this frenzy has created a groundswell of demand for workers beyond single-family construction. As you can see on the red line, the ranks of real estate agents are within spitting distance of their housing bubble heights. The same cannot be said for the army of mortgage brokers and others facilitating properties changing hands (blue and green lines). But they're getting there, and fast. And that's not good news for the long-term unemployed. Residential real estate was not productivity-enhancing then; nor will it be today. Housing activity is, however, easy to transmit given the available tools on hand - the Fed's QE.

As for the politicians, the risk is their focus has already shifted to the Midterm elections. If Democrats use reconciliation to force a huge stimulus package, odds are low there will be sufficient remaining political capital to pass meaningful legislation aimed at productive means. "If the stimulus spending is geared towards infrastructure that runs multiple years, that's the real answer. The public has the funding. The private has the labor," Gates added.

In October, long-term unemployment hit 32.1%; it has risen every month since and now sits at 39.5%. To combat the building labor market sclerosis requires those charged with hiring decisions move past automation and cost cuts to organically building anew. The dueling discussions of fiscal cliffs and vaccine rollouts must be laid to rest.