Leaving early for a board meeting.

I ended the day slightly shorter than I started the day.

Enjoy the evening.

Be safe.

• Gas prices up.
• Copper up.
• Lumber up.
• Food prices higher than expected.  

If I didn't know better, I think I might be in early 1974.

No trades this afternoon.

Out at short lunch.

Peloton (PTON) continues to roll over on the charts.

Will central bankers welcome the rate rise or try to fight it? 

With the rise in long term rates taking place now at a rapid pace, we all look to central bankers in how they will respond. Do they welcome it or try to fight it? I'll say again though that nothing made sense about the policy of creating an epic bubble in everything credit and then root for the exact thing that would pop it, higher inflation. Well, now they are getting the inflation that they wish for so why should they fight it? With respect to the Fed (and Powell speaks this week), the Treasury market is clearly saying to them that waiting until 2024 before raising the fed funds rate is going to be way too far in the future so we'll do it for you. To this, just in the past 7 weeks since December 31st, the 10 yr yield has tightened policy by 44 bps. The Australian 10 yr has tightened by 60 bps since the end of 2020 and this comes just a few weeks after the RBA ramped up QE. At 1.60%, it is at the highest level since May 2019. In May 2019 the US 10 yr was at 2.40% for those wondering where can US long rates go from here.

What this also gets to is the tight inter-relationship between asset prices and the economy. The Fed in particular has made them so intertwined over the past few decades that we have to remember it was a decline in asset prices that caused two of the last three recessions. The Fed keeps looking at only the banking system in measuring 'financial stability' and ignoring the excesses in markets they create that is the true source of 'financial instability.' So if the rise in rates continues because the Fed gets the inflation they've been nonsensically rooting for and lower stock prices are the result that don't bounce back like we are so used to and that itself hurts the economy, then what? What's the Fed going to do then, lower rates when they are already at zero? Do more QE when they are already doing $120b per month? I'm not saying that this is how things play out from here but these are the things we need to be thinking about with what's going on with long rates.

We've all heard the phrase, 'risk happens fast.' Just to quantify and bring up the duration issue again that I spoke about last week, TLT, the 20+ yr US Treasury ETF is down 9.5% year to date based on this morning's price, that is 6.3 years of coupons gone in 7 weeks. If you happened to buy it last August you are down almost 17%, about 11 years of coupons. I will say this, while I'm expecting Treasury yields to continue higher, Treasuries are now getting pretty oversold in the short term.

What the Fed should be doing which is exactly what they won't be doing is ending QE and saying they will be raising the fed funds rate by 25 bps. While sounding insane to some, particularly the Fed, it would contain the rise in long rates, maybe calm the jump in commodity prices and thus would allow the economy to rebound with the vaccine without seeing an uncontrollable jump in long rates. Crazy talk I know but I'll use the George Constanza example again, here.  

TLT

Aussie 10 yr yield

What's also interesting and somewhat scary is that the US dollar is trading as poorly as it is even with the rise in rates. Higher interest rates and a weaker currency is what third world country financial conditions are made of. I still really like gold and silver.

DXY

Reflecting solid semi exports, South Korea said in the 1st 20 days of February their exports rose 16.7% y/o/y. Average daily exports jumped by 29%. Semi exports were higher by 27.5% while autos were up by 46%. The Kospi though was down by .9%, moderating its year to date gain to 7.2% as their 10 yr yield rose by 5 bps to 1.93%, the highest since June 2018.

The February German IFO business confidence index rose to 92.4 from 90.3 and that was above the estimate of 90.5 with both components higher. The IFO said simply, "The German economy is proving robust despite the lockdown, especially thanks to strength in industry." The euro is up for a 3rd day and the 30 yr bund yield is higher for the 13th day in the past 15 and is up about 30 bps during this time frame. The 10 yr yield is the least negative since June 2020.

(2/19/21 Morning comments appear at the bottom.)

Morning Notes 2/22/21

The bulls and bears fought each other to a basic standstill in a holiday shortened week. The S&P struggled the most and was in fact down for 4 days in a row. The Dow benefited from the industrials, particularly some of the heavy weights like Caterpillar and others.

Bulls were also helped a bit by the continuing bid in oil and so the energy stocks were helpful all though late in the week, rumors that OPEC might up production started to take the froth off the oil market. Another factor helping the bulls were the financials and here again the steepening of the yield curve, and the fact that the 10year moved up to 1.3. The assumption among most equity traders, at least those I speak to, are that the part to look at on the yield 1.5% which right now is the approximate yield on the S&P's dividends, so that may represent a competitive point.

Another factor that helped the bulls for much of the week was Treasury Secretary Yellen's continued vocal support for a large Corona stimulus package and she was basically unrelenting in the face of some challenges from Republicans and others and that led the bulls to think they might be able to get a relatively big package that would pour more money into the economy.

The seasonal topping pattern that we have been talking about for two weeks here, is not clearly evident but maybe entering into the conversation as the bulls are unable to make a big run-up now. On Thursday it looked like the bears might take charge, but they were beaten back, so the game is still in the table and a lot will depend on how the market interprets this sharp drop in Covid cases, which were down about 70%, and if that was taken up by the bulls you will see those reopening stocks, cruise lines , airlines, hotels etc. begin to perk up. So, we will keep an eye on that.

Over the weekend, there was not a great deal of news. Earning season is winding down. It has been in a broad sense helpful to the bulls although individual stocks haven't quite reacted the way one might have assumed in their individual earnings. Some of that maybe because the bulls have been hyping the up-coming earnings and so you have the kind of sell on the news or at least take profit on the news.

Coming in this morning, the futures are telling us that Boeing will likely be a key factor today. One of its planes suffered a very serious engine malfunction out near Denver. It will raise a question if other planes of the same model have to be grounded and what will be the impact, so Boeing is a significant part of the loss in the futures this morning into at least in the Dow and will see how that progresses.

Another feature this week will be the semi-annual Humphrey Hawkins testimony from the Fed chairman, that will be Tuesday and Wednesday. Traders will watch carefully to see whether again he pushes off the signs of inflation as being merely transitory and whether they continue to concentrate primarily on employment. So, they be watching for every twist and turn in his testimony. Barring a geo-political surprise that may be a factor for the markets this week.

Anyway let's hope the weather improves.

Stay safe.

Arthur
__________
Morning Notes 2/19/21

The trading in the stock market took a rather familiar pattern at least recently with weakness early in the day and trimmed back somewhat in the afternoon. Wednesday, they got helped from things like the Fed minutes, Thursday was some easing back on bond yields, but it was a bit of a paradox there too.

Early on the worry that rates may be inching up a bit, beginning to hurt the broad section of equities took them to the lows. Then as the day wore on, despite the fact that there were new signs that the stimulus may get put through. Bond yields inched down a bit, but only in the standard 10year treasury bond and it was not by a great deal. But it provided a little bit of a sigh of relief to the stock market and they gained a little afternoon salvation move as Wall street focused on the GameStop hearings which were in my mind vastly unproductive. They didn't get after the potential manipulation which many of us were concerned about. Payment of overflow which by the congressional questioning they seem to think almost a new wrinkle in Wall street business programs. They seem to have forgotten there was this guy named Madoff and he was one of the earliest large practitioners of payment overflow. Then again, Washington always had Madoff.

The slight dichotomy that was noticeable, that while standard treasury bonds saw the yields ease a little bit, the same was not true of the TIPS or inflation protected treasuries. There yields continued to inch up and that may present a problem a little further down the line for traders as they try and discern whether "real interest rates" were in fact moving higher. What might that mean to the Fed and or inflationary pressures. Once again NASDAQ was the weak link in the chain. I think that continues to relate to interest rates. Big techs are thought to have a bit of a disadvantage if rates are going to rise, given how their platforms and programs worked. Another factor in the equity weakness, was its softening of oil and energy prices, which had virtually spiked recently as the storm in Texas and in large parts of America have shut down everything from the Permian basin to actual pipeline transmissions.

The pull back in oil may have been a response to some vague rumors that OPEC was taking advantage of the recent spike to up production and get some more money in the till. Nothing hard on the rumor, but it was about and seemed to be believed more in the oil pits than even in the equity markets. So overall, what looked like it might be a crack in the recent extended rally turned out to be another pseudo consolidation. The bulls were able to regroup well enough to not completely lose momentum. But the next few days may be key as we have been wondering for days if the seasonal pattern will begin to assert. That pattern being a tendency of market weakness after Presidents day and into the coming of March.

As we said the GameStop hearings riveted the attention of Wall street, which allowed some space for that afternoon rally as people's attention were focused elsewhere rather than the ticker tape. We feel the hearings so far have been thoroughly unproductive, they spent more time talking about market structure and not enough time trying to dig into possible manipulation and what was going on.

One final note, a key factor was Walmart who's earning and projections vastly disappointed. Traders had hoped they would be big winner on the pandemic like horizon, but this seems to be a rebuilding year going in. We will take another look as we see the end of the week and overnight futures are uncertain and waffly as dawn reaches New York. There is not much major news overnight and that probably is the reason the futures look so waffly. The traders probably will continue to keep one eye on the yield on bonds to see whether interest rates can remain a threat or are they signaling some threat of inflation. The bulls remain in charge, but there are clearly some signs of deterioration in the internal technicals. Some minor divergences show up. Let's not be slavish to the seasonal patterns, but certainly let's try and keep an eye on the action. Are we pausing or leveling off at the high.

Stay tuned.

Have a great weekend and stay safe.

Arthur

Here is all we have to know (from the Divine Ms M):

As telegraphed in my opener, I added to (GLD) and (SLV) this morning.

It didn't take long for a central bank head to indirectly respond to Peter Boockvar's question this morning (coming up!) of fight it or embrace it. Bloomberg just had this headline: *LAGARDE: ECB CLOSELY MONITORING LONG-TERM NOMINAL BOND YIELDS. She said this at an EU Parliament event. European sovereign bond yields are falling in response. 

She wouldn't be 'monitoring' rates if they were flat to down. If you don't want higher bond yields, don't root for higher inflation.

Garrison1 @Garrison1Boston

Replying to @DougKass @realmoney

Wood is soon going to learn one of investings eternal verities.As a PM, you can sing the praises of LT investing till the cows come home. But if your investors are fast-$ performance chasers, you will not be granted the luxury of standing firm when prices fall.

* "Wearing a storm suit under bright blue skies..."

My three partner on Paul Singer concludes: 

"Here are our nominees for the "We Told You So(s)" of the future, items that may not only separate the survivors from the road kill, but also give deep satisfaction to the "lonely prophets":

* Cryptocurrencies are and will be recognized as completely lacking in value. The only "crypt" aspect of them is the receptacle that the suckers' hard-earned (we are being kind) lucre will be buried. This prediction is particularly brazen on our part, given the recent price action in cryptos - but "in for a penny, in for a digital scam."

* Inflation will match, then surpass, then soar above the targets of the peculiar folk who inhabit central banks and whose job they think it is to raise inflation, end inequality, ameliorate the climate, expunge COVID-19, and cure dandruff. By golly, there is no human problem that cannot be solved by newly printed [soon-to-be] worthless "money" - at least until it all goes pear-shaped and people wonder "was it always true that 1 plus 1 equals 2? Why did we ever doubt that?"

With the world's central bankers still in "pedal to the floor" mode, and the world's treasury secretaries in full bore "if they print it, we will spend it" mode, most investors cannot envision any other stock market scenario than up, up and away. We are in a different frame of mind.

We are mightily impressed by the extremity of valuation metrics, by the historical unanimity of negative outcomes from these kinds of valuations and by the disconnect between the seeming inability to generate "sufficient" consumer price inflation and the clear historical difficulty of maintaining the purchasing power of fiat currency not backed by anything. Common sense tells us that the authorities will get the inflation they are desperate to achieve, and that once it gets rolling, it will surprise (almost) everyone. Experience also tells us that it is preposterous to price equities on a discount rate that is as abnormal and manipulated as it is presently, and that bond yields at current super-low levels are an accident waiting to happen.

Compared with our dark views about this year's financial market prospects, we are also cognizant that betting hard against the financial markets' "happy view" is probably a terrible idea, and that going to cash is not any better."

* The recent rise in cryptocurrencies reinforces the view, in some quarters, that the balance of the benefits and detriments to society of "financial innovation" may be net negative

* This cryptocurrency fad has a highly probable ending of the sort we all have seen before

* I am buying more gold and silver now

Twelve days ago I wrote a column entitled, "Bitcoin Is Not a Trade Medium or Currency": 

"After Tesla's (TSLA) purchase of $1.5 billion of bitcoin the story making the rounds was that many corporate treasurers will move sizeable amounts of their cash hoards into bitcoin. That development, in turn, would levitate the price of bitcoin further.

However, bitcoin remains a speculative, reserve asset class, and perhaps as a reaction to the Fed's insanely reckless policies, and one that is not yet a reliable currency for trade given its volatility.

An asset which is so volatile is not a prime candidate for trade currency nor is it a dependable cash equivalent.

Corporate Treasurers are unlikely to readily "invest" their cash in bitcoin owing to the volatility and its rapidly changing value and impact on a company's quarterly results and balance sheet. For companies, cash is typically used for short term liquidity. So, buying bitcoin becomes a different mandate and, for sure, is not a cash equivalent with respect to the purpose of a balance sheet or as seen as a "rainy day fund."

Bitcoin has tripled in the last few months and is up ten fold in the last year. So, if I paid $1 million in bitcoin for a piece of real estate 12 months ago, I have given up nearly $10 million based on the appreciation of bitcoin. The seller, if he didn't sell his bitcoin, is $10 million richer!

As I said before, extreme volatility doesn't equate to a suitable currency for trade.

Recently, the speculative cryptocurrency equities and their share prices (e.g. (MSTR) , (RIOT) , etc.) are moving disproportionately from the gains in the value of bitcoin and more from the "promise" of broader adoption of crypt currencies.

I do not see that happening on the scale the market expects given the asset class' volatility."

Again, Paul Singer chimes in on cryptocurrencies - in no uncertain terms:

"We continue to be of the view that the balance of the benefits and detriments to society of "financial innovation" is net negative. Cryptocurrencies have reinforced this view.

What do you do when you know something is crazy and unsustainable, but it keeps going - or even intensifies? Pulling out your hair is an option, though only if you have hair to spare. Hiding under the bed to avoid people who gloat about being long Bitcoin can get... claustrophobic. Deep breathing exercises can work, but only for short periods.

We choose to press on for the day when we can say, "We told you so." Some things are so large and consequential that even if the "We told you so" moment is delayed for years, having predicted it should be seen as visionary (at least in some narrow circles), and having not been sucked in by it may be the difference between success and failure.

The fact that some mainstream institutions, traders, and investment banks are embracing cryptocurrencies does not make cryptos' nothingness into somethingness. Cryptos have no validity, are not limited in amount, are actually nothing, and will revert to being seen as nothing. Cryptos are possibly on the way to becoming the greatest financial scam in history, consisting as they do of a computer program which spits out, after laborious clanking, flashing lights, whirring fans, and extraordinary consumption of electric power, a message that says "Lucky you! You have created a [you name it] coin!"

Of all the scams, including snake oil and mass hallucinations, can there be a greater one than a process based on nothing that creates hundreds of billions of dollars (yes, dollars) of trading value? Cryptos are not backed by governments, and they have only as much value as the price you can get from the next person. They are a kind of cult, marketed under a fraudulent premise: that some kind of medieval-style blood oath limits the supply. This premise is false because of two realities: (1) new ones keep being brought to "life," and (2) "forking," a process that creates variants of existing cryptos, extra profits for existing holders and the continued ability to pretend that the supply of the "original" is fixed. Look it up.

Cryptocurrencies are backed by nothing. The price volatility of cryptos is much more consonant with the proverbial "trading sardines" than with real stores of value.

The crypto fad is an example of the greater fool theory. Surely, we admit, actual currencies have some of these characteristics. Most sovereign currencies have been abused mightily by their creators and merit a skeptical approach. Amazingly, some issuers of sovereign currencies are trying to climb on board the crypto train, under the rubric of "digital currency." Can there be anything more obvious than the fact that all currencies today are digital currencies?

Fans of the cryptos seem unaware of the risk (actually, the near certainty) that sovereign nations, which all issue their own digital currencies, will perceive a threat to their ability to control their currencies and decide to regulate or ban cryptos within their borders.

Blockchain, the mechanism by which cryptos are transferred, is an important new technology. But it is not tied to Bitcoin or any other crypto. Blockchain does not need crypto trading to be useful. People who own cryptos do not own, or have an ownership interest in, Blockchain technology. Regulators are concerned that cryptos are prone to money laundering, fraud and theft. There are, indeed, no actual protections for crypto owners except blind faith in technologies that are often opaque, and whose inventors are obscure or invisible.

This cryptocurrency fad has a highly probable ending of the sort we all have seen before. But it is well worth the spectacle of watching people speak gibberish and act foolishly, as they pretend that nothing is something.

Aside from the deep desire to fool other people and create money out of nothing, the other major motivation for cryptos is to have a more "free" currency than that available by government fiat. The idiotic part about this "libertarian" motivation is that there is already an asset that passes that test but which is better in every way than the cryptos, and which has the additional benefit of not having recently embarked on an exponential upsurge in price: GOLD.

Gold is a real asset (cryptos are ethereal "assets"); gold has for thousands of years been universally accepted as a store of value and medium of exchange (cryptos have been accepted as a store of value for about 20 minutes in historical terms); gold is hard to mine and has a limited expansion of supply (cryptos can fork, and new ones are invented every day from nothing); gold is an important part of the reserves of the world's central banks, adding to its acceptance. Cryptos are outside of the central banking framework and are supported by nothing except unsupported belief."

* A bearish outlook for both stocks and bonds is supported by hints of history, hard physics and logic of argument

"The remarkable rally in global equities has continued beyond 2020, but saying that it ranks both qualitatively and quantitatively as one of the most powerfully speculative stock markets in history does not provide a guide to the date, or shape, of its demise or peak.

The stock market boom makes us think of hybrid cars, which are so in fashion now, in that there are two propulsion systems: (1) government policy propping up the stock market via ultra-low interest rates, money printing, and QE purchases by the Fed, together with massive fiscal deficit spending; and (2) the significant dissipation of risk management by investors of all stripes, as they increasingly feel that stock prices are protected and only go up in price, despite their stretched valuation metrics."

- Paul Singer, Elliott Management 

I remain steadfast in my bearish outlook for equities. 

Some observers on our site and elsewhere view the recent spate of speculation as bullish. They see the speculative flows into bitcoin and other speculative assets/equities as further evidence that this is a market with an appetite for higher risk and a strong sign that we have a good setup for another leg higher in many asset classes. 

I couldn't disagree more as I am of the belief that history shows that extreme (even flamboyant) speculation and moods (like we are seeing now) is typically associated with the end or near the end of a Bull Market. This behavior does not guarantee a near-term crash but it does sound "a klaxon of caution."

In the last week I have put my money where my mouths is and I have further raised my net short exposure - principally by establishing a medium-sized Russell Index (short) and adding to a basket of speculative gewgaws. 

This has served to increase my portfolio's short beta as well as adding to my gross and net short book. 

Indeed, with the S&P Index around the 3900 level, I can not remember being so at odds with the bullish consensus. My estimate of the spread between the current share price and "fair market value" is as wide as I can recall in many years. 

My Diary over the last few weeks reads more like an accident report on I-95 in which I have highlighted the markets' risks and lofty valuations: 

* The Last Poker Table 

* Will The Real TINA Stand Up? 

* Should We Prepare for a VAR Shock? 

* My Barron's Comments Over the Weekend 

* We All Live In Cathie Wood's World (But That Can Change Quickly) 

* All The Bubble Pathologies are In Place 

* If All The Hippies Cut Off All Their Hair - I Don't Care 

* Bitcoin is Not a Currency or Trade Medium 

* The Virtuous Cycle of Passive Investing - A Winter's Ball 

* Friend of the Devil

* Extraordinary Delusions and The Madness of Crowds

By now, you are all familiar with this chart I have frequently reproduced in my Diary:

This morning I turn to Paul Singer's (Elliott Management) voice and view of our markets. Singer is a savvy and enormously successful veteran of the hedge fund and investment scenes: 

Why Can't Markets Grow To the Sky?

"Market dynamics are essentially examples of mass psychological behavior. Yet markets are also subject to some hard science forces and vectors. These factors come together in ways that are not capable of being modeled or predicted with consistency - an assertion supported by the empirical fact that nobody, anywhere, has been able to predict market inflection points, or the shape and scope of market moves, with consistency. We do not have to belabor the notion that markets have moods. There are periods during which negative moods, interpretations and predictions cause prices that are dominated by "show me!", and there are other periods in which "I believe!" is the spirit that drives securities prices. But it is worth digging down into some of the hard physics involved in price movements and levels in securities markets.

One "hard" element is externally-supplied liquidity, whether from savings, corporate profits, funds provided by foreigners, or liquidity provided by fiscal authorities or central-bank money printing. There are times when, as now, those sources provide a great deal of fuel for net securities purchases. There are also times when there is a shortage of such funds. Even when there is no large net inflow or outflow of liquidity, asset-allocation strategies can slosh funds from one asset class to another, or from one country or sector to another. To us, the most interesting of the physical forces operating on securities prices is the natural leverage factor inherent in markets. If $1 million of Apple stock trades up 25 cents from its last trade (at current prices), the market capitalization of Apple rises by $4.2 billion (and vice versa, of course). This example shows that a small amount of net money buying or selling (or choosing not to buy or sell at a particular price or range of prices) can have a large effect on prices and aggregate values.

There are some natural arithmetical forces that add viscosity to price movements. As overall market capitalization (whether of a single security or groups of securities) rises, a larger amount of net buying is necessary to keep increasing the market capitalization. (And vice versa, in the case of price declines.) Price movements also create buying and selling by "value" investors, when investors think a price rise should be faded or a price fall should be bought. However, in some speculative markets, such as today's, the supply/demand curve gets weird, and rising prices stimulate frantic and increasing buying (so as not to miss out on a "good thing"), rather than valuation-based position-paring. There are other forces acting in markets that will determine prices and forward rates of return, such as direct governmental action (as in direct purchases of securities or promises to do so, guarantees of interest and/or principal, and tax and other policies which could encourage, or force, investors to buy or sell securities), and new theories of markets (e.g., MMT).

Usually, market prices are shaped by all of these forces in a way that makes them unpredictable. It is for this reason, among others, that blue skies ahead and a solid bullish consensus are more likely than not to be followed by stagnant or falling prices rather than a continuation of the rise, although in trending markets, either up or down, price trends can follow the consensus for long periods of time.

At present, the dominant force operating on financial markets is excess liquidity. As we see it, net excess liquidity can have a highly amplified effect on the market capitalization of companies or markets, given the natural leverage that we have described. Of course, leverage works both ways. As we have said, markets are primarily examples of mass human behavior rather than scientific phenomena, and as such are impossible to predict with any degree of consistency."

Current Markets and Some History

"Bonds are guaranteed...to lose money.

Over many market cycles, bonds have provided not only a rate of return, but also a hedge for equity and real estate positions. This is because in the past, interest rates generally fell in recessionary or adverse stock market conditions. The "normal" institutional portfolio construction of 60% stocks and 40% bonds, or some ratio near those levels, did not arise out of thin air. Instead, it arose from a historical experience suggesting that such a mixture was sound as a matter of efficient portfolio construction. At current levels of interest rates, however, bonds no longer provide a rate of return or a hedge. Globally, between $17 and $18 trillion of bonds have a negative yield. Yet they do incur a tax on capital equal to the negative yield plus the inflation rate, even without taking into account explicit taxes. Holding such instruments in portfolios appears irrational in the extreme, and cannot help investors achieve their rate-of-return or risk-management goals. We understand that central-bank policy, not investor preference, is the reason for these lowest-ever yields. Except in cases of regulatory requirements, however, investors do not have to buy bonds that yield nothing - or less than nothing.

So far, this discussion of bonds only focuses on nominal yields (or yieldlessness) in the absence of taxes, and does not address what happens to bond prices if central banks produce the inflation they are passionately determined to generate. One would think that, in the event of achieving or exceeding inflation targets, the paucity of yield would turn into potentially large bond-price declines, as inflation and the fear of future higher inflation were factored into prices and yields. The wild card under those conditions is that central banks have shown no shame about preventing markets from clearing with freely determined prices, regardless of inflation or supply/demand factors. Thus in the relatively near future, we could see inflation move into the 2% range or more (perhaps on the way to much more), with bonds propped up in price.

As investors face 2021, bonds offer, according to an unnamed wag, "return-free risk." The widespread assumption that governments would prop up bond prices come what may is not an assumption that should be relied upon. There are a number of factors that could bend or break the determination of governments to backstop bond prices, including a fall in their currency values, and/or a massive increase in the amount of bonds on offer from investors who are increasingly determined to escape the consequences of a rising inflation rate.

"I see a stock going up and I buy it and I just watch it until it stops going up and then I sell it" (per a Robinhood user)

As for stocks, the equation is more complex. It is rare that prices and market action provide even a modicum of hints of the future. Even when prices seem "high" or "low," there is no guarantee that price and valuation ranges will remain as comforting and reliable guardrails. A few historical examples support this point.

In 1929 and 1972, for example, the price-earnings ratio ("PE") of U.S. stocks peaked at 22x, and large bear markets followed shortly. In 1932, stock prices bottomed, but a PE could not be calculated because the "E" had disappeared. In 1982, stock prices bottomed at a PE of 6x. In 1987, a 40% crash followed a peak PE of less than 22x.

In 1995, the stock market PE exceeded 22x. Yet instead of being followed by a large bear market, prices kept rising. The dotcom boom was even more picturesque than 1929, and the PE of the stock market topped out at 40x in early 2000. Any "value" oriented investor who tried to fade the "absurd" prices of 1996 to 2000 got, as we say in the trading biz, "smushed."

In 2007-2008, a diabolical twist took place. Prices topped out at significantly lower PEs than in 2000, but were followed by the greatest bust since the Great Depression. The key element there (which at the time escaped the consciousness of policymakers, regulators, academics, strategists, investors, traders and kibitzers) was the extreme leverage and excesses in the real estate and derivatives markets.

Then we come to 2018, at the end of which a mere 20% downturn in equities - triggered, most believe, by a rise in policy interest rates to the Olympian peak of 2.5% - caused policymaker pandemonium, ending any chance of the normalization of monetary policy for ... ever? And, let us not forget the present - a government-engineered economic debacle in response to COVID-19, where a 36% plunge in stock prices (to nowhere near bargain prices) was followed by a 76% scorching rise, to valuation metrics which are at or near the highest ever.

This limited "History of the World" should provide convincing evidence that the right answer to the question, "Where are stock prices going from here?" is "Who the heck knows?!" However, at times, markets supply helpful hints, wisps of coming directions. Like at present.

There have been a number of speculative episodes in stock-market history. A look at history shows meaningful bouts of speculation and silly prices: In addition to the late 1920s, consider the early 1960s, the late 1960s, the mid-1980s, the mid-to-late 1990s, 2004-2006 and the current period. When you stack them all up, we believe that hindsight will show the champion of head-smacking craziness in the American stock market to be the era playing out right now, as we write, with ETFs, Robinhood traders, cryptocurrencies, the FAAMGs (Facebook, Apple, Amazon, Microsoft, Google) and Tesla as today's star attractions.

This flamboyant line-up, and our version of market history, does not guarantee a near-term market crash; it does, however, sound a klaxon of caution. It is not a coincidence that similar periods of speculation and overvaluation have generally been followed by market pain. "Trouble ahead" is signaled by a rare combination of low-quality securities, staggering valuation metrics, overleveraged capital structures, a shortage of honest profits, a desperate dearth of understanding evinced by the most active traders, and economic macro prospects that are not as thrilling as the mobs braying "Buy! Buy!" seem to think.

The consensus today is that the recovery from COVID-19 will be a juggernaut through 2021. According to this view, we will see a close-to-complete economic recovery: The extraordinary fiscal and monetary "happy juice" that has been poured on global markets and the global economy - and the substantial reserves of that "uncontrolled substance" yet to come - will ensure that the stock market rally will be supercharged into the foggy future, that interest rates are locked at "full throttle" for investors for years, and that "you can't afford to miss what is to come in the stock market!"

We certainly agree that for those whose job is relative performance to a benchmark, the herd exerts an irresistible tug against the desire to stand aside and watch the ammunition cook off in the conflagration. Nevertheless, it is sad that so many of those who are charged with deploying the capital of others for a return are forced to engage in an activity which, judged by historical as well as theoretical evidence, is likely to produce a completely inadequate return - or worse, actual pain and tortured explanations of how things went south.

For those with substantial capital in U.S. stock market index funds, a small reality check: Almost 2% of your capital is invested in Tesla. It is an electric car and battery maker. It was just plunked into the S&P 500, and it is selling for about a thousand times earnings, with a market cap of more than $800 billion. Its miniscule earnings are substantially supported by government carbon credits for making electric cars. Every other major carmaker in the world is rolling out electric cars in the near future. Good luck, "you few, you happy few, you band of brothers and sisters."

Inflation

"Almost no investors and policymakers fear uncontrollable inflation. Most believe that more fiscal stimulus is needed even after the multi-trillion-dollar spending spree in 2020; that permanent 0% interest rates and never-ending Fed buying of medium- and long-term bonds to control the yield curve will not lead to inflation well beyond the central bankers' targets; and that stock prices are reasonable, based on interest rates which are historically - and artificially - low.

Curiously, there is little, if any, discussion of why central banks, economists, treasury secretaries, Wall Street strategists, major investors, gurus, pundits, and assorted cranks like us have never gotten even close to right, with any degree of consistency, the timing of inflection points in interest rates, stock prices, the economy, recessions and recoveries. There is no ongoing discussion of why this is the case, and predictions and assumptions about the predictability of the future have not suffered one bit because of the terrible record of predictions in the past. This astonishing example of human folly causes us a great deal of embarrassment as members of the human race, and supports our theory that technology, social media and complexity in the organization of financial systems and governments can cause applied intelligence to decline, not increase.

As a great man once said, history does not repeat itself exactly, but it rhymes. There are many historical and theoretical reasons to conclude that the lengthy current period of radical monetary ease, asset purchases by central banks, large and continuous budget deficits, burgeoning long-term entitlement obligations, skyrocketing public and private debt and astronomical footings of derivatives that are every bit the equivalent of debt (see 2008) will inevitably result in serious consumer price inflation. There are many good reasons to conclude that asset price inflation is actually inflation, indeed a dangerous kind of inflation.

In popular wisdom, aside from defaulting on public debt, the other way of dealing with unpayable debt and debt-like obligations is by inflating away the real value of the obligations. We do not merely say that such an action would be unwise. We say that it would be preposterous, and that only if the populace is sleepwalking will the citizens fail to take steps to "front-run" attempts by policymakers to erode or destroy the real value of their assets.

Which brings us to the long period between WWII and the late 1970s, when bond owners actually were sleepwalking, or taking Quaaludes with their two-martini lunches. Bond returns were continuously negative in real terms (after inflation is taken into account but not even counting taxes imposed on nominal "income") until a sudden end to the hypnotic state caused a collapse in bond prices in the late 1970s and a restoration of positive forward real as well as nominal returns. We have seen recent commentary that the heroic Volcker achievement of purging inflation by raising interest rates to the sky was the "wrong" policy and the cost of his policies was too high in terms of unemployment and inequality. Alas, this revisionism ignores the devastating effects on society of a loss of faith in money. The reason the U.S. got away with fleecing bondholders for decades was that bondholders had a misguided faith in the country's leaders.

This reality - that fiat money and long-term claims on currency are supported by faith and belief, not observable facts - is being challenged more so now than at any time in modern U.S. history. But policymakers do not see it that way. Nobody is sitting at mahogany tables, circled by stirring portraits of the giants of public policy past, worrying that their ignorance and risky behavior will be unmasked. If we could say just one thing to these policymakers, it would be: "Be careful what you wish for, and protect the value of money at all costs; it is one of the most important moral duties and tools for societal cohesion that you have."

We do not have to engage in a lengthy debate about whether the primary cause of inflation is excessive deficit spending or rather excessive money creation, because currently we have both. We also have, perhaps for the first time ever, a stated determination on the part of policymakers everywhere to create faster monetary depreciation. All major central banks (except China's) have said explicitly that they want the value of their citizens' savings to diminish more quickly.

It is correct that stocks ought to be priced at a premium over the risk-free interest rate. But when those rates are artificial, and stocks are priced with reference to that artificiality, the whole exercise is false and dangerous to capital health.

Diversification of risk and liquidity are portfolio tools that are supposed to reduce overall risk. In the past, this risk-mitigation principle may have carried some weight. Today it does not. Instead, diversification is a fake narrative that lures people into basically ignoring the forces that are channeling and funneling returns into a thundering correlated herd in both directions. Money printing, zero and negative interest rates, the incredible growth of the derivatives market and various versions of passive investing are all forces making what we saw in March 2020 and subsequently - i.e., abrupt, gigantic one-way moves - more common.

Saying that this period will not end well is somewhat useful, though unhelpfully vague. However, it is the best we can do given the circumstances, characterized as they are by an investing populace that believes unconditionally that it will be saved by the authorities come what may, along with a consensus that inflation cannot possibly reach central-bank targets and keep right on running."

Debt Spiral

Debt is a governor to growth - and I have constantly reminded subscribers that it takes more and more debt (and monetary adds) to stimulate a unit or production:

"Too much debt weakens growth, and lack of growth elicits a policy response (particularly in the last 13 years) that creates still more debt, resulting in even more disappointing business conditions. Each additional dollar of debt in 1940 generated $0.54 of GDP; $0.60 in 1980; $0.42 in 1989; and $0.27 in 2019. The trend points to obviously diminishing returns, as public and private debt in the U.S. has grown from 167% of GDP in 1980, to 364% in 2019, to 405% at the end of 2020. It is worth noting, too, that these calculations of debt do not include derivatives. (Source: Hoisington Management Quarterly Review, third quarter of 2020.)"

Some Valuation and Risk Metrics

Back to my chart above:

* In 1980, liabilities were 38% of assets for U.S. nonfinancial corporations. Now they are 66%.

* Tobin's Q Ratio (nonfinancial corporate equity to book value): 1980, 35%; 2000, 170%; 2008, 60%; now, 155%.

* Public + private equity market cap as a percentage of GDP was 50% in 1980, peaked at 209% in 2000, and is now 270%.

* The following metrics are at all-time highs: enterprise value to sales; enterprise value to EBITDA; price to sales. The following are near all-time highs: price to book ratio; forward P/E; cyclically adjusted P/E.

Charlie's Six Chart Saturday! 

Danielle DiMartino Booth talks my book on deteriorating home affordability...I remain short homebuilders

• Zillow's quarterly Home Price Expectations Survey predicted Austin as the hottest housing market in 2021; by December, the median list price in Austin was up 23.6%, the steepest rise among the 50 largest U.S. markets and nearly double the 12.9% median nationwide rate
• The population of 25-34-year-olds has risen by 5 million since 2010; legislation to forgive $10,000 in student debt, provide a $15,000 first-time homebuyer credit and an extra $1,400 stimulus check will amplify high housing inflation, further harming this cohort's finances
• Bidding wars have dropped the share of Zillow listings with price cuts, now well below those seen in pre-pandemic Januarys; spiking home prices are also boosting cash-out refi activity, challenging affordability for first-time millennial buyers in spite of record low mortgage rates

Ah, the good things in life. Light in the dark, potable water, heat when it's 2 degrees outside. On Sunday afternoon, the #AustinWater hashtag was trending on Twitter. Just after 2 a.m. CST, @pounders tweeted out, "We delivered a truck full of water to the Travis County Fairgrounds in Austin!" At 9:14 am, @512southpaw tweeted, "It took seven days, but my street now has power and water AT THE SAME TIME." At 10:49 am CST, @ConsciousEnnea chimed in, "I'm at 1901 E. Anderson Lane with drinkable water! BYO container and come fill up." Within three hours, his surplus had run dry. Patented in 1889, Edwin Ruud's water heater opened up a world of possibilities we take for granted - hot showers, washing machines, dishwashers. Austinites now know that one cold snap severe enough to cut (under-regulated) electricity to a water plant can reduce the next Silicon Valley to a third world country.

In late January, Zillow predicted Austin would be 2021's hottest housing market via its quarterly Home Price Expectations Survey conducted by Pulseonomics (QI participates). The results: 84% said Austin home values would outperform the national average, compared to just 9% who believed it would fare worse. At 69%, Phoenix was the first runner-up followed by Nashville (67%), Tampa (60%), and Denver (56%). Page views on Zillow for-sale listings in Austin by out-of-town searchers were up 87% in November compared to 2019. And by the middle of last December, the median list price for a humble Austin abode was up 23.6%, the steepest rise among the 50 largest U.S. markets.

Austin's 2020 home price appreciation was double Zillow's 12.9% median nationwide. It's safe to say home price declines in what the survey predicted would be the three coldest markets in 2021 - from the ground up, New York, San Francisco and Los Angeles - acted as a drag on the national data. But they are the exceptions; they've been on the losing end of the post-pandemic mass exodus out of densely populated cities.

Can anything derail housing? We get that Millennials are a demographic force of nature. Per Census, there are nearly 5 million more in the prime 25-34-year old buying bucket over the past decade. But this is also the cohort whose careers were most damaged by the Great Financial Crisis.

Even with record low mortgage rates and the Fed manipulating that market, affordability for these first-time homebuyers matters. White hot home prices and the dearth of supply exacerbated by bidding wars suggest many of these entry-level buyers will be challenged when it's time to move on from the homes they buy today. To access the FHA financing many Millennials require, fast-growth cities will have to devise terms to describe the frontier beyond their exurbs (in North Texas, it's "Oklahoma").

Inspired by QI amiga Ivy Zelman, we delved into affordability for pre-invasion locals (nearly a quarter of post-C19 home sales are tied to the over-state-line exodus). Imagine the state of shock millions of Americans are in. They've chosen to live where they do to avoid the bubble behavior that's overrun their hometowns. To gauge the hometown shock factor, we tapped Zillow data on the share of houses with price cuts, defined as the list price at the beginning of the month divided by the number of unique properties with an active listing at some point during the month.

Focus not on the seasonal drop-off in price cuts at year end in the righthand chart, but rather how low January 2021 (red dot) is relative to prior pre-pandemic Januarys. Per QI's Dr. Gates, "The drop in the share of listings with a price cut illustrates how bidding wars are changing the landscape, not just for home price appreciation, but also affordability."

Spiking home prices are also manifesting in cash-out refinancing activity that crimps affordability. Today's left-hand chart takes the cash-out series from the New York Federal Reserve and converts it to a four-quarter total change (purple line). Pit that against building materials sales on the same basis (orange bars). Conclusion: Hot cash out. Hot home improvements. Nesting, upgrading, repairing, you name it.

We've lost count of the ways we've depicted the K-shaped recovery. So just add this to the middle-income-earner pyre as this is a high-income, high FICO score phenomenon. The more equity is extracted, the more it's poured back into improvements.

Meanwhile back in Austin... The sad parade of videos of destroyed Texas homes - ceilings caved in, water everywhere - brought Gone with the Wind to mind. Determined to raise the taxes to keep Tara out of carpetbaggers' hands, Scarlett O'Hara stole her sister's beau. The basis? His lumber mill that was "only a sideline," to which O'Hara replied, "A sideline, Frank? With all the good Georgia pine around Atlanta and all this building going on?"

As high as lumber prices are - they crossed $1,000 last week and are up 115% in the last year - it's conceivable that a still-raging cash-out refinancing cycle and the need to rebuild much of the world's 9th largest, $1.9 trillion economy, provide continued fundamental support, further hampering home affordability. Into this breach, legislation is being crafted to forgive $10,000 in student debt, provide a $15,000 first-time homebuyer credit and write an extra $1,400 stimulus check. Armed with that extra buying power into a bubble, we can think of no better way to ensure entry-level buyers never exit their brand-new homes.