Who Let The Doge Out

If money makes the world go-'round, I guess we should have expected this. There is certainly lots of money spinning around these days, but Jerome Powell can't be pleased with what he's seeing in this week's move in the previously left-for-dead crypto play, Dogecoin. The rally in this marginalized cryptocurrency has been spectacular, spurred on in bullish tweets by such investment industry titans as Gene Simmons of 'Kiss' and Snoop Dog, a guy who long ago checked his street-cred at the boardroom door.

And being anointed by Elon Musk hasn't hurt either. I'm not so sure that shareholders of Tesla are 'down' with his validation of Bitcoin as a medium of exchange when we are at levels approaching all-time highs for the world's biggest Ponzi scheme. But if you can issue stock at a multiple of intrinsic value and invest the proceeds in something with an effective multiple of infinity, you may just have found the monetary equivalent of the perpetual motion machine. The self-proclaimed "Destroyer of Shorts", seemingly tired of Gamestock, has moved on to the next big thing - the crypto craze. Long-term investment horizons are now 2 or 3 days, I guess.

These frothy speculative plays are the offspring of easy money and frictionless trading. The 'research reports' on which these investments are made are usually only 140 characters long. Musk seems to prefer one or two-word recommendations, like "Gamestonk" and "Use Signal". I guess it speeds up the process. No measured or sober analysis, just go with the meme-flow. This week, the Reddit "tribes" moved on quickly from their failed silver squeeze to something a bit more amenable to being cornered, a failed crypto-currency with a limited float - Dogecoin. According to its creator, software engineer Billy Markus, Dogecoin was all a big joke and he is completely out of it. The joke is now on him, after Musk's tout. It's the biggest case of seller's remorse I have ever seen. As far as I can tell from my due diligence, out of nowhere there is now $10 billion worth of nothing.

So what's a washed-up Boomer PM to make of all this? How do you invest rationally in an irrational market? Relax, people, it's noise, not signal. Do I care how my investment portfolio is doing this market? Yes, I care. And it's doing just what I want it to do! Nothing. I'm staying the course, ignoring the hype machine. The siren call of the latest popular SPAC or hot tip is not how real wealth is created. Finding good companies, with scalable business models is still the best way to express my risk appetite. This week, I invested in an exciting company that I have been following for a year or so. What it does in the short-run is of no consequence. The S&P 500 level is just a number.

The libertarian underpinnings of the virtual currency world may be validated at some point, but for now, the Fed still controls the monetary system. I don't see them yielding power to this new rabble of meme-iacs without a fight. The current FOMO based trading surge will eventually give way, returning us to the sober process of allocating capital to its highest and best use. The Federal Reserve will at some point address risk-taking imbalances being created by its historic easy money experiment. Now that the fiscal policy direction has been set in Washington, they will have to. When that happens, the crowd will quickly experience a much-needed de-risking.

It was Powell who let the doges out. But eventually, he will bring them back in.

Inflation Nation

This week I want to revisit a topic that I have been watching closely - inflation expectations. The currently accepted narrative espoused by many is a relatively sanguine view about the risks from near term inflation. The Fed has been messaging their comfort level with the impending 'base-effect' surge due to be reported as we lap last year's pandemic collapse in the data. To some degree, I accept their premise that the 'market' will be able to differentiate this set of transitory readings from a return to a systemic inflation regime. But that is a rational position, based on an informed reading of a complex topic. Unfortunately, the events of the past few weeks are evidence of the gullibility of 'the crowd'. We need to 'expect the expectations of others' in order to project future short term market moves. Will the Reddit crowd-sourced popular narrative be as accepting of the upcoming data with equanimity? In this volatile tweet-driven market, I fear that might be a tall ask. Tomorrow's CPI reading is an important 'tell'. It may be the last low reading we get this year - but if it is a 'hot' number watch out below! I'm still holding some $TBT in case the market loses faith in the Fed next month.

The rate normalization process has begun but as the chart shows, there is a long way to go yet. Suspiciously, the pace of curve steepening is slightly flatter than seen in prior periods. Like the Covid pandemic, things are taken longer than expected, I guess, and that is a good thing for markets. The longer it takes, the better.

10 Yr - 2 Yr Treasury Yields

Risk Model: 2/5 - Risk Off

Like many other events this year, the elusive correction that has been widely expected was postponed by a renewed focus on the strength of company earnings reports. Corporate profitability is a strong elixir for the stretched market valuations. And with credit spreads tight, and "High Yield" at record lows, monetary conditions couldn't be easier. Hard to see what could trip us up.

Unfortunately, this set of positive factors is already well appreciated and hence we have a continuance of an overbought market. RSI has cycled back to above the risky 60 level and the distance above the 200 dma is stubbornly stuck at risk-off levels. This is frustrating for those with cash, and who have been waiting for a chance to deploy it. Hand me a mirror.