Navigating the Regime Change
Techincal charts, CBDC and more
We can’t say we’re surprised at the equity markets reaction to the reality of tighter monetary policy. When our central bank decided to use Covid as a rational to unleash decades of future monetary creation, one couldn’t help but think a rising tide of cash lifts all boats. Well when you front run decades of time, labor, earnings, savings, spending all at once, the word leverage comes to mind in regards to nominal asset prices.
In a fractional reserve system we know that commercial bank lending is the real grease to the system and central bank money is reserve. I.E. the more debt to lever up, the more loans one can create and only keep a small “fraction” in reserve. Lets see, make $9 in loans but keep only $1 in reserve. This is our system, this is how it works, now everything is about to be reversed. Yet everyone is still lulled to sleep under the spell of free money and inflation will do that to you. So now look at how our reality has changed. The FED is about to reverse course and this is just the beginning. So how does a market discount future wealth destruction?
Well it seems like we are seeing it transpire each and every day. You see that same 9 to 1 factoring works in reverse, yet it works in a way that absolutely destroys far quicker than one can anticipate. It goes like this, money goes bananas, spreads like wild fire increasing the costs for everyone and everyone is forced to pay higher prices. The wealthy, somewhat immune go on and lever it up in real assets, bonds, equities, real estate and even doubling down hot potato style using leverage to out bid the next dope thinking prices can never fall. Then all of a sudden the reversal comes, prices stagnate, then fall then real earnings plummet and your now holding assets that are under water yet you still have the same obligations to pay if not more so depending on your leverage. Selling begets more selling until the FED has had enough and steps back in to reverse course, buy billions of USTs and MBS and salvage those with the thickest reserves and in the wake of it all countless investors are left to sell into new and lower lows.
Fast forward to today, where are we? Well we are at the start of this new tighter regime and if the bond buying isn’t there well then the madness no longer has its pillars of strength and one of the giants legs have been cut off and its only a matter of time before the next one gets sawed off. Its rinse, recycle repeat, the writing is on the wall. Yes today’s action and the months equity action for that matter has been driven by massive notional options expiration which comes due Friday. We are talking about trillions, and we saw the selling beget more selling today and yeah we are probably due for a consolidation after this options expiry, however that doesn’t change the fact that we are in a new regime. A tighter monetary regime that has taken far too long to stem the tide of overzealous investors.
GMOs Jeremy Grantham was out with his newest letter and its an eyeopener. To say he is bearish is an understatement and we agree with his sentiments and we think you know why. Follow the money in simple terms, if its FED money everywhere, buying USTs and MBS and near zero rates, well then you have your green light, if its not, well you don’t…keep it simple man.
Anyway let’s get to our charts of where we stand right now. First up let’s look at the ultra bond, where we think weakness in equities will lead to a flight to safety as money filters into bonds out of stocks:
When we look at the US 10Y yields we can’t help but think to high too fast:
Next up the US 5s30 yield spread where we feel by Q2 we will be close to inversion, as the bond market discounts the cheap free money the FED has stolen from the future and plunked right into levered speculators hands today front running a recession:
Next up equity futures starting with the SP500 where the weekly technical set up is a disaster and this pennant formation doesn’t bode well for the short term trend and a sell the rallies kind smell to it:
Speaking of selling the Russell 2k is down nearly 20% off its highs:
If an investor wants to try and play it safe we always recommend spreading and one of our favorites is the SP vs NQ. We have shown this chart in earlier posts and we continue to favor it now as the money tide has now clearly swung to favoring the broader market for the tech heavy NQ:
Moving to Silver where we highlighted that $22 area as the bulls standing chance, well we now have $25.50 in our sights:
We don’t follow individual equities that tightly but these are a couple of charts that have come into our focus today, first up Netflix which reported abysmal subscriber numbers today, now down some 28% off its highs, YIKES!!:
Amazon broke out of a long term wedge now running into the 100d eMA should see some technical support but the damage to the movement is obvious:
Apple has held up quite well and honestly we know its a cash cow, but we don’t suspect their lack of innovation can support its lofty levels and no matter how big the cash hoard is, a few bad years and things could get ugly fast:
Speaking of the recent trend in net cash for Apple is something to keep an eye on as MacroTrends.net reports a massive 63% yoy decline in net cash flow:
Finally let’s look at Bitcoin, where we now trade below the $42k level and are at risk of a full move lower to the ultimate level of $28600. Longer term you know our views its the king of the digital world:
Speaking of digital currencies, we saw the central banks recent piece on their so called “CBDC” who are they fooling??? The US dollar is already a digital credit or did they think $2 Trn in cash wasn’t just a mirage in a $30Trn US debt pile??? Everyone knows that physical cash is a fraction of the real money or credit, so what’s the point in instituting the CBDC then? Well as their piece obviously states and highlighted below in yellow at the end of the paragraph, the real intent:
IDENTITY VERIFIED - the true intent of Central bank digital currency
The Bitcoin network will always be a superior form of money and store of wealth, and to point this out we tweaked their little graphic that was used in their missive and its obvious, Centralized vs Decentralized, the red “Xs” (our handy work) denotes all the links you don’t have when it comes to Bitcoin, The blue line represents a Bitcoin transaction P2P. You tell me which one is more advantageous:
Alright we hope you learned something today, options expiry Friday should see a relief from the selling, but rest assure the regime has changed and so to should your view and outlook on how to navigate tighter economic and monetary policy, till next time.
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