#185: Music on the Dance Floor

Bloomberg News: Microstrategy falls 30% from its high of the day after Michael Berman from Signal2Noise announces a short trade idea against the high-flying technology company. [joke]

Its Friday; let’s get a little philosophical.

Remember, no matter how many setbacks you have, you can always be fortunate. How? By giving yourself the following gifts: good character, good intentions, and good actions. Dr. Chuck Chakrapani.

S2N Spotlight

One of the motivations for the S2N letter was to call out unsubstantiated claims. I came across a well-respected fintwit issuing bullish calls relating to the “famed” 50-day moving average on gold.

This spotlight has nothing to do with my view on gold, which is bullish as a safe haven store of wealth. Yesterday or 21 November, depending where in the world you are, gold peaked its head above the 50 day. It is very easy to frame this by showing just the right amount of chart to make your point. I decided to put the call to the test.

Please note: Nobody was harmed during this experiment.

What do we have here? I created a simple rule that whenever the price drops below the 50-day moving average, you sell. Otherwise, you hold on for dear life. For close observers wondering why there isnt a green marker on the chart below, the reason is there was a trade called at the close yesterday so after “trading” today there will be a green marker. The positive side of the story is that you reduced your risk by a max drawdown of -44% versus -50%; that is about all that was positive. The real side of the story going back to when gold just came off the gold standard is that you hardly made any money by only going long when the market is above its 50-day moving average. Almost the entire return for buy and hold was made when gold was below its 50-day moving average.

S2N Observations

I know my philosophical quote spoke of fine character. You will excuse me for a tiny bit of gloating and schadenfreude. I am still working on putting my philosophy into practice . It really was uncanny that the market did what it did straight after my letter yesterday. I have to share with you Michael Saylor’s forecast for Bitcoin’s price in 2045, that is, 20 years from now. He believes it will be trading at $13 million a Bitcoin.

It is worth noting for those of you who like to know history. MicroStrategy has been down more than 16% in a day 28 times throughout its history.

While we are talking crypto, I thought I would share with you the staggering growth of this asset class. Gold is sitting at $13.5 trillion fyi. When last did you hear anyone mention the word NFT?

In 2007, Chuck Prince from Citigroup was famously quoted saying, While the music is playing on the dance floor, you got to dance. Something like that. It seems the music is playing and everyone is dancing.

In the chart below, I inverted the US corporate bond spread and show it together with the S&P 500. I have circled lows in spread and how they couple with selloffs in the stock markets. This is not a timing tool; I would call it an early warning indicator.

I can feel this is starting to get a bit heavy for a Friday, so let me conclude with a bit of good old-fashioned liquidity watching. In fact, I am going to use this as a placeholder and come back to it in the near term, as it is simply too important. Treasuries General Account exploded over the COVID period due to QE and massive fiscal stimulus. As you would expect with the government, they completely overcooked it; the Fed was forced to come in and mop up the excess liquidity with the Reverse Repo taking it up to $2.5 trillion. It is currently at $217 billion on its way to zero through QT. We have been left with inflation and asset bubbles all over the place.

We are still sitting with way too much liquidity in the system. Do not be fooled by the record amount of “cash on the sidelines.” This chart on its own fails to take the record debt creation into the picture.