#192: New High or Not?

micksonmatch
December 03, 2024

S2N Spotlight

The S&P 500 made a new all-time high in dollars yesterday. If we believe that gold is the ultimate reserve “currency” and store of wealth, then we are a long way off from its 2000 all-time high.

Fun fact: The S&P 500 is currently on pace for back-to-back years with a total return above 20%. The last time that happened: 1998-1999.

Let me show you how impractical it is to think of making Bitcoin a reserve currency or main store of wealth; follow this thought experiment. I know I am probably upsetting some of my readers; some have shared with me that all their wealth is in crypto. I just don’t get how a store of value can appreciate like a speculative high-growth stock without collapsing the system as it exists today. Remember, I am a vocal opponent of reckless monetary policy, but I feel we have come too far too fast.

Let us say that I bought my house for 100 bitcoin 5 years ago, trading at $10,000. Today bitcoin is worth $100,000, so my house is worth 20 bitcoin if my house doubled in dollar value.

Yesterday I watched in disbelief as Michael Saylor did a presentation to Microsoft’s CEO and board about adopting Bitcoin as balance sheet reserves and doing his bitcoin yield trick. This is the Windows company, not MicroStrategy, the company that supposedly sells business intelligence software.

I screenshot this slide.

If his projections are correct, then any bitcoin maximalist would be crazy to ever spend bitcoin unless it became the reserve currency. In the case of my example, my house would be worth 0.2 bitcoin in 21 years, assuming no growth in the dollar value of my house.

Clearly I must be missing something. Singapore’s largest bank, DBS, is also suffering from FOMO. Bitcoin they say, is “a bit like digital gold.” “You might want to allocate.”

As someone who has been in financial markets a long time and been involved with index tracking of ETFs and other similar products, the following observations raised in an excellent article in the WSJ called Bitcoin Euphoria Threatens to Break these ETFs was not lost on me. It was referring to the leveraged ETFs offering 2x on Bitcoin and MicroStrategy. The problem is they are not able to fully hedge or position themselves to execute on their mandate. For example, 9% moves up in MicroStrategy might only see 12 or 13% up moves in the ETF versus the 18% expected. However, when MicroStrategy drops, it sometimes drops 3x as much not the 2x as expected. The amount of derivatives via swaps and options being used to reflect the correct value is sending huge warning signs to me to beware. What possibly could go wrong?

S2N Observations

While the US dollar has been going backwards against gold and bitcoin, other currencies are going backwards faster. The Indian rupee hit new lows.

Yesterday saw the release of the latest ISM numbers. It showed contraction (below 50) for the 8th month in a row and the 24th in the last 25. The study I am about to share shows a result you probably didn’t expect. I didn’t. If you sold the S&P 500 every time the ISM showed economic contraction, i.e., below 50, and bought it when it was above 50, you would underperform a buy-and-hold strategy.

Back to crypto I saw an analyst put out a buy warning on Ethereum as it is about to have an upside gold cross (50-day moving average above 200-day). Before you get too excited, you would have been much better off HODLing in the past. I have included the buy call in the chart. Jeez, we haven’t even crossed yet, and they are telling you to buy.

Finally, what trade is getting me excited? I think one of the best risk-adjusted trading opportunities is to buy a yield steepener. The chances are we will see a continuation of reckless spending and stimulus; the long end of the curve is likely to blow out relative to the short end eventually. We are still likely to see the yield invert again, so this is a trade I would be adding into. Just a theme I am sharing, not trading advice.

S2N Screener Alerts

Just when we thought coffee futures were going higher than a caffeine addict on his 3rd long black, we have a 3-sigma down day; sounds like a flat white.