#206: Why Pay a Premium?

micksonmatch
December 23, 2024

S2N Spotlight

I am a big reader; I went through a phase where I read a book a day. That was during my photoreading phase, a story for another time. These days I am a bit more normal. Over the decades I have tried to get my hands on any book that deals with mass psychology. A couple of years ago I read this book.

“We are the apes who tell stories,” writes William Bernstein. “And no matter how misleading the narrative, if it is compelling enough, it will nearly always trump the facts.”

One of the skills I have picked up by delving into these kinds of books is the ability to identify the hero-type archetype, usually in the guise of a saviour, that these manias need to fuel their narrative. This type of archetype is particularly powerful as it taps into religious dimensions with all their supernatural power, real or imagined.

I feel that Bitcoin and crypto have entered this phase. In fact, I would argue it has been a religion for many years, but now I believe Michael Saylor has become the self-appointed and confirmed high priest of the Bitcoin religion that has witnessed mass revelation. I feel I have to say this, even if it is unpopular, as I just don’t see it any other way. By the way, despite whatever I say in this post, I still think that around 0.5 – 1% of one’s wealth should be allocated to this “speculative asset” I am not a complete heretic.

On the weekend someone said to me Amazon had adopted the Michael Saylor treasury strategy that Microsoft had recently rejected. I wasn’t close to the news, but I said B.S. There is no way. I was glad to read this yesterday as it confirmed what I thought.

Why Saylor Has to Keep Preaching

The market cap of MicroStrategy on Friday was ~$89 billion. As of 16 December, they owned 439,000 Bitcoin.

At a Bitcoin price of $96,000, that gives the holding a value of $42 billion. Let us be generous and throw a valuation of $2.5 billion for the value of the software the company sells (not sure if they do sell anything). That means you are paying 2x the value of a Bitcoin by buying MicroStrategy shares.

Unless I am missing something, like the newest discovery of alchemy, where you can turn not base metals but virtual value into greater virtual value. This just doesn’t make sense. If you want extra exposure to Bitcoin, buy a perpetual or an option; you will get more than 100 to 1 leverage on most exchanges. If you are more conservative, then buy a bitcoin ETF with a multiple.

Over time I believe this premium will evaporate, and so will many billions of dollars.

S2N Observations

The most important signals are coming from the fixed income market. Allow me one more observation before I share a few charts. For those who have followed the US markets for some time, you will know that the debt ceiling debate plays an integral part in the drama of the financial markets.

I am not going to go into the merits and the particulars of this latest act in the drama. Save to mention that we now have not one loose cannon but two running the show. I have always loved mavericks who do it their way. In Trump’s first administration, he played chicken with the entire system with the government shutdown for 35 days while he tried to negotiate more favourable terms. He eventually conceded without all he wanted. That chapter was not included in his latest version of “Art of the Deal” (joke). By the way, that book I read in 1987 had a profound impact on my life. Story for another time.

We are in the throes of another government shutdown. This time with another hardliner helping drive the negotiations, none other than bro Elon Musk. We are in for an amazingly volatile time in the markets, which is tremendously exciting. I loved how tweets were running the first administration sent at all hours of the am. Now we have 2 guys who own their own social media platforms, and both are addicted to feeding us with action statements.

Against that backdrop, the US yield curve has completely changed over the last month.

You can just feel the curve steepening and normalising along with its inflation expectations.

I have argued for some time that you should follow the 2-year US Treasury to get a sense of where the Fed’s monetary policy is likely to go. As you can see, they are currently touching. I believe based on the current upward trend of bond yields we are heading towards a scenario of greater inflation. This is why I believe the Fed has finished with its cutting and is likely to be raising next. Powell has 17 months left of his term and is likely to be in legacy protection mode and will not want to be like Arthur Burns, who cut rates only to shortly afterwards raise them to bring down inflation.

If there was a chart that would support the current Fed’s stance, it is this simple chart where it is seen against the current inflation that the Fed is being restrictive. The value of this chart is all about whether you believe the current inflation of 3.3% is reflective of the current environment and whether it is going up or down in the near future.

To help answer the above question as expected, we got a dramatic reduction in the reverse repo balances. Last week I shared that the Fed dropped the rate on the reverse repos by 30 bps instead of 25 bps, and withdrawals were plenty. QT is fast coming to a close. Down from a high of $2.5 trillion, we are now below $100 billion.

While I harp on about the fixed income market in the US, we are seeing yields collapse in China. The 2-year is below 1%, I think for the first time ever (you need to fact-check me). This all feels very deflationary.