#60 S2N: Back in the Game

I am a macro-trader, so what is my fascination with an individual stock and all the gossip?

There are certain times when seemingly irrational price action provides insights into the market’s prevailing or developing sentiment, much like a low-frequency carrier signal contains within it a message. Yesterday was the mother of all bear squeezes, which has the hallmarks of a Reddit attack. Let me break this down for you. Yesterday, GameStop stock rocketed another 60% (it was up over 100% at one stage in the day) after a 75% rally the previous day. Five days ago, GameStop had a market cap of $5 billion with around 20% in short interest. This means there was a $1 billion bet on this stock going to zero or anywhere close to that. Instead, the current market cap is now $15 billion, which is a 200% rise in 5 days and assuming the 20% of traders short couldn’t close out their shorts they are nursing a $2 billion black eye. I would hate to be one of the hedge fund managers with a GME short in my portfolio reporting to investors.

Naturally, the talk is that @theroaringkitty’s tweet that I referenced yesterday was not done in isolation. The conspiracy theorists are pointing to another interesting character, @MrZackMorris, another meme trader who was acquitted in his case where he assumed the identity of Zack Morris (fake name) and orchestrated trades through social media to net himself $100 million at the reported expense of investors he duped. The rumour mill is suggesting this was another case of the “people” taking on the “establishment” and winning. How fitting that a broker named Robinhood is at the forefront of such activity.

To me, this has a symbolic feel to what is happening in world economies and societies where inflation has caused the haves to be much better off than the have nots. Any student of economics will know that having such a large income inequality gap is destabilising for society and usually results in conflict. We are at a very vulnerable time in world history, with the world very much in conflict. Not just socio-economically, but militarily, as well as geopolitically through trade wars, that are still very much alive and kicking. Early today, President Biden upped the anti with major tariffs on Chinese-made electric cars and steel. Before we all slit our wrists, I will make some constructive short-term comments on the SP500 below in “Observations.”

As a betting man, despite the bleak picture I painted above, there is broad-based (breadth in trading talk) momentum in the market, and the probabilities are extremely high that the SP500 is about to register another new all-time high. The New York Stock Exchange, with its 2,000+ stocks cumulative advances versus declines, made new all-time highs. As did the SP500 AD cumulative line.

There was a lot of talk about yesterday’s US PPI coming in much higher than expected. I really try to stay away from the noisy monthly data, especially with all the revisions. March’s numbers were revised down heavily, so yesterday’s April headline numbers shot up more than expected. I prefer to look at the year-on-year data, that is, April 2024 over April 2023. Once again, I am not saying we don’t have too much inflation in the system, but there is no need to be hysterical 2.07% versus a mean of 3.24% is below average. The market simply needs to stop anticipating cuts in the near term. Inflation has already become ingrained in our psyche, so it is here to stay for some time to come.

In Australia last night, the Treasurer presented this coming financial year’s budget (1 July–30 June). I find budgets so boring. I couldn’t even bring myself to watch; I figured I would catch the highlights in the morning, which I did. Most of the budget is well-telegraphed long before he makes the speech. Jim Chalmers is a smart guy and a brilliant presenter, but I am not a fan of his economics. I would hate to debate him; he is very slick. He presented another budget surplus, so he naturally thinks he is a megastar. (Note to self: try and show tomorrow why Australia is the lucky country.).

Despite the rapid increase in government debt, the Australian government still has a very enviable government debt-to-GDP ratio of around 34%. That compares very favourably to the USA, at north of 120%. If you read that classic economic book that took the world by storm a decade ago, by Kenneth Rogoff and Carmen Reinhart, “This Time Is Different: Eight Centuries of Financial Folly,” you will know that anything above 100% is a front-row seat to disaster. Don’t expect things to go bad overnight; I am just saying…

Another country that got carried away with its Abenomics and has an eye-watering government debt-to-GDP ratio of around 300% is Japan. The minute they stop buying their own government bonds, then they start to weaken. To me, this is still a great trade: short Japanese 10- & 30-year bonds and long US bonds.

The Japanese short yen trade remains a good bet with the current yield differentials.

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