Infinite Confidence
Three weeks have passed since D.C.’s Hunger Games and while thousands of National Guard troops have calmed the capitol down, financial market absurdities continue to pile up. Hundreds of would-be revolutionaries are being rounded up by the FBI and other government law enforcement personnel, with their not-guilty plea couched in “The President made me do it” terms. Punters of a different style are throwing U.S. dollars at any speculative wall they can find to see what sticks. And plenty continues to inexplicably hang high, for now.
Investing legend Paul Singer told Grant Williams and Bill Fleckenstein on “The End Game” podcast “central bank control has step-by-step gotten more pervasive.” He believes nine years of ZIRP and other central bank shenanigans will unleash price inflation. Bond investors believe that inflation won’t go beyond the arbitrary two percent that central bankers are targeting.
Price inflation in the late 1960’s and 1970’s came from nowhere and policymakers thought it was temporary. Ultimately, prices headed higher with a mind of its own. Radical policy making will create the same ‘70s show. Stimulus, fiscal and monetary, will lead to a stunning surprise according to Singer. The inflation horse will leave the barn while the monetary mandarins root it on thinking they can stop it on a dime at their discretion, despite a horrible track record of predicting price inflation or turning points.
Singer says it’s “senseless to own 30-year bonds.” They are not a hedge but a “speculation.” He believes a price readjustment is imminent. Stocks, as well, are in as speculative a period as ever. “Financial markets as mass human behavior, nothing that is modelable,” Singer says.
Singer gave up believing investors are rational a long time ago. In that regard, Singer threw shade at Bitcoin, et. al. “Something that’s constructed in a computer program and after some time and a considerable expenditure of electricity, something of value is created,” he says, “is nonsense.” Gold is real, you can bite it. Crypto currency investing, Singer claims, is a cult. He describes Modern Monetary Theory as insane and is “the road to perdition.”
Government debts and entitlements are simply unpayable, says Singer. Inflating our way out of it is preposterous. Investors will front-run the Fed’s operation leading to bond market sell-off and the demand for currency will crash. “They believe confidence is infinite,” he says.
Financial complexity has far outstripped the knowledge and imaginations of central bankers. Same think, group think, derivatives and herd mentality have caused markets to far overshoot reasonable valuation. Citigroup Inc.’s chief U.S. equity strategist Tobias Levkovich “panic/euphoria” index illustrates the point. On this measure, euphoria is its highest on record, exceeding even the tech bubble, reports Bloomberg.
And then there’s retailer GameStop Corp., which, “soared as much as 145% to $159 per share, briefly reversed all those gains then finally finished at $77 each,” Almost Daily Grant’s reports. In September GME shares went for $5 amidst talk of bankruptcy. Three short weeks ago it traded for $17 and last Thursday $43.
For context, we turn to ADG,
GameStop is expected to generate $5.6 billion in revenue and $114 in negative free cash flow for the 12 months ending in January 2022, down from $9.3 billion in revenue and $483 million in positive free cash flow in fiscal 2016, while the average price target among the quartet of sell-side analysts compiled by Bloomberg stands at $14.
If that sounds crazy, the WallStreetBets webpage summarized the zeitgeist:
“[F*ck] the shorts, [F*ck] fundamentals, this is a once in a lifetime opportunity.”
As I write, GME is trading at $224 a share in after hours trading. Elon Musk just posted on WallStreetBets, “GameStonk!”
Call options trading is at an all-time high, with Yahoofinance reporting, “Whipped up by chat-room chatter and riding a hot streak for the ages, newbie day-traders show no signs of reining in their bullishness. It’s a showcase of influence that draws daily warnings from the old guard.”
“These guys see their collective power and go on stop-hunts,” Charlie McElligott, cross-asset strategist at Nomura Securities, told Yahoo. “They understand that their grabbing of short-dated, deep out-of-the-money call options in stocks packs a lot of convexity and dealer-hedging sensitivity to a move higher in the underlying stock.”
Until it doesn’t.
In a tamer market, Bloomberg reports, “The S&P CoreLogic Case-Shiller index of property values climbed 9.1% from a year earlier, beating the median estimate of 8.7% in a Bloomberg survey of economists. It was the biggest jump since May 2014 and followed an 8% gain in October.”
Nine percent? Ho-hum.
