The Fed Put

I’ve been reading apparently serious pieces wondering where the strike price of the Fed Put is. The Fed Put is a deeply held belief in the investment community. It is the belief that the Fed will step in and save the stock market before any kind of serious decline.

The dot-com bubble did not stop until the Nasdaq 100 had lost 83% of its value. The GFC was, in fact, arrested by the Fed, which eliminated mark-to-market accounting for banks. The Nasdaq 100 at that point had lost 52% and the S&P 59%, although most of the real carnage was in real estate. Both of these bubbles were created by the Fed.

Here we are in the everything bubble. Also created by the Fed. What makes people believe, contrary to all history, that the Fed will be able to keep this one inflated?

Back To Normal?

Thanks to Sven Henrich, Northman Trader

Choice

I just have to include this quote from John Hussman’s latest screed:

“the Federal Reserve has fashioned itself into a reckless circus clown handing out lollipops to diabetic toddlers. Having taught them that they will be continually appeased, regardless of the long-term consequences, even a “taper” is now met with wails of surprise, crisis, and tantrum.”

Game Changer

Fed Chair Powell, having got his re-appointment out of the way, finally decided to admit that inflation was not transitory and “tapering” needed to be accelerated to deal with it.

Well good luck with that, Mr Powell, but markets reacted to the announcement with a negative tone which is now supported by a hawkish Fed. Of course the real problem is not the Fed, it is the White House crew’s spending that causes inflation. The Fed helps by keeping rates low and of course the rate on cash money is zero, so reducing the cash flood is actually a minuscule rate increase. But as I have mentioned before, normal rates would be in the 8-9% range and we’re a long way from that. But we’re headed there, and above there, if inflation is to be Volckerized.

Nu

The news of another potentially dangerous mutation of the Wuhan virus is roiling markets today. Pfizer’s remark that a vaccine for it could be 100 days away emphasizes the failure of the vaccine-based strategy and its partners in crime – lockdowns, masking, mandates, etc., all of which are based on the notion of vaccines eventually providing an infection-free world. That just isn’t going to happen.

We can only hope that the early treatment strategy continues to provide a strong defense against Fauci’s virus. No doubt the “health” bureaucrats will keep doubling down because they cannot admit failure, so “sauve qui peut” is the word of the day. Of course the right strategy is getting rid of the bureaucrats, but with a President who is deeply unpopular himself there is little hope of decisive action.

Avoid infection if you can, otherwise reach out for the drugs that are keeping the poor countries healthy while the rich countries tremble.

I see crude (USO) is down 12%, Dr. Copper (CPER) down 4% at time of writing.

Edit: Nu is now Omicron.

Narrow

If you allocate $1 into SPY, that means 6 cents into AAPL, 6 cents in MSFT, 4 cents into GOOG/L, 4 cents in AMZN, 2 cents into FB. That is 22 cents of every $1 into 5 stocks.

If you allocate $1 into QQQ, that means 11 cents into AAPL, 10 cents in MSFT, 8 cents into GOOG/L, 8 cents in AMZN, 4 cents into FB. That is 41 cents of every $1 into 5 stocks.

The Top Of The Cycle

Jeremy Grantham is the expert on bubbles. This interview was a month ago, but is still extremely relevant. I recommend reading the whole transcript.

Jeremy Grantham (02:15):
I wouldn’t say necessarily, that we’re at the peak, I think it’s clear that we’re deep into bubble territory. Bubbles are characterized typically at the end of a long bull market by a period where they accelerate, and they start to rise at two or three times the average speed of the bull market, which they did last year, of course. And the Russell 2000 actually went up an amazing 50% in three months, ending in early February this year, which compares very favorably to the 50% rally in ’99 of the super tech bubble. And the NASDAQ went up 50% in six months. So, this was bigger and better.

Jeremy Grantham (03:01):
And, of course, they’re always extremely overpriced by average historical standards. And this one, there are a few people who would still argue that 2000 was higher, but most of the data suggest that this is the new American record or highest-priced stocks in history. And then, there’s the most important thing of all, which is crazy behavior, the kind of meme stock, high participation by individuals, which has kind of tripled in 18 months to an abnormally high level, enormous trading volume in penny stocks, enormous trading volume in options, and huge margin levels, peak borrowing of all kinds.

Jeremy Grantham (35:21):
No, I am not. I am leaving currency worries to other people. I have enough to worry about. With every real asset category, badly overpriced, that is quite enough for me to worry about. And history is quite complicated enough anyway without attempting to think about every aspect of the system. So, I will leave that to that. What is slightly unusual about this bubble on a global basis is that, yes, real estate has bubbled everywhere and often worse than in the US. Yes, commodities are everywhere. Yes, bonds are everywhere overpriced and interest rates are negligible everywhere.

Tesla and AI

Tesla is now being investigated by the Federal government as the dangers that its so-called Autopilot software poses have become so egregious that they could no longer be swept under the rug. People who never signed up for Tesla’s beta program are being killed by it.

The real danger, though, is the omnipresent use of the misnomer “Artificial Intelligence” or “AI”. This term leads people to believe that computer software and hardware can provide something similar to human intelligence. This could not be further from the truth.

What has been developed, and is an important and useful innovation, is machine learning. This is the ability to train recognition software that can, for example, identify elements of an image as cars, people, road signs, curbs and so forth. It can even recognize situations in some cases. What it cannot do is reason about a situation and figure out what to do about it. These action plans have to be developed by humans and programmed into the software. For every possible situation. That’s why self-driving software is taking so long and needs to operate in a constrained environment where events that it is not programmed to handle do not occur.

Think about it. You can teach 16-year old humans to drive a car reasonably safely in a few days. That’s because once they understand the rules of the road they are readily able to reason and apply them in situations that they have never seen before. That’s intelligence. Despite decades of trying, computer software isn’t there yet. There are powerful arguments that say it will never be, that human intelligence differs in fundamental ways from the von Neumann model of the stored program computer. We don’t have a stored program, we make it up as we go along. Maybe quantum computers will be different, but not in my lifetime as far as I can see.

Delta Demon

The writers who opine about these things claim that the selling in the last couple of days is due to fears of new lockdowns as a result of the spread of the Delta variant.

Perhaps this is so, and perhaps there will be new lockdowns. But the lockdowns will be to exert political power only, because the data show that there is nothing to fear – except political arrogance and megalomania.  Yes, the Delta variant is more infectious and has led to an increases in cases. However, the case rates have not caused an increase in hospitalizations or deaths. This is the normal course of evolution of viruses, where they become more infectious but less dangerous. Pay no attention to governors drunk with power or to Dr. Fauci, “I am the science”, political science that is, who should long ago have been removed from office pending an investigation into his role in the funding of the research that led to the escape of the virus from the Wuhan lab.

Nothing To See Here

The big tech stocks are soaring because inflation is apparently no longer an issue, courtesy of a crackdown on commodity speculation and a slowing rate of credit expansion in China. While those indeed have economic consequences, they are not about inflation in the US.

Inflation in the US is the consequence of the ongoing debasement of the US dollar, as the Fed and the administration attempt to keep consumption going lest the masses turn on them. This is no different than the debasement of the denarius as the Roman Empire slid into turmoil and eventual collapse. Just faster.