Lunatics have taken over the Asylum

By: Uri Estrin - February 18, 2021 08:46am EST
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People have short memories, so it’s been a long time since a generational correction has occurred.
People have short memories, so it’s been a long time since a generational correction has occurred.

One of the earlier references to the idiom were from the 1845 horror story published by Edgar Allan Poe’s “The System of Dr. Tarr and Prof. Fether” where the inmates in a private hospital for the mentally ill had the keepers pinioned hand and foot and thrown into the cells.

In a similar manner, the Redditers and the Robinhoodites have ‘pinioned’ the speculating hedgefund shorts. You can infer any further metaphors.

But while the media is consumed by the Reddit retail investors, the dangers they are self-inflicting and the David and Goliath battle, in my opinion though, they are missing the most crucial element; how does a hedge fund, by betting on a single stock, threaten to it’s own collapse?

This shows an egregious disregard for investor’s capital and analysis of risk, in the pursuit of absolute greed. This is what’s currently driving the markets, it’s absurd and not sustainable.

Tesla is another example. The company is an electric vehicle producer. It produces a fraction of a fraction of worldwide motor vehicle production, yet it is valued at a market cap exceeding the sum of the top 5, twice over. Tesla rose over 700% in 2020 and is now in the market cap company of Alphabet, Apple, Microsoft and Amazon. Tesla is nearly a $1T company with 2020 revenue of $30B and profit of $721M. Comparatively, Amazon ($1.65t market cap – about 2x Tesla) had 2020 revenues of $386B and net income of $21.3B – with a B. How does Tesla’s comparatively minuscule revenue and profit justify it’s elevated valuation?

Tesla did something else interesting, it just bought $1.5B in Bitcoin. Companies buy Treasuries and other financial instruments, mostly for cash management. Buying Bitcoin is purely a marketing and speculative exercise. Tesla didn’t take an investor stake in Bitcoin to facilitate a strategic alliance, but rather a speculative position. This being another sign of excessive greed and risk in the market place and not to be left out, other financial houses and corporates and looking to follow suit.

Bitcoin is up over 180% in the last 3 months alone, 387% in the last year. The climb has been dizzying and nauseating to old school investors who base investment strategies on fundamentals. Pure speculation aside, there is no other driving force for these steep rises. What are the fundamentals to support this; has the Dollar collapsed? Have the credit markets seized? Is there hyperinflation? No, only wild promises of never ending appreciation. The FT recently described Bitcoin as possibly being a ‘digital tulip’ - and we know how that ended.

People have short memories, so it’s been a long time since a generational correction has occurred.

Of course though this time is different as it always is. “We have stimulus”, they cry and an indestructible belief that the Fed will backstop everything and pick up the pieces. As last resort, most investors presume that they are so experienced at investing as to know exactly when to exit without loss – we here too know how this ends.

Bitcoin could conceivably go to 0. Stocks could potentially lose 80%. Never in our life time do we at Macrotomi think we have been so close to such a scenario. The red flags are everywhere. The signs of exuberance and excess are everywhere. It’s just amazing how much louder and overpowering are the rallying cries.

For those who are risk averse, short term Treasury Bills are the safest bet in a crisis.

We are strong proponents of (currently losing) long term US Treasuries. Yields are rising but people should be careful not to confuse speculation with inflation. Current markets are in a total risk on environment and Treasuries are a casualty. January’s core CPI was 0% month on month which isn’t exactly a flashing warning sign for runaway inflation – which we have written repeatedly about. The jobs numbers are still pretty awful, it's difficult to see high inflation against a terrible job's market and a long way from full employment. 

At some stage – it’s hard to predict when  (but it must be getting closer) – the risk on trade well reverse and suddenly. So too will long bond yields. Interestingly, a steepening yield curve has reliably preceded many recent corrections.

It’s never fun to leave a party when the free Champagne is still being passed around. So in the meantime, the lunatics are having a manic episode and it’s fun while its lasting. These things never do though.


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