Thursday Mid-year Mailbag
Q: Did we just survive the worst six months in stock market history?
You might think that from some of the headlines today, but, no.
We did survive the worst first half of a year…since 1970. Or something. But that is a highly cherry-picked statistic (and admittedly good clickbait).
It's just happenstance that the S&P 500 hit its all-time high on January 3 — the very first trading day of the year (which I'm guessing might be a first?).
We've been down-only ever since, but equities are still just 21% off their highs.
If the bear market ended with the low we made June 17, 23.4% off the high, this would go down as one of the least bearish bear markets on record.
I know it doesn't feel that way, but 1) it's been a slow grind lower: Consider the VIX hasn't been above 33 this year, which is pretty weird for a bear market. 2) Nothing has blown up. 3) The Fed hasn't had to rescue anything.
I'd go so far as to say — until we have an accounting scandal like Enron or a bank failure like Lehman or a stick-save from the Fed like in the pandemic — this is a bear market in name only.
Which means, if this turns out to be a real bear market, we still have lots to look forward to.
Q: Is inflation over?
Maybe!
If you tilt your head and squint, it kind of looks that way from this morning's data: May core PCE of 4.7% is the slowest rate of inflation since November. Which is to say, disinflation is already here.
So, we've got that going for us, which is nice.
But, for market purposes, it's not over until the Fed says it is.
PCE is the Fed's preferred measure of inflation and, now that it seems to have peaked, 4.7% seems not so incredibly far off of their official target of 2% (And I imagine the unofficial target is more like 2.5 or 3% at this point.)
Unfortunately, no one outside the Fed pays attention to PCE. CPI gets all the headlines, and it's the headlines that matter: The Fed's real target is not inflation, but inflation expectations, and expectations are set by whatever the market chooses to pay attention to.
The good news: By any market-based metric, the Fed's credibility is fully intact — futures markets peg inflation at just 2.1% in five years.
The bad news: The Fed still worries the man-on-the-street, non-market expectations for inflation could get out of control.
This is a more nebulous target, because the popular perception of inflation is not set by PCE, CPI, the futures market or anything the Fed ever says — I know that because we're not even listening to anything the Fed says.
According to a poll cited by "The Economist," 40% of Americans think that the Fed's inflation target is above 10%.
And an "Economist/YouGov" poll showed that twice as many Americans think that raising rates increases inflation than lowers it.
Americans might even be right on the second one; I don't know. But, based on those two data points alone, I think the Fed should stop worrying about what most people think because most people are not paying them any attention.
The only thing we do pay attention to is the numbers on the sign at the gasoline station.
So, maybe the Fed should make the price of gas their official target.
Q: Will crypto go up when inflation goes down?
It's fair to say rate hikes popped the crypto bubble, but I don't think that means rate cuts will re-inflate it.
For altcoins, at least, the bubble was well and truly popped, not just deflated. It'll take a while for a new bubble to emerge — there's no reflating a popped one.
I expect there will be another one, though, we just need a new narrative — preferably based more on utility and less on hype this time.
I do expect, though, bitcoin gets a bounce whenever those Fed rate cuts start to look imminent.
How sustainable that bounce is might be a function of how much credibility bitcoin has left as an inflation hedge.
Michael Saylor still believes, at least. Shocker.
Q: MicroStrategy is still buying???
I guess they made the margin calls their chief financial officer said were coming at $21,000. And we're still a long way off the $3,500 level that Saylor himself says would require them to post more collateral.
So, we can probably take "forced selling by MicroStrategy" off of our 2022 bear market checklist.
In its place, though, you can add "forced selling by miners."
On a Twitter Spaces yesterday, I learned from Blockworks research analyst Ryan Swanson and editor David Canellis that 1) miners have not been selling their mined bitcoins, and 2) we might be getting to the point where they have to.
(Skip ahead to minute 19:00 on the recording if you want to get to the bitcoin discussion.)
I guess I should have been aware of No. 1, but I don't know: With every other kind of miner, they dig something up, and then they sell it for US dollars. I kind of assumed bitcoin miners would do the same.
The fact that bitcoin has been so weak without miners selling is a bit concerning.
If they are forced to sell, it's less of a risk than with MicroStrategy: Exchange-listed miners hold something like 40,000 BTC versus about 140,000 for Microstrategy.
So, we've got that going for us — if nothing else.
Q: How does SBF have so much money to buy everything?
I guess he wasn't long crypto, which is unsurprising — he said from the start he got into digital assets strictly to make fiat dollars.
He's a mercenary trader, not a laser-eyed true believer. That caused some grumbling among the crypto natives, but it turns out to have been a good thing for everybody — there's at least one person who kept his head in the bubble and now has the means to buy out some of those who did not. And there's plenty of those. Take your time.
More specifically:
- He raised money when he could, not when he had to.
- He kept fixed costs low with just 250 to 300 employees at FTX.
- He made money at Alameda with genuine arbitrage (like his original Japan BTC trade) as opposed to the fake arbitrage of GBTC and stETH trusts everyone else seems to have been doing.
That has put him in prime position to pick through the rubble and see what's worth saving — like BlockFi, per today's news.
He will probably make a lot of dollars in the process (which he will subsequently give away), and maybe even rescue crypto while he's at it.
So we've got SBF going for us, which is nice.
Thanks for reading, and see you tomorrow for some mid-year charts.
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