Newsletter - 01/01/2024
Yes. The market is overbought.
Yes. The market is overvalued.
Yes. The market is ripe for a fall.
However, all of that is based on macro.
The charts are telling us something different.
For now, I have to hold my nose and take longs. As much as I KNOW the above, and we are all right in believing those data points, the market SHOULD continue to move higher.
Typically, the "Santa Claus" rally starts on December 22.
It does not matter what I THINK - price action and the charts are still saying go long.
What the HELL is going on
All eyes or rather ears were on the Fed and my favorite whipping boy, Jay Powell. I admit that I was stunned with his "dovenishness" in his presser. In the span of TWO FREAKING WEEKS Powell went from this:
. . . it is "premature to conclude with confidence that we have sufficiently achieved restrictive stance, or when policy might ease (rate cuts)"
to
. . . rate cuts are "something that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today."
What the actual F???
To put this in perspective, the Fed pivoted in two weeks to "no, we are not talking about cuts" to "yes, we are talking about cuts." Did something change? I mean, I know I was sick so maybe I missed it but was there something else? The Fintech gurus said that it was the CPI print but that's bullshit. Even a second year college economics student knows CPI lags PPI. So what was it?
Powell then warned that if the Fed didn't start cutting rates AND inflation keeps falling then REAL RATES might become too tight. BULLSHIT.
Look at the next chart. If you factor in inflation, REAL RATES have been NEGATIVE since the GFC. That's pretty freaking tight.
Look, I don't know if their motivation is the election, or the coming war with Russia. I personally think the motivation is to prop up stock prices in order to prevent banks from failing since bank stock prices falling would remove the "cover" for their atrocious balance sheets.
So, I MUST hold my nose and buy good setups while being fully aware that I am buying bullshit. I am not the arbiter of morality or common sense because if I were, the market would be at least 50% lower. I am in this arena to make money. Period.
A final note on this. This is an excellent example of what I THINK vs what the market is doing. Other than the bureaucrats that live in DC, who honestly DO believe everything is sunshine and lollipops out here, no one states that the economy is healthy and growing.
But if I were to trade that thesis, even though I am "right," I would still lose money until the market is forced to acknowledge the underlying macro environment. This is one of the most common mistakes that all investors make, retail and pros. Their macro thesis is correct but their timing is wrong. Their timing is wrong because THEY are effectively telling the market what it should do and of course, the market listens to no one. I have made this mistake in the past because I decided that the turn was "just around the corner" so it wouldn't hurt to be a little early. Then the turn didn't happen. And the market continued counter my thesis. And I missed gains. Then, I would jump in at exactly the wrong time, you know because you've done it too, and then the market would align with my thesis.
This is why I let price TELL ME what the market is doing and I let it SHOW ME when the turn happens. Even I have this desire to be right and timing the market based on macro is part of that fool's errand. But I exorcised that demon decades ago.
Patience is extremely difficult in investing. When the data supports your thesis it is even more difficult. But successful traders acknowledge the "big picture" of macro, be it from the economy or individual stocks, but they trade what is in front of them - the price action.
Do you want to win (make money) or be right?
Member Question
During Friday's live session, which if you have never been to one, you are really missing out, BaconTurkey asked a great question.
What if the US had never gone off the gold standard. I didn't have an answer for him so I went looking.
For those of you that don't know, the US "officially" went of the gold standard in
1971 under Richard Nixon, who was set up and screwed by the CIA - but thats for another time.
However, that's not entirely accurate.
History:
The US was actually only on a straight dollar to gold peg from 1879 to 1933. We all know what happened in 1929. By being on the gold standard, it made the dollar more volatile as the price of gold was driven up and down by supply and demand. Also, on the gold standard it made it near impossible for the US government to expand their balance sheet in times of distress. For example, after 1929 the US government embarked on a jobs and infrastructure plan. If the US had remained on the gold standard, in order to expand their balance sheet, ie use credit to pay for their program, they would have had to buy more gold which would have pushed the price of gold waaaay up at exactly the wrong time.
After WWII at the Bretton Woods conference, there was an attempt to create an international system with gold as a standard but it failed.
What if:
If the US had never gone off the gold standard, the level of economic growth would have been much lower. Like really low. Like no tech boom. Limited infrastructure. The government would have to "acquire" more gold in order to provide more dollars/credit for expansion.
What's worse is that the US would be subject to severe bouts of inflation and recession which would further make the economy weak. Therefore, going off the gold standard was very smart. As it is with all things though, humans f'd it up.
In place of an asset backed currency you get fiat currency, backed by nothing. What's worse is that while you cannot make gold appear out of thin air you can make dollars come out of your ass. And that is exactly what the US government has done. Well actually the bankers have done.
The Result:
Let's take a look at the following charts to see what has happened since 1971 and the real affect on our country's productivity/profitability - the GDP.
First, let's establish a mean. From 1870 to 1970, debt-to-GDP was 150%. GDP from 1950 to 2007 grew on average at a 3.53% annual rate.
Since 1971, GDP has grown by 2300%. That's incredible. But collective debt, that's people, businesses and the government, has grown 5600%. Thats a 357% debt-to-income ratio.
US Economy Debt, Income and Leverage Ratio from 1949 to 2022
Even more stunning is what has happened at the personal level. Looking at debt-to-income, from 1960 to 2022 the ratio has gone from 78% to 171%. Households have also gorged themselves on debt.
Household Debt, Income and Leverage Ratio 1960 to 2022
Remember from above that pre-2008, real GDP grew at an average rate of 3.53%. Since 2008? GDP has grown 1.76%. The availability of cheap credit has NOT led to a level of growth in GDP commiserate with the amount of debt.
Going off the gold standard did not in of itself cause the fiscal crisis we are in. The Fed's irresponsibility and Congress' lack of control in spending is what has created the current levels of unsustainable debt, which is mirrored by the tremendous amount of personal debt currently held by households.
If we had not gone off the gold standard, it is very likely that the level of debt would be significantly lower. However, it is also likely that the standard of living in the US would be equally lower. That is not to say we would be living in huts and living Amish. But without the ability to print money out of thin air, which allowed for ever expanding levels of credit, the US would have suffered many more extreme bouts of inflation and recession, its citizens would not have the level of comfort of life in terms of material things, and the US would have been more vulnerable to external threats due to a much smaller military force.
However, the lack of control in the use of credit has created unsustainable excesses that at some point will become so large, so unbalanced, that the US will be forced to either go in a severe "credit diet" or it will be done for them, by the credit markets. Staying on the gold standard would have prevented the current levels of debt but it would have also prevented the explosive growth of the US economy. But the cheap and easy credit since the 2008 GFC has done nothing but inflate assets while significantly lowering the "profitability" of the country, as is evident by the huge drop in GDP.
New free trade ideas
I opened two new trades this week: both calls. First up was PBW. This was a breakout trade and its very easy to see from the chart below that there was a clearly defined resistance level that now that it has been "broken" to the topside, will act as support. Remember that before I enter a trade it must past numerous other tests no matter how good the chart looks. It has to have a minimum R value, price targets defined by the chart, and it must pass the projected price vs. 1 standard deviation move test. My goal is always to be forced into a trade because it is too good to pass up.
The second free trade idea was SPWR. Again, the breakout level is very clear and defined.
The VIPs and I took an additional trade in NIO and will open this week with two more trades, both to the long side. I review probably over a hundred possible trades per week and sometimes end up with no actionable setups. However, when I am "forced" to take a trade it is because it has passed all of my tests and the probability of profit is in my favor; it is too good to pass up.
Market Levels and the week ahead
I would be very surprised, astounded, if the SPX does not take out the 52 week high of 4818.62. That price level is so close that I believe the bulls will find it too tempting not to "see" what is above that level. Remember that market tops are accompanied by excessive bullishness so price could very well move 3-5% beyond that topside level.
The Nasdaq has also broken out to the topside BUT it would need to advance an additional 8% in order to take out the highs. In order for it to do this it will need time, perhaps until the middle of January. I am not saying it cannot do this but that the chances of it doing this are obviously much lower then the SPX taking out its highs.
Seasonality and the Santa Rally favor additional upside in the markets. So I am holding my nose and buying. However, as you will see in the final section of this week's newsletter, pain is coming. A lot of pain.
When will banks collapse?
Due to my adamant opinion that banks and CRE are a mess, I am asked a lot as to WHEN they will collapse? Or at the very least, when will they stop going up? Well, I am glad you asked.
Remember that macro takes time to be reflected in asset prices. Believe it or not my response to $KRE and $BAC going up is humor not frustration - because I have seen this play out before.
But when do I believe that the macro will take over the driver's seat in terms of stock prices? At the latest: March 2024.
Let me explain. First of all, the BTFD, the Fed's bank bailout facility, just hit a new record high (indicated by the red line below where negative means a "draw" or debit on the Fed's balance sheet) at $124B. However, bank stocks, the green line, have moved strongly higher. The ever widening gap between the two is not sustainable.
But its the next chart that is the real "tell" for me. As large banks' cash reserves go up (green line) small bank cash reserves are going down (blue line). AND, this is where it gets fun, when you remove the BTFD money from small banks, small bank cash relative to total assets is actually BELOW the Reserve Constraint level, the yellow line, which is the level the Treasury requires for reserves vs. liabilities.
SO WHAT? Look at it this way: at the same time large banks' cash reserves are going up, small banks' reserves are going down AND they are tapping the BTFD more. The BTFD is scheduled to RUN OUT in March 2024, although in all fairness I could see the idiots at Treasury extending it.
The easiest way for a large bank to grow, and in fact the cheapest way, is for it to "rescue" a smaller failing bank. You know, like Silicon Valley Bank. The "neat" thing about this method is that the rescuer bank gets all the good (deposits, good loans) without any of the bad (bad loans and losses).
Large banks are going to need a place to use that excess cash and what better way than to "save" a small bank or two from failing. But wait, there's more!
There is the possibility that the Fed's pivot to cutting rates was in part driven by the desire to reduce the losses of the bonds on banks' balance sheets which could reduce the likelihood of a smaller bank or two from failing. In this scenario, the Fed and Treasury do not want a lot of banks to fail, just specific ones that JPM wants to buy - and without all of that pesky CRE trash.
How the People in Power Screw YOU
Instead of how Wall Street screwed you this week, I wanted to show two examples of how the elite are screwing you.
First up is the State of Minnesota. It has become unacceptable to expect immigrants moving to the US to assimilate into American culture. Instead, we, US citizens, are expected to accept their cultures and it has gotten to the point that there are parts of the US where US traditions are openly banned in the spirit of "cultural sensitivity" which is of course, bullshit.
Take a look at the next picture. I don't think any comment is needed.
And, as further evidence that the rule of law is almost always suspended AND that the world elite are desperate to start a war with Russia, here's the latest plan by the world's global asshats:
An important note to my comments about immigrants: it used to be when a person immigrated to a country, they did so with the full expectation that they would assimilate to some degree into the welcoming country's culture, or at the very least not try to make their new country a mirror image of their old country. Not anymore. I find that disgusting. While I retain a deep fondness for my homeland, I AM American and therefore, I live by American laws, and have assimilated into American culture.
Do I think this is part of some evil plan by the global elites? Absolutely. All we need to do is look to Europe to see what happens when countries allow immigrants to dictate what is acceptable. Breaking down country specific cultures and traditions is exactly what the global elite want - no more borders, no more country specific traditions.
Finally, before anyone thinks that I am a WASP or a white supremacist or a MAGA nut, know this: I was not born in the US and I am not white. So there.
UPCOMING WEEK:
As we get later in the week, I expect to be in front of my screens less, barring any sginificant move in the market or one of my trades. However, as I always do, I will keep one eye on the chat and try to answer any questions in a timely fashion.
Paid Memberships:
ALL OF THE LIFETIME VIP MEMBERSHIPS ARE GONE! But I am still running a special on VIP memberships and through the end of the year, VIP Trial Memberships have been discounted to $99. VIP Trial memberships give you the chance to try out all the VIP benefits such as real time VIP only trade ideas, VIP only chat where we discuss trade ideas, and a one on one meeting with me.
From this:
To this:
MERCH STORE IS OPEN AND LIVE!
Don't forget the Discord live chat is STILL FREE but it will be closing to new members soon. In fact, we have already started removing non-active members.
In the meantime, come and join us - its the best community out there: Discord.
Also, be sure to check out the new page for Daytrading on the website, run by the fine gents @BaconTurkeyClub and @Juggernaut. If you ever wanted to learn or just watch two pros daytrade live, they are at it every day here: DiscordFuturesChannel.
Finally, be sure to check out VampireTrades and his amazing penny stock trades.
Thankyou Family!
theBoss
Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.