The one-time buying burst that will not be repeated

[7 min read]

Dear Reader,

I recently posted the below chart on Twitter and said the NASDAQ was giving me another chance to make an ass of myself. I didn’t expect it to only take a few days.

The chart shows the NASDAQ making highs in February, followed by the same highs in April and June. Each sell-off found support at a higher low. I viewed the convergence of these trendlines as bearish, for reasons I will explain below.

From a technical perspective though, you have punters buying the dip but then selling at the highs. Not a lot of conviction.

Yesterday though, the index broke out to new all-time highs again.

Thanks to the fall in long-term bond yields in recent weeks, investors are back buying ‘growth’ stocks. Lower bond yields mean a lower discount rate, which means higher valuations for stocks with distant growth prospects.

It’s a win-win for tech!

But hang on a minute…

While the market might be back putting high valuations on future, potential, dreamed-of profits, there is also the little matter of near-term earnings for the tech giants that form the bulk of the NASDAQ and the S&P 500.

As Fred Hickey of The High-Tech Strategist reminds us:

‘Prior to last year’s 13% increase in global PC unit shipments (per IDC), PC shipments had fallen for seven consecutive years. The market was saturated. IDC recently reported PC shipments in the first quarter soared 55.2% year-over-year to 84 million units, led by Apple Mac PCs, which skyrocketed 111.5%. Apple’s iPad revenue had peaked in 2012 and more recently had fallen for six consecutive years. Apple’s iPad revenues jumped nearly 79% year-over-year in Q1. Global smartphone shipments soared 25.5% in Q1 to 345 million units, up from 275 million units a year earlier. Global smartphone shipments had dropped by single-digit percentages in each of the prior three years — again due to market saturation. Apple’s iPhone revenues in Q1 climbed 66%. Apple CFO Luca Maestri on last week’s conference call warned of a “sequential decline steeper than usual” in the current quarter. “So when you look at our normal seasonality, and you’ve mentioned a percentage that is really an average of several years, what we’re saying is that we believe that the sequential decline is going to be higher than that.” At over 30 times earnings and a market-leading $2.2 trillion valuation, Apple’s stock was priced for continued high growth — which is not likely to continue.

‘Covid-19 created a one-time burst of buying that will not be repeated. By now, most people have bought new computer equipment for working at home or for kids’ schooling at home and now some will start heading back to the office and schools. The PC (and tablet and smartphone) markets will be even more saturated and the year-over-year comparisons later this year will become horrendously difficult. When will the stock market begin to anticipate this? Maybe now.’

Maybe not just yet, Fred.

The NASDAQ may have just broken out to a new all-time high, but the move isn’t unanimous. For example, Apple, Netflix, Amazon, and chipmaker Advanced Micro Devices are all trading below their highs.

While Amazon is close to its high, the peak actually occurred back in September last year. That was the peak of small business destruction (Amazon’s competitors), following one-size-fits-all lockdowns last year.

Meanwhile, Microsoft, Facebook, and Alphabet (Google) all made new highs along with the NASDAQ.

As the Northern Hemisphere continues to open up, it will be fascinating to see whether the NASDAQ can continue to rally, or whether more subdued demand (and resultant slowing of earnings growth) will pull the index down.

The quarterly conference calls that kick off post the end of the June quarter will be interesting indeed.

And while the Northern Hemisphere opens back up, we’re shutting things down. There’s been an ‘outbreak’ in Sydney. Our panic-stricken neighbours have ‘slammed shut’ their borders, ignoring the fact that we are one country.

It’s not surprising though. Fear is a powerful motivator. What I find strange is the broad willingness to agree with freedom-eroding lockdowns.

Which brings me to an interesting article I read in The Spectator recently. Toby Young writes:

‘The question I’ve puzzled over…is why the global elite became such enthusiastic supporters of the heavy-handed, statist approach to managing the coronavirus crisis — stay-at home orders, business closures, face masks — and passionate opponents of less draconian alternatives, such as those set out by the signatories of the Great Barrington Declaration.

‘…supporting non-pharmaceutical interventions is a high-status indicator, a way of advertising that you’re in the same club as tech titans like Bill Gates and Jeff Bezos and eminent public health scientists like Anthony Fauci and Neil Ferguson. It’s a sign of your membership of the cognitive elite. You may not be a virologist or an epidemiologist, but you’ve picked up enough of the lingo — herd immunity, R number, vaccine escape — to give a plausible impersonation of an expert at dinner parties.

‘Perhaps more significantly, challenging Covid orthodoxy is a low-status indicator. In the eyes of our meritocratic overlords, there is no intellectually respectable opposition to the policies embraced by nearly all western governments, bar Sweden.

‘The reason Davos Man has outsourced his opinions on the pandemic to the World Health Organisation is not because the policies recommended by Tedros Adhanom enrich him. Rather, it’s because they cost him nothing. He can just as easily work in the shepherd’s hut at the bottom of his garden as he can from his corner office. His children are provided with a full timetable of lessons via Zoom, courtesy of their private school, and if he feels like a holiday abroad he can charter a private jet. Becoming a cheerleader for lockdowns is a way of signalling that he is among the tiny elite of successful people for whom there is zero cost associated with them.’

Indeed…

Regards,

Greg Canavan,
Editor, The Rum Rebellion

Bitcoin: All Foam; No Beer?
By Bill Bonner

Dear Reader,

We are working on a shocking new insight.

It came to us yesterday as we were wondering about bitcoin, cryptos, and (a term new to us) ‘microcurrencies’.

The crypto sector has lost about US$1.3 trillion since the beginning of May. Bitcoin itself has been cut in half.

But both colleagues and dear readers insist that the crypto class still has value.

‘These are not just money substitutes,’ said a colleague. ‘There are many microcurrencies that make business easier and less costly.’

But when we tried to pin him down on how they work, it was slow going.

‘You see, they’re based on smart contracts that are registered on the blockchain and then bypass the middlemen.’

No beer

All the foam was there, but where was the beer?

Perhaps we are just slow-witted. But the more he explained, the less we understood.

A smart contract, we discovered, is no different from a dumb contract. It can be a 200-page document…or a handshake…with as many ‘if X when Y, then Z’ clauses as you care to put in.

If there is a dispute, it needs to be resolved. How the ‘smartness’ part helps, we don’t know.

‘You don’t understand,’ an old friend added.

‘This is a whole new asset class. It is like the beginning of the auto industry. Most of the car manufacturers that started out failed. But those that remained were great successes.’

We still made no headway.

The auto industry produced millions of cars and trucks. It made huge profits. Its US ‘headquarters’ — Detroit…Motown — was once the richest city in the US.

But crypto? What is the ‘asset’? Why is it an asset at all?

As far as we can tell, it’s like artificial intelligence (AI) — one part new technology, and nine parts old claptrap.

Grave doubts

Which brings us to our point. We offer no opinion on the cryptos that claim to be useful for things other than money — except that we’ve seen no significant examples.

But as to the usefulness of cryptos as money, we have grave doubts.

And we were delighted to open the financial news this morning and see that our old friend, Nassim Taleb, shares them. Business Insider elaborates: ‘Bitcoin is worth zero and there is no evidence that blockchain is a useful technology, Black Swan author Nassim Taleb says’:

‘In a recent six-page draft paper titled “Bitcoin, Currencies, and Bubbles,” Taleb laid out four key arguments against the cryptocurrency, which he promoted to his 743,000 Twitter followers.

‘First, the author said that in spite of the hype, bitcoin failed to satisfy the notion of “currency without government”. In fact, he said, bitcoin proved to not even be a currency at all.

‘“The total failure of bitcoin in becoming a currency has been masked by the inflation of the currency value, generating (paper) profits for large enough a number of people to enter the discourse well ahead of its utility,” he said.

‘Taleb’s second criticism said bitcoin can neither be a short nor long-term store of value. He used the famous juxtaposition of gold versus bitcoin — which he said was poor comparison — to illustrate his point.

‘“Gold and other precious metals are largely maintenance-free, do not degrade over a historical horizon, and do not require maintenance to refresh their physical properties over time,” he said. “Cryptocurrencies require a sustained amount of interest in them.”

‘His final two points argued that bitcoin is not a reliable inflation hedge, contrary to some analysts’ views, and is not a safe haven for investments — whether meant to protect against government tyranny or other catastrophes.’

Nassim reminds us that bitcoin was no protection in the panic of last year; it sank even more than the stock market.

And when the FBI was recently able to track ransomware payments made by Colonial Pipeline — reported to be in the region of US$4.4 billion in bitcoin — it became obvious to everyone that the alleged privacy and security of bitcoin transactions was more wishful thinking than fact.

But the cryptos still have their fans and ‘hodlers’ (people determined to hold on through thick and thin). Many of them began hodling when bitcoin was under US$1,000. Even after getting cut in half lately, it’s still over US$30,000 this morning.

‘See,’ begins a crypto enthusiast. ‘I told you they were valuable. That proves it.’

Usefulness of money

To make a molehill out of a mountain, what we notice is that the more a currency goes up (or down) in price, the less valuable it becomes.

Money — or anything that purports to be money — is not valuable in itself. You can’t eat it. It’s generally not much to look at. You can’t wear it or use it for transportation.

A dollar may be used to start a fire. A funny-bunny crypto coin can be an amusing joke. A gold coin can serve as a paperweight.

But the only real usefulness of money is as money, nothing more.

Money helps us keep track of what other things are worth. And if it is to be valuable, it must be truthful.

If it gives us a false report, on the other hand, it’s as dangerous as a double agent in wartime, giving out misinformation so that we will make a mistake.

A year ago, bitcoin said it was worth about a third the cost of a Ford F-150 pickup. Two months ago, it said it was worth two of them. Now it says it is worth only one. Which is it?

And here’s the thing: When money can’t keep its story straight, it loses its value as an informant.

Take bitcoin, ethereum, dogecoin, et al.

People buy them because — they say — they are superior forms of money. Then, if they go down, they sell them…because they have proved to not be superior forms of money, after all.

But if they go up, they have proved to be untrue and unreliable.

Delightful confusion

This puts the thinking speculator, if there were any, in an awkward situation.

He has taken a flyer on a new form of money…that has proven to be not very useful at all.

And yet, it has gone up in price. And now, other buyers are buying…because it is NOT a good currency. That is, they are buying because they think it is going up in price even more.

All of which makes our head spin.

But what a delightful confusion.

If you are buying a crypto, remember…Nassim Taleb could be right. It may have no value. Zero.

And the more it goes up, the less value it will have.

Regards,

Bill Bonner,
For The Rum Rebellion