New Rally or Just a Bounce?

Good morning on this lovely Tuesday!

The markets were overwhelmingly positive yesterday, which puzzled me.  They were down hard on Friday, and I expected a follow through.  Not even close.

Let’s have a lookie-loo.

Nothing to See Here…

Honestly, I feel like Chemical Ali today.  After sounding the alarm with our Crazy Ivan, everything equity was up yesterday.

Courtesy: stockcharts.com

The Dow was up nearly 2%, while the S&P 500 was up 1.4%.  The Nasdaq Composite lagged behind but still gained nearly 0.8% on the day.

Not only that, but every sector was up, as well:

Courtesy: stockcharts.com

So yesterday was an all-around victory for the bulls.

The question is this: is it a bounce or the resumption of the rally?

I don’t call it a “dead cat bounce” because they happen in bear markets.  A dead cat bounce is also called a bear market rally or a sucker’s rally.

But it’s a strong up move right when we were coming off a bit.  In fact, the bounce was so strong the SPX regained its 50-day moving average.

If it’s the resumption of the rally, then it looks like the market is taking Powell’s inflation scare words with a grain of salt.  Adding to that argument is that the TLT was down hard yesterday, as the UST 10-year yield climbed back up to 1.50%.  Gold futures climbed to $1,782.90.

But what’s not fitting is the crypto crash.

Crypto Crash

At the time of writing, which is 12:47 am EST, Bitcoin is trading under $33,000 again and Ethereum has fallen below $2,000.  1,042 crypto coins are trading down, while only 89 are trading up.

DOGE is down over 23% at the time of writing.

It’s been a bloodbath, and not what you’d expect to see from a safe-haven asset (if you consider it as such).

Investors may be pulling money from crypto to cover other obligations.  Or just getting to the sidelines.

Money Supply Matters

“There is no means of avoiding the final collapse of a boom brought about by [bank] credit [and therefore money] expansion.”

Ludwig von Mises

I try to read Zero Hedge sparingly, lest I fall into a black mood, as Doctor Watson would say of Sherlock Holmes’ depressive state.

But today’s article on money supply is right up my street.

ZH reports that Morgan Stanley’s Michael Wilson suggests monetary tightening started months ago.

Stuff like this gets the Austrian economist in me excited, as my heroes always talked about monetary inflation.  Unfortunately, their point sometimes takes decades to get proven.

Succinctly, Mises believed excessive money supply increases lead businesspeople to make malinvestments.  That is, the boom distorts the markets enough that normally unprofitable projects are taken on because of low interest rates that exist with an excess of loanable funds.

Then, the boom they create must inevitably turn to bust once the central bankers try to reduce the money supply they previously inflated.

(Keynesians think the bust comes first, then the boom.  Austrians think the opposite.)

In the below chart, we see the risk assets (top of the chart: ARK Innovation ETF, Unprofitable tech stocks, healthcare innovation stocks, China Internet stocks, US Momentum stocks, and the SPAC index) fall sharply once the Fed balance sheet growth (bottom: year-on-year % change) reduces.

 

Next, we see M2 growth sharply falling.

This makes perfect sense from an Austrian point of view.  As we’ve got another week before the month ends, the FINRA margin data isn’t up-to-date, but that’s the next place I’d look to see if investors are taking money off the table.

The other reason – and I’m playing Devil’s Advocate here again – is that I’d feel a lot better about cryptocurrencies if they were created in a normal world.  By normal, I mean 5% interest rates and minuscule money supply growth.

I know this will infuriate coiners, but you can literally do anything with rates at zero.  And the first thing to do is constantly roll over your debt at zero cost.  That is, there’s no punishment or cleansing in the system.  No bankruptcy for companies or entities that are unprofitable.

That means companies are running around that shouldn’t exist.  Tons of them.  And the same goes for projects.  What happens when the piper comes around for payment?

We simply don’t know yet.  Cryptos have never lived in the real world.

Some of you will bring up TITAN and how it was crushed.  But, allegedly, it wasn’t even a “scam” or a “rug pull.”  A rug pull is when coin founders abandon the coin and abscond with the investors’ money.

“Ouchy!” – Micah Ring

The whales who owned the coin just got out.  That’s it.

Let’s see how they do when the market imposes real consequences on projects again.

Until then, we just need to stay vigilant and observant.  Right now, the markets are sending mixed signals.

As George Soros once said, “When a long-term trend loses its momentum, short-term volatility tends to rise. It is easy to see why that should be so: the trend-following crowd is disoriented.”

We need to discover once and for all if the long-term trend has ended.

All the best,

Sean

P.S.  Good friend, colleague, and Rude subscriber John writes: “I’m enjoying your “Rude Awakening” newsletter, but not while I am drinking coffee. Usually there is a line which might cause me to do the “laughing spew” and that would be such a mess. 🙂 Small detail – a few days ago you wrote about Greenspan, and how he took office right after the Oct 87 crash. Actually, it was before, in August. I remember as I was already working in the markets. But that’s forgivable for you since you were still probably a hormone-fueled teen.”

John, you’re absolutely right.  Greenspan took over before the crash. Thank you for the correction!   Although our email horse has shot its bolt, we’ll fix it on the Rude Archive page.  

As for being a hormone-fueled teen… alas, I didn’t turn 13 until December 1987.  Na, na, nah, na, na. 😉

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