Monetary Illusion X.0
Ten years ago hedge fund manager Hugh Hendry wrote in his annual letter that central banks have given rise to a new form of investing that he called "imagined realities". He said that the worse the reality of the economy became, the more investors would anticipate monetary bailout. He said that it would all end badly but in the meantime there was money to be made by capitalizing on rampant gullibility. To prove his point he said that in 2015 he predicted Chinese markets would outperform global markets due to the massive amount of monetary stimulus entering the tanking economy. He was right, the Shanghai Composite went vertical during the first half of 2015 and then it exploded in the second half, bringing global markets down with it. The Chinese government did everything possible to halt the losses but nothing worked. The index lost all its gains.
So Hendry was right in the sense that we now live in an era wherein any fantasy can take form as long there are enough fools who believe in it. And if you front-run that stampede of fools and get out at the top, then you can be one of the very few who actually profit from it.
Which is why Ed Yardeni this week opined that in 2024 markets will be led not by the Magnificent 7 largest stocks - but by the Magnificent 1, as "the new Cisco" Nvidia builds upon last year's 500% parabolic ascent. Yardeni can say whatever he wants because there is no one in the financial media who would call out such an outlandish prediction. By Yardeni's own assessment, the whole gambit would be predicated upon yet another monetary policy mistake that in the end would end very badly in the Hendryite way:
"Is Nvidia today’s Cisco? It’s possible. If so, then it has a lot more upside before it crashes"
"If Powell and his colleagues take a victory lap and celebrate their success at bringing down price inflation without causing a recession by lowering interest rates, they run the risk of fueling asset inflation. When that bubble bursts, a recession most likely would ensue"
"To quote Prince: “Let’s party like it’s 1999.”
This is now the bullish case in a nutshell. Pray for another monetary pump and dump that comes at the expense of the overwhelming majority.
When Cisco crashed in 2000 it lost -80% of value. That stock has yet to regain its all time high from 25 years ago. At the peak it had a market cap of $500 billion which is a mere one third of Nvidia's market cap today. If Nvidia followed last year's trajectory, it would be a $7.5 trillion company in one year - three times the size of the Canadian stock market. In other words, suck in several trillion dollars into a Ponzi market and spit it all out into recession. That's the most bullish scenario.
Similarly, why are the retail bandits who drove the Gamestop pump and dump constantly lauded as heroes? There are now at least two movies/documentaries on the subject of the Gamestop saga that portray the WallStreetBets Reddit boiler room as a band of heroes. In the same way that Crypto bandits are portrayed as "beating the system" by creating a far worse form of financial criminality.
Below we see that Gamestop peaked in February 2021 at the same time as the IPO bubble AND the crypto bubble. I have constantly excoriated both Silicon Valley and Wall Street for dumping a $1 trillion of mostly worthless junk into the stock market. But here we see that the infamous Gamestop followed the EXACT same trajectory as Wall Street's criminality. They were ONE and the SAME. But I guarantee when this all explodes, all you will hear is how the small investor got conned by the big boys again.
Right now as I am writing post-FOMC, regional banks are imploding deja vu of last February/March. Right on time, wave '3' down is accelerating, as the first casualty of this second annual bank run has now been identified as New York Community Bank:
However, last year when banks imploded after the January FOMC, the entire Artificial Intelligence bubble magically appeared out of nowhere to carry markets higher. So it was that there was a massive rotation out of cyclicals into Tech stocks.
My advice is don't expect that to happen again. Why?
The Fed just said yesterday they are not going to finance another imagined reality
We're clearly running out of fools to follow as artificial intelligence peaked back in 2021. You know, with Gamestop.
