Updated: Mar 5
The macroeconomic picture in the United States is best understood as a tale of two economies: one is in a deep recession, from which it is preparing to emerge; the other is in late-stage expansion, and is showing signs of faltering. Which will dominate?
We've got quite a few numbers bouncing around like pinballs here, and they're not all telling the same story. It's very like the Tale of Two Cities, where the narrative proceeds independently in two very different settings among characters whose twain fortunes seem never destined to meet:
Real Gross Domestic Product increased 4% in Q4
Industrial Production Index increased +0.9%
10-Year Treasury Constant Maturity Rate 1.34% on 2021-02-19
Unemployment Rate 6.3% for January 2021
Total Non-farm Payrolls increased by 49,000
Initial Unemployment Claims 730,000
Cyclical stocks improved
Gold is down 5% in 2021
Johnson & Johnson's single-dose, refrigerator-stable vaccine is 86% effective against severe disease
Nasdaq fell 6.5% from its high, then recovered 4%
TSLA and BTC fell
ARK Innovation ETF fell, facing $465M in investor redemptions
The macroeconomic picture in the United States is best understood as a tale of two economies: one is in a deep recession (unemployment rate at 6.3%, initial unemployment claims at 730K, non-farm payrolls increase of 49K), from which it is preparing to emerge; the other is in late-stage expansion, and is showing signs of faltering. Which will dominate?
The Depressed Discretionary Spending Economy
As the United States confronts--and, hopefully, bests--the COVID-19 crisis, the force-shuttered consumer discretionary spending economy could emerge from hibernation in roaring fashion. The rotation away from defensive stocks--companies whose value is dependent upon staples--and into cyclical stocks--companies whose value is driven by discretionary spending--presages market expectations that this is the case. That this is the case is further supported by the imminent approval of yet another vaccine, this one from Johnson & Johnson, and one that can be administered in a single dose and stored at common refrigerator temperature.
As COVID-19 positivity rates and mortality rates recede, the price of gold has fallen off (5% this year,) as has the price of other safe haven assets such as the obligations of developed sovereign governments. Accordingly, yields on the US 10-Year Treasury, the benchmark for fixed income in the United States, increased as prices fell (yields and prices move in opposite directions.)
The roaring 20's came about as we know due to the end of the first World War and--as we now know at first hand--the end of the 1918 influenza epidemic. The world turned its productive capacity from the manufacture of armamenta, uniforms and prudent rationing to that of cars, clothes and indulgent consumption. We think that consumer discretionary spending is due for a rebound on the magnitude of this change, and commensurate increase in value of shares in these sectors may rise accordingly.
The High Tech/High Growth Speculative Economy
Meanwhile, higher yields also mean higher discount rates for uncertain future cash flows, and so technology companies--whose value heavily relies on their future growth--saw their share prices sink. The NASDAQ, predominantly comprised of technology company shares, has drifted lower over the past week as the market works to determine how likely its future growth is to materialize. Additionally, speculative money continues to flow into these companies' shares, aided by the emergence of a new class of market participant, the Robinhood Trader. Much like the E-trader who emerged in the late 90's and early 00's, the Robinhood Trader's enthusiasm for new technology listings who have a lot of brand recognition but not a lot of revenue has lifted these prices. These traders also enjoy access to inexpensive margin with which to lever their bets, increasing their influence on share price level and momentum. Companies that enjoy these attributes, or Ibbotson's Popularity, we believe will struggle to break out of their current trading ranges, a dynamic common to late-stage economic expansions.
Gamestop, a recent Popularity stock addition, is adding another $5.6B in market value as of this writing. We would guess that this comes approximately two weeks after the last vertiginous price surge, which time period would be coincidentally coterminous with the pay cycle for most American workers. The Redditors of WallStBets are likely funneling their replenished discretionary spending into call options once again, showing all of the institutional traders once again who's boss.
One of these companies, Tesla, has experienced greater headwinds than the indexes that it is a member of, likely due not only to the aforementioned discount rate effect, but perhaps also due to the increasing number of SPAC-sponsored competing electric car companies that are now listed for trading on global exchanges. (Special Purpose Acquisition Companies, or "SPACs", are blank cheque companies, typically organized by a former investment banker, that provide the means by which private companies can bypass the normal IPO process that keeps clothes on the backs of investment bankers. They are hated only slightly less than their entirely bankerless alternative, the Direct Listing.) It may also be that traders have updated their valuation models to reflect that Tesla is now also an indirect holding in Bitcoin, which continues to see pretty extreme levels of volatility despite its recent institutional "acceptance".
Bitcoin, an asset with Popularity-like attributes, similarly ascended new heights before entering a new trading range around $50,000 BTC/USD. Institutional flows are primarily responsible for the new price level, rather than the retail ones that had supported past price ceilings. As we've written about BTC in the past, we won't linger here except to say that it continues to demonstrate its insufficiency as a store of value, as its price volatility remains absolutely staggering--especially with regard to gold, the barbarous yellow metal which it is supposed to replace.
Lastly, Cathie Wood, the founder of the world's largest actively managed ETFs (as opposed to the passive ETFs with which goodstead implements its strategies), saw her flagship fund lose money on its Tesla and Bitcoin bets, causing investor outflows on large trading volumes. Nevertheless, she continues to bang the drum for Bitcoin, Tesla, and the other disruptive, innovative companies to which her ETF is dedicated--as well as companies that hold Bitcoin. And why not? These investments have allowed ARK to return something on the order of 150% over the past year.
ARK, then, is equivalent to holding both technology stocks at exceptionally high Price:Earnings ratios, as well as Bitcoin bought at the top of its price range. If one were to look for a single instrument through which they could gain exposure to biggest risks in this second economy, it would be shares of ARK ETFs. goodstead doesn't make short investments for its Members. We don't believe that these are appropriate or necessary for the vast majority of them. But if we were to be short an asset, then we think we might not be able to find one that we believe would offer a better risk:reward profile.
goodstead is not in the market timing business. No one knows what will happen, and he who lives by the crystal ball soon learns to eat shattered glass. But we believe that this economy, frothy by any measure, will struggle to add to the highs it has already achieved. But we could be wrong.