The Breakdown - Social Chaos and Bankruptcy Rallies: The Best Insights From FinTwit June 2020

Episode Date: July 10, 2020

Today on the Brief: Slight good news in new and continuing jobless claims  Record corporate equity and debt sales during the crisis USDC freezes $100k Our main conversation: Introducing the Macro Media Index. The Macro Media Index is a monthly summary of the best macroeconomic tweets, essays, podcast and videos from around the internet.  In this inaugural edition, NLW looks at a few key themes: The disconnect between the market and the real economy The role of the Fed and monetary policy in growing wealth inequality and social unrest The Robinhood Rally and bankruptcy bet that took institutional investors by complete surprise  The great inflation vs. deflation debate Featuring insight from previous Breakdown guests including Luke Gromen, Lyn Alden, Jesse Felder, Preston Pysh and more.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, Crypto, and Beyond. This episode is sponsored by BitStamp and Crypto.com. The breakdown is produced and distributed by CoinDes. And now, here's your host, NLW. Welcome back to The Breakdown. It is Thursday, July 9th, and today's episode is a recap of the absolute best macro content. from June. It's a new thing I'm experimenting with called the Macromedia Index. And basically the inspiration is that there is so much great insight that comes from financial Twitter that is

just lost forever based on the ceaseless march of markets and the constant gnaw of new insight, new information. And I really think that when we try to understand what has happened, finding a way to capture some of that and bottle it up is really important. So I'm releasing this as a Twitter thread, as a blog post, an email, and as a podcast simultaneously. We'll see how the podcast format works out. To be honest with you guys, it's the one that I'm the least confident of, but we'll give it a try. Before that, however, let's do the brief. First up on the brief, it's Thursday, which means it's jobless claims day. Last week, we had 1.427 million new jobless claims, and this week, economists expected around 1.375 million. We beat those numbers, actually,

actually, and saw only 1.3-14 million new claims. I say only, but of course, there's still 1.3 million people filing new claims. Additionally, we saw a drop from the close to 20 million continuing claims that we had seen for the last several weeks, down to 18.1 million continuing claims. So why does this matter? In my estimation, this jobless claims report that comes out every Thursday is one of the key narrative barometers for helping people understand how they should feel about markets right now. And in that light, what matters is whether the actual claims numbers beat or didn't beat the estimations. In this light, obviously, it was something of a good week, right? We saw better than expected new jobless claims. The flip side is, of course, that the pure numbers are

still staggeringly high. And finally, on this note, I think that even more important than the continuing claims number is the permanent losses. We talked a little bit about this earlier this week, and Joe Wisenthal wrote about it in Bloomberg earlier this week as well. But those permanent losses are growing faster than they did in the great financial crisis, and that's something that could have a really long-term impact. Next up on the brief, record amount of sales of corporate stocks and bonds. So what happened? Basically, this year has been an absolute bonanza in selling corporate equity and corporate debt as companies try to suddenly kind of backpedal into some sort of resiliency and up their cash supply. By a way of numbers, when it comes to bonds, companies that had

investment-grade credit ratings issued $840 billion of debt in the first six months of 2020, which actually matches the previous full-year record from 2017 and roughly doubles the previous half-year record set in 2016. Even the junk debt companies still sold $180 billion, which is slightly more than the previous half-year record set in 2015. This was, of course, fueled in large part by the Fed scooping up these bonds, including junk debt as well. That selling bonanza also translated over to the equity markets.

In Q2 of this year, companies raised nearly $190 billion, which is the most ever in a single quarter for U.S. equity capital markets going back to 1995, where the data begins. Why it matters? Well, this has a pretty big impact on what we'll see going forward. And really, the key question is whether this will continue. One positive indicator is that institutional investors are playing catch-up. So this is a quote from Rick De Los Reyes, who is the co-portfolio manager of the Tiro Price Multi-Strategy Total Return Fund, and this was in the Wall Street Journal. He said, institutional investors relate to the party this time that put a lot of pressure on them to participate with secondary offerings or IPOs.

So it is possible that we're going to continue to see these sort of offerings come to market as institutional investors have that demand for cheap stocks. Last on the brief today, something from the crypto world. USDC, the stable coin, freezes $100,000. So what happened? The Center Consortium, which includes Circle and Coinbase and which issues the world's second biggest U.S. Stablecoin, USC, blacklisted an address at the request of U.S. law enforcement, effectively freezing about $100,000. Now, the Center Consortium has said that this is one of two reasons that they would blacklist an address.

So the reason being a request from law enforcement in the U.S. or a request for regulatory compliance from the U.S. The other reason being network security. So it's not like this is out of step with what they've promised. But why it matters is that although this is totally reasonable based on where the center consortium is trying to be and having this be the kind of legitimate above board in the U.S. system stablecoin, it does limit U.S.D.C. as a currency regime escaping stable coin, which is part of what is driving the growth in stable coins right now. People are fleeing currency regimes, and those people tend to still be focused on Tether. Lee Quinn recently wrote an article on Brazil and Stable

Coins for CoinDesk and said that, according to Binance's representative in Brazil, the number of Brazilian stablecoin traders quadrupled since January 2020. The exchange's two most popular stable coins among Brazilians were Binance's B-USD and Tethers' USDT. Stable coins are going to be an increasingly important part of both the legitimate sort of regulated markets as well as these shadow markets as well as the global Eurodollar market. So it's really important to understand where different coins within that ecosystem are going to fit. But with that, let's wrap the brief and shift over to our main topic, the best macro media content of June 2020. All right. So as I mentioned in the beginning, the idea behind the macro media index, the best of the previous month's

macro content, is to have some record of this content, which would otherwise be. just totally flying by and never seen again in the context of Twitter. Those of you who have been following me for a while will kind of recognize this format a little bit from the original Longreed Sunday, which had the same motivation for the crypto industry and which was also distributed via Twitter. Usually I'm going to try to do this closer to when the month actually ends. The only reason it's a little bit delayed this time is that we had the July 4th holiday, which kind of just got in there and crowded it out for a minute. But I want to go back to the beginning of June, where it's, it started. And I think that where people were, and the first theme I want to explore, is the

disconnect between the market and other signals. So at the beginning of June, people were really starting to grasp the rate at which, the speed with which the stock markets, the equities markets, at least were recovering. So Ryan Detrick tweeted on June 3rd, this is going to go down as the greatest 50-day rally ever for the S&P 500 index. Basically, not only were we seeing a huge growth in markets, a huge return of markets from the March lows, but the single biggest 50-day rally ever, which was really mind-boggling to a lot of people. In fact, later in the month, when someone asked Jim Bianco, who's obviously an incredibly respected researcher and analyst in the space, why did you change your view now? We've known about Fed printing press for quite some time,

like 40% ago. Jim Bianco said, it's complicated. I've been wrestling with this question since the March 23rd low. I thought the Fed would push prices higher, but did not think it would, quote, work this well until late May. Understanding that booming retail responding to the Fed is what changed. We'll come back to that booming retail point, but I think the key part here that I wanted to pull out is the idea that a lot of people, even really smart people, were caught by surprise by just how well the Fed's action, or at least the sort of appearance of Fed action, channeling Jeff Snyder a little bit here, worked to drive markets to highs instead of the lows that we had seen in March. Of course, for anyone who peeled back a little bit of the nuance in the situation, the actual

story of even the equities rally was a little bit more complicated than just the stocks go-up story. Dan Nathan at risk reversal on Twitter on June 23rd said, The NASDAQ's advantage over the Dow and S&P 500 is the biggest since 1983. The gap between the S&P 500 and the Dow is the widest since the 2002 when the Dow was ahead. Software ate the pandemic. And you can see in terms of just how big the growth in the NASDAQ is as compared to everything else, it's been technology stocks, particularly big tech stocks that have really been driving this rally. And so it's important as we try to make sense of it and determine how really,

and how deep it is to understand just how big a role tech stocks have had in this rally. If tech stocks and the rest were a tale of two markets, Jesse Felder wrote about another tale of two markets in his piece, The Biggest Disconnect Between Prices and Profits in Stock Market History. He starts his piece, everyone is talking about the massive disparity between stock prices and fundamentals right now. To paraphrase Jeremy Grantham, we now find ourselves in the top 1% of stock market valuations and the bottom 1% of economic outcomes, based on the annualized rate of decline in second quarter GDP. A popular way to demonstrate this gap is seen in the chart below which plots total equity values along with total corporate profits. At first glance, it appears that

this is the biggest disconnect between prices and profits in at least 30 years. Still, for as important as that recognition of the disconnect between the markets and these fundamentals were, many folks like Dan Tapiero were just trying to challenge their priors and trade the market that we had, not the market that we thought we should have. On June 9, he wrote, hard to believe, but looks like we're in a new bull market for global equities and assets that has a long way to run. Chart suggests USD decline could be in motion as last time liquidity indicator exploded up was after Plaza Accord. Very rare data. think out of the box. And this is a point which I think is so important for people who are market

professionals that if you examine macro, if you see why things feel out of whack, sometimes even after you've assessed that in the short term, you're going to have to make a trade that makes your brain go a little baddy, right? And I think that seeing people like Dan argue for these kind of hard to believe, but here's what I'm seeing in the data tweets is really, really valuable. Then again, some others tried to look at data in a slightly different way to make more sense of it. Absolute 2020 breakout macro superstar Lynn Alden tweeted on June 22nd, the S&P 500 as priced in gold looks a lot less weird than as priced in dollars, since it cancels out some of the stimulus and QE effect.

Ever since US GDP growth peaked in Q3 2018 in rate of change terms, the S&P as priced in gold keeps making lower, highs and lower lows. So the point here is that you kind of have to hold for potential currency appreciation as part of these highs, and that when you look at it with a more fixed currency like gold, you see kind of a different story than the narrative of greatest markets of all time. And frankly, something that looks a lot more in line with previous historic highs in terms of corporate profits. BitStamp is the original global cryptocurrency exchange.

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This disconnect between markets and the real economy and the real world in general got another context as the month kicked off with an incredible amount of social unrest around police brutality and the murder of George Floyd. On June 1st, Christopher Cole tweeted, civil unrest and anger directly linked to income disparity and equal access opportunities. I said this to the New York Times in 2017. If central banks want to keep saving the day, that is fine. But volatility will be transmuted through other forms and threaten the fabric of democracy. One commenter said, that's very interesting, any other historical examples you know, and Christopher Cole responded, the French Revolution related to fact serfs were given land ownership,

but then taxed and humiliated to pay for lavish wars and extravagant monarchy. Social revolutions occur after a, quote, middle class achieves but loses status after financial crises. Going back to our previous discussion of the feeling of disconnect between markets and the real world, Alex Kruger pointed out that even though it seemed like with incredible social upheaval markets should be acting, well, less positively, he pointed out that historically stocks have not been negatively impacted by riots in the U.S. 1968 MLK assassination, Dow Jones up 5%. 1997 New York City blackout, up 0.3%.

1992, Los Angeles riots, up 1%. 1999, Seattle WOTC battle, up 1%. Stocks going up while riots flare should not surprise anyone. On June 2nd, Luke Gromman put this in historical and generational terms. He wrote, if we think of 1995 to 2020, as a boxing match featuring American exceptionalism versus millennia of history shows that extreme income inequality almost always leads to social unrest. It appears millennia of history may have just won by a knockout. Hashtag fourth turning. Nick Carter brought Bitcoin into the conversation.

He wrote on June 1st, Bitcoin doesn't, quote, fix this, but now that both civil society and the state are going berserk, having an untamperable, apolitical wealth storage and transfer system, is a profound relief. It's a necessary piece of the anti-authoritarian toolkit. Still, if we're going to talk about June 2020, the big breakout story has to be the Robin Hood Rally. Avichel Garg from Electric Capital wrote on June 6th, the stock market in 2020 feels like the crypto market in 2017. So we have talked a lot on this show about the Robin Hood rally and Dave Portnoy's Davy Daytrater Global Global and R slash Wall Street Betts. If you haven't listened to the episodes, go back to yesterday to find out what happened

with Doge and TikTok and why the Robin Hood Rally is part of that story, or go back a couple weeks ago to listen to my conversation with Jill Carlson about why it's real. But anyways, Preston Pish, I think, really nailed this on June 15th where he said, in my humble opinion, if you think Dave Portnoy at Stool Presente doesn't understand the first. Fed is going to print into oblivion, you're naive. Stonks only go up. This is his way of saying the whole things manipulated, you idiots. It's hilarious Wall Street doesn't seem to get the joke. And of course, the crescendo of this joke, of this gag, of this takeback and reclamation of absurdity and power from Wall Street was the Hertz bankruptcy bump. Alex Kruger put it

this way, he said the Hertz plus 1,400% post-bankruptcy reversal is the second most remarkable corona-driven market move after crude oil price turning negative. Joe Wisenthal agreed, he said, I've seen a lot of unusual micro-bubbles over the years, cannabis, blockchain, fuel cells, space, electric cars, etc. But I don't think I'd have ever guessed before that bankruptcy itself would be an exciting investment theme. Unbelievable stuff. And of course, what Joe was pointing out, that it wasn't just Hertz, which was soaring, but J.C. Penny, which had gone up 167% since bankruptcy. Whiting Petroleum, which had been up 835%.

GNC Holdings, which was also hanging by a thread. So all of these were part of this micro bubble around bankruptcy. On June 10th, Jesse Felder published another great piece called One for the Ages, and he basically said, during the dot-com mania, my friend Bill Fleckenstein tracked the bubble in what he called the Mania Chronicles. Consider this my very limited version of the same. The stock market has set many records this year.

After putting in the fastest 10% decline from a new high, it then put in the fastest 20 and 30% declines. Since then, however, it's now put in the fastest recovery from a crash in history. An unprecedented boom in money printing for the explicit purposes of supporting asset prices is certainly part of the reason for the recovery, but it is also important to note

what the money printing has inspired, an unprecedented boom in financial market speculation by retail traders. Remember, go back to that tweet from Jim Bianco earlier, where he talks about exactly this, that the involvement of retail traders and their response to the Fed was the thing that he didn't get and didn't anticipate. Now, for some important context, I highly encourage you to go read Jamie Catherwood's article, Rubbish Rally's.

He tweeted the first new article on Investor Amnesia. his site in almost a year, a quick dive into a 19th century rally that is even more illogical than the recent returns on Hertz shares. The story is basically about these land grants for a scam, a fraudulent colony, a fraudulent country that wasn't even real, but the land grants, 20 years later, 30 years after this mania had popped and it was revealed that this thing was just a big scam, were still trading all of a sudden for kind of a valuable amount. I actually actually did this as a read-through on the show a few Sundays ago if you go back and look. It's called Rubbish Rally's and it's really a fun read.

But with that, let's flip over to a different topic, something that's been a meta-topic, right? This wasn't just related to June. This is one of the big picture macro themes that we keep coming back to. It's the place of the dollar in the world and this question of whether we should be more worried about inflation or deflation. Preston Pishigan had a great threat about this. He said, I can't use the misuse of this terminology anymore. Inflation, deflation. Here's my point of view. Central banks are aggressively inflating the Fiat monetary base. Since 2008, the U.S. Federal Reserve

has expanded their balance sheet from 0.8 trillion to 7.1 trillion. That means they have inflated that Fiat money base supply of currency by 21.9% annually over that 11-year period of time. Well then, why haven't we seen CPI inflation? Easy, because they are buying financial assets with that freshly printed money. Bonds are purchased off the open market and freshly printed cash is supplied into the free and open economy. The problem, the money goes straight into the hands of the people holding assets and only a trickle comes down into the lower income sections of the economy, where a majority of the population percentage-wise exists.

As the wealthy portion of the population continues to benefit from this process of inserting freshly printed cash into the system, their net worth continues to grow, and they get first access to allocate the capital to even more advantageous assets that make more money. This is not free and open. This is manipulated. You won't find CPI inflation because the freshly printed money is nesting itself into financial assets by bidding the market capitalization higher and higher. Preston then goes on to talk about deflation, but I actually want to shift to the deflation

master himself, Jeff Booth, who on June 10th had another excellent thread. He wrote, We are told we need inflation. That is not true. It only seems this way because the rules of the game were designed that way. An inflationary environment that was manufactured by central banks, and once they were caught in it, they didn't see a way out. So instead of facing new facts, the technology brings efficiency and allows prices to fall, they doubled down on inflation. We are now in a system that requires evermore inflation, jobs, and higher taxes to pay for a black hole of debt that can never be paid back. Unable to reach escape velocity from the debt gravity, central banks actually fuel the thing that they fear most, deflation. Debt itself is deflationary because of taxes that need to go up in the future to pay for demand that was pulled forward through debt.

This is a really great summary of a lot of the themes that Jeff, who is the author of The Price of Tomorrow, has been harping on and being harping on, beating a drum around and are really important. You can go back and listen to my interview with Jeff from a couple months ago to get a real strong take on this. Lynn Alden puts some of this in the context of what is likely to happen with the dollar. This truly excellent thread from June 19th is worth a full read, but she ends it since September 2019 and the repo spike, and especially since March 2020, the Fed has grown its balance sheet faster than the ECB or the Bank of Japan in absolute terms and as a percentage of GDP. Others might play catch-up in the second half of 2020, but the U.S. is also likely to do more fiscal then as well.

The median American has less wealth than the median Japanese or European citizen. The U.S. has more wealth concentration, more reliance on the service sector, and more people on the brink of insolvency. Probably tons of fiscal stimulus coming over the next three to five years. The U.S. went into this pandemic with the biggest fiscal deficit as a percentage of GDP, among major developed countries and have been the biggest spender slash printer as a percentage of GDP in this pandemic as well. The U.S. also has a structural trade deficit. This is why, although there can be more USD tightness or perhaps even another brief spike, I consider a strong probability of being near the end of this current dollar bull cycle ever since the Fed was forced to shift to QE in September

of 2019. I'll be exploring these themes of the dollar and the dollar strength a lot more There was a great essay by John Turrick called What If the Dollar is a solved problem on June 22nd? And instead of getting too deep into that, I'm actually going to leave it. I'll point you to the blog spot where it is. But John is actually going to be on the show next week. So we'll be able to dig into this idea of the dollar as a solved problem together. One more note on the dollar, which has to do, I think, with FinTwit expectation setting and something that Luke Gromman noticed.

So Stephen Roach, who is a Yale University Senior Fellow, has been writing. in every place, basically, that will let him, that the dollar is going to fall as he puts it very, very sharply. And interestingly, Luke Grumman wrote, the most interesting thing about this article to me has been the reaction from Fin Twit, which is basically to ridicule the idea that there even could be inflation. So as you can see, there's just a ton of amazing content on financial Twitter and macro Twitter this past month, and I wanted to try to capture some of that. So I hope you've enjoyed this little trip down June 2020 memory lane. I think that understanding these in terms of big picture themes and what people were talking about

gives us a better way to look forward into the future. So that's it for today, guys. I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.