Monday, 6 December 2021 —Wollongong, Australia

By Greg Canavan Editor, The Rum Rebellion

[7 min read]

Editor’s note: Today’s Rum Rebellion is a sneak peek at our subscriber-only content, The Insider. The full version comes with video charting analysis by veteran trader Murray Dawes.

Please enjoy, with our compliments…

***

Here are a couple of mainstream market quotes to ponder (and ridicule just a bit) as we kick off the week. Firstly, from the Financial Review:

‘Australian shares are set to open higher, bolstered by a late rally on Wall Street after a wild day of swings on concerns about the potential impact of omicron and in particular the impact of an extended pandemic on inflation.

‘Goldman Sachs, citing concerns about omicron, cut its forecast for US economic growth in 2022 to 3.8 per cent from 4.2 per cent.

‘“Our global economics team concluded that the ‘downside’ scenario — where the virus spreads more quickly but immunity against hospitalisations declines only slightly more — is the most likely omicron outcome,” Goldman said.’

And from The Australian:

‘Bitcoin and other cryptocurrencies suffered steep declines — losing up to $500bn in value over a single day — as jitters over the impact of Covid-19’s Omicron variant rattled investors and sent them looking for safer ground.

‘The downward spiral for Bitcoin began on Saturday morning before gathering momentum after late-afternoon selling.

‘Between Friday evening and late Saturday afternoon Saturday, bitcoin fell from $US56,740 to $US44,800.’

Last week, I wrote that I think Omicron is a sideshow compared to the main event, which is the Fed taper and subsequent tightening path.

The reality is that viruses mutate, and they mutate ‘downward’. That is, they don’t want to kill their host, so they become less severe, even though they might be highly transmissible.

I’m not suggesting Omicron isn’t going to pose some headwinds. From a psychological level, it will impact consumer confidence and spending. And there is always the risk of heavy-handed political responses.

But, on balance, if Omicron becomes the dominant strain, it will signify the beginning of the end of the pandemic.

Yet the media thinks it’s all about the new strain. Despite COVID being the best thing EVER for crypto, this new strain is apparently behind this weekend’s rout in prices.

Where’s the logic?

I’ll get back to cryptos in a moment.

Right now, though, the key thing to understand is that the market is reacting to the Fed tapering its ridiculous US$120 billion per month of asset purchases faster than expected. And ‘risk assets’, like cryptos and stocks with insane valuations, are taking it on the chin.

To me, at least, this makes much more sense.

That is, if you start to remove liquidity from the system (or promise to), assets that benefitted the most from that liquidity surge will begin to fall.  

Cathie Wood’s ARK Innovation ETF [NYSEARCA:ARKK] is perhaps the poster child for the pandemic liquidity surge. It’s down more than 40% from its February peak and down 25% since early November. As you can see below, the chart looks ugly:

What’s more concerning for the insanely valued tech stocks is that falling bond yields are not offering support.

The argument used to be that low bond yields justified tech valuations via a low discount rate that put a high value on distant future cash flows.

But in the past few weeks, the yield on the 10-year US Treasury bond has plummeted from 1.66% to 1.35%. That’s the bond market saying the Fed’s rate hikes will lead to a slowdown next year.

It’s also a recognition of the coming fiscal tightening. The US budget deficit in the year to 30 September 2021 was around US$2.7 trillion, down slightly from a record US$3.1 trillion in 2020.

The Congressional Budget Office expects the deficit will fall to US$1.15 trillion in this (2022) fiscal year.

In other words, there will be a big drop in government spending this year. Will the economy be able to make up for that with a Fed keen to tighten?

These are the questions the market is grappling with. It’s not about Omicron.

Meanwhile, gold continues to impress here. I know the recent sell-off has disheartened many. But as you can see below, the chart still looks constructive and it’s doing this in the face of a very strong US dollar:

Digital gold, however, isn’t looking as strong. This is hardly new ground for Bitcoin [BTC] and crypto, though. It’s par for the course. Volatility is the price you pay for the potential of massive outperformance.

I’m just a bitcoin observer, though, not a specialist. Here’s a brief excerpt from our crypto expert, Ryan Dinse, who had this to say to his subscribers about the weekend price action:

‘As you might be aware, crypto markets fell sharply over the weekend.

‘At one stage, Bitcoin [BTC] seemed to be in freefall. It was down 20% at one point, hitting US$42,000, before stabilising and rebounding to US$49,000.

‘Those falls in bitcoin brought down the entire crypto market, including our DeFi Index portfolio.

‘So what happened?

‘Basically, an important price level was breached by a big bitcoin seller — a so-called "whale" — dumping their coins quickly.

‘Because this happened in thinner, less-traded weekend markets, it had an outsized effect on price. A downside to the 24/7 market, I suppose.

‘In turn, a lot of leveraged traders — that is, people who borrow to trade using their crypto assets as security — were liquidated (forced to sell).

‘This process of liquidation cascaded down, causing a domino effect as prices kept falling, until the leverage was cleared from the system.

‘According to some stats I read, 372,000 crypto accounts were liquidated for a total of US$2.31 billion in forced sales. I’ll never for the life of me understand why people trade crypto on leverage.

‘Anyway, when the leverage was gone, prices stabilised and started to rebound.

‘While this might seem dramatic — and I know a 20% fall in one day seems extreme when you compare it to stock markets — remember in crypto this is fairly common.’

Summing this up, I think what you’re seeing is the market pricing in liquidity withdrawals. That’s why the most liquid speculative assets are falling the hardest.

This may usher in a broader bear market as we head into 2022. But with interest rates remaining low, well-priced stocks that didn’t participate in the easy money melt-up this year should do reasonably well.

So depending on how you’re positioned, there’s no need to panic. But if you’re loaded up to the gills in speculative meme stocks, you may want to use any future rallies to lighten the load…

Regards,

Greg Canavan,
Editor, The Rum Rebellion

By Bill Bonner Editor, The Rum Rebellion

We continue our history of the US’s Nightmare Winter.

By way of prelude, here’s CBS News:

‘After California became the first U.S. state to ban gas-powered lawn mowers and leaf blowers earlier this year, more states, including New York and Illinois, are mulling over similar measures.’

And this from The Washington Post:

‘Roughly 45 percent of households are being hurt by price increases, according to a survey of nearly 1,600 people conducted Nov. 3 to Nov. 16. About 1 in 10 said that hardship was severe enough to affect their standard of living, while 35 percent described the hardship as “moderate.”

‘The effects were most acute in lower-income households, with 71 percent of those making less than $40,000 a year saying they experienced hardship, compared with 47 percent for middle-income households and 29 percent of those considered upper-income.

‘“Most low-income households are already hurting,” said Mohamed Younis, editor in chief of Gallup. “You can only imagine what that’s going to look like in the next few months if this continues to get worse.”’

This winter will bring hardships for the poorest among us.

But today, we look at another winter — harder…longer…and further in the future.

What are the odds of a staggering economic collapse…political and social chaos…hyperinflation…and revolution?

One in two? One in 10? We don’t know.

But let us continue the tale of ‘history’ we started last time. You decide how likely it is.

Flying blind

In the 2020s, major governments throughout the world were committed to two remarkably implausible policies, highlighted by the news items above.

First, they were ‘transitioning’ to a post-fossil-fuel economy, setting a specific temperature target for the planet.

Second, they were funding their programs with ‘printing press’ money.

None of the major powers — Europe, the US, Japan, or China — had any real money.

The real money — backed by gold — was eliminated in 1971, when Richard Nixon closed the gold window. Thenceforth, the US government would no longer honour its promise to redeem dollars for gold presented by foreign central banks.

Since then, they were all flying blind.

And that worked, more or less, for the first three decades. Old habits, principles, and customs prevented politicians and central bankers from running wild.

Deficits were mostly contained. ‘Printing press money’ was still a rarity. In the late 1990s, the US’s debt-to-GDP ratio was actually going down.

But gradually, time-tested reflexes gave way to empire-building ‘stimulus’ fantasies…and free money temptations.

By 2021, all the world’s major economies were running large deficits and headed for bankruptcy.

Over-reliance on renewables

And yet, rather than reverse course and let them recover, policymakers doubled down — especially in the energy sector.

Internal combustion engines were penalised. Electric vehicles were subsidised. Power plants were decommissioned. Oil pipelines were shut down. New oil wells weren’t drilled. Storage tanks were abandoned.

To make matters worse, inflation hindered investment in all new energy projects. With the political and financial sands shifting beneath their feet, nobody wanted to build new power plants or refineries.

Energy from solar and wind struggled to keep up. Unlike oil-fired generators, they were idle much of the time. At night, for example, the solar panels were worthless. And there was no guarantee that they wouldn’t be idle just when you needed them.

In theory, you could make up for it by increasing capacity, giving yourself a comfortable ‘margin of error’. But that would mean an even greater ‘investment’ in new power sources.

In practice, it was impossible to develop enough generating and storage capacity from renewables to replace the more efficient output of market-driven, tried-and-true, old-fashioned gas, oil, and coal.

Supply strangled by bureaucracy

And it was a matter of life and death.

Afterall, the world only used roughly 50 exajoules of energy in 1900 — to support 1.6 billion humans. By 2021, it was using 11 times as much — to support five times as many people.

What would happen when the power suddenly went out?

The energy system, 1900–2020, was developed in a mostly free economy with — until 1971 — reliable money. It had been built out without subsidies or tax credits…and readily adapted to supply/demand pressures.

The post-2020 ‘transition’ system was different. It was directed by bureaucrats, regulators, politicians, and meddlers. It was shaped by government, not private enterprise.

But government is very different from the private sector. Businesses earn money by providing goods and services — such as gasoline — at a profit. The government never produces a single gallon of gas.

Instead, it regulates…restricts…curbs…and controls. In other words, it subtracts — it doesn’t add.

Systemic breakdown

On paper, the supply of energy — much of it coming from highly subsidised, inefficient, and centrally controlled new ‘renewable’ sources — was adequate.

In practice, the system — like the Soviet economy — was rigid and brittle.

Then, one especially cold night…with no sun…no wind…and temperatures falling below zero in half the country…it failed completely.

The power system collapsed. Valves froze up. Fuses blew. Ice-covered wires fell.

The dark passage had begun. Stay tuned.

Regards,

Bill Bonner,
For The Rum Rebellion