Elevated inflation and a Fed that is way too far behind the curve is where we find ourselves today. The Fed most likely will hike rates 75bps on Wednesday – it’s long overdue and likely will be received by the market as “ok” only because the market is awaiting/pleading/begging for some evidence that the Fed is finally starting to get it when it comes to inflation and the economy. Anyone worried that the market will be shocked by the prospects of a major rate hike hasn’t looked at the 2y UST in the past 4 days: it’s moved from 2.8% to 3.3%. Don’t worry about the Fed hiking rates quickly – the market is already there.
My chart today isn’t meant to be funny – it’s meant to be illustrative of the speculation that existed in some parts of the economy last summer. Here you go:
The graph above was a non fungible token (NFT) that sold last summer for $3.4m, or roughly 110x the average US household income. Not a joke, also not investing. It was pure and utter speculation.
Higher yields and higher rates have resulted in higher volatility. It’s also resulted in the end of speculation – speculation that peaked last summer. Trying to front-run the Fed’s quantitative easing (QE) program by buying long duration, low yielding, high quality fixed income with the hope you’d do it before the Fed bought the same? OVER. Those speculative assets are down -15% to -20%. They won’t default but relative to inflation they will experience permanent loss. Bitcoin $100,000 ? OVER. Six major crypto currency platforms have now shuttered. Coinbase announced this morning they are laying off 18% of its workforce. Everyone should be expecting more than a few hedge funds that speculated in crypto to shut down in the coming weeks. Redemptions are coming and they are coming fast to those who speculated in crypto using leverage. Meme stocks like AMC Entertainment and Gamestop? OVER. Robinhood trading platform for day-traders down…it’s stock down -85%. Not coming back. Speculative blind SPAC pools doing an IPO? DONE. Many of those SPACs owned underlying companies valued at 40x forward revenue. Those SPACs are now down -80% or more. Not coming back. Permanent loss. It’s real and it’s happening. Speculation is being extinguished and while painful to the rest of a good and relatively priced market, ending such speculation is a good thing. Speculative tides do also go out and this one has gone out.
We don’t own NFTs of monkeys smoking cigars. We build and own well diversified, high quality portfolios that will perform well over long periods of time. And we’ve been doing it for a long time. Quality always matters, but in a market like this quality matters most. Real companies with real earnings and good balance sheets. They are out there, they exist, and they are on sale.
Can the market go lower? Sure it can. Yesterday was the first day in this extended sell-off that felt like liquidation was underway. Every stock in the SP500 was lower yesterday. That never happens but just happened. Redemption and liquidation of speculative strategies is happening, and it’s dragging down quality companies too because they are in the path of that redemption and liquidation. Higher rates may choke off speculation but it does not choke off quality companies from doing what they do best: building great franchises, growing earnings, and translating those earnings into cash to reward shareholders. That’s investing, not speculating.
Remain buckled up with your seat in the full and upright position. I will say this for the 37th time: this volatility doesn’t end until the market thinks the Fed is on a path to curbing inflationary pressures.
Chief Investment Officer
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