Roller Coaster
Posted on Thursday, May 13th, 2021
Started writing the blog earlier than normal this week as Diane has all of her shots and we decided to get away for the weekend. So forgive us if we missed something in the last 48 hours. It was an eventful week. We have recognized the need for the market to cool off the last couple of weeks and so here we are. We still see a rapid sell off and rebound. The Federal Reserve is still pumping money into the system on a biblical level even though the recovery is well under way. The benefits are clear – Huge run up in asset prices and a recovering economy from the pandemic lows. The dangers are clear to us as well but they do not seem clear to the authorities at large. The most serious of these is the loss of the US status as the reserve currency. Stan Druckenmiller gave an interview on CNBC this week. Here are the highlights.
Over the long haul, he said, the policies and the heavy debts and deficits they support will threaten the dollar’s standing as the world’s reserve currency. That status means the dollar is accepted for transactions and as a store of wealth anywhere and is widely held by central banks around the world.
The reserve currency of the world for the last 400 years has been the country that controls the waterways. Why does the country that controls the sea have the reserve currency? Most goods move by water. These goods will be delivered and paid for in that country’s currency. Is that changing?
Druckemiller has entertained the thought that a challenge could come from the crypto world. He said in the CNBC interview that the ultimate solution could be “some kind of ledger system invented by some kids from MIT or Stanford” though he conceded that “I don’t know what it will be.
Is the internet – the block chain – crypto-currencies the new navy? If letters of credit are done over the internet in crypto then whomever controls that currency is the reserve currency. China? The reserve currency is an enormous privilege and enables us to bail out our economy in frightening times. The MMT crowd doesn’t understand this and neither does Congress. Congress is only interested in the next election cycle.
I admire Stan. He is a legend in the investing arena but he is wrong a lot. His mentor George Soros would say to run into these bubbles and take advantage. When does this bubble burst? The Fed and the government keep shoving money into the system. What will it take to break the fever? The fever in the speculative issues like Tesla is already breaking. NASDAQ is taking a break. We are moving to mid cycle behavior. The handover in power from growth stocks to value stocks will have some pain especially in the beginning of the changeover.
The asset bubble may continue for some time but we are starting to get concerned that it could get messy when the government tries to start spending less. Even a diminished rate of spending may burst the bubble. That’s why they will keep spending. There are tremendous political pressures on the Fed to keep enabling the financial and market excesses and those pressures will only increase. We are in a raging mania but it is understandable due to the immense financial largesse from central banks. The minute that stops…or even slows…
Seasonally we tend to struggle in mid to late May. This market is looking like we are going to ride the rollercoaster all summer. It goes down you sell. It then goes up and you buy. Rinse and repeat. Like a rollercoaster. Up and down – all around. You end up back in the same place that you started and it costs you money. We are in the midst of a massive rotation out of growth and into value. It hasn’t happened for years and most are not positioned correctly. We have all been massive growth investors shunning value for years. There may be pockets of strength in tech as monumental buybacks help but value is winning. The averages will also struggle here as investors rotate. The averages are heavily laden with tech stocks. You have to get involved in the other side of the ledger. This is a great reason to analyze your 401K choices. Most 401K’s that I see have only options for what has worked for the last decade – growth funds. There are no options for value, energy or precious metals.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.