The Melt-Up
More Cocaine, Please
I was first turned on to David Hunter about a year or so ago. We were in the throes of the March 2020 market crash, and he was one of the first and few voices that was calling for all time highs in the stock market within a year. Given that most investors were desperate and hopeless at the time, his calls seemed unrealistic at best and borderline insane at the very least. However, here we sit with the DJIA at 33,800.60, the S&P 500 at 4,128.80, and the Nasdaq at 13,900.19, all basically at all time highs.
It was Hunter, a self-proclaimed “Contrarian Macro Strategist w/40+ years on Wall Street”, who first introduced me to the term “melt-up”, which, as Investopedia puts it, is when a stampede of investors don’t want to miss out on the rise in asset prices so they purchase these assets en masse, despite the fact that the fundamentals of these assets (or the economy) do not justify the inflated asset prices. According to both Hunter and Investopedia’s definition, a “melt-up” seems to be exactly what we are experiencing. We’ve are currently experiencing the euphoria of rising equity and security prices, which has only been overshadowed by the hyper-euphoria in crypto markets. Moderately wealthy investors have gotten rich, and ultra wealthy investors have gotten ultra wealthier. The poor and others who don’t own these heavily inflated assets have actually seen their wealth decrease, as the value of the dollar continues to lessen. As a result, economic inequality is at levels not seen since The Great Depression. And who do we have to thank for this? None other than our dealer at The Federal Reserve.
A metaphor paralleling what is currently occurring in both traditional and crypto markets to a cocaine high came up in two different conversations with two different friends yesterday. One used the metaphor as he described just how difficult it is to tear himself away from the screen while there is so much money to be made in such a hot crypto market right now. His experience is not unique. Lately, I’ve seen prominent traders on Twitter post about how they have been taking prolonged breaks from trading, because the last few months of double-digit hour screen time per day is starting to catch up with them. But who can really blame these traders for spending so much time in front of a screen buying and selling digital assets? We are still mostly locked down due to COVID. And great number of people are still unemployed, yet people are seeing their account balances rise like never before. It’s almost impossible not to be completely absorbed by the dopamine rush.
Hours later, another friend said the following: “Someone recently told me that we are about to see big upward moves in the (traditional) market. How is this even possible? Look at the increase in asset prices over the past year - all while the economy has been halted. This is like telling me that after doing cocaine for a year, ‘Now, we are really going to start doing cocaine.’” I couldn’t have agreed with him more. We’re reaching that point of addiction where we’ve lost our job, family, and friends, a point of irrational exuberance and insanity. I even have 18-year-old students in my writing class writing short stories about trading with call options (very risky financial derivatives).
Personally, I know I’d rather scroll through Twitter in efforts to get an idea for a trade rather than binge watch a show on Netflix. We’ve all experienced so much screen time from being locked down that interactive screen time (i.e., studying the market or buying and selling assets) seems to be the only thing that really satiates us. (Luckily, I have to be accountable to myself in that I’ve signed up for a half Ironman in September and have to be outdoors exercising for hours every day, which forces me to lower my screen time.) My greatest fear with all of this is the inevitable hangover awaiting all of us. This is what I fear the 80% drop that Hunter predicts will happen in markets once markets hit their peak will feel like for most. For this reason, I keep in mind the old Wall Street maxim:
Bulls make money
Bears make money
Pigs get slaughtered
We are living in an age of over-leveraged pigs. I suggest not being one. Hunter predicts that the peak of traditional markets is the S&P 500 at 4600, DJIA at 37000, and Nasdaq at 17000. These calls seem more or less on point as per my back-of-envelope math. The Bitcoin Stock-to-Flow model predicts a peak of $288k/Bitcoin. There will likely be a number of people anxiously waiting in front of their computer screens to hit the sell button right as we approach these numbers. I won’t be one of them. I will likely begin to sell chunks of my holdings long before we approach these numbers because 1.) No one knows for sure if we will even get to these highs and 2.) Exchanges may go down or not have adequate liquidity to cash people out (this pertains more to crypto markets). With all of this said, both Hunter’s numbers and the $288k/Bitcoin target may end up being conservative if the U.S. government goes even further into money printing overdrive, and there are some who feel that we are just at the beginning of the “Roaring 20s” and that expecting a crash is an antiquated way of thinking. They might be right, and I could be dead wrong, but I’ll still be keeping my piggishness in check.
The Aftermath
Hunter claims that when markets crash, the only position you will want to hold is cash. After that, he predicts that a new cycle will begin, a cycle no longer dominated by FAANG stocks, but by commodities. I tend to agree. It will be like hitting the reset button in a way. I also feel that it will likely be important to hold Bitcoin as this reset takes place, as it will likely eclipse gold’s $11 trillion market cap when and if it runs up to a $1 million/Bitcoin after dropping to possibly as low at $40k/Bitcoin when the crash occurs. I think it will be important to own this store-of-value asset, as the dollar is likely on its way out as the global reserve currency and could continue to lose significant value in coming years.
As I write this, what comes to mind are the lessons learned from Weimar Germany, and those I’ve learned from my fellow “bar stars” (fitness enthusiasts who use public metal bars, usually in the vicinity of playgrounds or parks, to do pull ups and other exercises). I used to work out with a number of immigrants from former Soviet states who recall vividly how their money was devalued almost overnight decades ago. The only ones who were able to preserve their wealth were the ones that stored it in other currencies. I also witnessed something similar happen in Venezuela while I lived there. Will the same situation occur with the U.S. dollar? I don’t know and I hope not, but, in some ways, the road that we are on has the potential to cause such a crisis.
Best,
Frank
Recorded Conversation That I’m Currently Absorbing: “Update from Raoul on the Dollar, Rates, Growth, and Crypto (w/ Raoul Pal and Ash Bennington)
Currently Reading: The Sovereign Individual: Mastering the Transition to the Information Age, by James Dale Davidson and Lord William Rees-Mogg
Currently Listening To: “A Walk”, by Bad Religion
“I’m going for a walk…” -Bad Religion