6 Dec 2021

The world is seriously in bad shape when the President of a country thinks it’s cool to sit behind his laptop screen trading Bitcoin with his countries resources (present and future) tweeting away at all and sundry how cool he is and how big his gonads are. I have been trading 20+ years and I wouldn’t have the temerity to brag about catching the bottom and then going online and roasting all those who are calling out his reckless behaviour.

I turned on my computer Saturday night after a 24hr screen detox and saw the Bitcoin price in freefall down more than 12%, it turns that was a lot higher than where it got to as the market liquidated leveraged longs. The market got down to $42k which was a drop of more than 20% in the space of a couple of hours, that is pretty breath-taking. The part that shocked me most was not the price drop but the lack of coverage on any mainstream media. There was no talk on Bloomberg, and reading the Monday morning Australian Financial Review still no word.

I am not 100% sure what to make of the liquidation numbers on the various exchanges. While there was a spike it has not resulted in any major bankruptcies that I am aware of. I will be watching out for news of any exchanges in trouble but why is there no panic ????

Meanwhile the broader equity markets are vulnerable with the Nasdaq leading down more than 2% on Friday. Interesting that traders were closing out shorts in the build up to the recent selloff as the bullish sentiment took hold. Once again confirming that one needs to be brave and contrarian at market sentiment extremes.

The Mighty Dollar continues to feel the love and it will be interesting to see if the anticipated interest hikes are able to match the demand for the buck. Its possible that it is acting as a safe haven in a world of uncertainty. By the way Gold is starting to look interesting again but has yet to break out properly to the upside.

Oil continues to trade down, I note with interest that Rivian that electric car company with a more bullish valuation than Tesla is now trading at the price of its IPO less than a month ago. I see this stock as a poster child for the EV (electric vehicle) mania.

Something that caught my eye was the massive increase in container production in China see below image which accounts for 95% of the worlds container supply. There has been a serious shortage of container space during the recent Covid supply chain shocks. If China is slowing down as an economy and many of the main commodities are trending lower then perhaps this massive increase in shipping capacity might be another support for the inflation is transitory debate as this surge in supply is likely to drive prices of shipping down. By the way here I am pushing on a string that inflation is likely to top out by the end of next year and prove to be more transitory than what the market currently anticipates and Jerome Powell at the Fed who coined the term has abandoned the “transitory” term from the Fed’s official minutes based on the current slew of inflation data points. Yet I am saying we could see a strong decline in the cost of shipping and more broadly. This is how price discovery works in a free market. If there is a shortage of supply due to an increased demand then you need to satisfy that demand with more supply. Manufacturers of containers are incentivised to increase the supply and profit from the excess demand. The challenge is that it takes time to build much more containers than you typically need so the manufacturers have to forecast demand and then take the risk of an entrepreneur to satisfy the anticipated demand. If the forecast demand does not materialise then the manufacturer will be forced to cut its prices to sell the stock it has on hand either at lower margins or at a loss. The travails of a businessman. Manufacturers will be forced to drop prices to increase demand if my fears about the Chinese economy and the 4th Covid wave in the northern hemisphere prove to place a brake on the current economic upswing. This is price discovery in a free market and its healthy in the long run.

Interest rates at 5000 year lows with governments doing whatever it takes using fancy tricks of yield curve manipulation and printing money with imaginary debits and credits is a good example of a free market gone wrong and artificial price discovery. In the end the powerful forces of the free market will flex their muscles and we will get a market allowed to partake of the ancient art of price discovery.

JP Morgan

A quick post script to when I wrote this, I just came across this chart which echoes exactly what I was saying above.

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