Unanchored
September 15, 2021·7 comments·In Brief
The economic relationships that once seemed permanent have started breaking apart. Taxes no longer anchor spending. Stock valuations no longer anchor prices. Inflation no longer anchors bond yields. Each of these snips happened within a few years, leaving traders and investors navigating a world where the old frameworks no longer connect the dots.
- Government deficits are no longer constrained by anything resembling fiscal reality. The question "how will we pay for it?" has become a punchline. Meanwhile, the relationship between inflation and bond yields has inverted completely. CPI hits 5 percent while Treasury yields sit at 1.2 percent. Bond vigilantes have disappeared.
- Stock valuations have become almost irrelevant to stock prices. Companies like GameStop and AMC trade on attention and momentum, not earnings or assets. Overvaluation itself attracts short sellers whose losses fuel further rallies. Passive index flows don't even look at price anymore.
- Effort and output have decoupled in ways that create wealth from almost nothing. Money-losing apps go public or sell to tech giants for billions. Financial engineering produces value where traditional economics says there should be none. The disconnect between work and reward has stretched to uncomfortable distances.
- The line between virtual and real economies is dissolving. Play-to-earn games let you earn currency in a fictional world that has real monetary value. The metaverse isn't just science fiction anymore. VR bandwidth has made it possible for "virtual reality" to become actual reality for millions.
- Traditional frameworks for evaluating assets may have become tools for losing money instead of making it. If you're using models built on valuation, effort, or the idea that "if I can't hold it in my hand it's not real," you might find yourself watching from the sidelines as a different set of rules rewards completely different behavior.
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
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Comments
Very interesting and thought provoking piece.
Now most of the changes occurred when the Fed and other Central Banks went ultra-loose monetary policies ( or at least when the majority of market participants recognized it and thought it permanent)
What happens when say “Inflation is Here” and must be dealt with?
What happens when the CBs get out of the money printing business and have to maintain an honest to goodness Cost of Capital in order to arrest Inflation?
I humbly submit that the “snip” is a function of what John Hussman has described as “Deranged Monetary Policy “
A policy that can’t be extended forever
And hopefully won’t
Nailed it.
The Times They Are A Changin’
Great article!
This crypto, meme stock, NFT, tokenized world is this generations Dot Com bubble. Except it’s fueled by infinite leverage and zero regulation. We all know there’s massive fraud in these types of systems. Humans cannot by their nature self-regulate.
These new asset classes will see a crushing pullback over 90%. Who knows what the stock markets will do.
And when will this crash come? Who knows? Are we there yet? Do we have 200% more to go?
Those who trade this with discipline will get out alive and wealthy. Most will lose it all.
Speaking of unanchored, European junk bonds had a negative real yield last week. That’s … ummm … never happened before and should be … impossible?
Another “too big to fail” opportunity… Common knowledge is we will never have another default cycle. Until today and seeing Evergrand make it to the front pages, sure feels like even the Europeans could kick the can a long way down the road.
What does ‘OG’ mean in OG NFTs mentioned in the footnote? Thanks.
Great post. It really highlights how the game is changing radically in ways that are easy to miss.
My grandmother had a portfolio of stocks listed on the stock market. I have a portfolio of stocks listed on the stock market. All of the terminology is the same, but the game is completely different.
Sorry slow reply ! It means Original Gangster… i.e., the most old school and highly-respected.
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