Bankers, Bitcoins, Bubbles, and Breaking Bad

June 25, 2017

Weekly Market Outlook

By Keith Schneider

blankThis week, tech and biotech stocks led the market. The Healthcare sector roared with the prospect of higher profits, should Obamacare be shelved. IBB, the biotech ETF rallied 9.57%.

There are so many concurrent, self-reinforcing bubbles, it’s hard to choose a favorite. The first, the flood of money from central banks and bond market, is telling us two things: The Fed will not raise again soon, nor reduce its balance sheet. Good enough reasons for the current rally to continue in stocks and bonds.

Another magnificent bubble blowing is the alternative currency game. Bitcoin is up 300% YTD and touched $3000. You can mine Bitcoins by buying NVDA graphic cards to solve the complex equation needed to create one.

After the cost of the cards, you still must pay electricity to run computers. The relationship between the pricing of Bitcoins and its impact on Nvidia (the company that makes the fastest, most efficient chips to create them) is direct.

The higher the price of Bitcoin, the greater the demand for Nvidia (and companies with similar-type) chips. NVDA has a PE ratio of 50 plus. Hence the boom in semiconductors stocks impacts all tech stocks and the relative valuation of the entire market.

The bubble in Bitcoin has impacted the valuation of everything which is inside or alongside the bubble created by the central banks.  The demand for alternative currencies was partially driven by central bankers creating so much fiat currency that for some it became imperative to create alternatives.

So, is it time to sell and get a one-way ticket to Mars?  Well for those Breaking Bad fans if you ask Walter White (AKA Heisenberg) the answer is “no,” at least right now. Werner Heisenberg discovered the uncertainty principle in 1925, which is related to Soros’s trading theory called Reflexivity. It is a simple concept, whereby the impact of observation in physics or human behavior in investing impacts outcomes.

So, if people believe in Bitcoin and Bitcoin prices holds up, they will buy more NVDA chips (or its competitors), which in turn will impact its earnings, and then ultimately its stock price, and then trickle down to other stocks as well, especially other semiconductor and tech stocks.  Even companies outside the tech sector will be impacted.

That is Reflexivity at work on a global scale. Watch out below when it all unwinds. Precise timing is everything and the biggest rise of an asset timewise is usually near its peak. It’s also close to when the assets in the bubble break badly from its highs and often never return to those lofty levels.

I participated and profited directly from a classic example of this during the Hunt silver corner in the late 70’s when silver ran from $5 per ounce to $50 before crashing back down to $5 in short order, bankrupting many, including the Hunt Brothers. Exit strategies and short-term market timing is crucial for successfully playing this game,

Meanwhile, risky high yield debt (HYG) continues to lose relative (RISK OFF) to US The S&P 500 (SPY) gained versus Utilities (Risk On), a positive. Mixed signals from that front and the big bullish trend for stocks remains intact. Solar stocks have been bouncing nicely off their lows and ignoring the energy rout.

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