Yea this is a Bloomberg screenshot.
If you don’t what know it feels like to sit at the top of a bubble, it feels like this.
Elon Musk used Tesla’s cash on hand to load up on bitcoin. Effectively converting most of the cash on Tesla’s balance sheet into Crypto…
I haven’t given my opinion yet on Crypto, so here it is: The technology is good, but any form of currency will always need to be regulated by the government because currency needs to be tracked and taxed in a society.
Crypto could very well remain a medium of transfer (outside of government intervention), a medium of decentralized transfer, but there is no way to value an asset that doesn’t generate cash flows.
The value in Crypto is in its function as a medium of transfer of value, but the “value” part is almost impossible to figure out. Will blockchain technology revolutionize banking and other industries? Absolutely.
Doge-coin? For real… If you can’t see a red flag this big, you must be colour blind. Or worse- brainwashed.
Inflation is psychological.
It is really really important for you to understand this- inflation is psychological.
The Fed’s whole argument is that inflation is going to be a ‘blip’ in the history books. Unfortunately, the history books say otherwise, the history books have shown that the Fed is pretty damn useless at predicting things like this and are rather reactive to the problems they *sigh* keep creating. The market also rearview mirror looking when it comes to predicting what comes ahead. Imagine using your rearview mirror when driving somewhere, lol.
Inflation is as psychological a phenomenon as doge-coin. When the media is pumping “OMG inflation” business owners big and small say “Hey, maybe we should up the price of our products…everyone else is doing it”. Then starts an inflationary cycle. With all the cheap money in the economy at the moment, it was bound to happen.
The markets have already reacted by way of interest rates on the long-term yield curve rising. (The fed can control the short terms rates, they don’t really control the long-term- they might try).
How I see it playing out…
The same as last time.
Funnily enough, I stopped writing this article before the whole crypto crash and 13-F holdings announcements. Nothing much has changed in my view.
Inflation is the most powerful tax of all. Raise income taxes and you get riots, but print money and spend it before the value of that money has deteriorated and you get inflation tax and no riots about tax because people are not educated enough about the nuances of inflation to understand that they should be fucking angry.
How do you get away with this? You just change the way you define inflation. Before 1990 house prices were included in CPI. Yes, House prices aren’t included in CPI anymore, only rent prices. Rent prices do not exactly follow housing prices.
The reasoning is this: Inflation moved away from a ‘cost of living’ measure and became more of a ‘standard of living measure’. The conspiracy theory part of my brain tells me that it’s easy to steal money via inflation-tax when people’s standards of livings stay the same. Over time, living standards should be getting better NOT staying the same.
When you add back house prices inflation you get a CPI that looks a bit different.
Above from Shadowstats. The blue line is Shadowstats inflation measure that includes housing prices. As you can see, inflation using historical measures has been much higher.
Hedges
I have found a few OK hedges, and Burry’s latest 13-F holdings report gives us another.
One inflation hedge which trades at a fair price is NGVC, a grocery store chain that trades with little debt and just took a little dive, bringing it into a price range I deem acceptable.
Grocery chains pass on the immediate costs of some kinds of inflation, like food CPI, directly onto consumers. It can increase their margins because most of them also use LIFO (last in first out) method of accounting. This means the cost of goods they sell increases and they pay less tax while making the same profit in cash. However, this inflation hedge isn’t full proof.
Another inflation hedge could be PWOD. A small bank that is highly interest-rate sensitive compared to others in its peer group. Although inflation isn’t always correlated directly with interest rates so this inflation hedge is also not perfect.
Burry led me to another inflation hedge…taking a long position on short treasury bond ETFs. Let me explain this one… The federal reserve controls the short-term yield curve through open market transactions (literally just buying bonds on the open market to push up bond prices, and reduce interest rates). But they do not control the long-term…They could if they wanted to but that would be unprecedented and they probably don’t want to go there…The market controls the long term, and when the market believes in inflation, they will themselves push up yields by selling bonds.
So how do we use this information to hedge ourselves…
Understand this…If inflation goes up, bond investors require a higher yield on their investments.
If a bond is paying you 1% a year but inflation is 2% a year, you are essentially losing 1% in real terms.
So Burry buys a lot of this ETF that is short treasury bonds. If interest rates go up…bond prices go down and his position makes money. Why doesn’t he just short them himself? Sometimes funds have certain requirements that prevent them from naked short selling, so he can get the exact same effect by going LONG (buying) an ETF that is short treasury bonds.
Burry’s position
Burry’s bet, which you can see here, is significantly fucking huge and shows huge balls and huge conviction. DO NOT blindly copy his trades, many of his trades are already well in the money and may have changed.
His bet is massive because if he is wrong he can lose a lot of money quickly. To me, this is literally a big short 2.0 because it shows a purely one-sided. He is putting his money where his mouth is.
These things take time, so don’t shit yourself all at once. The last time he took a massive position it took bloody 2 years to play out.
Hey, thanks for the update! Quick question, if they changed the definition of CPI in 1990, did they update the historical inflation statistics before 1990 afterwards? Also, if you take the inverse of purchasing power overtime, it is clear that it does not reflect an 7-9% inflation over time, so what could be causing an increase in the PP of the US Dollar?