Malt Liquidity 55

Year in Review

As with most projects conceived randomly over a latte, I certainly didn’t expect this one to last as long as it did. Though I burnt out a bit by the end of the year (as markets became more and more post-satire), I’ve had a lot of fun discussing the posts with many people over the course of the year, and look forward to re-upping in 2022.

Over the course of the last year I talked about how cranial correlation and FOMO seemed to be driving asset allocation across the board. In particular, I signed off last year to avoid FOMO on high beta names because for each large winner, there happens to be a loser.

Of course, this was the year of Gamestop and the main asset allocation model being that of following whatever happened to be Netflix’s top trending asset of the month. But looking at the best indicator of retail sentiment, ARKK and HOOD, we happen to see a different story beyond the insane screenshots and the massive exponential returns:

Quite simply, I think everyone just got bored of trading. Equities don’t move as much as they used to, and without maintenance of trading volume assets will simply go back to drifting around their historical beta. Given the enthusiasm and the volatility for crypto, NFTs, and other assets to flip (watches and whatnot), equities that rely on being permanently bid can’t sustain their rise anymore. While a valuation guru might say these companies are still overvalued, I think the high beta inflation regime is long over at this point.

The Crowding Continues

Looking a bit deeper, has the market actually returned all that much this year? YTD we are up quite a lot, but most of the returns have come from a handful of stocks that are permabid by institutions along with individuals.

We can logically conclude that a sort of push-and-pull effect occurs: “real” flow goes into large caps, they rebalance as part of the ETFs they are in, “passive” flow goes into ETFs and drags the rest of the stocks up along with the large ones to a smaller extent. This case of cranial correlation is not that curious, but I suspect that gigacaps can no longer continue to inflate as they have been for the past couple years. While there are still not that many great places to put money (as housing and SPY run red hot while bonds still lack a bid beyond the fed), you’re starting to see more attractive valuations across the board in various sectors. After a large cap sell-off, I wouldn’t be surprised to see assets being bought up by active managers or private equity, especially in the face of rising rates.

China

I took a victory lap of sorts on the Evergrande situation, stock delistings, and China trying to curb speculation in crypto as China attempts to control the leverage in its financial system.

…it’s all about trading volumes on assets like bitcoin which contain a high percentage of retail participation. Indeed, the continued rise of assets like bitcoin and the correlated coins to it resolutely depend on trading volumes staying constant over time - price growth necessitates a lack of interest on the short side and continued volume crossing spreads to push the price higher in low-volume periods. As long as there is no mass exodus, the price of BTC/ETH should not catastrophically collapse, but without maintenance of trading volume, the price should deflate (relatively) slowly over time.

With Chinese speculation muted, I expect BTC/ETH to continue to deflate while a hotter, venture-capital backed crypto continues to maintain itself. It’s hard to say what the long game is in bitcoin or ethereum, but I suspect it to have a fate similar to gold - another speculative medium that attracts some trading volume, but existing in its own universe while people doggedly claim it’s an inflation hedge. Without an influx of new dollars and sustained trading volumes, it’s hard to see how the major cryptos make any new highs.

GME/AMC

Outside of Elon Musk (who I’ve already written about plenty of times this year), the main story of the year was without a doubt the Gamestop short squeeze that took over the zeitgeist for months. While I missed every single high short interest stock trade this year (while ruminating about them on blog posts), I remain interested in seeing how long these stocks can sort of hang out in their own universe. As far as I can tell, passive volume props up the day to day moves of GME and AMC along with the IWM basket, and since there aren’t any short sellers left on these stocks, the only thing that craters them is a liquidation event, which I can’t exactly see happening anytime soon. For all I know, they can stay in this weird, floaty, independent space for another year, though I think a broader market selloff will end the ranging.

To recap some predictions…

• btc/eth will not make new highs in 2022

• gme/amc will deflate to about half of their current levels

• we will close in on 1% FFR by the end of the year

• looking back from Dec 2022, inflation will appear pretty close to transitory

• there will be at least one major piece of legislation regarding reverse mergers/SPACs in the pipeline

• large cap tech will take a haircut, and value stocks will become bid again

• I will cross Malt Liquidity 105 and have 10 new fiction posts up

Thanks for reading! It’s been a memorable year with plenty of events I’m pretty sure I’ll never see again. I hope you all had as much pleasure reading these posts as I did writing them.