June at Lykeion

We look back at what we've written over the past month

Let me ask you a question.

Would you rather go back to a world in which travel is restricted, masks are mandatory, and your favorite bar closes right when you’re starting to feel that third Monkey 47 kick in, BUT the market keeps on making new all-time highs, or

Would rather find yourself in June 2022, having booked a week off in Formentera (or whatever the US equivalent of that is) after dusting off buenos dias and una más porfa from your repertoire (which, btw is irrelevant as Formentera is 90% Italians during summer), only to find out that your flight is delayed, that your carrier lost your luggage (so no Birks for you, señor), and that whilst you promised yourself you’d be checking out from work, you just can’t stop thinking about Jerome Powell, Michael Saylor, and the worst US equity market performance in more than 50 years?

Neither is perfect, we know – but hey, that’s life. As for us, we’re not in Formentera (for that, we need to put a paywall on this and hope you guys convert to paying subs), but we’d still prefer to be where we are right now. It’s a good time to be doing meaningful work and study as the world as we know it is changing right in front of us.

Travel-wise, Tim’s crossing the Atlantic and staying in Tel Aviv for a bit (any recs are welcomed), and I’m soon headed back to Portugal for time with the family.

Whatever you’re stressing about, just remember that we’re nothing more than “monkeys with a plan”. And if that doesn’t work, Aperol Spritz might do the trick instead.

Must Read: The Euro, the State of the Bear Market, and the Need for a Stronger USD

As you know, this is a macro-driven market, and YTD Roger’s insights have been spot on and ahead of the news cycle. The reason why his June report is this month’s Must Read is that he covers some very important short-term events that, if they materialize, will end up shaping the medium-term macro narrative:

  • Is Yield Curve Control reaching a tipping point in Japan?

  • Will Yield Curve Control in Europe lead to a stronger Euro in the short term?

  • Is the US Dollar the best tool to get inflation under control?

A Q&A with Doomberg

There’s little introduction needed here, except for the fact that this was our first podcast attempt. Doomberg has become one of the most successful “newsletter” analysts out there, and we took the opportunity to ask him a ton of energy-related questions… and more. We were quite curious about his content-creation method, which shines a light on why they’ve been able to create such a successful brand. Podcast or transcript, it’s your choice. But make sure you check it out.

What Would It Take for the USD to Lose its Reserve Status?

When in doubt, ask Jacob. In his June report, he delivers a deep dive explaining what led the US dollar to become the global reserve currency, and what it'd take for that to change. Spoiler alert:

  • The US dollar status as a reserve currency is not permanent.

  • That said, it takes a lot to make countries consider ditching the global reserve currency because the transition process is incredibly inconvenient and uncertain.

  • Unseating a global reserve currency is the sort of process that happens over decades, not years, and usually has more to do with the decline of the dominant power (US) than the rise of a challenger (China).

This was the kind of masterclass that justifies college tuition.

Charts of the Month

My favorite one for the month:

“To visualize just how historic this recent attempt at controlling their yield curve is, take a look at last month’s BoJ bond purchases…”.

If Japan is to be considered the laboratory of monetary policy, this should be enough to tell us that Yield Curve Control, in the long term, is unsustainable… anyone cares to forward this to Mrs Lagarde?

DeFi's Liquidity Issues and BTC's Market Value to Realized Value

In June, I was tasked with trying to shine a light of hope on traditional and crypto markets. It was like being presented with a patient with third-degree burns over their body and all I could do is throw some Aloe Vera at them and tell em’ to get back out there.

Seriously though, in crypto, I don’t think that the bear market is over yet, and, more importantly, I think it won’t be over until we get some macro clarity within traditional markets – and by this I mean we get to see how Powell’s “to Pivot or not to Pivot” soliloquy ends. In the meanwhile, in our latest Update, we contextualize the current bear market, we explain the MVRV (one of the most sought-after market indicators for tops and especially bottoms), and we highlight the importance of the Ethereum merge. A diversified selection of content to drive your attention away ("Parkour!") from the fact that BTC just had its worst quarter since 2011.

Market Sell-Off: What's Next?

Take this one with a grain of salt as it was written in early June (schitzo markets don’t lend themselves to evergreen content) but there is a really important segment in there that I’ll just put forward below, which highlights my general thinking about the market right now:

“Is another sharp correction in asset prices caused by an actual earnings recession (and not only higher rates and high inflation) the necessary catalyst to give an excuse to central banks to pivot, and for markets to begin trading higher for longer once again?

To answer that question, we might want to look at 1974 and 2018.

  • In both cases, financial conditions were tight (in the former, we also had high oil prices), which eventually led to an economic growth collapse (in 1974, the ISM moved from 56 to 30 in four months).

  • This led to a sharp sell-off, forcing the Fed to pivot (from higher to lower rates), driving a strong rebound in equity markets.

  • If we also take into consideration that the ability of central banks to drive asset prices higher or lower is much stronger now, it’s not unreasonable to assume that, whilst an earnings recession would drive the market lower, the subsequent rebound in asset prices could be even more significant than what we’ve seen in the past.

Simply put, whilst there is downside to prices in the short-term, I think the case for adding high-quality companies that have re-rated amidst the current correction is now much stronger. Reason being is that some high-quality names in tech are at relatively cheap levels when taking into consideration their market dominance as well as their free cash flow profiles. i.e. they generate tons of cash.

The embedded assumption within this view is the belief that central banks, namely the Fed, won’t be able to pursue a significantly hawkish agenda if we begin to see real indications of an economic recession. This belief might be both naïve and simplistic at best, but I do believe that the magnitude of the recession needed to correct the imbalances that began in 2008 is so large that no politician or central banker will allow it to happen. This means a return to a kicking the can down the road management of the monetary agenda (by using COVID or Monkeypox or Russia or some yet-to-be-determined global ‘headline’ as an excuse) is the preferred route of those who have no desire to steer a ship amidst one of the biggest economic storms we’ve ever witnessed (I honestly can’t blame them).”

Ah… and remember, this is barstool chat, not financial advice…

As always, we'll see you out there.

Great grass, but all we could think of was how to pull off a 5x5 aside with our mates. | Kew Gardens, LondonWe look back at what we've written over the past month