Bubble or a new and positive normal? Understanding stocks, dollar and gold narratives


The dust seems to have settled from the rollercoaster in Reddit stocks but there are ramifications for broader markets. Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the latest developments, the Fed's response, vaccines, and more. Equities, dollar, and gold are bracing for a new reality.

Yohay Elam: The frenzy around GameStop and other "meme stocks" pushed other shares lower.

Joseph Trevisani: Economists sometimes refer to 'froth' to explain speculates surges that don't fit into logical economic theory.  Is that what we have seen in GameStop and others recently?  A move very much like that oil in 2007 and 2008? Speculative. Does the retail aspect this year make the event any different?

Valeria Bednarik: It has nothing to do with 2007 or 2008.

Yohay Elam: I think that there has been a fear that hedge funds would have to liquidate their holdings in other equities to cover losses.

Valeria Bednarik: The huge difference is from where it came from. The ultimate battle between Hedge funds and retail investors. And the omnipresent pandemic. Locked at home, not much entertainment for a year... people jumped into apps investment without doubts.

Joseph Trevisani: I disagree...the speculative surge in oil and that of GameStop are driven by the same profit motive...and will come to the same end. Yes, the circumstances are entirely different. But the market rules are the same.

Valeria Bednarik: Sure about being the same?. Arbitrarily banning trading doesn't sound like "same rules".

Joseph Trevisani: Not entirely... I am going to try to make the case in my piece today. True there are major differences... but I think major similarities also.

Yohay Elam: For me, Robinhood's actions are reminiscent of some brokers in response to the SNB bomb. They had to raise money in a firesale.

Valeria Bednarik: Agreed! those old good times.

Joseph Trevisani: Yes, Robinhood... how appropriate though reversed... The SNB bomb effectively killed FXCM.

Yohay Elam: It seems like Robinhood wasn't fully covered either...

Joseph Trevisani: Yes that is the only way a supposed broker..can get into trouble for FXCM. Their hedges were filled far from the written levels..enough to drain their capital.

Yohay Elam: Robin Hood sided with the hedge funds – and itself – against retail traders. The irony.

Valeria Bednarik: Well, anyway, it is becoming old news already. The frenzy was fun but short-lived. Lesson learned for retail investors I mean.

Yohay Elam: One lesson learned is the Fed's reaction.

Joseph Trevisani: If Robinhood had an un-covered position then it was short, as the customers were long... hence their siding with the funds.

Yohay Elam: Or perhaps they did not pass the orders to the market, ala forex market-makers.

Joseph Trevisani: Exactly...

Valeria Bednarik: No biggie for Powell. What was more interesting to me about the latest Fed's decision is that policymakers are neither concerned about the possible bubble created by easy money.

Joseph Trevisani: In the oil bubble, there were not outside players. What if there had been, and they had shorted oil would the outcome have been any different?

Yohay Elam: He even rejected the correlation between loose monetary policy and rising stock prices.

Valeria Bednarik: Yups.

Joseph Trevisani: The Fed's overall concern is the economy, market froth is the price for their easy money.

Yohay Elam: Other officials also seem unbothered by actions in stocks. That goes hand-in-hand with allowing inflation to overheat.

Joseph Trevisani: Well, Mr. Powell must reject the connection and of course he was right on the specifics but wrong on the generalities... easy money is the background.

Yohay Elam: Indeed, I think the Fed is the No. 1 upside driver of stocks. So, will stocks go broader stock markets continue higher?

Joseph Trevisani: Yes, but that doesn't mean it is a bubble. Bubbles are defined by the negative, when they pop you have a bubble, if not. you don't. Yes, I think they will if the economy continues to improve.

Valeria Bednarik: Meanwhile, the dollar seems to have found some self-strength.

Joseph Trevisani: The safe-have scenario has been exhausted for months, but until recently there was nothing to replace it. Now there is potential if the US recovery speeds up.

Valeria Bednarik: Exactly, now its stimulus hopes, as President Biden promised $1,9 trillion, which, by the way, will only inflate the bubble but well, the dollar is up and seems it has room to extend its recovery. Would a strong NFP report tomorrow fuel its advance?

Yohay Elam: I think that stimulus and its impact on yields are somewhat more significant than data.

Joseph Trevisani: Yes and we may get one, but yields reflect the data. If claims were rising and PMIs falling would the 10-year be where it is? The rise in claims was tied to California's lockdown. PMIs are strong in services and manufacturing, and claims fell sharply today. Virus news has been mostly relegated to the back pages now that the election is over so that the psychological atmosphere is improved. Still, I read a piece yesterday that only 15% of Manhattan office workers have returned to their offices. I drove through mid-town yesterday, by NYC standards, deserted.

Yohay Elam: I see this spike in yields and the dollar related to Dems advancing reconciliation. The previous spike was when they won in Georgia. But indeed, we are having excellent data this week. So it's hard to untangle data from politics.

Joseph Trevisani: I think markets are slowly returning to standard measures.

Valeria Bednarik: Guess it's a mixture of all, included the exhausted safe-haven trade, as Joseph said. Gold is now trading sub-1,800 not a minor sign of the growing dollar's demand.

Yohay Elam: Gold has no yield.

Joseph Trevisani: Markets need a picture. When I first got to a trading desk the older traders, older in experience not years, a famously taciturn lot, used to say when I asked how I should view the market, which seemed to me. (ex-English major) almost completely random. You need to have a view. I had no idea what they meant, it took about three years to figure it out. That is what is currently happening, the view is changing from safety to normality, at least normal for markets, economic and rate comparison. Val, that is what I mean earlier. Exactly on gold.

Valeria Bednarik: Yups. Now I got it.

Yohay Elam: Indeed, we are not out of the woods yet with the pandemic, but there's normality on the horizon and markets look to the future.

Valeria Bednarik: Yeah that. I still believe that by March, the market will be able to confirm or deny the theory that economic comeback will come later this year. The view may change then.

Yohay Elam: March is a great timing indeed.

Joseph Trevisani: Agreed. Sort of like a pedestrian time machine.

Valeria Bednarik: But I have to agree that chances are in favor of a brighter future. In market terms, that could be a steeper dollar recovery and a continued rally in Wall Street.

Joseph Trevisani: Yes. Which I way I say equities are not a bubble.

Yohay Elam: By March we should have even clearer evidence out of Israel that vaccines are a game-changer. And also significant evidence from the UK. Probably from the US as well. Mid-March's Fed meeting will be interesting.

Joseph Trevisani: By that time they may be incidental.  Rates are falling sharply here well before vaccines reach a minimal impact level. But if the vaccines work, Israel has some yet unexplained data, they will provide an important psychological surety.

Yohay Elam: The latest from Israel. The 60+ years old (first to vaccinate), in the past 3 weeks:~41% fewer cases ~31% fewer hospitalizations ~24% less critically ill.

Valeria Bednarik: And not all with the second dose.

Joseph Trevisani: Interesting, thanks. I haven't seen that data. So there was a delay but it is working as expected.

Valeria Bednarik: Right?. Meaning, we learn that immunization increases after a few weeks post-second dose. So that's 1 dose data, which is quite encouraging.

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