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The big business story of 2021 isn't GameStop. It's the rise in Interest rates |
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Let's get serious. The GameStop saga took up a lot of mindshare the last few weeks, but it will won't register on the account statements of 99.999999999% of investors. The Congressional hearing this past week with the leadership of Citadel, Robinhood, Reddit, and Keith Gill, known on Reddit under the pseudonym DeepFu#@ingValue and on YouTube and Twitter as Roaring Kitty, made it clear that that Congress knows very little about how our ultra modern stock market functions.
There are market makers, brokers, electronic exchanges, short sellers, flash traders, and other participants. If one considers the massive volume of instantaneous transactions that are completed every 1/10 of a second, one comes to the realization that our stock market is a technological marvel. Of course, no market participant is more important then the actual investor; the end owner of stocks. So what happened with Robinhood, when it put in trading restrictions on GameStop and a handful of other Reddit stocks?
The risk from too much leverage, more than what Robinhood was capitalized to handle, created a potential situation where stock options players and short sellers might not be able to fulfill their side of the transactions. These potential "failures to deliver" could have wiped out Robinhood and hurt any other firm that did business with it, creating a negative spillover loop in the financial system. That risk had to be reigned in, hence, the trade restrictions on certain stocks.
I don't think this was even close to anything nefarious on the part of any firm. I do think it was a matter of an inexperienced management team at Robinhood, led by CEO Vladimir Tenev, who didn't have the proper risk mitigation tools in effect. By Tenev's own admission to YouTuber "Meet Kevin", if Robinhood had an additional 10 Billion Dollars of capital, there probably wouldn't have been a need for the trading restrictions. The situation has passed. Capital requirements will be raised. Let's not let this be a distraction to our shared mission of becoming financially independent in retirement and sending our kids to college.
Now, to the lead. Over the last six months, long term interest rates have been rising - a lot. The 10 year Treasury yield, chart below, is now solidly and persistently over 1.0%.
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It reflects positive things happening in the economy. My base case for a long time has been that we see a powerful economic uptick in H2 of 2021, led by both fiscal and monetary stimulus. The downside risk to the stock market would be if inflation exceeds the Federal Reserve's comfort level, whatever that level may be. But in a few instances, this scenario looks like it's arriving a little sooner. Strong retail sales figures, high commodities prices for copper and lumber, and PPI (producers price index) coming in at the highest level in over 10 years. Giant investors like Warren Buffett and David Tepper are buying energy stocks. And this is before the proposed $1,400.00 stimulus checks make their way into consumers' bank accounts.
So, the 64 Trillion Dollar question is if the Federal Reserve will consider any ensuing inflation later this year as transient or permanent. If it goes with transitory, short term rates stay low, the yield curve steepens, and inflation will be allowed to rise, something the FED repeatedly states that it is comfortable with. This favors banks, energy, TIPS (Treasury inflation protected secretaries, floating rate products, deep cyclicals, consumer cyclicals, gold, and commodities. It also appears to favor crypto, like Bitcoin. It disfavors high multiple stocks. And if the FED sees inflation as persistent, it would raise short term rates, slow the economy, level out the yield curve, and the opposite of what I just wrote would be expected.
At the end of the day, I'll personally favor all of the above because I know the economy runs in cycles. I may lean one way or the other at different times, but mostly, I'll rebalance and carry on.
The video below is from one of my livestreams this week; where to invest in times of rising inflation. While you're watching, please subscribe to my YouTube channel.
I live stream every Monday through Thursday at 4:30 PM EST about personal finance, investing, debt management, budgeting, life cycles, financial news, politics, and more. You could catch it live on Facebook, LinkedIn, and YouTube, which is the easiest place to find the replays.
I love hearing from you! Let me know your thoughts about this topic:
MGoldberg@ClientFirstStrategy.com
Thanks and see you next week,
Mitch
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Thanks!
Mitch
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I opened ClientFirst Strategy, Inc. because I believe that the only way to help my clients potentially achieve their goals is by offering unbiased advice & investment management expertise. To my clients, thank you for your continued vote of confidence. If you are not a client but would like to explore the possibility of becoming one, I invite you to call me directly, visit my website, join my email list, and/or connect with me on social media. |
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Mitchell O. Goldberg
AIF®, AAMS
President | Investment Professional
OSJ Manager
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ClientFirst Strategy, Inc.
290 Broadhollow Road, Suite 200 E, Melville, NY 11747
(D) 631-920-6622 (F) 631-920-6624 (C) 516-818-0338
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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. The S&P 500 and Dow Jones Industrial Average are indexes. It is not possible to invest directly in an index. *The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. **The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Securities and investment advisory services offered through NEXT Financial Group, Inc., member FINRA/SIPC. ClientFirst Strategy, Inc. is not an affiliate of NEXT Financial Group, Inc.
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