Riddle me this, my fellow contrarian.
If the Federal Reserve is really tightening its balance sheet, then why is the stock market already up 10% on the year?
Why is gold at all-time highs?
And why is bitcoin going completely bonkers?
The answer is “quiet QE.”
As we discussed last summer in this column, Fed Chair Jay Powell’s words have sounded hawkish. He and his cronies talked tough about inflation. But look at their actions: the Fed has quietly provided ample liquidity to the financial markets.
Which is why dollar hedges like gold and bitcoin have soared.
This “Fed pivot” happened in the fall of 2022, during the UK gilt (“gilt” is Brit-speak for bonds) crisis. Remember that? UK pension funds were levered up on “safe” gilts, which began to implode. Uh oh. Central banks sniffed a financial crisis and didn’t care for the smell. They reversed course on their monetary tightening and loosened up.
Quiet QE.
Back in the day, this would have been reflected in higher gold prices. These days, investors are more likely to buy bitcoin as a hedge against money printing. Or a bet on it.
Ain’t no casino like the crypto casino.
Prior to the gilt event, here in Contrarian Outlook, I’d been yapping about the Fed ad nauseam.
The upshot? As long as the Fed was tightening monetary liquidity (i.e., shrinking the money supply), it wasn’t worth buying anything.
But this changed in late September 2022, when events across the pond quietly turned Jerry’s tough stance inside out. I wrote the following to my Dividend Swing Trader readers:
The Bank of England is teasing financial animal spirits with its announcement that it will “buy” long-dated bonds.
(And of course print money to do so. A bad policy for taming inflation, but bullish for equity prices!)
If stocks use the BOE’s U-turn to find their footing here, the market can really rip higher…
Yeah, markets sure did rip! The S&P 500 has jumped 48% since then and Bitcoin rocketed 266%!
Some tightening cycle!
Last summer, we discussed quiet QE right here:
Jay contends he is tightening the Fed’s balance sheet, but he’s really not. The stock market tape doesn’t lie. This may not be a dotcom 1999 scenario, but it’s a Fed-fueled mini-bubble nonetheless.
Look at Nvidia (NVDA)! The stock trades for 36-times sales. Not profits. Not cash flow. Thirty-six times revenues.
If NVDA took every dollar in sales and dished it out to investors, they would get their money back in 36 years. That is not a good investment.
But hey, money is loose because the Fed got scared. So we have NVDA at nosebleed levels. Bitcoin is going bonkers.
And it is likely to continue until the Fed tightens for real. Which could be years from now. Until then, bitcoin will continue to have the wind at its back as the crypto casino heats up further.
Now I’m not saying we run out and buy bitcoin. I prefer backdoor plays. The old “pick and shovel” providers.
The phrase “pick n’ shovel” dates back to the gold rush of the 1840s, when hordes flocked to California to get rich mining for the metal. But the guys who made the real money didn’t actually mine anything. They were the entrepreneurs who sold the “picks and shovels” as well as booze, “entertainment” and lodging to the hapless speculators.
We’re not peddling booze. Instead, we’re looking for the stocks that are benefiting from the bitcoin gold rush.
CBOE Global Markets (CBOE) owns the Chicago Board Options Exchange (CBOE) and BATS Global Markets. You might know the firm from its most popular product: The CBOE Volatility Index—the world-famous “VIX.”
And the real profit party is unfolding in the crypto markets. CBOE has rolled out the red carpet as a gracious host!
There’s a saying in Las Vegas that the house always wins. Well, if the financial markets have turned into giant casinos, then CBOE is the house we want to own.
In January, CBOE launched bitcoin and ether futures markets. Both are margin products, which will allow “investors” to, ahem, lever up. Move over sugar and corn futures, here comes crypto.
Back in my corn futures trading days, my wife joked (and feared) that I’d get hit by a bus and, one month later, trucks of corn would show up at our door. After all, a futures contract is indeed a contract—one must sell before the expiration date or be prepared to take physical delivery.
(Brokerages will typically force us to liquidate before we take delivery. Still, the joke was close enough to a crazy possibility to land well consistently with company.)
In the spirit of “corn deliveries” CBOE also has products in the works that will include physically delivered products. Crypto being digital, we’re talking about physical tokens and certificates and such.
As we discussed earlier this month, our Federal Reserve is sneakily pumping monetary liquidity into the financial system. This money printing is being reflected in higher crypto and gold prices.
There will likely be long-term consequences, but this isn’t our concern as short-term traders! Bitcoin is expensive but backdoor play CBOE remains cheap.
CBOE, by the way, boasts one of the safest dividends in the world. The company generates free cash flow that is more than four times its annual payout. Investors who own the VIX-maker were rewarded with a 10% dividend raise earlier this year.
This is how we “crisis proof” our income portfolios, while also taking advantage of the Fed’s money printing. The best defense in this chaotic environment is a smart offense.
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