For the markets, it was more of the same last week: the winners won while the rest of the market spun its wheels. 🧵 This continues to be a tale of two markets, with the mega growers breaking away from the pack to such a degree that it becomes nearly impossible for the rest of the market to keep up, let alone outperform. It’s making me rethink the bullish broadening thesis. Perhaps the broadening can only happen in a down market, at least in relative terms. /2

With the debt dynamic worsening around the world, and central banks no longer funding that debt (at least for now), the direction of the term premium for bonds remains a question mark. With the correlation between stocks and bonds now positive, what role do bonds play in a diversified portfolio? 🧵 There are certainly reasons to own them: real yields are now positive and the math of owning bonds is far better now than it was a few years ago. But since 2022 they have not provided the relative balance that the 60/40 paradigm had generally provided since the late 1990’s. /2

In my view, bitcoin is exponential gold and an aspiring player on the store of value team. My work suggests that the price of bitcoin is driven primarily by the growth in its network, which is in turn driven by bitcoin’s unique scarcity feature, as well as the monetary and fiscal policy cycle, and of course sentiment.🧵 As the chart shows below, Bitcoin and Ethereum’s S-curve have followed the path of many technological developments throughout history. It’s all about the network. /2

What’s behind the secular bull market of the past 25 years? Several factors, including falling interest rates, rising margins, and de-equitization via M&A and share buybacks. 🧵 The buyback era started in the mid-2000’s and has been a powerful driver of valuations. Buybacks lead to a higher payout ratio for earnings. Like a bird in the hand, a higher payout ratio commands a higher P/E. /2

In terms of the secular trend, I think we are in the 7thinning. Secular bull markets are prolonged super-cycles spanning a decade or more and producing above-trend returns.🧵 In my view we’ve been in a secular bull market since ‘09, not unlike the ‘49-‘68 and ‘82-‘00 regimes. Here we see how closely the current super-cycle has tracked those two. There was also the ‘20-‘29 secular bull market, but it went too far too fast, and like Icarus it got its wings burned prematurely. /2

It’s been a while since we have seen the reflation playbook in action. For those unfamiliar, it involves a monetary pivot, a weaker dollar, and a rally in risk assets led by commodities and EM equities.🧵 We had several episodes of this in the aftermath of the Global Financial Crisis (GFC), and they were typically sparked when the Fed capitulated on rate hikes or QT (quantitative tightening), while China was stimulating its economy. /2

My sense is that we are in the 7th inning of a cyclical bull market, and that the 1966-68 analog is a possible guide for where we are in the soft landing recovery. In terms of the secular context, I think we are also in the 7thinning. 🧵 While other chartists may disagree with my approach, in my view this secular bull market started in 2009, when the deviation from the central trend was at its steepest. In that sense, we continue to closely track both the 1982-2000 and 1949-1968 super-cycle. /2

After the 6% drawdown since March 28, the forward P/E ratio on the S&P 500 has declined from 21.2x to 19.9x. Valuations were high, so this is good to see. Price should decline less than valuations during this correction since earnings estimates are rising 12%. Pass the baton.🧵 Trailing earnings are now growing at 4% year-over-year, after falling 2.6% in 2023. /2

If the secular regime has transitioned from the Great Moderation of the past few decades to one of fiscal dominance, perhaps the most seismic change to the investing paradigm that most of us grew up in is the changing influence of bonds in a 60/40 portfolio.🧵 During the Great Moderation era (defined as disinflation and low volatility of inflation), the correlation between stocks and bonds was negative. That meant that if there was a shock to the 60 side of the portfolio, the 40 side would offer a counterbalance. /2

If the fiscal picture in the US is deteriorating per the new era of fiscal dominance, and gold is rallying sharply as a result, wouldn’t it make sense for the dollar to be declining? That’s what the chart below suggests.🧵 Why is the dollar holding up so well? I think the answer is the Fed. While fiscal dominance should be pressuring the dollar, the Fed’s restrictive policy is providing a counterbalance. /2

Several unusual things are happening in the markets, which in my view are most likely explained through the lens of fiscal dominance. 🧵 We are all painfully aware of the $11 trillion increase in the Federal debt since the pandemic in 2020, and we also know that the Fed has been shrinking its balance sheet (and therefore stopped being the buyer of first or last resort). /2

What time is it in the cycle? Now that we are 17 months into a bull market cycle, it’s worth asking how much life there is left. How long can this broadening bull continue?🧵 As the chart illustrates, cyclical bull markets can be as modest as 48% (1966-1968) or as grand as 200% or more (1982-1987, 1994-1998). /2

Based on the 1949-1968 and 1982-2000 super-cycles, we might be later in the cycle. Adding some support to that thesis is the CAPE model. The CAPE (or cyclically adjusted P/E) model holds that the prevailing 10-yr P/E ratio is a good predictor of the 10-yr forward annualized return (CAGR).🧵 By that measure, the 10-year CAGR should moderate from its peak of 16.5% in 2019 to a mere 2.6% in 2034. Those returns are not consistent with a secular bull market (quite the opposite) and therefore suggests that we are late in the game. /2

With the market gaining ground at a strong clip, the total return index is back above its 150-year trendline (in both nominal and real terms). This raises the question of what inning we are in with regards to the secular trend. My guess is that we are in the 7thinning.🧵 Where we are along the secular trend remains a guessing game in real time, but so far, the market continues to track the secular bull markets of 1982-2000 and 1949-1968. You can see that the trendlines below are almost identical. /2

With the S&P 500 index having gained six P/E points since its October 2022 low (from 15x fwd EPS to 21x), it’s time for the market to grow into its multiple.🧵 With the economy apparently soft landing and the Fed not pivoting as quickly as was expected just a few months ago, earnings will have to do the heavy lifting from here. If that doesn’t happen, the market cycle will be over its skis. /2

Here is some more detail on the 1966-1970 analog. I indexed the inflation-adjusted S&P 500 to the Oct 2022 and Oct 1966 lows. The similarities are obvious, not only cyclically but also in terms of the secular trend. The bottom panel shows the Fed’s policy rate then and now.🧵 During the 1960’s, the policy focus was on employment more so than inflation, and it was a period of concurrent loose fiscal policy and loose monetary policy. /2

The soft-landing vibes remind me of the 1966-‘68 analog. It was a period of fiscal dominance (guns & butter) and monetary acquiescence, not unlike the COVID days. It was also when the stocks/bonds correlation shifted positive & the secular bull market for equities was maturing.🧵 In 1966 the Fed prematurely pivoted from a tightening policy to an easing policy- this allowed the market cycle to recover and for a recession to be averted, at least until 1970 when the recession did happen. It was a cycle delayed, not canceled. /2

Fed pivot or not, liquidity is on the rise again. Overall liquidity, as defined by the Fed’s balance sheet, less reverse repos (RRP) less the Treasury’s cash balance at the Fed (TGA), has been rising since mid-2023, taking stocks with it. 🧵 As the Fed’s reverse repo program gets closer to being depleted (only $440 billion left), all eyes will be on how much longer the Fed’s Quantitative Tightening (QT) program will continue. /2

With the trailing P/E-multiple now at 23x and the forward P/E at 21x, the implied equity risk premium (iERP) has fallen to 3.5%. The iERP is basically a sentiment indicator and is the residual value in the discounted cash flow model (DCF) at which the price “makes sense.” 🧵 The “realized” ERP is around 5% (going back 100 years), and if we plug that number into the DCF model (assuming 6% EPS growth), we get a fair value of 16.2x. That’s five points less than the current valuation. /2

Continuing on my previous thread, the next chart illustrates what I expect to be diminishing returns from future halvings. On the left I show Bitcoin’s outstanding supply (blue) vs incremental supply (orange), and on the right I show the same for gold.🧵 While it’s fair to say that a Bitcoin halving in 2012 (from 2.7m to 1.3m) or 2016 (from 1.3m to 656k) had a major impact on price, I doubt the same will hold true a few decades from now when the incremental supply goes from 160 coins to 80 to 40. /2

Can we value Bitcoin on supply alone? Bitcoin burst onto the scene in 2008 and its track has been explosive to say the least. Whereas gold and silver have followed a more linear path, Bitcoin is operating in an exponential dimension. Why is that?🧵 I believe it’s partially due to the exponential nature of adoption curves. But why should Bitcoin be exponential if it’s just a commodity-currency? I think the answer lies in the non-linearity of its supply curve, and its non-linearity relative to gold’s supply curve. /2