Are you ready to grasp at straws as the financial world collapses all around us? Here’s a nice thick meaty one to grasp. Changyou.com Limited (CYOU), a Chinese producer of online games, reported really positive earnings yesterday while pretty much everything else was in total freefall. It was enough to keep the stock stable yesterday. Apparently, the coronavirus is juicing at-home gambling behavior. People under quarantine have nothing better to do. On that logic, it looks like the adult entertainment industry could also get a nice corona bump, but the only public porn company I know of that you can invest in is RCI Hospitality (RICK), and that one was down 16% yesterday. Problem is, RCI operates adult nightclubs, off limits to those in quarantine. Unless, of course, the U.S. gets entirely locked down like Italy and creative customers and dancers start self-quarantining at strip clubs for a month. That would be entertaining.
Anyway, let’s address the elephant in the room. Everyone is now panicking. Regular readers of this column may remember an esoteric essay I put together last September entitled “On cryptocurrencies, gold, quantum financial mechanics and fiat black holes”. The point of that article was that if and when the Federal Reserve forces interest rates on the U.S. dollar into negative territory, then all commodity markets – which are all dollar-denominated – would be locked into permanent backwardations. Negative dollar interest rates would be a disincentive to hold dollars through time, so anyone with any cash would prefer to hold real assets instead, only using cash itself for immediate expenses. The result would be sudden unexpected consumer price inflation and a financial black hole would form that would suck all fiat currencies into nothingness.
I am only one flawed imperfect human and I could be wrong. I have no crystal ball. But from what I am seeing right now we look to be only one final step away from this financial black hole actually forming. The only thing missing is an announcement of global, coordinated central bank action to unleash a torrent of liquidity to “help markets” and ensure “economic growth”. That would most likely push the dollar officially into negative interest rate territory. The dollar is already circling that would-be event horizon, judging by the collapsing dollar index over the last two weeks.
If there is an announcement of this sort from the world’s monetary cartels, which could happen any day now judging by the level of global market panic right now, all debt that can be sold to central banks, will be. The fiat currency that sellers of this debt will get from central banks in that event will then be traded for real assets in a flood to tangible value, and central banks will completely lose control of everything faster than they can even realize what the hell is going on. The saddest part is, for all their Econ PhDs, they won’t even come close to ever understanding why any of this happened at all. They are all completely clueless.
If and when this happens, gold and/or Bitcoin SV (BSV) will become money de facto and that will be the end of unbacked paper money. As for BTC, the idea that this useless thing is somehow “digital gold” has been completely shot to hell. At best BTC is a subpar venue for transferring capital across borders. BSV can also do this, and better, but in addition to that it is actually useful and has utility in and of itself since it is scalable and fully on chain. BSV is not yet money, but if any cryptocurrency has any chance of becoming a bona fide money, it is BSV.
We’ll get back to the gaming sector in a minute, but we need to first look at what’s happening in the debt markets right now to understand why this is so close to actually happening. The bond markets right now are pure unmitigated insanity. The entire U.S. yield curve from 1 month all the way out to 30 years yesterday yielded less than 1% for the first time in history. (The 30Y has jumped back above 1% today. We’ll see where it goes tomorrow.) With the single exception of the overnight federal funds rate, everything is yielding less than 1%. This singular overnight rate, which is supposed to be the lowest rate across the curve, is now the highest. It is currently calibrated artificially by the fed at 1.09% after an emergency 50 basis point cut last week. In order to sustain it at 1.09% they’ve printed $320 billion in the three days since announcing the cut. There’s much, much more on the way given another even larger cut is still coming. It has to. Here’s why.
If it costs banks 1.09% to borrow money overnight in order to buy paper that yields even less than that, there will be no institutional buyers for any U.S. Treasuries of any duration at all when the kneejerk panic into “safety” eventually stops and institutions actually start to care about making money again. Right now they only care about not losing any more money and they just don’t know where else to stuff all the cash. The Fed will be the only buyer in such an environment. They would have to print like mad to buy it all, which would destroy the dollar, or they can alternatively let interest rates slingshot back up into the stratosphere like a Chernobyl-model explosion until all that debt is able to attract private buyers. The latter option, of course, will crash the global economy overnight. So what the Fed knows it must do according to its own twisted logic is push the overnight rate even lower so it gets comfortably below the yields of other maturities so banks can borrow at that rate overnight and keep buying Treasuries across the curve.
But in the real world – which central banks do not understand from the vantage point of their inflation-financed ivory towers – another cut won’t accomplish squat. Let’s say for the sake of argument that the Fed announces another emergency 50 basis point rate cut this week or next or latest at their next scheduled meeting on March 18th. When they did that last week everybody panicked and poured still more money into the debt markets, pushing rates even lower. The next time they cut, there will be even more panic and rates will be pushed lower still, forcing them to cut the fed funds rate even further and so on. You can see what I’m getting at here. The Fed is being led by the markets by force right into the singularity at the center of the financial black hole that now appears to be forming.
At some point there will be a Mexican standoff where all banks suddenly realize that every other bank is stuffed with a bunch of paper that yields absolutely nothing, or less. So who sells first? And to whom? (Cue western dual music.)
The answer, probably, is that the weakest bank will sell first, whoever that is, and it will sell to the Fed, or to whoever its local central bank happens to be. I personally think it will be Deutsche Bank, whose inevitable collapse will lead to it become the first systemically important institution sucked into this financial black hole, just as its predecessor Credit Anstalt became the first bank casualty of the Great Depression back in 1931. That wreck was then incorporated into what eventually became today’s Deutsche Bank. Deutsche stock is at new all time lows again as of yesterday.
The rest of the banks will then carpet bomb their respective central banks with sell orders, selling everything they can to the Fed or the ECB or whoever, for cash. Then they’ll take that cash and buy real assets. Then everyone will suddenly realize that everything they need is damn expensive all the sudden and nobody will be able to borrow any more. That’s when all the leveraged firms get completely eviscerated and all those now deep in debt suddenly become poor.
Right now we are in the panic stage that precedes the central banks completely buckling and printing. In the panic stage, all stocks tank. This tanking is the capital markets trying desperately to deflate all the inflation stuffed into them for the last 50 years. Yes, everything tanks, but the really leveraged irresponsible momentum stocks that have been on buying sprees recently, they tank much faster.
My five favorite gaming stocks are all down, some heavily. 888 was hit 7% yesterday, breaking through 100 pence. Rank, 5.2%. William Hill, 4.2%. Betsson 3%, and NetEnt only 1.4%. Compare those figures though with the wild momentum and/or heavily leveraged stocks I have been warning about for a long time. Penn was walloped 14.6%. Eldorado Resorts has fallen off a cliff, down 21.4%. Eldorado has lost over 2 years of gains in less than a month. Scientific Games, which I warned readers never to touch, is down 22.5%. IGT is the proud new owner of about 17 brand spankin’ new rectums, down 33.5% (!!!) yesterday. GVC, that scrappy leveraged umbrella gaming company that I must admit really annoys me by constantly defying my expectations (good for them!) is only down 6.7%. GVC has some kind of magic I can’t figure out, but I still wouldn’t touch it. I still think that at the end of the day when this is all over it’s going to collapse like IGT is now.
As for Macau, it is closing in on 2015 lows. If the Macau ETF (BJK) breaks $30, you can spend a little (operative word being little) capital buying a few calls for maximum 5% position anticipating a short coronavirus relief rally. Looks like China finally has the thing under control. I fully expect central banks to announce a liquidity tsunami soon and Macau stocks should jump on it, temporarily. Those executing this short term Macau trade should keep in mind that it is risky though. We’re dealing with astronomical financial phenomena here that have not existed before to this magnitude.
For those wondering, no, I do not think coronavirus has all that much to do with what is going on now fundamentally speaking, aside from it being the trigger, or the pin, or whatever analogy you may want to use. What is happening now has been 50 years in the making since 1971. 2008 was just a little speed bump. This…this is the cliff. There will probably be one final relief rally back up on a reaction to central banks intervening that will suck in the last of the sideline cash. Then, this summer, when money supply growth falters, that’ll be it.
When the dust eventually clears, even my favorite gaming stocks will be down, some significantly. I do not recommend selling them because then you’ll be sweating about bottoms and when to buy back and you’ll freak out at every small relief rally. Looks we’re going to have one of those today. So just hold through this if you can afford to, and if you want some comfort consider a few put hedges on the long term holds rather than selling your positions. Firms like 888, Rank, William Hill, Betsson, and NetEnt will survive this because they have good finances. Others, like IGT, Scientific Games, and possibly even Penn and Eldorado/Caesars (dare I say GVC?), will not. Not in their current forms at least. If they can’t eventually restructure, their assets will be liquidated and the companies that have played it safe until now will finally be justly rewarded.
My personal advice is to allocate at least 10% of your personal portfolio to gold and silver and related stocks with good balance sheets before the bond market completely breaks down, and to have a small allocation in BSV for speculative purposes in case it becomes money when the black hole forms.
As for me, today is the Jewish holiday of Purim, when all Jews are under a once-a-year religious obligation to get totally drunk. (Babylonian Talmud, Tractate Megillah 7B) The holiday is recorded in the Book of Esther, and is in celebration of the defeat of Haman son of Hamdata who tried to kill us all. Haman is the spawn of Amalek, Israel’s second cousin, the tribe that attacked the People of Israel in the desert right after the splitting of the Red Sea. Amalek specifically attacked Israel from behind, targeting the weak, the sick, and the elderly. Sounds exactly like coronavirus. With any luck, a high blood alcohol content kills the damn thing. I’ve never loved getting drunk all that much, but this year it may come in handy.
And now that I’m finished, I’m off to a Purim party to sterilize myself from the inside. Bottoms up!
