When One Man’s Tweets Move Markets

Everyone saw the inflation coming since the Fed started printing money last March as if the US dollar was Monopoly money.  Then, when the CPI data came out on May 12 showing the 4.2% increase year over year, the biggest jump since 2010, the equities markets took a big hit.

Some analysts are saying the jump in inflation is temporary as the annual inflation measure is the comparison from last year during the pandemic. 

The Producer Price Index rose even more at 6.2%, which is also the largest increase since 2010 versus 3.8% estimates. All the media outlets talked about how surprising those numbers were, but was it really surprising for anyone in the markets? 

Whenever I want to get a better sense of what is going on with the economy outside my New York City bubble, I call my childhood friends who are contractors buying raw materials and hiring workers. They have been talking about how they cannot get hold of raw materials fast enough due to a supply shortage, hence the skyrocketing prices. 

They have also been talking about how they cannot hire workers fast enough and how used trucks cost more than brand new trucks due to a three to six month wait time. 

Who let the dogs out?

Now, let us look at Dogecoin (DOGE). Dogecoin has rallied almost 7,000% year-to-date, which is nothing short of impressive. Its 1-year return is over 15,500%. That is nothing to be laughed at despite the token being originally created out of a joke. 

Elon Musk has been promoting Dogecoin for quite some time and his followers have followed to pump the token. When retail investors saw its return profile, lots of Robinhood-like traders jumped in, pushing the price even higher.

Then, when it was announced that Elon Musk would appear on Saturday Night Live on May 8, DOGE pumped even higher with speculation growing as to whether it might hit $1. It came close at around $0.74 before his appearance on SNL. Then it crashed.

Since Musk’s SNL appearance on DOGE has been down approximately 48%. While many have made money on DOGE, others have been hurt.

Some people felt left out by DOGE’s rally and subsequently decided to pump another meme token, Shiba Inu (SHIB). Its price soared over 10,000% over the last 30 days and it is up 33.5 million percent in the last six months. Yes, over 33 million percent. However, it is down 50% in the last three days following reports that Vitalik sold the tokens. Some people are becoming millionaires by day and losing their homes by night.

What about bitcoin? 

Bitcoin has been range-bound for the last three months, while ethereum took its spotlight and more than doubled in the last month and a half. Bitcoin is the new store of value that has been stealing institutional flows from gold and should trade as an inflation hedge, right? 

Wrong. Bitcoin was not shielded from last week’s market turmoil due to the higher-than-expected inflation number. Then, after the equity market closed, Musk tweeted that Tesla would stop accepting bitcoin as a payment due to environmental concerns, pushing down Bitcoin’s price 15% on the day, and took most of the cryptocurrency markets with it. 

Is this the same guy that just promoted Dogecoin on a national television? 

Wasting energy

Dogecoin uses the same proof of work mechanism as bitcoin and is just as energy intensive. Hasn’t his company, SpaceX, burned more fossil fuels on their exploding rockets than bitcoin miners ever could? But what do I know, I am no rocket man.

Bitcoin’s energy consumption doesn’t equate to carbon emissions. Different reports suggest that 40-70% of Bitcoin’s energy consumption is carbon neutral. Many reports refute the idea that bitcoin is a big contributor to carbon emissions. Tesla stock is down almost 40% since January. There seems to be more to his tweets than first meets the eye.

Market impacts

There are inefficiencies all over the market — whether that be equities, fixed income, or cryptocurrencies. One single tweet from Trump could bring a stock down to its knees in a matter of minutes. Now, we are seeing one person’s tweet disproportionately impacting the whole cryptocurrency market. 

Active market-neutral strategies are beneficial in times like this, which is our firm’s flagship strategy. A few days ago, you could get paid to buy protection in the options market. Now, everyone is rushing to buy protection. 

It always seems to be when there’s nothing but euphoria in the market, something smacks you in the face and takes the market down.

Pullbacks as entry points

Market-neutral strategies outperform when there’s more volatility in the market, especially when there’s fear in the market. We are witnessing increasing interest from traditional allocators, including big macro hedge funds, in our market-neutral strategy that has outperformed the market whenever the market is down.

Bitcoin’s narrative hasn’t changed, and more institutional adoption is happening before our eyes. All big bulge bracket banks are now offering or looking to offer digital assets to their clients. More corporations are putting bitcoin onto their balance sheet to hedge against inflation and potential devaluation of the US dollar. 

We are still in the very early innings of institutional adoption. I believe pullbacks like these present a great entry points for investors.