Melaleuca Alternifolia Oil
VIPs
After doubling over the prior decade to a fifth in 2020, the share of retail trading volume is now nearly 25%; meanwhile, per Sentiment Trader, a record high 40% of stocks are trading at one-month lows, despite the S&P 500 being just 1% under its all-time high
The CBOE’s SKEW Index, which tracks S&P 500 tail risk, has been well above its 30-year average print of 120 in recent years; since last June, while gold has hovered near its post-C19 highs, the SKEW has averaged 141 and eclipsed 150 to reach record highs in May and June
Since the Senate Parliamentarian’s announcement that two more reconciliation bills couldn’t be done in 2021, 10-year Treasury yields have dipped by 18 bps; it’s no coincidence the dollar has also found support as the odds of an additional $6 trillion in fiscal spending fade
Who needs penicillin when they’ve got the Melaleuca Alternifolia tree? For that, we have the adventurous Captain James Cook to thank. The combined Royal Navy and Royal Society expedition to the South Pacific aboard HMS Endeavor first landed on the east coast of Australia in 1770. We know the British love their tea. Add in an intrepid spirit and put to boil the leaves of a tree you happen upon while exploring the new environs and you’ve got a tasty spicy brew. Seeing this, the aborigines cleared up what they thought to be confusion. The leaves from the Melaleuca Alternifolia tree were medicinal, silly man! Cook’s solution was to compromise and use them for both. With that, the world came to know the “tea tree.” Indeed, until the advent of penicillin in 1928, tea tree oil was the default medication to treat skin infections. In 1922, Chemist Dr. A.R. Penfold found that the wonder drug was 13 times stronger than the era’s standard antiseptic bactericide.
Some would posit that other historical explorations have produced more valuable finds than tea tree oil. Spanish royalty comes to mind given they were on the receiving end of boatloads of gold Hernan Cortes shipped back from Mexico in the 16th century. And yet, many of today’s crypto fanatics would demur on the perceived value of the precious metal.
Brighter lines are being drawn between believers and nonbelievers. On Thursday, subprime mortgage legend Michael Burry Tweeted: “All hype/speculation is doing is drawing in retail before the mother of all crashes. When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries. History ain’t changed.”
The “Main Street” to which Burry refers has swelled. As reported in the Wall Street Journal on Friday, after doubling over the prior decade to a fifth in 2020, the share of volume attributable to retail investors has continued to tick up and is now nearly 25%. History teaches that massive retail participation revolves around a handful of narratives. The data display as much. Per Sentiment Trader, at 40%, the share of stocks trading at one-month lows even as the S&P 500 is within 1% of an all-time high is at a record in 94 years of history.
At least in private conversation, few dispute that we’re in the midst of a massive bubble. QI friend Peter Atwater observes that today’s stunning overvaluation is not however, confined to tech stocks or real estate. Rather, the bubble is an illusion: “Deception has transcended the financial markets. It’s cultural and it is everywhere. From ‘influencers’ on social media to blitzscaled business start-ups, the past decade has been a Gold Rush into fakery.”
Peddling illusion created deceits such as Luckin Coffee, Theranos, WeWork and Wirecard; it is fomented expressly to cheat the naïve. We know many of those at the top of the financial food chain have made fortunes selling snake oil…again. We concur with Atwater, that “After the dot.com debacle and the housing crisis, the crowd won’t take kindly to yet another bubble burst.”
That brings us back to the subject of gold. How the fallacy that gold’s sole role is an inflation hedge has persisted in a post-Quantitative Easing world is a mystery. While gold positions were liquidated alongside that of every other asset class when Lehman Brothers collapsed in a rush to cash, gold’s rally preceded the rebound in the stock market by six months.
And then came a presidential election sufficiently contentious to alter the trajectory of uncertainty in America. While markets don’t provide perfect measures of tail risk, the Chicago Board Options Exchange’s SKEW index (yellow line) is a fair representation designed to capture the S&P 500’s vulnerability to a black swan event. For perspective, over the past 30 years, the SKEW’s long-term average has been about 120.
In December 2015, a Washington Post editorial warned that, “If Trump is the Republican nominee in 2016, there might not be a conservative party in 2020 either.” Not only did that moment in time mark gold’s lowest spot price (blue line) since then, the SKEW has averaged 132 and only dipped below 120 eight times.
Since the pandemic hit, millions of Americans have begun to openly discuss the sanctity of capitalism, the key underpinning of a stable democracy. Volatility reflects the further amplification of uncertainty. Since last June and despite the Fed’s exertions to suppress volatility, the SKEW has averaged 141, higher than the 140-line that denotes high tail risk. This May and June, it’s hit record highs north of 150. Gold, a post-QE disruption hedge, has persisted near its highs over this period.
The confusion that’s followed last week’s FOMC meeting sent gold tumbling, pushing it down by 10% from its recent high. We’re not convinced the Fed will have the luxury of time to even begin to normalize. We look instead to the investing public waking to the Senate Parliamentarian’s pronouncement that Democrats couldn’t force two more slugs of spending bills in the 2021 calendar year via reconciliation. It’s no coincidence that the yield on the 10-year Treasury has slumped by 18 basis points since that June 3rd moment; the dollar (red line) has also risen back towards its 2021 highs. Regardless of where the inflation debate lands, gold should perform as well as tea tree oil on a bad skin infection.