TLDR: My read on FOMC and BOJ actions, the SMCI elephant in the room and what BlackRock sponsored Bitcoin narrative signals. Subscribers only, log in to listen the podcast.
TRANSCRIPT
Hello everyone, and welcome to the second episode of JustDario Cigar Time. I’ve just picked up my cigar, so let’s sit down virtually. I’m delighted to make you a participant in this weekly moment where I organize my thoughts, drafts, and research, reflect on the past week’s events, and attempt to visualize potential future scenarios. We’re doing this as humans without a crystal ball, but hopefully with sound intellect. Thank you all for the support on the first episode. It was a test, and it went very well. So, let’s do it again. I’m happy to make this a regular feature for everyone.
This week has been remarkable—I won’t say historic, but certainly noteworthy. I’m referring, of course, to the Federal Reserve’s actions. Everyone’s been commenting on it, and I wrote my own analysis immediately after the decision. I had already structured my thoughts and was effectively waiting for the final piece of information—the Fed’s decision—to wrap it up and publish. I stand by everything I wrote (”FED ACTION TODAY MARKS THE BEGINNING OF THE END OF THE FIAT MONETARY SYSTEM EXPERIMENT”).
What we’re seeing nowadays, repeatedly, is everyone’s effort to fit current events into models tailored for a past era with a completely different market structure. These models—and never forget this—are based on two strong assumptions that make them work in theory but render them extremely weak in practice. What are these assumptions? First, that the market behaves rationally, and second, that the market processes all available information. Of course, this isn’t the case. And to be fair, it’s becoming less so over time. We’re effectively in a period where even statistical information isn’t trustworthy anymore.
So, the Fed announces a 50 basis point rate cut. In the first 30 minutes after that news, what you see in the market is always the algorithms’ reaction. Why? Simply because humans aren’t that fast. As humans we need time to think, digest our thoughts, and physically input orders. So the first half hour, I’d say, is purely algorithmic reaction. And these algorithms reacted as expected. You know, people give so much credit to these algorithmic strategies, viewing them as perfect and efficient at extrapolating data. In reality, they’re often the most simplistic tools out there. They merely replicate what worked in the past, assuming it will continue to work. The problem arises when it stops working—that’s usually when the algorithm creates a big mess and significant losses occur. But that’s a story for another day.
For the first 30 minutes, we saw the yen soaring, stocks celebrating, and yields having a roughly muted reaction. But then something happened. What exactly? Stocks started to sell off, the yen began to weaken sharply against the US dollar. But the point that very few people highlighted—and I’d like to discuss with you today—is that Treasury yields, particularly on the long end of the curve, started to increase. Wait, what? Yes, they started to increase. Didn’t the Fed just cut rates by 50 basis points? Indeed, they did. But doesn’t that mean inflation is now under control? Shouldn’t it come down? Aren’t we heading towards a soft landing or perhaps no landing at all? Well, that’s the story they want everyone to believe.
But never forget that this narrative can only be bought and followed by the market up to a certain point. As I immediately flagged, algorithms love this kind of information because for every input they have a predefined output—they react predictably. But people living in the real world don’t take long to digest information when it directly affects them. And the fact that inflation isn’t under control whatsoever is indeed a fact. It’s not just my opinion—for the first time since 2005, the Federal Reserve’s policy rate decision wasn’t unanimous. Yes, I know the mainstream media has been carefully ignoring this. Very few reported it, and those who did immediately downplayed it. But one Fed governor voted against cutting rates by 50 basis points. Why? Because she deemed it premature for the Fed to claim victory over inflation.
This is a big deal. When the Fed isn’t unanimous, it means that a part of the market—and perhaps the system—is channeling their thoughts. These thoughts get through to the FOMC and are then reflected in the governor’s actions. So, someone breaking ranks was perhaps the biggest news this week. And be careful about these small details that diverge from a pattern that everyone takes for granted or thinks can’t change. These small details, in reality, are often premonitions of something developing.
So interest rates started to increase. And then, predictably, we needed a narrative for that. People started writing, “Oh yes, maybe the market is pricing in a risk of inflation returning.” What does that even mean? Is it about selling treasuries to buy stocks because this liquidity is going to flow into equities? Is the Bank of Japan dumping treasuries into the market amid the strengthening yen? Whatever the case, every narrative is simply trying to rationalize the fact.
What’s going to be the real information from this fact? We’re likely to find out next week when the PCE data is released. Why then? Because we know it won’t be representative of real inflation in the market—or rather, the real economy. Sorry for the confusion. But just as we saw a small uptick in core CPI inflation two weeks ago—signaling that even despite all the adjustments, the BLS is starting to struggle to keep inflation out of the official data—we might see something similar in the PCE.
So, paradoxically, we’re now in a situation where people believe inflation might return—or if not returning, at least the real level of inflation is starting to be acknowledged by the market. It’s much higher than official figures suggest. So be careful about that. Furthermore, if we look back to the last month of 2023, we’re in a similar situation where the DXY depreciated too much and yields fell too far. This is symptomatic of a market that increasingly not only overreacts to events but also trades on momentum—which is nothing more than massive herd behavior. So either everyone crowds onto one side of the boat, or everyone shifts to the other side. This is why we have such volatility in the market; the boat keeps rocking as people swing from left to right, because what’s happening in the very short term isn’t clear.
We have a market that’s increasingly dependent on central bank support in the short term, and also on central bank activism. This is another point I wanted to discuss today, and for whatever reason, people aren’t really addressing it. Of course, mainstream media doesn’t talk about it. I tried to research if there was ever a time when central banks were so active in trading the market. We’re not just talking about monetary policy—central banks are actively trading in the market. I don’t want to speculate about whether certain rumors are true or not, but I believe they are. Even the Federal Reserve has reportedly set up a trading desk in Chicago to trade commodities. Who knows? But the Fed, the Bank of Japan, the Swiss National Bank, the Norwegian Central Bank, and others are so active in market trading that, due to the sheer amount of money they keep printing and the control they’re exerting, they’re creating incredibly large distortions in the market. And why are they doing this? They’re doing it to maintain a status quo that’s becoming increasingly fragile. This is glaringly obvious.
Furthermore, they don’t even tell us what’s happening. On Friday, we got the Bank of Japan’s interest rate policy decision. It was so carefully crafted to be a non-event. It was designed not to make any headlines whatsoever, not to trigger any reaction. But still, the moment Governor Ueda stopped speaking at the press conference, we saw a four-sigma move—the yen sharply depreciated. Of course, narratives immediately sprung up to explain this. Maybe he said this, maybe he said that. No, he didn’t say anything substantial to us. The only thing that might be noteworthy—and I actually liked this—was on Twitter, where he said they’re observing and considering their future policy based on whether the Federal Reserve and the US economy achieve a soft landing or a hard correction. Wow. When I read that, I thought, “Oh my God, if this gets picked up by algorithms or people who understand what this really means, we might actually see something happen today.” Well, of course, everyone ignored it. So, fair enough. Everything’s on Twitter these days.
So governor Ueda stopped speaking, and then the yen started depreciating sharply. You know, there’s no point in speculating about the whys and wherefores. It simply wasn’t supposed to happen. It’s completely illogical, right? But why is it happening? The answer lies in what’s occurring behind closed doors. It’s similar to studying a phenomenon in physics: you observe the effects, then work backwards to understand the cause, and ultimately uncover the natural law governing it. It’s not that different for financial markets and perhaps human behavior in general. Clearly, something is happening. What exactly? Who knows? This is why everyone trying to make sense of this market in the short term is fighting an uphill battle. The sooner people understand that what’s happening is equivalent to navigating a boat through thick fog, the better. So far, everything has been fine. But if you hit a rock, things can quickly turn sour—as we saw six weeks ago with the big crash in Japan.
So in the short term, there’s no point in speculating. We don’t have the full picture. We don’t know what’s truly happening from all angles. We can only react based on what surfaces, and if we can uncover it. One thing we know for sure is this: all these people talking about macro central bank theories, giving fancy names to their models—it’s all very impressive. But hold on. At the end of the day, if you’re creating something overly complicated to explain something simple, as my old university professor used to say, it means you’re not understanding what’s really going on. You’re trying to overfit your model to achieve a high R-squared. But in reality, you’re simply adding coefficients because you can’t explain the real coefficient—perhaps the true relationship driving everything.
The Bank of England’s short-term open market operation with repo to provide emergency liquidity to the banking system keeps increasing, now at £44 billion. That means there are one or more banks in the UK or with UK operations that can’t borrow £44 billion in the market. This is what the data indicates, and no one is talking about it. I published an article on this and showed how this began exactly when the yen carry trade started to unfold (”THE JPY CARRY TRADE IMPLOSION CONTAGION IS ALREADY SPREADING INTO THE UK”). Now, the yen carry trade is being carefully contained by the great efforts of the Fed and the BOJ. But even they know that there are billions and trillions in carry trades out there. Perhaps the real carry trade isn’t even in stocks. The real carry trade is in all those illiquid fixed-income assets that have been used for ages to extract yield during the zero interest rate policy years. So the Bank of England keeps injecting emergency liquidity into the market. No one seems to care. Of course, you can’t make a technical chart on that. You can’t draw a momentum line or anything like that. You can’t come up with a fancy explanation, because there’s only one explanation: someone is in trouble. Obviously.
To what degree? Well, if the amount of this facility keeps growing, if the Bank of Japan’s money printing keeps increasing, if the Fed had to cut 50 basis points instead of 25 and is trying to sell the idea that it’s because the economy is strong—come on, guys. They’re all intelligent people, products of a very long human evolution. Everyone knows when someone is spouting nonsense. The difference is whether you want to believe it or not. Many people like to believe it. But the truth is, be careful, because these guys have quite a consistent track record of messing things up. Consistently. So believing that they’re right this time? Well, that’s up to you. As you know, personally, I have a different view and I’m managing my financial resources and activities accordingly.
So clearly, something is happening. And they’re not telling us, of course. We see these crazy movements in the market. We see the emergency liquidity facilities keep increasing. We see the Bank of Japan effectively running a perpetual state of liquidity injection and bailouts in its own system. We see the Fed taking action for reasons that aren’t really about the economy, particularly not because of inflation. And this action, as I explained before, even in a weak economy, is going to make things worse because inflation is moving things towards a state of stagflation. Inflation is a result of money printing, not the result of some sublime balance or whatever. Those are very short-term things that then revert to the mean. No, inflation is a monetary phenomenon. And the US, Europe, even Japan—they’re all in the same boat. They’re all in the same situation, and they’re all effectively withholding the real data (”IS THE MARKET PRICING A FED CUT OR IS A NEW BANKING CRISIS ABOUT TO SPARK AGAIN?”)
Anyone can book a ticket and go to Germany, France, or wherever. See the prices for yourself. Talk to the people. Ask them if inflation is only 2%. Of course it’s not. Ask them how the economy is doing. It’s not flat or slightly growing as they pretend, or slightly in recession as the German officials claim. I mean, for the first time in history, Volkswagen is going to shut down production plants in Germany and lay off workers. This is another piece of news that signals a huge tectonic shift in the economy of a country that has so far held Europe together. So we have financial institutions in trouble. We have Volkswagen in trouble from the industrial base. We have a dissenter on the Fed board saying we haven’t defeated inflation, but then we have the Federal Reserve go ahead and cut 50 basis points, pretending to say everything is fine. The economy is just doing that because it’s time to decrease rates. And we’ve achieved a soft landing. What are they talking about? We have the Bank of Japan saying they’re going to trim down the futures market, and they do the complete opposite.
There’s no model for this. There’s no fancy theory or whatever. The only thing we can do is put all these pieces of the puzzle together, follow the money, follow the actions, and try to understand what’s really going on. And the earlier we know, the better, so we can position ourselves accordingly. Because the moment the news comes out or whatever is happening becomes factual, it’s going to be too late. High-frequency trading algorithms are going to take advantage of whatever’s left in the market, and everyone else is going to be left holding the bag.
So clearly, we have this whole messy macro situation that’s becoming harder and harder to explain. But we also have other pieces of information that can actually help us understand more of what’s going on, at least for a section of the market. I’m referring to SMCI. I believe that we live in a time when people have become so numb to stocks going up, to the “get rich quick” approach to the market, to the Fed bailing out everyone in case something happens, that they don’t realize this is actually a construct that only stands true today. In reality, you can’t rely on that. You can’t assume something that was true yesterday will be true tomorrow or in the future.
Why am I saying this about SMCI? It’s clearly the Achilles’ heel of the semiconductor boom. They’re being caught red-handed. Part of the claims against SMCI were strongly substantiated and very hard to fight against. Another part was less supported by factual documents, but more by a collection of employee feedback. Some parts were complemented by assumptions and so on. So okay, it wasn’t a fatal blow, so the company’s fine. However, then the company says, “Oh, we’re reviewing our accounting system.” Okay, that means something’s going on there. Then the company very coincidentally changes its auditing firm after many years. They kept the same firm even after they got caught fudging their accounts in 2018, got fined, and were suspended from listing for some time. And then yesterday we got the notice from the exchange saying if they don’t comply with the disclosures, they’ll get delisted. (”SMCI – THE NUCLEAR NOTHING BURGER THAT CAN EXPOSE NVIDIA SHENANIGANS”)
So now, how the hell are people ignoring this? How is it possible? And here comes a thought in my mind: are there really that many investors out there? Yeah, I know there are the disclosures of the funds and whatnot. Yeah, those are passive investing. But who’s really actively trading the stock that, by the way, increased way more than Nvidia in percentage terms? All of a sudden it started to go vertical because, I mean, rationally speaking, after all these events are trickling down and you see the stock constantly being built up to the point that on Friday it was up 4.5% for no reason. Don’t try to make up any narrative. “Oh, because it was quad witching repositioning or whatever.” No, that’s bullshit. That’s complete crap. There wasn’t really anything that could substantiate that stock going up that much that day in particular, unless it was being manipulated because they knew this news was going to hit after the close, as it did. This is the truth, and this is the only logical explanation, like it or not.
So, SMCI, as I said, is incredibly important because it’s so deeply connected. It’s actually been part of the Nvidia success story. Like it or not, it’s the third biggest customer. Potentially. And we’ll know perhaps after an investigation, but everything points towards them with regards to that entity that’s helping Nvidia effectively distribute their GPUs where they shouldn’t go in Asia or to some parts of the world that shouldn’t be getting them. SMCI apparently developed this technology that’s going to be so great everyone can’t live without for their own data centers around the GPUs and future AI applications. So clearly, this company is very, very important.
Do you think that if things develop in a direction that’s clearly not good for the company, all the other stocks connected to it are going to keep running as if everything’s fine? Of course not. Particularly in this market where everything’s so interconnected, there are likely the same 4 to 5 people pulling the strings behind these gamma squeezes that have been hitting all these stocks belonging to the same category. There’s a DOJ investigation ongoing. There are investigations in Europe as well. (”“HYPERSCALERS” OR “HYPERCHEATERS”? – ADDING HINDENBURG PIECE TO THE BIG PONZI PUZZLE WE HAVE BEEN PUTTING TOGETHER TILL NOW WHILE WAITING FOR NVIDIA EARNINGS”)
So while we’re thinking about the Fed, the Bank of Japan, or whatever, and we try to figure out what the hell these guys are up to—and it’s very difficult—we have a piece of information that in reality isn’t very difficult to understand. We can actually understand what’s going to be the consequence of certain scenarios. Right. So what do you think? Is SMC triggering a domino effect that can go up to Nvidia? Microsoft? This market is not going to be good, right?
Although my view is there’s still going to be a rotation that’s effectively happening to utilities and financials because no one can afford to be out of this perpetual bull market, as everyone believes. But think about that and then put this into context. The Fed just cut rates 50 basis points, claiming it’s doing that in a strong economy, overlooking the fact that US banks alone, US major banks alone, as per FDIC public data, reported more than $500 billion of, let’s call it, paper losses in their held-to-maturity books. Is shifting towards financial stocks really like a flight to safety trade? Of course not. (”NVIDIA WON’T CRASH MARKETS TOO MUCH BECAUSE TRADERS HAVE A BURNING HOUSE STILL STANDING WHERE THEY CAN HIDE”)
So be careful about that because U.S. treasuries are going to have to deal with increasing inflation in the markets. You’re going to have JPY trade problems still ongoing for quite some time. You have this sneaky ticking time bomb in one corner of the market that has been effectively the leader of the bull run till now. You have banks that on any front are clearly shaken. They’re not having a very good time. Okay. So don’t be shortsighted on this. The market is much bigger and there are other ways to protect yourself.
The fact that gold keeps churning all the time is not random at all. It’s a combination of all these factors I just described. Inflation is there in the economy, like it or not. There’s a need for a safe haven that doesn’t belong to all the categories I described. Because clearly, yeah, you can enjoy some little gains or whatever. And then one day you wake up 20% lower. Or you have completely messed up monetary policy and deficit spending from governments that are far from being put in check.
That’s why the likes of gold and extremely safe assets are doing well. And paradoxically speaking, in this category you can find Berkshire Hathaway. Why? I mean, the guy is trying to cash out as much as he can and just keep whatever is going to be there in the ultra-long run. Some people call it the most expensive money market fund. That’s not the case. In reality, what Warren Buffett is doing again, as he did all the time before, is positioning himself to have the lowest possible beta exposure to the market. So when things come down, yeah, stocks are going to come down. But at the same time, there’s going to be a lot of alpha in that moment because you can cherry-pick the companies that are going to be massively undervalued by the market if people start to panic. He didn’t do this once or twice. He did this every single time in the past 50 years.
People are ignoring this broadly. Although some smart people clearly are giving credit and gold to Berkshire stock, to a certain extent, they should still want to be invested in the market. But be very clear that you trust the guy to do this job. Silver is back on track and, as a matter of fact, using cash has been performing quite well overall. Because at the end of the day, if you remove the high-flyer stocks from the market, the overall market didn’t really do anything impressive in the past 12 months or so. Yeah, they’re all the time fine only if you’re in that stock.
So here I want to conclude with Bitcoin. Oh my god, he’s going to talk about Bitcoin. What about Bitcoin? No, in reality, you know what I think about crypto and whatever. You know there are two sides of crypto. There’s a side of crypto that’s effectively commoditized. And there’s a side of crypto that can provide incredibly long-term, deep value opportunities. Of the likes that we found in the early 2000s, when people invested $10,000 into Amazon, for example. As many people like to say, you could have $40 million now. Yeah, you can find those types of opportunities in crypto right now. Not in stocks, like it or not.
But with regards to Bitcoin, there have been two very, very important pieces of news. And believe me, these pieces of news are not random. They’re carefully crafted to give a signal to the market about what’s going to be the direction of the push from the people that are fed up with having enough power to pull the strings and get towards where they want to go. So we got this news about an article from Forbes saying BlackRock is preparing for a US dollar fiat monetary crisis with Bitcoin. Wow, isn’t that exactly what I wrote about after the Fed decision? Think about that. I said the Fed is starting to take decisions that are politically motivated and not anymore economically motivated or market motivated. To an extent, that is where you can see the beginning of the end of the fiat system.
And I’m not saying just go back through history. Look at what happened to the French central bank in the first experiment. Go back to check what happened thousands of years ago to the Chinese empires when they started to print paper money out of control. All those systems failed. And it’s going to fail again. And you get this news from BlackRock. This news is not random, trust me. And 24 hours later, boom, the SEC approves the trading of options for the BlackRock Spot Bitcoin ETF.
Now, if one plus one is still equivalent to two and the market we go to, no, till today still persists. This is a very strong signal of what’s coming. BlackRock is an asset manager. The higher the assets under management they have, the higher the fee they can charge, the higher the revenues of the firm. If BlackRock believes one part of its portfolio is going to struggle, they need to compensate with something else. And this something else is BlackRock themselves. They’re saying it’s going to be Bitcoin. And now they even got the tool on top that is effectively the gasoline that enables all this unbelievable gamma squeeze and bull run or whatever that we saw so far. I’m not speculating here. This is fact. This is what happened, it’s out there. Yeah. They can’t tell you, but they’re telling you between the lines. It’s up to you to read it or not. Is this bullish or bearish? Well, you know, you make up your own mind. But that was quite a powerful signal of things to come.
And I’d like to conclude by saying no one can predict the future. No one can time the market, especially in the short term. The future is extremely erratic and blurry. We can, based on information today, have a good idea of what the future consequences of these actions will be. But you never know, maybe two weeks from now there’s going to be an alien invasion. And whatever you said about the JPY going to 300, of course it’s going to be down the toilet because it’s not going to be JPY anymore. That’s what I mean.
What’s important is to stay on top of things. Try to understand what’s going on without having behavioral biases and without watching things through someone else’s lens or through beer goggles. Then position yourself in the best possible way and never forget, ultimately, what creates wealth in the long run is not being invested during the bull run at all. It’s avoiding the big drawdowns that happen at the end of a bull run, and being the one with the cash to come in when valuations are depressed and enjoy the following cycle until things become overvalued again. That’s the time to get out.
The likes of Warren Buffett built his fortune on this, not on fancy HFT algorithms, arbitrary whatevers and whatnot. It’s a very simple rule. It’s not fancy. It’s very hard, you know, to make a living out of that because it doesn’t really trigger a narrative or anything. But at the end of the day, it’s the most simple things that consistently tend to work.
So keep your eyes open. Keep your eyes open to these three aspects I described today. Keep an eye on the PC next week and be on alert, because this is an incredibly erratic market that in the short term can swing incredibly without notice. So, you know, personally, I’m out because I want to sleep at night. But if you like to be invested, you need to be very aware of this. And remember, if the news comes out and you’re invested, you’ll already be late when the damage is done. Whatever news it is, you should rather take precautions while you have time to do so.
I wish everyone a nice Sunday. I hope you enjoy it and I’m looking forward to next week ahead. Thanks everyone for listening and talk soon.