A LEKKER REAL-TIME UPDATE (9/4/2024)

“Man Politely Asks Bear to Leave Party, Part 2”

Originally shared on X

I haven’t done one of these since May 1st due to the fund launch, but I am now able to discuss Lekker publicly so let’s go.

First, a quick plug. If you’re an accredited investor who has been struggling to trade this market or could otherwise benefit from an actively managed macro-driven crypto strategy, Lekker Capital is an open-ended liquid fund accepting new subscriptions on a monthly basis with a $250k minimum. If interested, please contact me on here or info@lekkercapital.com. Now let’s dive in.

Lekker Capital entered the month of September with elevated cash balances expecting what we have seen to start the week (see message in below).

But with recession fears reaching a fever pitch and crypto sentiment washed out, I believe we are at or very close to a tradable local bottom. The market is a game of psychology and I am continually intrigued by how it always gives something for everyone to latch onto. The oil decline has added wind to the recession callers’ sails, the Yen wobble has refueled the Yen carry experts, the NVDA chart has the dotcom bubblers confident and of course you always have the China doomers that come out after every 3% pullback. But where are my fellow bulls? Nowhere to be found. It’s much more comfortable to be in the herd, but it’s often safer to be outside of it.

As the summer progressed, digital assets failed to keep pace with their traditional counterparts despite a somewhat favorable macro environment. Plagued by idiosyncratic sell pressure from large governments and bankruptcy estates, the last few months have felt like one big dead cat bounce. Equities on the other hand have continued to hold up just fine despite an ugly start to August and lingering recession fears. This choppy price action has lead to the market succumbing to the Troxler Effect, another way to say ‘missing the forest for the trees’. While market participants have become hyperfocused on all of the potential negative outcomes priced into the market today, it seems many are missing the large positive forces that have been brewing and are sitting ever closer on the horizon. Even though we’ve completely reversed the post-Jackson Hole move, it’s important not to forget Powell’s clear and strong communication that the Fed has reached its maximum point on the efficient frontier of tolerable economic pain x monetary policy easing (see my beautiful design skills in below image).

Put another way, the Fed reaction function is now the most positively convex its been in years. If Friday’s NFP data is weak, the Fed will increase the pace and magnitude of interest rate cuts, whereas if the data comes in above expectations, it should help to calm the market’s recession fears but not alter the Fed’s path all that much. No matter the coming week’s data, we are now two weeks away from the first Fed cutting cycle in over four years, an event the market has been looking forward to for a very long time but as we sit on the doorstep has somehow lost hope. Go read Peter Atwater 's book, The Confidence Map, to understand the reason behind the “darkest before the dawn” concept.

Additionally, I see many across the market wrongly questioning “will Fed rate cuts work?” when the actual question that should be asked is “how many Fed rate cuts are needed to work?”. Why? Because oil is making new YTD lows and there is not an inflationary impulse in sight. The Fed has very clear runway here to once again follow through on its promise to do “whatever it takes”. I find it ironic that many commentators who have been wrongly calling for rate cuts for 2 years have become so fatigued of being wrong that their tune has changed to “wow rate cuts are finally here, but will they work?”. As is often the case, this is yet another example of price —> narrative —> price. Attempting to fit a narrative to recent weakness.

A point I want to reiterate from this week’s On the Margin podcast episode, heck it’s even the title of the dang thing, but the passing of the baton from NVDA/AI to the rest of the market is a good thing. Remember when everyone was losing their minds earlier this year that NVDA and Mag7 were the only things going up? The whole Mag7 vs. S&P 493 story? We are now once again seeing price —> narrative —> price. The same commentators who said the market was unhealthy and unsustainable because it was only AI led, are now saying the stock market and economy are doomed because “the generals are getting shot”! Which way is it western man?! If you were an investor of Lekker Capital you would be prepared here because you’d know from previous letters that the secular AI trade became the ‘safe haven’ earlier this year and now market participants are gaining comfort in expanding into other parts of the market. This is positive. The narrow and highly concentrated market leadership is widening, also known as breadth expansion. Want in on another funny little tidbit? Remember all the people who oh so strongly believe Bitcoin is just 3x levered Nasdaq or NVDA? Set a reminder to check back in on those people on 12/31, I think they might be very surprised.

Lastly, let’s talk sentiment. Does it matter? Is it a useful tool? The short answer is yes. When beliefs become widely held, they tend not to pan out. Remember my tweet a few days ago on seasonality? It may have come across as a joke but it’s my base case. If you can’t tell, I like to joke sometimes - if you don’t know how to have fun then you just haven’t found your calling yet. Now I’m actually of the belief that seasonality does matter, but I also have lived long enough to know things don’t play out the way the whole market expects them to. So maybe take that newly acquired seasonality awareness and go look at it in markets that it’s not being talked about (cough, oil, cough, Treasuries, cough). Heck, even Tom Lee is bearish now.

If you’ve followed me for awhile, you know I can be as big of a grumpy bear as the rest of ‘em. I don’t get enjoyment out of it, but I also don’t like losing money, so it’s called for sometimes. But when I scroll my Twitter and news feeds all I see is doom and gloom. It’s nonstop recession fear mongering, NVDA top calls and a more frequent than usual comparison to the 2008, 2000, 1987 crashes. I am of the opinion there are major differences in underlying conditions between today and each of these analogs but hey that’s what makes markets. Oh and then there are the bears who have been screaming correction for years on end because “multiples are rich and equities are expensive”. They will eventually be right someday, but I don’t think today is that day as long as global central banks are about to drastically ease monetary policy with inflation bottoming at 3% and the US Treasury is severely manipulating the long-end of the yield curve. I have not once seen anyone discuss what I actually think is the best macro comparison to today and that is Q4 2020. Cue the “you’re an idiot” replies and while you’re at it also mark this one down as something to check back in on 12/31. If you become an investor in Lekker I can go into greater detail on this point and what it means for your portfolio in the months ahead.

I’ll leave you with a few final sentiment/positioning tidbits. On March 13, my good friend Ram Ahluwalia called the Solana top with this tweet heard round the world. Today the prevailing narrative is that memecoins killed Solana. What a difference 6 months makes. And two more because I’m feeling generous. Yesterday saw the largest BTC ETF outflows since, coincidently enough, May 1st, the last day I stuck my neck out there like this. And lastly, Ethena TVL is down $1B from its June highs.

“But Quinn you called for a bottom and my highly diversified portfolio of quality memes is still down!” Asset selection matters. In my opinion, Bitcoin likely represents the best risk/reward here and might be forming a beautiful inverse head and shoulders pattern. But I also see opportunity in other parts of the market too, outside of just BTC. Become an investor in Lekker and you can get that level of detail.

As a parting disclaimer, do your own research, build your own conviction and always manage your risk. There is a large number of qualitative and quantitative metrics used to inform my views that are not listed above. While my process indicates now is an attractive risk/return opportunity for a swing long, I do not know if it will be a 2 week or 2 month trend, and I have no obligation to communicate that to you unless you’re an LP in the fund. New information comes in everyday and always needs to be taken into account. I have a number of pre-established confirmation and invalidation signals that will inform how I manage the portfolio. Maybe I’m completely wrong and the market will break down here and I will look like a fool. That’s okay too because I will not get emotional, stick to what my process tells me to do and make sure I survive to get a chance at the next fat pitch. Babe Ruth’s career batting average was 0.342. In markets, you have to be a bit better than that but you will never bat 1.000, and you must always accept some level of risk if you’re seeking a worthwhile reward.

Please contact me here or at info@lekkercapital.com if you’re interested in getting involved.