How worried should we be about the crypto crush?
The line between market resilience and irrational exuberance is frustratingly hard to discern
Katie Martin
For evidence of froth in financial markets right now, look no further than our trusty friend, crypto.
The seemingly unstoppable rise of this most speculative of assets — for want of a better word — this week reached new extremes with the quirky tale of Eightco Holdings.
This time last week, Eightco Holdings was just a rinky-dink corrugated packaging and ecommerce inventory management company.
On Monday, however, it announced plans to refocus its efforts away from packaging and on to borrowing money to buy crypto tokens linked to the eyeball-scanning technology championed by OpenAI’s Sam Altman.
Questions like “why?”, “what are these tokens for?” and “who would scan their eyeballs for Silicon Valley magnates?” are, seemingly, for squares.
Markets did not wait to find out — the stock rocketed more than 5,000 per cent higher before settling down to “just” a 3,000 per cent gain on the day after what the company described as a “first-of-its-kind” initiative.
This may indeed be the first of its kind for these particular eyeball tokens, but hundreds of these types of projects are sprouting up all over the world as companies listed on regulated markets turn their back on otherwise humdrum business activities to bet it all on tokens beloved of the US presidential administration but still devoid of mainstream real-world applications.
They all owe a great deal to the inspiration provided by Michael Saylor, a pioneer in the field, who after the pandemic successfully flipped his struggling software company MicroStrategy into a $92bn bitcoin-munching monster now called Strategy.
In the process, he has created enormous wealth for a huge band of loyal followers (but has still been rebuffed from inclusion in the S&P 500 index).
I wish nothing but luck to anyone putting their life savings into this kind of wheeze, which generally appeals more to have-a-go retail investors, who are either fully aware of the risks or are true believers in the potential of crypto, than it does to institutional fund managers.
This is not a systemic risk as such, and professional investors can be forgiven for writing it all off as an amusing refutation of the efficient markets hypothesis.
But it matters in the sense that this is an extreme fringe of financial markets that are just too upbeat for their own good.
This is a warning sign that something here is not right.
And the Federal Reserve hasn’t even started cutting interest rates again yet.
Not all investors, for sure, but many, are willing to accept that markets are uneasily giddy.
“If you had told me a year ago what the world would look like, I would have thought the market would have been down 30, 40 per cent,” Nicolai Tangen, head of Norway’s vast $2tn national oil fund, said at the FT Weekend Festival earlier this month, and that was just in relation to the challenge to globalisation stemming from US trade policy.
Instead, we have punchy trade tariffs, efforts by Donald Trump to mount a hostile takeover of the Fed, political interference in core US economic data, and a president who is willing to pick winners and losers in corporate America.
All the while, US stocks are at or near record highs, up by 10 per cent this year.
In truth, that flatters the US a little. In comparison to other stock markets around the world, this is one of the poorest US performances since 2009, and the decline of the dollar means that investors outside the US would be much better off sticking to home.
Nonetheless, it is clear that investors are in high spirits.
The latest survey of investors by Absolute Strategy Research released earlier this month found an unambiguously positive vibe among fund managers.
“Global asset allocators are more bullish than they were three months ago, and their conviction has risen,” ASR said.
Optimism is not just running above its level from a low point earlier this year — it is above the median for the entire past decade.
The question now is what happens when you take that resilience, mix in the excesses on full display in the crypto market, and then start cutting interest rates, as the Fed is expected to do next week?
Optimists are keen to stress that corporate earnings in the US are in rude health, and that is true.
But as ASR also points out, it’s very rare over the past half century for the Fed to cut rates while earnings are performing so well, with the last notable example being shortly before the financial crisis of 2008.
It is not possible to determine in real time where the line lies between admirable market resilience and troubling market exuberance.
But it would be unwise to view the crypto froth as a sideshow.
0 comments:
Publicar un comentario