A Bitcoin Display in Hong Kong: Cryptos Dramatic Rise Might Have Blinded Some Investors to its Shortcomings.
Paul Yeung/Bloomberg
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Clichés would not exist if they did not contain an essential truth. This applies particularly to those that have to do with history, both its tendency to repeat itself and how failure to learn from it condemns repeating the mistakes of the past.
Still, it’s amazing to experience what appears to be a replay of a not-so-distant time.
Could it really be just over three months since the proliferation of cryptocurrency ads during this year’s Super Bowl broadcast? Even away from the big game, it seemed impossible to avoid Matt Damon saying that fortune favors the brave as he promoted Crypto.com.
Reminiscent of the flurry of Super Bowl ads on the internet more than two decades earlier, Seabreeze Partners Doug Kass stepped away from the ad blitz with one clear investment implication: Short crypto.
Last week strengthened its conclusion dramatically, with the collapse of
TerraUSD,
a supposed stablecoin, plus a related thing called LUNA, which has driven an array of cryptocurrencies including
Bitcoin.
While
Berkshire Hathaway
(ticker: BRKA, BRKB) CEO Warren Buffett recently remarked that he wouldn’t pay $25 for all Bitcoin, the losses were real. According to CoinMarketCap, reported by Bloomberg, some $270 billion in crypto market value went bankrupt at some point last week.
Although crypto boosters claim these things are stores of value, detached from the risk of conventional financial assets, Bitcoin prices have been totally in sync with the stock market, especially the tech-laden market.
Nasdaq Compound.
And on this last point, it feels like deja vu again. child prodigies companies that issued stocks at outlandish valuations during the recent bubble have been hit in an echo of the dot-com era.
The parallels to the 1999 madness seemed apparent in late 2020, and were noted here at the time of the IPO of
Airbnb
(ABNB).
Last week, the bear market spread from names of growth at all costs, such as those of the
ARK Innovation
exchange-traded fund (ARKK), to profitable members of the FAANG cohort, such as
Apple
(AAPL), which had been considered a relatively defensive redoubt.
The Nasdaq stock looks like a remake of the depressing episode in the markets of two decades ago. Through Thursday, the Naz was down 28.9% from its peak about six months earlier. This was a relatively longer slide than the decline from late February 2000 into the following May, but was still of a similar magnitude to the 28% decline in that time period.
Then came the rebound in risk assets on Friday, with the Nasdaq recovering 3.82%, its best performance since November 4. Could this be the start of a rebound? Or a bearish rally?
History shows that after this initial decline in 2000, the Nasdaq entered a bull market by the technical definition, rising 23% from late May to late August. But that would turn out to be a rally in a bigger bear market. From that point to the end of September 2002, the Nasdaq lost 73% of its value in the bears’ final, prolonged and sickening decline.
A key similarity between the dot-com bust and now is the action taken by the Federal Reserve. Even after the tech bubble came out of the air, the Fed remained on the tightening path it had embarked on in mid-1999, raising its target federal funds rate from 4.75% to 6 .5%, in August 2000. So far, the Fed has hiked from just 0.75% to 1% in two steps, with further half-point increases likely in June and July.
The Fed is unlikely to be deterred from tightening regardless of what the stock market does, says a seasoned professional. With annualized inflation above 8% and officials from President Jerome Powell’s central bank admitting that monetary policy has been too easy for too long, the priority for central banks is to regain credibility. Investors who have been conditioned to be bailed out by the Fed’s damn insurance policy to bail out markets with easy money will be disappointed, the pro concludes.
Meanwhile, he sees liquidity continuing to be drained from the global financial system, with the crack in crypto being a symptom. Hong Kong’s need to defend its dollar peg against the US greenback was overlooked in the week’s headlines. Evercore ISI states in a client note that Hong Kong is the go-to global market at the end of global easy money.
It’s probably not the only one.
Write to Randall W. Forsyth at [email protected]
