Albert Edwards Is Irritated At Bitcoin

Listen, Albert Edwards has a bone to pick with Bitcoin and that’s this: the cryptocurrency’s meteoric rise is keeping people from focusing on all the other bubbles he likes to talk about.

As you’re no doubt acutely aware, it’s all a bubble. Every, single last bit of it. Bonds, credit, and equities are the most simultaneously rich they’ve been since the 1920s. Remember this chart from Goldman?…

Of course part of the reason that chart looks like it does is because the low inflation environment has kept bond yields suppressed and given central banks an excuse to keep easing, which in turn drives the global hunt for yield that serves to levitate credit and ultimately, drive equity valuations into the stratosphere. A knock-on effect of central bank largesse is suppressed cross-asset vol., and the persistence of that has led to a massive bubble in the short vol. trade.

Normally, this would be getting a lot of attention. And it is. But not nearly as much attention as Bitcoin. And to the extent you can be fooled into thinking one bubbly asset actually isn’t bubbly simply by looking at it compared to something that’s even bubblier, well then consider everyone fooled:

For the SocGen’s incorrigible bear, this is distracting everyone. “Bitcoin’’s parabolic rise has diverted attention from the bubble in equities,” Edwards writes, in his latest missive dated Thursday. Here’s some more fun color:

How do you know when an asset price rise has turned into a bubble? In the non-virtual world, valuation is often a good starting point. A bubble can also be identified by the steepness and persistence of any price ascent as doubters and naysayers are swept away in a tidal wave of bullish froth. That is something the main S&P Composite Index certainly shares with Bitcoin.

One justification for the surge in stocks is a profits recovery. But the underlying profits recovery looks increasingly fragile and indeed on some key measures a rapid deceleration is underway. With equities over-valued, overbullish and now also over-bought, the boring old profits cycle still needs watching.

Here’s what he means by overbought (we showed you this chart on Monday):

As far as the profits cycle bit goes, Edwards notes that “looking at only domestic, non-financial companies (ie companies selling in the US), profits have barely rebounded on an economic basis (ie adjusting for inventory gains and putting depreciation on an economic, rather than tax basis)”:

Basically, stripped of anything that might confuse pedestrian readers, if business investment is primarily driven by domestic profits, the picture stateside doesn’t appear so rosy:

Of course Edwards doesn’t expect these subtle and nuanced arguments to matter because after all, “the market can stay expensive and irrational far longer than most investors can stay solvent, or indeed longer than most investment managers can retain their jobs in the face of underperformance.”

That last bit is key. This is an environment where resistance is effectively futile. Everyone has been incentivized to behave “badly” where that means continuing to chase yield and sell vol. – anything to avoid being the guy/gal who tries to “do the right thing” by rebelling against a prevailing dynamic that has become self-fulling.

*********