Christmas Bubbles

Caution crept into global markets Thursday, as investors appear suddenly reticent after a month of big gains for global equities and even bigger gains for some corners of the market that suffered most during the pandemic.

Minutes from the ECB’s October meeting show officials were concerned about the European recovery losing momentum. That’s hardly surprising. The writing was already on the wall vis-à-vis the necessity of new lockdowns and the likely hit to activity by the time policymakers last met. Risks, the ECB assessed, were clearly to the downside.

An expansion of the bank’s emergency pandemic asset purchase program is all but guaranteed next month, and officials acknowledged that taking action in December “would be consistent with prevailing market expectations.” However, some officials “noted that additional asset purchases might not have the same impact on financial conditions and real economic activity as they had had earlier in the year.”

“It could not be excluded that the euro area, or at least some countries, would experience a double-dip recession,” the October minutes said. In fact, that appears to be the most likely outcome, or at least from where I’m sitting which, admittedly, is not on the ECB’s Governing Council. The GC expects inflation to remain negative “through early 2021.”

All of that underscores the palpable risk to the European economy as governments struggle to rein in the virus. Angela Merkel implored Germans to do their part to avert a “worst-case scenario” in which the country’s healthcare system is overrun. She suggested Europe should shut down all ski resorts this winter. The chancellor extended a partial lockdown in Germany through December 20. “We undoubtedly have some difficult months ahead of us again,” she remarked, in comments to parliament Thursday.

France is gingerly moving to relax a national lockdown starting Friday and the UK is under the impression that by Christmas, it will be safe for as many as three households to congregate around a table. Earlier this week, the UK government released a ridiculous advisory called “Making a Christmas bubble with friends and family.”

“You can form an exclusive ‘Christmas bubble’ composed of people from no more than three households,” the UK said. “You can only be in one Christmas bubble [and] you cannot change your Christmas bubble.” To be fair, the UK’s latest measures have had some success. The figure (above) shows cases declining.

Speaking of “Christmas Bubbles,” Bitcoin collapsed Thursday. Some readers seemed flummoxed this month by what a few described as “a lot” of Bitcoin articles. While I suppose “a lot” is always subjective, we published a total of three (that’s 3) Bitcoin articles over the past 32 days. That’s less than 1% of the total number of articles published over the same period. So, the notion that we’ve somehow “overdone” it simply isn’t true.

But more importantly, the reason I dedicated any coverage at all to Bitcoin is that it was quite clearly headed back into the stratosphere late last month, and once it got there, I wondered if it might suddenly plunge, especially considering some of the nonsensical things people were saying to the mainstream financial media. Sure enough, it plunged on Thursday, diving as much as 13% after rising to within $7 of its record high.

Some other crypto assets lost nearly a third of their value.

Some of the decline was attributed to regulatory concerns. You know, the kind of concerns that so many commenters on a late October article published in these pages said aren’t anything to worry about.

“Last week we heard rumors that the US Treasury and Secretary [Steve] Mnuchin were planning to rush out some new regulation regarding self-hosted crypto wallets before the end of his term. I’m concerned that this would have unintended side effects, and wanted to share those concerns,” Coinbase CEO Brian Armstrong tweeted late Wednesday. “This proposed regulation would, we think, require financial institutions like Coinbase to verify the recipient/owner of the self-hosted wallet, collecting identifying information on that party, before a withdrawal could be sent to that self-hosted wallet.”

Commenting from Singapore, Lehman veteran Mark Cudmore (who now writes for Bloomberg) wrote that “given how many financial participants I know who have been focusing on their Bitcoin profits in recent months, I would anticipate this to have a broader sentiment impact across markets.”

Spillover concerns were rampant when the last crypto bubble burst, but they were ultimately overshadowed by the implosion of the VIX ETP complex, an unrelated event, although I suppose you could subsume the short vol trade and the crypto mania into the generic “bubble” category if you wanted to make a connection.

“All the most recent crypto longs are offside as they converge around the Thanksgiving table (whether virtually or in person),” Cudmore continued. “It’s true that the Thanksgiving holiday boosted the mood [in 2017] but that’s because the latest joiners were all making rapid money and gaining confidence — it’s different this time around.”