“US equity market prices have surged over the last year, prompting concerns about stretched valuations and the potential risk of market corrections,” the ECB said Wednesday, in the bank’s latest financial stability review.
Spillovers to European stocks from a potential US equity market correction “could be substantial,” the ECB remarked, cautioning that a rout on Wall Street “would also likely have a broader tightening effect on euro area financial conditions.” The bank also warned that “excessive increases in yields not motivated by domestic fundamentals threaten to unduly tighten financial conditions if a rise in US yields has a large spillover effect on the euro area.”
If you peruse the full document, you’ll find the ECB discussing Archegos, America’s meme stock mania and other “pockets of speculative activity” stateside. European policymakers called risk sentiment in the US “robust,” and said the readily apparent ebullience is “prompting extraordinary price volatility in specific sections of US equity markets.”
The report echoed the Fed’s own assessment, released earlier this month. Policymakers on both sides of the Atlantic are concerned. You might fairly charge them with being willfully blind to their own role in creating conditions ripe for “speculative activity,” but at least they read the news.
Speaking of speculative activity, Bitcoin is in a tailspin, down 40% from the highs (figure below). As of Wednesday morning, it had erased the entirety of the gains logged following Tesla’s announcement that the company added $1.5 billion of exposure to its balance sheet, some of which Tesla quickly sold, making $101 million in the process.
Elon Musk’s tweets have bedeviled Bitcoin adherents of late. Tesla’s decision to stop accepting the token for vehicle purchases was decried by an incredulous peanut gallery, including small-time billionaires like Cameron Winklevoss and Mark Cuban, both of whom feebly voiced their support for Bitcoin as Musk toyed with the market like a cat batting around an injured, helpless mouse.
Insult was added to injury when Beijing reminded folks that digital tokens can’t be used for payments. Virtual currency shouldn’t and can’t be used in the market as money since it’s not a real currency, a blunt statement read. Financial and payments institutions are forbidden from pricing products and services in virtual currencies, the same notice said. “The only tolerable digital currency to a government with strong capital controls is their own CBDC,” Adam Reynolds, CEO for APAC at Saxo Markets, told Bloomberg.
Respondents to BofA’s latest Global Fund Manager survey identified “long Bitcoin” as the most crowded trade on Earth (figure, below, from BofA).
As much as fans hate to admit it, the boom in crypto is another manifestation of the “speculative” froth flagged Wednesday by the ECB (and earlier this month by the Fed).
Even if you want to suggest that governments are “scared” of digital currencies, you’d have a difficult time explaining how the 21,000% surge in Dogecoin (predicated almost entirely on Musk’s jawboning) is anything other than speculation.
If crypto is experiencing a reckoning, it’s just further evidence that the proverbial froth is coming off. According to data from “CoinGecko,” some 7,000 digital currencies shed more than a half-trillion in value over the past seven days alone (figure below).
Gold, meanwhile, is ascendant. Wednesday’s weakness notwithstanding, inert yellow metal is tracking for a sixth weekly advance in seven.
“Gold is the flavor of the week,” Bloomberg’s Mark Cranfield said.
“There are a few elements in its revival, not least of which is the turmoil in cryptocurrencies,” he added, noting that “some investors appear to be having second thoughts that Bitcoin and friends will really work as hedges against inflation, virus flare-ups, geopolitics and the risk of policy errors by central banks.”
You are absolutely correct — We’re all Cathie Wood. No matter what the asset class is, no matter what the company’s name or differentiator, no matter what the market catalyst, human beings are, well, human beings. Our behavior patterns don’t change. That’s why the adage about the four most dangerous words in investing are “this time is different” are the truest words ever uttered.
By Jackson hole crypto may be toast
China is preparing to release it’s digital Yuan to the globe, of course they aren’t accepting other Crypto’s.
If you’re a government looking for a way to reduce financial market froth with no or minimal impact on the real economy, you could do worse than to start with crypto “currencies”.
This bubble you can pop without doing anything to rates or QE or stimulus. If Musk can jerk BTC around with a tweet, imagine what governments can do with regulations and taxation – or by talking about doing the same, or just by talking about talking about it.
This is a bubble that most people – not most traders or crytofans, but most ordinary people – wouldn’t notice being popped. Tell them how crypto is used for crime, kills the environment, and makes shady billionaires (some of which is even true) and they’ll cheer on the pricking needle.
Your economic and security advisors are warning you that this baby needs to be killed before it grows. The warnings are more forceful in China, perhaps, but every government is going to be worried about its national currency being displaced by something that is incredibly volatile, dominated by anonymous persons from other countries, hard to track and tax, and beyond that government’s ability to issue or absorb. Oh, and the darn stuff is inherently deflationary too.
China will brook no challengers to its digital yuan. The US government may send subtler signals at first, but ultimately the musings of Yellen will turn into actual actions by the SEC, IRS, Congress etc.
BTC enthusiasts should be bribing, excuse me, contributing to Republican Congressmen as fast as they can. If they can make crypto into some financial equivalent of guns, they might be able to stave off regulation.
JYL – ” this baby needs to be killed before it grows.” Is that a Bob Marley reference?
Great post there, sir.
Of course!
Darkside reportedly took in $90M in ransom from 47 victims before they “shut down”. After the stock market digests the impact of cryptos coming back to Earth, we still have to get through the bubble deflation (hopefully not a “pop”) of spacs and other wildly unprofitable companies trading at a huge multiple…..times -1.
Going to be rough going, better put a reef or two in the mainsail.
Might not be too many days before positive correlation for equities-bons flips to negative.
I’ll weigh in as someone on-the-record involved in crypto, and on the single worst day to be commenting. No hiding here. What is happening right now is almost certainly the forced liquidation of some hedge funds in the space. This is a purge of leverage, and there are no bailouts. In other words, it’s capitalism in operation in the wild. Although I am not someone who believes in that as a “religion”, it seems to me, to be perfectly honest, that most investors and Wall Streeters are dyed-in-the-wool cult members, even though they are also always the first in line for the FED and the government teat and unironic about socializing their losses. Kleptocratic cantillionaires are not capitalists. It’s a self contradiction. I am not sure why it is so hard for them to admit it, but I assume it just cuts too close to their self-constructed identities and too deeply challenges their most fundamental beliefs. Surely many of the insider pundits and government officials will pile on crypto in the coming days. They will “Munger” about. Lots of Mungering ahead. And it will be a spectacular lack of self awareness and hypocrisy. Not to mention an inability or unwillingness to understand new technology.
“…data from “CoinGecko,” some 7,000 digital currencies….”
Try to imagine a functioning economy with 7000 forms of currency. No, I can’t either.
I still wonder if Musk is actively buying now and will announce a reconciliation in about a month that causes BTC to spike … just my inner conspiratorial thinking…as Einstein once said “Flags (and Twitter.com) are proof that human beings are herd animals…