What Concern?

Concerns about the potential economic ramifications of the rapidly spreading, highly infections “Delta” coronavirus variant are seeping into markets, we’re told.

But the layperson (i.e., someone not inclined to look too far beyond the benchmark quotes that sit atop various business sections) would have a hard time locating those “concerns.”

Global equities were poised to close the book on the first half with a fifth consecutive monthly gain, and a seventh in eight. The same was true of US and European shares (figure below).

Notably, China’s ChiNext rose more than 2% Wednesday to the highest since June of 2015, when the country’s equity bubble famously collapsed.

Records on various benchmarks notwithstanding, there is evidence that market participants are worried that this may be as good as it gets.

“Put skew has turned very expensive – the three-month put skew for the S&P 500 is at a multi-decades high – suggesting investors already fear that some indigestion in the equity market could trigger higher volatility,” Goldman’s Christian Mueller-Glissmann said.

Still, he noted that Goldman’s volatility regime model (an aggregate of macro, macro uncertainty and market indicators) points to a very low probability of a high vol regime (left figure, above). “The probability has dropped from 100% during the height of the COVID-19 pandemic to about 5% now,” Mueller-Glissmann remarked.

Of course, a high volatility “regime” is something different from a volatility spike. The latter is always possible and at a very basic level, predicting fleeting vol spikes is akin to predicting the unforeseen negative macro catalysts which typically cause them. You’re either a fortune teller or you’re not.

Speaking of volatile, Bitcoin had its worst quarter in years (figure below).

I have quite a few regular readers who count themselves crypto proponents. Some of them are well-versed in the space. Generally speaking, they tolerate my jokes because I’m dispassionate about it. I’m not Charlie Munger. That is, I don’t “hate” Bitcoin or resent its success. It’s a digital token, not a vengeful ex who absconded with half my fortune. It’s not something that’s amenable to being “hated.” It has no sense of purpose, although its fans seem to claim otherwise, periodically ascribing something like self-awareness to the coin.

That said, the figure (above) is downright silly. In my opinion, no investment thesis, no matter how compelling, could ever warrant adding something that volatile to a portfolio. Adding amphetamines to my diet would doubtlessly enhance performance over certain intervals — and dramatically so on some days. But it’s not worth it (really, it’s not).

Gold (the non-digital kind) is having a rough time too. June was the worst month in four years (figure below).

I’ll probably add to my (always modest) position. Seriously, I probably will. I don’t resent gold for the same reason I don’t resent Bitcoin (it’s inanimate). But I do resent the necessity of owning an inert metal that pays no interest. However, I have a very simplistic view of markets at the asset-class level. If an established asset class (so, crypto doesn’t count) just had a “worst since…” month or quarter, I’ll typically add a little.

Obviously, gold faces headwinds, with a hawkish Fed chief among them. If tapering is accelerated on the back of, say, a few hot NFP prints, it would likely bring liftoff forward, perhaps into next year. I’d note that holding gold to hedge equity risk can be perilous when the proximate cause of an equity selloff is a sharp rise in real yields. That’s something to think about as the Fed looks towards tightening.

In any event, you’d be inclined to think equities will have a difficult time matching H1’s performance in the back-half of the year. But then again, if someone had told you in late March of 2020 that the S&P would double over the next 15 months, you’d have probably suggested they were suffering from a COVID-induced delirium.

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6 thoughts on “What Concern?

  1. “If an established asset class (so, crypto doesn’t count)”

    At what point of longevity would you consider crypto to be an established asset class?

    1. Never. It’s not an “asset.” It doesn’t exist in any real sense. Governments will eventually regulate it out of existence.

      And just plot Bitcoin’s 60-day realized volatility against whatever asset you want to plot it against. It’s a joke.

      I mean, I don’t know how else to put it. Anyone looking at the situation objectively knows this, but much like the former president, Bitcoin’s fans have lost the capacity to view it objectively in part because the psychological burden of coming to terms with the possibility that they’ve been duped by something that so many people told them was a lie is terrifying.

      Right now, it’s still possible to suspend disbelief. But when Bitcoin has its own January 6 moment (and it will), fans will resort to wild conspiracy theories to explain why the bottom suddenly fell out.

      1. Right, and I agree, Bitcoin is absolutely a worthless bubble token that has no real utility. But when I was saying Crypto I really meant blockchain technology and the tokens that actually do provide some utility. Figure lending operates on blockchain and is making borrowing much easier and faster. Tokens like Ripple and Stellar Lumens are seeking to make it easier to send funds across boarders in Africa. China is releasing their own blockchain backed digital currency soon.

        I’ve been back and forth with myself on the future of blockchain and at this point I feel like it will have a longer term presence in the world, it just won’t be Bitcoin

        1. Here’s my thing with the whole space (crypto and blockchain): Useful stuff (any stuff, not just technology) is eventually commandeered by big business, government or both. If it’s not commandeered in its original form, it’s copied and the originals are driven to obscurity. That will happen here too, and when it does, it will render the whole “decentralized” talking point meaningless. To me, the idea that this space will develop on its own, decentralized, without any overseer/gatekeeper role for governments and corporations is far-fetched in the extreme. There’s no reason Google can’t replicate the entire ecosystem if they wanted to. Crypto proponents will tell you that’s an ignorant thing to say. I’d remind them that Google is omnipotent, and knows everything about them up to and including what they were doing right before they sat down to type a reply calling me ignorant. If they dropped crumbs onto their keyboard while responding to me, Google could tell you what they were eating. And it doesn’t matter whether they were using Chrome or not.

          1. Very good points. However, using the Google example, they have the market cap to buy up some of these smaller blockchains which would actually cost them less than developing their own solution. There are already tons of examples where they have done this both from software and hardware perspectives over the past decade. IBM also already made a significant investment in Stellar so that may signal interest in an outright purchase. I guess the investment thesis then for any blockchain token is will some mega corp buy it out and leverage it then.

            Otherwise I tend to agree with you. The decentralized thesis is simply not there. As previously stated, all it takes is for a terrorist attack to be funded using a decentralized blockchain for the government to immediately ban it. So that “benefit” of the technology is actually a detractor from an investor’s perspective. However, being able to execute transactions on a unimpeachable ledger at light speed across boarders seems to be a real world example of innovation that may drive demand. (In my very marginally informed opinion)

      2. Remember, the guy who really got rich from BC is the guy who invented it. His stash is by far the biggest and he is clearly a multi-billionaire who has probably been cashing in for years, skipping those pesky taxes, and laughing up his sleeve. It was a con all along.

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