For months, BofA’s Michael Hartnett warned that the first half of 2022 would likely be defined by a “rate shock” with the potential to drive up volatility.
Just five sessions into the new year, that prediction looked prescient. Treasury yields were higher again Friday (apparently nudged by swaps) pushing 10s near 1.80% (figure below). 5s, meanwhile, hit 1.50%, the highest in two years.
“For those leaning bearishly into the new year, things appear to be going according to plan as cycle high 10-year yields were achieved at 1.799% and five-year rates jumped to 1.52%,” BMO’s Ian Lyngen and Ben Jeffery wrote, in their weekly wrap.
As Bloomberg was keen to shout from the rooftops, Treasurys headed into December payrolls poised for “the steepest opening week decline to a year in data going back to 1973.”
The question now is when dip-buying interest will emerge. For BMO’s US rates team, bonds may see “meaningful support” once 10s get to 1.85%-1.90%. Weekly flows data showed the largest outflow from Treasurys in a year (figure below).
For what it’s worth, I bought the dip already. And not necessarily because I doubt the macro rationale for higher yields. 10-year yields were cheaper by more than 20bps on the week. I tend to fade extreme moves wherever and whenever I see them.
That could look decidedly ill-advised in hindsight (like buying more Ether on Thursday and Friday, something I also did), but as regular readers are apprised, fading an early-year mini-tantrum in rates and taking what, at least for now, looked like a “good” opportunity to push my crypto exposure closer to the ~5% allocation I’m aiming to achieve by the end of the year, would hardly count among the riskiest gambles I’ve made in my life.
As I mentioned to someone who actually understands DeFi and the case for Ether and competitors far better than I ever will, my current allocation to crypto is nowhere near 5% yet, so I wouldn’t want to give anyone the wrong impression — I’m not “bullish,” per se. All I’m aiming to do with my crypto foray is match the token (no pun intended) allocation I have to gold. And everyone knows I don’t like gold.
It’s either fortuitous that crypto sold off (figure below) just as I decided to start allocating, or else it’s sheep (me) to the slaughter. Either way, I’m fine with it. As a reminder, I first bought Bitcoin during the December flash crash. So, I had some cushion on that, at least.
Harley Bassman is long Ether too. So, I’m in reasonably good company.
To be as clear as possible, this could be a very bad time to be in crypto. Obviously, Fed tightening has the potential to take the wind out of the sails, just as tighter policy risks prompting a sharp de-rating in richly-valued tech, especially of the profitless variety.
Many crypto proponents argue that even if you don’t buy the notion that Bitcoin is akin to gold or some other kind of “pure collateral,” it’s an uncorrelated asset and as such, can serve a purpose. Just after I bought my first Bitcoin in early December, I was quick to note that in my experience, that isn’t usually the case. In fact, it’s traded like a risk asset since the onset of the pandemic (figure below).
As you can see, its correlation with the S&P shot up at the onset of the crisis and stayed positive thereafter. That’s no coincidence. It’s all liquidity-driven, and after initially falling with everything else, Bitcoin benefited from many of the same dynamics responsible for the meme stock craze, other manifestations of retail euphoria and the generalized rally in risk assets, including and especially stocks.
So why own it now? When the Fed is hell-bent on reestablishing its inflation-fighting credentials with an accelerated pace of tightening including what sounds like an outright sprint into balance sheet runoff?
The short answer for Bitcoin is that if it can go to $25,000 and then $50,000 and then $60,000, it can go to $100,000 or $250,000. Even Bitcoin’s most ardent, disdainful critics always add some caveat to that effect in the course of deriding it. Sure, that’s the same greater fool theory of investing I’ve traditionally lampooned in these pages, but as you may have noticed over the past five years, there are more fools out there than many of us suspected.
Further, one man’s trash is another man’s treasure. Gold has almost no practical use, and no intrinsic value either outside of being finite. But for centuries, humans have been enthralled enough with the stuff to commit unspeakable atrocities in order to obtain it. The Aztecs were famously befuddled at the Conquistadors’ obsession with the yellow metal. By way of explanation, Hernán Cortés (allegedly) told the people he planned to pillage that: “I and my companions suffer from a disease of the heart which can be cured only with gold.” I doubt that cleared up the confusion, but the Aztecs (and the Inca) would soon learn just how serious that affliction could be. For countless people the world over, Bitcoin is the new gold. I’m done arguing with them about it.
As Goldman suggested this week, Bitcoin could very well capture a larger share of the “store of value” market, especially if gold continues to falter despite a bevy of ostensible bullish catalysts, not least of which is the highest US inflation in four decades. Rising real yields serve to further undermine the fundamental case. Bitcoin has no internal rate of return either, but at least it moves around a lot. Gold, by contrast, is acting just like the inert doorstop that it is.
Beyond Bitcoin, I’m a believer in the DeFi story. There’s something there, and I don’t think it’s going away overnight. Additionally, it’s not going to be a one-horse race. So, I put a little on several horses, two of which I was ready to shoot already as of Friday afternoon.
Maybe all of that is money in the furnace, but even if you haven’t, like me, taken extreme risks in your life, you’ve done sillier things with your money than buying overvalued bonds or putting a tiny fraction of your portfolio in a highly speculative “asset” that may, in hindsight, be another Beanie Baby bubble. Have you ever purchased a brand new car (i.e., a car with less than 100 miles on it)? That was a (very) silly thing to do. Have you ever rented a house or an apartment? All of that rent money can properly be conceptualized as lost equity in a home you didn’t buy. In both cases, you wasted thousands (and likely tens, if not hundreds of thousands) of dollars. And so on, and so forth.
Coming full circle, the first week of 2022 will be remembered for the mini-rates tantrum and specifically for hawkish Fed minutes and rising real yields. When considered in conjunction with weakness in stocks, it was a decidedly inauspicious start to the new year. Indeed, it felt a bit like diversification desperation. Far from being a hedge, your risk-free asset (bonds) was the proximate cause of consternation.
BofA’s Hartnett painted a somewhat depressing picture. “[The] price of basic human needs such as food, heat and shelter is soaring,” he wrote, flagging a 27% YoY rise in global food prices and massive increases in US heating costs for natural gas, oil, and propane. US rents are rising double-digits too, and lumber prices are going up again.
“Little wonder US wage growth is up to 4.7%,” Hartnett said, on the way to reminding everyone that “inflation causes recessions.”
Love this quote H–“Sure, that’s the same greater fool theory of investing I’ve traditionally lampooned in these pages, but as you may have noticed over the past five years, there are more fools out there than many of us suspected.”
When I think of crypto I think of “frontier” emerging markets. Your stake (a fraction of a fraction of an asset base) is placed because of what “could be” not what is. I’m not there yet but I continue to educate myself on it because make no mistake it is here to stay. The simple fact i am reading about it here confirms that. That said, some horses will win, some will place, maybe show, while some others……………………….
Remember, every risk asset you own is valuable at some level only because of what it will be in the minds of possible buyers. There is no what it is. A bond pays interest as it represents a legal debt but the risk that it won’t pay in the future is always present. Stocks don’t have any real future to count on. Every day you own a risk asset you have made a tacit decision to reinvest in that asset because what you think what it will be is superior to what some other asset you could own will be.
I have some Crytpo – BTC, ETH, LUNA, MANA and FTM – simply due to FOMO. I’ve traded it on and off for some nice profits but now I’m holding because every time I sold in the past, it would skyrocket. But I have no more in than I’m willing to lose.
I might seriously look at crypto if BlackRock or Vanguard expresses any interest.
These two “gods” control $20T AUM (on a combined basis) and as far as I can tell, neither has expressed any intention to start a crypto ETF.
If half of their combined AUM ($10T) is in equities- they effectively are 20% of the US equities markets. Scary.
If Larry invites Mortimer over to get carryout some night for dinner (reference to WSJ article)- I would like to order what they ordered.
Interesting to read more about your own trades and (speculative) investments. Been an avid reader for 3 years, don’t really recall you doing this at all previously.
Yeah I’m going to try to mention them more this year. I say that every year but I always forget. ha
Premium plus feature to follow your portfolio. 🙂
“Harley Bassman is long Ether too. So, I’m in reasonably good company.” Bill Miller is waist-deep in crypto. Add him to your “reasonably good company”.
Crypto? “Say it ain’t so Joe!”
H-Man, your right about disclosing a very rare peak into your portfolio. Be prepared for the onslaught of freebie investment advice seekers and remember your disclaimers on investment advice. I personally like you meandering down financial streams where you seem to see fish but always point out there are a lot of dry holes on those journeys and even if there are fish, they don’t always bite. So when do the tens crack two?
I enjoyed this article very much, I’m a long time reader and your commentary on crypto has always been insightful, perhaps even more now that you have a little skin in the game.
It is simply not true that gold isn’t a high value industrial metal. Gold has many important properties: it’s extremely ductile, chemically inert, highly conductive, etc. The proper characterization is that gold has myriad industrial uses that are limited by its high cost and short supply. It’s true that the supply would not be as limited if people got over their aesthetic fascination with gold–but the decline in price would be limited as industrial uses became more feasible economically. As an interesting tidbit, the recently-launched James Webb telescope has gold-plated mirrors. Why? Gold is chemically inert, and highly reflective of infrared radiation.
To go further, while there are trans-uranic elements, you can’t simply conjure up new elements at will. Obviously, new materials (compounds, not elements) are continuously being developed, but you have to work with the ~90 elements that we have here on earth to create these new materials. I can’t decide to create a new element called “dogeium” and sell it to people and say it’s just as good as gold. Whereas I CAN (or at least somebody can) come up with a new cryptocurrency, and with a straight face, say it’s just as good as Shiba Inu coin. You can bet that Goldman or Blackrock or any other wall street player would like to be a part of this–because if they can do it right, they can effectively print their own money. It’s a question of branding and backing, I imagine. But why stop there? If the value of the coin is based on its acceptance by people, then I could see the great branding empires getting in on it. Luis Vuitton coin? Kanye coin? Kardashian coin? Of course you all know this. It’s the greater fool game, and it can go for a long time. As someone who owned stock in eToys back in the day, I get it—but I’m not going to play it.
The only real reason I could see for regular people to actually place value in crypto is to move money out of a despotic country that doesn’t want you to move money out. There’s potential value in that.
Crypto is pure internet. It couldn’t exist without it. With gold being an element we’re reasonably sure there isn’t another element on this planet waiting to be discovered that will replace it. We already see that’s not so with any version of crypto.
“Gold has almost no practical use, and no intrinsic value either outside of being finite.”
Gold and silver suffer in the marketplace precisely because they are no longer “finite”. Every real ounce is multiplied hundreds of times by paper “tokens” that investors accept as the real thing. Thus there is no scarcity.
If I held gold as an investment, the tsunami of paper gold, crypto currencies and NFT’s, and their impact on gold’s value, would be frustrating. However, I own gold as insurance against the ongoing debasement of the dollar. Ultimately, unfortunately, it will serve it’s purpose.
If the world ever gets to the point when holding gold has served its purpose- I would rather own a small cabin attached to a mini farm.
with canned soup and guns and plenty of ammo… I’m with you there.