It’s scary that there’s an increasing amount of leverage within the crypto community. A currency left to its own devices, which BTC and crypto are becoming, will usually create credit.
It’s increasingly possible that a BTC crash could happen, especially considering that there have already been 3 declines of 50% or more already. There’s the likelihood that the 4th decline of that magnitude is on the way, which is why some investors have gone long gold and short BTC.
Gold has struggled in the past year owing to all the attention shifting to BTC. There’s likely to be a mass return to gold, the reliable asset that’s been around for millennia, and with somewhat guaranteed purchasing power. We've seen a lot of bull-runs in the past come and go, and this BTC run seems to be yet another one of those, just extended.
The fact that stablecoins provide more leverage than the underlying asset, introduces debt into the system. So we’re getting an increasingly large crypto asset base, on less and less equity.
Looking at all the past major crises, the use of leverage is a common underlying denominator. It almost feels like the real estate bubble of 2005 now, when people thought there was nothing to worry about. It can get worrying the levels of complacency that one sees in the space.
In the late 1800s and early 1900s, this was happening all the time. The country ran on a private banking system that could create all sorts of money. There were approx. 10,000 banks, which came down to 5,000 banks within 5 years, whilst a massive credit contraction happened.
When you have private credit creation with no backstop (like the Fed), you enjoy the upside of everything running well but you also run the risk of things going the other way. Crypto enthusiasts should consider this market analogy from the late 1800s early 1900s.
When everyone is scared to do something, that’s often the best time to do it. And it sure feels like one of those times with BTC right now. There are very few people willing to go out and speak negatively about BTC. It seems about the best time to short BTC and all these speculative assets; meme stocks, crypto, Tesla, etc. have had a full year of going up, and a lot of these charts are now broken.
A bear market has started on these junkie speculative stocks. There’s going to be a return to more traditional stocks. Taking security to a highly speculative unsustainable price is not what markets are about.
It appears that the Omicron is more of an excuse than the real reason why the stocks went down. Speculators and Index Funds were too long with these speculative names in their portfolio and the correction was bound to happen anyway. A lot of these hedge funds are going back to neutral where they are not too long on speculative stocks.
EV stocks, meme stocks, speculative names.
Investment managers are hiding in the top 6 stocks; Microsoft, Google, Facebook, Amazon, which have been terrific performers for years. As people got scared, they have just gone back to these six perennial top performers. These stocks are priced for perfection and the consensus narrative is that they will continue to perform for a long time.
2022 could be the year that real economy stocks e.g. bank stocks, energy stocks, insurance, etc. come back, and the FAANGs might underperform. The question is whether we can shift from the high-price FAANG stocks into these other stocks without causing a market crash. 2022 bears the potential for a violent internal market rotation out of FAANGs into real economy stocks.
The market will realize that it is incorrect about how high the Federal Reserve will raise rates before the economy rolls over. Volker, back in 1982, raised rates, broke the back of inflation, and set in motion 40 years of disinflation.
Looking over the next couple of years, we should be more worried about an inflationary spiral instead of a deflationary collapse. QE doesn’t create any actual activity in the real economy, so the only real way to make inflation now is through fiscal means; the government could spend it into existence. We have however forgotten that the private sector can create money as well.
After we are clear of COVID-19, we’re going to see that consumer balance sheets will be in the best shape in decades. Consumers will be out there building households, spending, and borrowing.
Although corporate debt is high, corporate cash is also high. COVID-19 has also made people realize that globalized supply chains are not as riskless as they thought, and therefore you’ll see a massive reshoring back to respective continents (America & Europe), which will see an increase in CAPEX spending. Corporations will be spending money to build warehouses and factories in Europe and America; we’re likely to have a strong, good old-fashioned economy in 2022, which will culminate in a dramatic repricing of bonds and a dramatically violent rotation out of growth stocks which are the longest duration stock assets.
