We had another big swing in stocks today, from down about 2%, to finish UP on the day.
On Friday we talked about the rise in market volatility, and what’s driving it.
It’s regime change. For the better part of a decade we had an economy driven by monetary stimulus (and loads of central bank intervention to absorb any potential shocks to markets). And since the election, we now have an economy driven by fiscal stimulus and structural reform.
With the idea that we now have a test to see if the economy will stand on its own two feet, without the benefit of central bank intervention, market volatility is up — an indicator of the uncertainty outcomes.
But as I said Friday, with dramatic change, the pendulum can often swing a little too far in the opposite direction at first (from little-to-no volatility to a lot, in this case).
As it stands, stocks are now down about 1% on the year. In normal times you would see other alternative asset classes (to stocks) performing well. Bonds would be the obvious winner — but if you owned 10-year notes you would be down about 3% on the year (about flat after the yield). When stocks are down, and uncertainty is rising, gold tends to do well. Not this year. Gold is down 4.5% on the year. What about real estate. The Dow Jones Real Estate index is up, but small (+1.8%). Among the best investments of the year is cash. If you owned 1-month T-bills all year, you would be up close to 2%. I suspect this dynamic of little-to-no return asset class alternatives will change very soon.
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December 7, 5:00 pm EST
Last year, the stock market broke a 21-year old record of the most consecutive days without a 3% intraday drawdown — some 240+ straight days.
We’ve now had a 3% intraday drawdown (open to low) three times since just early October.
So, what is responsible for the rise in volatility? Why such a contrast from last year?
It’s regime change. After nine years of zero interest rates and trillions of dollars of QE, the torch was passed this year. We entered the year with big tax cuts to implement.
This was the official transition from a monetary policy-driven economic recovery, to a fiscal stimulus-driven recovery. The Fed passed the economic stimulus torch to the White House.
Now, there was good reason that volatility remained subdued under the Fed’s emergency level zero-interest-rate policy. Why? The Fed told us, explicitly, that they (and other major global central banks) stood “ready to act” against any potential shocks that could disrupt the global economic recovery. That was an explicit promise to absorb risks so that investors (businesses, consumers, etc) would keep economic activity moving, by spending, hiring and investing.
The Fed (and other central banks, namely the ECB) had to be the backstop, so that people would pursue higher risk/return assets, in a world where risk-free assets yielded nothing. That was good enough to secure an economic recovery, but only at stall-speed levels of growth.
With that, as we entered the year, the U.S. economy was, for the first time in more than nine years, removing the central bank backstop (removing the life support for the economy). The gameplan: To replace low interest rates and QE with a $1.5 trillion fiscal stimulus package to catapult the economy out of the economic rut of 1% growth, and back toward sustainable 3% (trend) growth. And with that influence, the economy might have a chance to sustainably mend and breath on its own again.
So far we’ve gotten the growth (whether or not it’s sustainable has yet to be seen). But this regime change has also introduced uncertainty (and shock risks) back into the economy and markets. That resets the scale on volatility. And I think that adjustment has been underway.
With that said, the pendulum often swings a little too far in the opposite direction at first (from little-to-no volatility to a lot, in this case).
What stocks do you buy? Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Today I want to talk about the decline in Bitcoin.
As we often see with markets, people tend to confuse forced capital flows with genius.We’ve seen it in the tech giants. The “disrupters” in Silicon Valley were only able to disrupt long-entrenched industries because of the hundred billion dollars that flowed from Washington to Silicon Valley as part of the American Recovery and Reinvestment Act. When the government is pouring that kind of money into “new technologies”, private equity (i.e. pension fund money) will follow it. Plenty of funding, regulatory advantage, and no pressure to (in some cases, ever) produce a profit turns out to be a recipe for destroying industries. The entrepreneurs are credited for their genius, but they have those capital flows from Washington, at the depths of the economic crisis, to thank for it.
Bitcoin is another case of confusing capital flows with genius. It’s no coincidence that the ascent of Bitcoin coincided perfectly with the crackdown on capital flight in China. In late 2016, with rapid expansion of credit in China, growing non-performing loans, a soft economy and the prospects of a Trump administration that could put pressure on China trade, capital was moving aggressively out of China. That’s when the government stepped UP capital controls — restricting movement of capital out of China, from transfers to foreign investment.
Of course, resourceful Chinese still found ways to move money. Among them, buying Bitcoin. And that’s when Bitcoin started to really move (from sub-$1,000). China cryptocurrency exchanges were said to account for 90% of global bitcoin trading. Capital flows were confused with Silicon Valley genius.
But in September of last year China crackdown on Bitcoin – with a totalban. A few months later, Bitcoin futures launched, which gave hedge funds a liquid way to short the madness. Bitcoin topped the day the futures contract launched.
With the above in mind, I want to copy in my Pro Perspectives note from last December where I discussed the Bitcoin bubble.
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THURSDAY, DECEMBER 7, 2017
With all that’s going on in the world, the biggest news of the day has been Bitcoin.
People love to watch bubbles build. And then the emotion of “fear of missing out” kicks in. And this appears to be one.
Bitcoin traded above $16,000 this morning. In one “market” it traded above $18,000 (which simply means some poor soul was shown a price 11% above the real market and paid it).
As we’ve discussed, there is no way to value Bitcoin. There is no intrinsic value. To this point, it has been bought by people purely on the expectation that someone will pay them more for it, at some point. So it’s speculation on human psychology.
Let’s take a look at what some of the most sophisticated and successful investors of our time think about it…
Billionaire Carl Icahn, the legendary activist investor that has the longest and best track record in the world (yes, better than Warren Buffett): “I don’t understand it… If you read history books about all of these bubbles…this is what this is.”
Billionaire Warren Buffett, the best value investor of all-time: “Stay away from it. It’s a mirage… the idea that it has some huge intrinsic value is a joke. It’s a way of transmitting money.”
Billionaire Jamie Dimon, head of one of the biggest global money center banks in the world: “It’s not a real thing. It’s a fraud.”
Billionaire Ray Dalio, founder of one of the biggest hedge funds in the world: “Bitcoin is a bubble… It’s speculative people, thinking they can sell it at a higher price…and so, it’s a bubble.”
Billionaire investor Leon Cooperman: “I have no money in Bitcoin. There’s euphoria in Bitcoin.”
Billionaire distressed debt and special situations investor, Marc Lasry: “I should have bought Bitcoin when it was $300. I don’t understand it. It might make sense to try to participate in it, but I can’t give you any analysis as to why it makes sense or not. I think it’s real, as it coming into the mainstream.”
Billionaire hedge funder Ken Griffin: “It’s not the future of currency. I wouldn’t call it a fraud either. Bitcoin has many of the elements of the Tulip bulb mania.”
Now, these are all Wall Streeters. And they haven’t participated. But this all started as another disruptive technology venture. So what do billionaire tech investors think about it…
Billionaire Jerry Yang, founder of Yahoo: “Bitcoin as a digital currency is not quite there yet. I personally am a believer that digital currency can play a role in our society, but for now it seems to be driven by the hype of investing and getting a return, as opposed to transactions.
Mark Cuban: He first called it a “bubble.” He now is invested in a cryptocurrency hedge fund but calls it a “Hail Mary.”
Michael Novagratz, former Wall Streeter and hedge fund manager. He once was a billionaire and may be again at this point, thanks to Bitcoin: “The whole market cap of all of the cryptocurrencies is $300 billion. That’s nothing. This is global. I have a sense this can go a lot further. He equates it to an alternative (or replacement) for the value of holding gold – which is an $8 trillion market… over the medium term, this thing is going to go a lot higher.” But he acknowledges it shouldn’t be more than 1% to 3% of an average persons net worth.
Now with all of this in mind, billionaire Thomas Peterffy, one of the richest men in America and founder of the largest electronic broker in the U.S., Interactive Brokers, has warned against creating exchange-traded contracts on Bitcoin. He says a large move in the price could destabilize the clearing organizations (the big futures exchanges), which could destabilize the real economy.
With that, futures launch on Bitcoin on Sunday at the Chicago Mercantile Exchange. This is about to get very interesting.
That was the top.
What stocks do you buy? Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
