Markets Update – BTC to 900?

, Phoenix Dragon Mountain, Korea

As we approach the Lunar (Chinese) New Year,  its a great time to clean one’s house. I was in South Africa for the Solar New Year. As I have spent more and more time in Asia, I have begun to appreciate the lunar calendar so in many ways this is a bigger event for me.

Today I did a fair amount of reflection of Space X’s huge achievement last week and the importance of space travel and that we become a multi planetary species. I just so love the cheekiness of Elon Musk putting a roadster out in to space. I am looking forward to doing a call with the director of the Space Museum soon about this exciting time for space.

I am getting a fair amount of e mails asking whether people should dump all their stocks. But I am reluctant to call the top….yet.  Our base case was always the second quarter of 2018. I guess I am expecting markets to go higher again but for those with  little tolerance for volatility I understand why you would want to get out. We are very late in this long cycle and it truly is the ‘bubble of everything.’. Now is the time when things can start to get a little more vicious up and down – expect to hear the word ‘volatility’ a lot more.

Markets

This is one of the key charts that has essentially spooked stocks recently.

A rise in inflationary expectations along with more hawkish talk from central banks around the world, is getting investors worried at a time when the market was rising continuously without any break. So it really wasn’t surprising that the markets fell.

https://www.marketwatch.com/story/is-the-decades-long-downtrend-in-interest-rates-finally-over-2018-02-08

I think Merryn Somerset Webb nailed some of the inflationary pressures building up in a recent FT article:

“That is a dynamic that is arguably beginning to show up everywhere else. The slack is disappearing. There is no spare capacity left in Japan (or you would see new cuts to it). Industrial production in the US hit a record high in December, despite the US being too busy with buybacks and financial engineering over the past decade to build new capacity. Manufacturing output in the UK is at its highest in 10 years. This could all lead us to several interesting conclusions. The first, highlighted by Gavekal, is that it is an explanation for the way stock markets in countries that have been hampered with too much productive space in the past are suddenly breaking out. See China, Japan and Korea — markets you might want to stick with for a bit. The second is that, guess what, the boom in the US might not be entirely down to Donald Trump’s policies. The factories could be humming because global capacity constraints are being hit rather than because he’s the best economic manager ever. And the third is that the real inflation our great leaders (the central banks) think is impossible however much they might print, isn’t impossible at all. It is early days to be too sure about this. There could be more capacity than is immediately obvious and the global economy remains relatively fragile. However, the insanely tight labour market in Japan and the historically low unemployment rates in the US and the UK do rather back up the idea that excess capacity is yesterday’s story. And it’s hard to pretend that a little inflation isn’t creeping back into the numbers almost everywhere: the UK’s Retail Prices Index is now sitting at 4.1 per cent (which presumably is why Mark Carney is very keen indeed that we are aware that it has “known errors” in its calculation).”

https://www.ft.com/content/d89e5386-074a-11e8-9650-9c0ad2d7c5b5

And because of all the AI-driven traders in the market, panic can ensue quite quickly nowadays.

I think that this might be another killer chart explaining the worries in the markets. This is that the Federal Reserve is unwinding its balance sheet quite rapidly now. So the question is: who will be buying US treasuries? There will clearly be a fair amount of pressure on the US government bond market, adding to the pressure of yields to rise (prices of treasuries/bonds move inversely with interest rates).

Bitcoin

In December I retweeted the Ethereum founder’s fears about the whole movement being derailed by excessive greed in the crypto currency space. It seemed obvious that another vicious pull back was imminent, especially when it seemed that regulators were itching to get involved around the world. Now there are articles by mainstream voices everywhere saying that the whole project is over, such as Nouriel Robini.

A Bloomberg article recently suggested that BTC might drop a lot more:

“Bitcoin is heading lower — much lower — if the go-go years of the dot-com bubble are any indication.

Already slashed by more than half since hitting a record near $20,000 in December, the cryptocurrency could plunge a further 90 percent in an environment of unsustainably growing supply, according to Bloomberg Intelligence commodity strategist Mike McGlone. Using Amazon.com Inc. and the Nasdaq Composite Index’s spectacular rise and retreat at the turn of the millennium as a proxy, he said the currency could plunge to $900.”

https://www.bloomberg.com/amp/news/articles/2018-02-12/bitcoin-risks-crashing-to-900-if-dot-com-mania-is-any-guide?__twitter_impression=true

The new head of the Bank for International Settlements, Agustin Carstens, made a call to police Bitcoin a lot more going forwards in his first public talk:

“Bitcoin is not functional as a means of payment, but it relies on the oxygen provided by the connection to standard means of payments and trading apps that link users to conventional bank accounts,” Carstens said in Frankfurt on Tuesday.

“If the only ‘business case’ is use for illicit or illegal transactions, central banks cannot allow such tokens to rely on much of the same institutional infrastructure that serves the overall financial system and freeload on the trust that it provides.”

And…

“If authorities do not act pre-emptively, cryptocurrencies could become more interconnected with the main financial system and become a threat,” he said.

“Most importantly, the meteoric rise of cryptocurrencies should not make us forget the important role central banks play as stewards of public trust…”

“Private digital tokens masquerading as currencies must not subvert this trust.”

Full article here: Bloomberg reports

Some time ago I said to investors that Bitcoin might – at some point – act like digital gold and go up in crisis. We even saw usage surge in states like Venezuela when they had social discord. But by the end of last year, it was behaving as a full on speculative asset.  Morgan Stanley even noted how Bitcoin and the valuations of the S&P500 peaked at the same time in December.

I need to write something a long longer to full encapsulate my views but long story short, I think we will indeed go one leg lower before its worth investing again. I don’t think its the end of the movement but greed and speculation has definitely clouded the issue.

South Africa

The home of President Zuma’s close business associates – the Guptas – were raided today and the South African Rand went up. It seems that we will see Zuma step down imminently. Perhaps there will be an interim President whilst there is time for an election, which Ramaphosa should win. I am quite excited by South Africa’s next chapter. There is so much opportunity for the Rainbow Nation. I will be writing more soon…

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