Crypto Creep

Like mission creep, similar things happen in the investment world, where initially a product is thought of as one thing, but then as the price advances, new things are attributed to the product, giving it 'superpowers'.  Cryptocurrencies are a perfect example of a new investment, hard to value, with questionable fundamentals, that is initially treated like complete speculation, like Beanie Babies, like tulips, but as it goes higher and higher, and the uptrend shows more staying power, you get more and more believers.  

1) In the beginning, its the geeks and the paranoid idealists who view cryptos as an alternative currency that takes power away from governments and decouples money from the State.

2) Then you had the 15 minute macro experts who suddenly thinks blockchain is the next big technology and therefore makes bitcoin a good investment. The logic isn't questioned, its just repeated.

3) Next, you had the first big wave of speculators who see bitcoin going up, see others investing in it, and start piling in (2017-2018).  Its still considered a fringe asset among institutions, and not something that most consider as part of a balanced portfolio. 

4) After the Fed and US government goes bonkers and floods liquidity everywhere in 2020, speculation catches fire.  Suddenly, the markets go from fear of deflation, to fear of excessive money printing which gives bitcoin the digital gold label.  It is now considered an inflation hedge, a hedge against the devaluation of the dollar.  

5) Bitcoin goes parabolic and assorted coins trading for sub pennies are heavily pumped and start going up huge, and pump and dump scams show up.  Crypto mania is everywhere, hedge funds and institutions are getting involved, an ETF is made, with more in the works.  Shells of deadbeat small cap companies change their business to crypto mining, "defi", NFTs, or another crypto related buzzword that's hot among lotto retail speculators.  

Cryptocurrencies are the perfect asset class for those looking for juice and to get rich quick.  They can rationalize their investments with simple Fed brrr memes and by believing that institutions will begin to add them into their portfolios.  The most important aspect is the juice.  If bitcoin didn't have explosive price moves, the retail speculators wouldn't be playing it.  When you don't have a lot of money, 10% a year in stocks just won't make you rich.  

It is the mentality of the times.  That's why you are seeing such explosive growth in call option volumes since the summer of 2020.  And most of the volume isn't even in the monthly options, they are crowding into the weeklies, the ones with the most gamma/$ premium.  The riskiest and cheapest options that decay the fastest but provide the most bang for the buck.  Its a full blown lotto mentality in the financial markets.  

It would be nice if these bouts of mass speculation in high beta names and call options were a precise timing tool, but unfortunately, they are a better tool for timing tops in those names than in the broader market.  What is happening is probably the last speculative wave of this bubble that precedes the final top in the SPX, with a lead of 3 to 6 months. 

One thing to watch is the rates market.  5 year yields are trading at another 52 week high, and the market is back to pricing in more than 2 rate hikes in 2022.  The hot CPI number wasn't shrugged off by the bond market this time, like it has been so many times this year.  Part of that is because 10 yr yields went down to the 1.40-1.42% support area, the day before the CPI, and also the terrible 30 year auction afterwards.  But an additional factor which is being underestimated is the sudden concern about inflation from Biden.  And Manchin.  Politicians are getting more concerned about inflation and less about employment.  Political winds are shifting, and they will affect Fed actions in 2022.  

I thought that the Fed would be slow to act to hike in 2022, but I am beginning to change that view, based on the politics.  Its a midterm year, and while a lot of people love it when asset prices keep going up, there are more people who don't like to see gas, food, and rent going up.  If commodity prices keep surging higher in 2022, like I expect, that's going to put Powell (probably renominated soon) under more pressure to raise rates.  Still don't expect him to speed up the taper or hike until after tapering is over (June), but he's probably hiking at the very next meeting in July.  It doesn't matter if Powell hikes in July or September, because in either case, I don't see him hiking in early November, a few days ahead of the midterm election.  Not necessarily because of the politics behind it, but because the market will probably have a steep drop before that meeting.  So the most likely scenario is a July or Sep. hike, pause and then second hike in Dec., as long as you haven't entered a bear market by then, which is a possibility.  Its either lights out after the first hike or after the second one, in my view.  I don't see this level of optimism, the super bubble valuations, the extreme overweight in US stocks among investors to be able to continue more than a year from now.

I have sold most of my SPX long, still have a some left that I wasn't able to get out of at good levels so I am holding and looking to dump next week on a bounce.  The first 2% dip after such a strong run is usually bought, and the recent highs are often retested.  It looks like the first dip is over, and likely to see a reflexive bounce and another call buying frenzy early next week as we go back towards all time highs.  The times to fear a big parabolic rise is after months of a rising market, which isn't the case now.  That September/October correction purged the positioning enough that this market probably won't crash back down after a big advance like a January 2018 or even a September 2020.