Here we go again with two of the market themes that just keep popping up again and again this year: the chaotic dalliance with crypto disasters and the pursuit of a softer stance from the US Federal Reserve.
Both are dramatic in their own ways, but the latter of the two is far more important to the health of ordinary investors’ portfolios.
The glee that occurs when crypto hits the skids is always tempered by the grim knowledge that some naive amateur investors are losing their life savings. Bitcoin, the biggest token of the bunch, is down about 18 percent this week.
But any new buyers who got in after it dropped 70 percent from November to June and held on to around $20,000 after that probably knew what they were getting into. If you held on after the crash, chances are you knew it was a punt.
Retail investors are hurt the most by the floating value of coins. The professionals take the pain through their stock investments. And they’ve suffered a brutal collision with reality this week, after Sam Bankman-Fried’s FTX – arguably the more reliable exchange in this freewheeling market – suffered an old-fashioned bank run before filing for bankruptcy.
First, trust evaporated from FTX’s native token, FTT – a fairly common occurrence with tokens based on trust and hand-wavey aspirations rather than traditional boring stuff like earnings, dividends, interest payments and institutional resilience.
This was bad enough, but FTX competitor Binance swooped in and made matters worse. First by publicly stating an intention to sell his holdings of FTX’s tokens and then by offering to save the exchange itself before pulling out of such a deal, leaving its CEO Changpeng Zhao as the last remaining king of crypto. SBF, as he is called, was forced to resign as CEO.
This is all high drama and humbling for FTX’s financial backers, who were surely drinking the Kool-Aid. One of them, venture capital firm Sequoia, said this week that it will write down its $210 million investment in FTX to zero, noting that “a liquidity crisis has created solvency risk” for the exchange.
Contrast that with Sequoia’s gushing assessment of FTX’s prospects in an extremely long article it published online less than two months ago. In a now-deleted 13,800-word profile (that’s about 16 times the length of this column), Sequoia described Bankman-Fried’s “legend status.” His explanation of how one day you could use FTX to “buy a banana” (I’m not kidding) had the Sequoia team enthralled. “I love this founder,” said one. “It was a vision of the future of money itself,” the profile explained. Now you will struggle to retrieve your money from FTX, let alone use it to buy fruit.
The best comedy or drama writers on the planet couldn’t come up with a more ridiculous recent for an industry already craving absurdity. Remember that Bankman-Fried himself told the FT last year that he would very much like to buy Goldman Sachs. And yet the coins cling on. Even with all these slings and arrows, bitcoin is trading at around $16,500. Morgan Stanley believes, based on when retail investors came in and on trading psychology, many will not sell until we drop to $10,000.
In fact, the price of the tokens briefly recovered from their lows this week after finally, finally, a break formed in the inflationary clouds.
Data released on Thursday showed that annual inflation in the US was 7.7 percent in October. By any reasonable measure, it is extremely high and well above the target. But it was the smallest increase in 12 months since January.
All year, investors have been desperately searching for a sign that the Fed might at least slow the pace of rate hikes, and they finally got one, in cold hard data.
The market reaction was absolutely explosive. The S&P 500 index rose 5.5 percent. Stripping out the wildly volatile scenes of spring 2020, it’s the biggest daily rally in more than a decade and one of the biggest ever. The tech-heavy Nasdaq Composite closed 7.4 percent higher.
Government bond prices shot higher, hammering interest rates. The rate on the two-year loan fell by about 0.25 percentage points to 4.33 percent, the biggest drop since October 2008.
This is the market’s way of saying: Mission accomplished. Crisis over. Are investors getting ahead of themselves? Yes. This is just one data point, and it is not guaranteed to push down the Fed’s endpoint of rate hikes. But that’s how the game works. And fund managers have been holding more cash than at any time since 2001, according to Bank of America data, providing enormous firepower to fuel the recovery.
“The markets finally got what they wanted,” said Emmanuel Cau, strategist at Barclays. The reaction has been “euphoric” and amplifies FOMO – the fear of missing out, he says.
The fact that this seems to have given bitcoin a boost as well, after a week where the market’s foundations have proved to be built on sand, tells you two things: First, after a few false starts, this could be the big one this time, the beginning on a meaningful market recovery after a terrible 12 months. Second, you can’t buy bananas on the blockchain, and you probably never will.
katie.martin@ft.com
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