Surprisingly, the Santa Claus rally in US stocks failed to materialize last week. Instead of gently melting up in price, the S&P500 dipped almost 0.4%. Unexpectedly, volume in the holiday-shortened week was extremely light. And volatility, while creeping higher, still closed the week…and the year….at extremely low levels.
Technically, the minor dip in the S&P500 was barely visible on the weekly charts, where the bull market is still clearly in effect. On the daily charts, however, a clear downshift in momentum has been established. So at least in the short term, a pullback over the next several weeks would not be out of the question.
In US macro news, the results were mixed as usual. On the bright side, the Case Shiller home price index continued to show strength in home price appreciation; the results beat expectations by a small percentage. The Dallas Fed manufacturing survey came in stronger than expected. And the Chicago PMI beat consensus estimates. On the down side, the Richmond Fed manufacturing survey missed. Consumer confidence missed. Pending home sales missed. International trade in goods was worse than expected, and initial jobless claims were also worse than predicted.
Unless you’ve been ignoring mainstream news lately, there’s no way anyone could have missed the news about the soaring price of Bitcoin, a crypto currency that has recently attained about $200 billion in total market value, a valuation that’s grown from zero in less than 10 years.
But it’s important to remember that this “technology” has essentially no intrinsic value. By comparison, even thought the US dollar arguably also has no intrinsic value (such as gold), it does have the full backing of the US government and importantly, all US obligations must be settled in US dollars. In addition, the US government dollar does not have competing “currencies” that can pop out of nowhere, at any time, as an alternative to the dollar. New crypto currencies are seemingly appearing almost every month lately.
So it’s no surprise that Jamie Dimon, the CEO of JP Morgan, has referred to Bitcoin as a fraud.
But more importantly, it appears that Bitcoin is signalling to the world that global markets awash with trillions of dollars of traditional money created by major central banks are chasing even the craziest ideas for earning returns in a low-return environment. Back in the late 1990’s during the late stages of the dot.com bubble, many new businesses with almost no revenues (much less profits) were enjoying massive valuations because the were getting a lot of “eyeballs” visiting their websites. Many others were valued, perversely, on the rate at which they burned cash—the more they burned and the faster they burned it, the more highly the firms were valued.
We all know now how that bubble ended. Or do we? Is it possible that, as several older and astute economists have pointed out over the last 100 years, investors are once again displaying a remarkably short financial memory? And if so, have they already forgotten what happened 17 years ago, when the NASDAQ crashed by over 80% from peak to trough?
To anyone who read the Wall Street Journal 20 years ago, and especially to anyone who’s been participating in the financial markets for over 20 years, this Bitcoin phenomenon feels awfully familiar. We’ve seen this movie before….and we already know how it will end.