TESTING FINANCIAL CYCLE MANIA

via Danielle Park, CFA

Over the last year, cryptocurrencies became an icon for the speculative fervor that has increasingly driven the 2009-18 financial cycle. Leading the sector, bitcoin rose from $1200 last March, to $19,187 by December and back to $8140 this morning. Between rampant fraud, stolen coins, regulatory crackdown, outright bans and liquidation selling, cryptos can’t seem to catch a break these days. See: Over $60 billion wiped off value of cryptocurrencies in 24 hours as bitcoin slide continues.

Though poster child bitcoin alone is down 58% in 3 months, its price is still up a whopping 578% since last March. Even if cryptos aren’t going extinct here, there has to be much further downside baked into current prices.

Doubtless crypo gains have been egregious, but for those watching the wild ride bemused from the sidelines, there are warnings here about financial speculation and what it portends for other asset prices.

A separate (but related) example: In my home town just north of Toronto, fully leveraged mortgage brokers are aggressively bidding on office buildings to buy up our downtown. We keep getting cold calls from their representatives asking if we are willing to sell ours (which is not for sale)… things that make you go hmmmm.

Meanwhile as shown in this chart of the Dow Index from my partner Cory Venable, US stocks have followed a similar ebb and flow to cryptocurrencies over the past year, though to a much more muted extent. This week, we are once more testing baseline support on the current expansion cycle.

There is no doubt that one of these tests’ baseline support will break, and when it does, cyclical support lies thousands of points lower. As we saw in the 2007-09 cycle (shown below), strong interim rallies are normal, but the downside destination is relentless notwithstanding.

All these things are connected in the excessive financial liquidity fueled by credit, which has enabled reckless risk taking over the past 5 years. The ‘everything bubble’ that has risen on the wave, will also sell-off all together. Of that we can be sure.

We should prepare now to buy from the panicked sellers of everything ahead.

 

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