Submitted by QTR’s Fringe Finance
Those who have been following me for a long time know that the term “animal spirits,” often used to describe the appetite for risk-taking in markets, is on my list of the financial world’s bullshit overused phrases and sayings perpetually invoked to explain to the commonfolk why markets only go up in our rigged, inflation and debt-based monetary policy system.
I’ve taken similar exception to terms like “Santa Claus rally,” which we are undoubtedly going to hear no less than a trillion times between now and 2025, as financial commentators and analysts scramble for public relations lipstick to slap on top of a 30x price-to-earnings pig.
Because, after all, according to “economists,” central bankers, and equity strategists, we should pay no attention to inflation or the purchasing power of the dollar — only the stock market and spending. The stock market always goes up and it should always have a reason to do so, according to them. By their logic, it’s never overvalued, there are never any bubbles, there is never any malinvestment and there’s nothing to worry about.
Stop worrying about subprime housing—“subprime is contained,” Ben Bernanke told me. Stop worrying about inflation—“inflation is transitory,” Janet Yellen told me. Stop worrying about Enron — dozens of magazines in the 90’s said it was the best company on the planet. Elizabeth Holmes was “the next Steve Jobs”. Sam Bankman-Fried was the next Warren Buffett. And so on and so forth we fly into the perpetually euphoric and unprecedented monetary debasement experiment that will yield results that nobody can time or predict.
A couple of years ago, the S&P 500 was at 3,000, and analysts set price targets for the next year at 3,500. The year after that, the S&P was at 4,000, and analysts set price targets for the following year at 4,500. The year after that, the market was at 5,000, and analysts set price targets for the next year at 5,500.
The number keeps going up, the money printer keeps printing, the wealth inequality gap keeps widening, the market becomes further and further micromanaged by central banks, the ATMs of the country keep spitting out Federal Reserve notes, society continues to function, our US Dollar continues to “lead” the world economically. All the while, the Earth keeps spinning inside our solar system, which is inside a galaxy, which is inside a universe that, according to scientists, continues to expand into nothingness.
And then one day you wake up at 3AM, like I did today, and the Shiller PE is a nosebleed 38x.
And, with the uncertainty of this unprecedented experiment ahead, it isn’t just equity markets right now that personify the “animal spirits” in the market; it’s cryptocurrencies, which are now collectively worth over $3 trillion.
The emerging asset class, still not understood by a majority of people on Earth, has been ground zero for risk-taking over the last couple of years. And if you’re in the mood for risk, why waste time trying to capture a pedestrian 30% in the stock market when Bitcoin feels like it’s doubling every other day?
On top of that, there are options, futures, and leverage in all different types of ways to double, triple, quadruple, and 10x that double many times over. For risk-takers, cryptocurrency is like catnip.
A lot of the discussion on Bitcoin and the cryptocurrency universe has revolved around when the digital asset, now worth about $1.7 trillion will reach parity with gold, which commands a market cap of about $19 trillion right now.
And at the rate things are going, it might not be too much longer before Bitcoin is a $5 trillion asset. We have a new incoming presidential administration that is favorable towards crypto, and the FOMO is palpable right now across the financial industry, with basically everybody except Vanguard capitulating and giving in to either buying Bitcoin, custodying it, trading it, or otherwise figuring out a way to make money off of it.
Bitcoin adoption is surging, and this could mean one of two things: it’s either becoming a deeply rooted part of the financial system or we’re in a $3 trillion bubble that could burst.
Once a skeptic, I’ve come to embrace Bitcoin, though I remain cautious about the unprecedented risks it carries. Gaining a better understanding of its mechanics and evaluating its risks helped shift my perspective. With Bitcoin nearing a $2 trillion market cap and other cryptocurrencies like Dogecoin holding significant valuations, it’s a good moment to revisit the key risks involved.
While bullish takes on crypto are everywhere, I prefer to examine the potential downsides. Years ago, I believed a crypto collapse could trigger a financial crisis. Although I’ve moved away from that view as adoption has grown, the larger Bitcoin gets, the bigger the potential economic shock if things go south. It’s not a prediction, but it’s a risk worth considering.
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Then there’s the question of what could go wrong.
Bitcoin is an unprecedented asset class with unique risks, many of which are still unknown. For example, if Satoshi’s dormant coins suddenly moved, it could trigger a sharp price drop, with significant consequences for a market driven by leverage and speculation. Even if Bitcoin survives long-term, a $1 trillion to $1.5 trillion loss in value could ripple through the economy. As Bitcoin’s market cap grows, so does its systemic risk.
I’ve also often raised the question of what comes next after SHA-256 hash functions and whether or not Bitcoin will be safe amidst the jump to quantum computing. The prevailing sentiment has always been that to protect the Bitcoin network, miners and those invested in developing the network will have to stay on the forefront of technological change and encryption capabilities to ensure the network doesn’t lose a beat as the world of microprocessing advances. The ‘bull case’ thoughts about this risk, at least according to Michael Saylor the last time I talked to him, was that if you had the power to crack SHA-256 encryption right now, there would be much bigger potential targets to go after than the Bitcoin network, seeing as how the very same encryption ensures the integrity of almost all major, consequential defense, military, and government computer networks worldwide.
Saylor makes a valid point, but as Bitcoin’s market cap grows, so does the incentive to hack or compromise its network. With a $1.8 trillion bounty effectively on the line, the temptation for bad actors increases. Fortunately, Bitcoin’s network is built with significant redundancy and safeguards, but the true risks, especially from quantum computing, will only become clear as technology advances.
I will continue to watch cryptocurrency very closely, if not for any other reason, then as a gauge for risk-on sentiment starting to falter. When investors move to risk-off strategies, they tend to sell the riskiest assets first—starting with cryptocurrencies, then equities, bonds, and eventually autos and real estate. Since crypto markets are highly leveraged, their movements can serve as a key signal for broader market and economic downturns.
There’s a reason the saying “stocks take the stairs up and the elevator down” exists.
There’s also a reason for the saying “the bigger they are, the harder they fall.”
There’s also a reason market panics often shock and scare market participants: they happen when people least expect them.
And all I’m saying today is when euphoria and speculation have hit their peak, when you least expect it, that ‘animal spirits’ can become ‘cannibal spirits’ very quickly.
Despite three years of rate hikes, the stock market has remained resilient. This could be due to excess liquidity, strong investor optimism, confidence in Fed policies, or even anticipation of lower taxes and deregulation following Trump’s reelection.
Everyone is breathing a sigh of relief right now, me included, as it relates to the economy. As I wrote earlier this month in my article, The Dam Has Burst, The Floodgates Of Liberty Just Opened, it feels like the nation’s soul can breathe a little bit.
Many feel relieved, believing the Fed may achieve a “soft landing.” Inflation concerns are easing, even though prices remain above the 2% target, and optimism about the stock market persists despite signs of a strained consumer and a fragile economy.
A final reminder, as the nation feels awash with liberty — liberty is an ally of freedom. And freedom in markets means that prices go both up and down.
QTR’s Disclaimer: Please read my full legal disclaimer on my About page here. This post represents my opinions only. In addition, please understand I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have been hand selected by me, have not been fact checked and are the opinions of their authors. They are either submitted to QTR by their author, reprinted under a Creative Commons license with my best effort to uphold what the license asks, or with the permission of the author.
This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. I may or may not own names I write about and are watching. Sometimes I’m bullish without owning things, sometimes I’m bearish and do own things. Just assume my positions could be exactly the opposite of what you think they are just in case. If I’m long I could quickly be short and vice versa. I won’t update my positions. All positions can change immediately as soon as I publish this, with or without notice and at any point I can be long, short or neutral on any position. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. I edit after my posts are published because I’m impatient and lazy, so if you see a typo, check back in a half hour. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.
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