Cryptocurrency and technology are the first dominoes to fall as stimulus liquidity dries up, this money manager says. What can happen next?


Stocks revive for a bullish session as CPI data is out and stock futures burst higher on softer-than-expected inflation.

Markets didn’t need another brick in the 2022 wall of worry, but FTX, the world’s third-largest cryptocurrency, got one anyway as it faces a crash that could add to an already shaken broader risk appetite.

Read: Sequoia FTX investment: Some are surprised by the positive side, others by the negative side

JPMorgan predicts a “cascade of margin calls, deleveraging and crypto company/platform failures” related to FTX that could last for weeks, and another 25% drop for bitcoin. On the bright side, strategist Nikolaos Panigirtzoglou says the overall cryptocurrency hit will be smaller than the Terra post, given the earlier deleveraging.

Read: Technical analyst Tom DeMark says that bitcoin’s low could come on Friday

Ours call of the day Thomas H. Kee Jr. of Stock Traders Daily and portfolio manager at Equity Logic attributes the recent sell-off in cryptocurrencies and tech names this year to stimulus-related liquidity drying up.

“When excess liquidity floods the economy, excessive risk-taking is a natural byproduct, but when liquidity plugs dry up, irrationally overextended assets often rise to more prudent levels,” Kee told MarketWatch in emailed comments on Wednesday.

“The two obvious groups that benefited from the excess liquidity affected by the stick were big tech and cryptocurrencies. Each of these are now being revalued because each of these were overvalued due to the stimulus, but they are not representative of the overall market,” he said, adding that the sell-off could be “a harbinger of conditions ahead”.

“Though the crash conditions are isolated to stocks like Amazon AMZN,
Tesla TSLA,
Meta META,
etc., and virtually all cryptocurrencies, the reason why this happens is not as drastic or immediate, but can also affect other asset classes. The broader market, housing, private equity, bonds, all of these assets rely on new money inflows to appreciate, and the new money from the stimulus is gone,” Kee said.

What they all have in common is that “new demand for these assets has dried up.”

Read: Tesla stock removed from Wedbush Best Ideas list due to ‘Twitter train wreck’

Central bank stimulus is no longer reliable to generate new money flows, asset demand is now dictated by natural flows. The amount of fresh cash invested in the economy is measured by a ratio called the Investment Rate, he said.

Dating back to 1900, this marker shows what happens when there are liquidity peaks and troughs. Kee notes that a peak is the best time to sell, and vice versa, for longer-term investment goals.

“The immediate conditions in our economy do not look like a collapse today, but overpriced assets, undervalued assets and hyped assets are no longer supported by fictitious demand. That’s why big tech crashed, that’s why cryptocurrency got crushed, but it’s not a market crash,” he said.

Designed to record bearish market conditions, Kee’s proprietary Evitar Corte Model does not currently suggest an imminent bearish environment. But it says a reassessment of risk is taking place, which it noted in its December 21, 2021 Global Liquidity Report. That report also pointed to higher volatility associated with low liquidity environments, though it is “not a market crash, at least not yet.”

“I expect it will spread eventually, but the economic data so far doesn’t support the need for concern. I will be watching the FOMC and economic data for signs that this will play out. “I expect retail deflation,” he said.

When it comes to technology, Kee said evaluations are important and “those with good evaluations can do it.” He has buy recommendations on Google parent Alphabet GOOGL
and Apple AAPL
(read what he had to say about Apple in September), but warns that cryptocurrency is “all to avoid.”

“There was nothing to value in the crypto market, it was pure speculation, and when free money is available, speculation is at its peak. Now the free money is gone and the speculators can’t raise it any more,” he said.

Markets

MarketWatch

Shares DJIA

SPX

COMP
TU00 has higher leverage with 10-year and 2-year bond yields

BX:TMUBMUSD10Y
each fell more than 20 basis points and the dollar DXY
1.4% lower CPI data. Oil prices CL

BRN00
is also higher.

As for bitcoin BTCUSD,
The No. 1 cryptocurrency hit its lowest levels not seen since 2020 after Binance confirmed it would not buy the assets of troubled rival ETX.

Read: Inside Binance CEO: ‘I knew very little about the internal situation at FTX’

Buzz

The data showed that the cost of living rose a relatively modest 0.4% in October, a sign that inflationary pressures may ease against forecasts of a 0.6% rise. The annual interest rate fell to 7.7% from 8.2%, while the base rate increased to 0.3%, against forecasts of 0.5%. The annual prime rate fell to 6.3% from a 40-year peak of 6.6% the previous month.

Weekly jobless claims rose 5,000 to 225,000, the highest in four weeks.

Shares of Chinese EV maker NIO NIO
after sending a wider loss, but there is a better delivery instruction. Stock in US-listed Lee Auto LI
and XPeng XPEV
They are also rebounding after being battered in Asia over concerns about China’s COVID-19 restrictions.

Elsewhere, Six Flags SIX
WeWork WE loses earnings
US Foods reported a loss of $568 million to the USFD
Profits almost doubled, though they were below consensus. Better-than-expected results lift Ralph Lauren shares. RL.
After-hours earnings news is expected from Toast TOST,
Aurora Cannabis CA:ACB
and Leafly LFLY
among others.

Shares of Apple supplier GoerTek Inc. CN:002241
It fell again after the Chinese electronics group was told to stop production for a major overseas customer. Analysts believe they are AirPods Pro 2.

Fed Governor Christopher Waller is skeptical of the US government developing its own cryptocurrency. Fed presidents speaking on the economy during the day included Patrick Harker of Philadelphia, Laurie Logan of Dallas, Loretta Mester of Cleveland, Esther George of Kansas City and John Williams of New York.

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Graph

More about Cryptocurrency…

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Tickers

These were the most searched tickers on MarketWatch as of 6am:

Ticker

Security name

TSLA

Tesla

AMC

AMC Entertainment

GME

GameSteop

AAPL

apple

DWAC

Digital World Acquisition Corp.

NIO

NIO

MULN

Mullen Car

AMZN

Amazon.com

APE

AMC Entertainment Holdings Preferred Stock

META

Meta platforms

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