Bitcoin falls below $90K before recovering, AI bubble talk weighs on markets

Key Concepts

Bitcoin and Crypto Markets: Decline below $90,000, erasing 2025 gains, bearish bets in options, correlation with tech sell-off.
AI Bubble Concerns: Weighing on sentiment, sky-high valuations, Google CEO Sundar Pichai's warning, focus on Nvidia's earnings.
Federal Reserve Policy: Uncertainty about December rate cuts, CME Fed Watch tool indicating less than 50% probability, differing views from Fed policymakers.
Market Correlation: Positive correlation between NASDAQ and Bitcoin, Bitcoin's downside divergence as a negative harbinger, impact of Bitcoin below 55-day moving average on NASDAQ's informational ratio.
Bitcoin Liquidity and Demand: Flash crash in October, retail investor "shell shock," institutional trend-following investors breaking moving averages, tightening liquidity due to Treasury General Account (TGA) increase.
ARM Holdings: Revenue growth, shift to compute subsystems, powering diverse devices (edge AI, physical AI, cloud AI), focus on power-efficient compute ("intelligence per watt"), potential for new AI-driven devices.
Retail Earnings: Home Depot's weakening sales and cut outlook, Walmart and Target earnings expectations, consumer sentiment, price sensitivity, and store experience.
Housing Market: Aging population ("aging in place") reducing inventory, shortage of housing, proposed solutions like 50-year mortgages (critiqued) and the "Reinventing the American Dream Act" focusing on red tape reduction and funding for affordable housing, including manufactured housing.
Trending Tickers: Coinbase (tied to Bitcoin), Klarna (buy now, pay later), Amer Sports (sports brands), Axalta (paint and coatings merger), Lockheed Martin (F-35 sales to Saudi Arabia).

Market Overview and Bitcoin Sell-off

The broadcast opens with a focus on market movements, highlighting Bitcoin's fall below $90,000 in Asian trading, though it later recovered slightly. US stock futures are also pointing to losses, which have eased from earlier lows. Global markets are faltering, with Japan's Nikkei experiencing its worst day since April.

The Bitcoin sell-off in the past month has been dramatic, erasing all of its 2025 gains. This decline is further evidenced by increasing bearish bets in the options market. This crypto downturn coincides with a broader tech sell-off, fueled by concerns over an "AI bubble" and persistently high valuations. Google CEO Sundar Pichai's statement that "no firm would be unscathed if the AI boom collapses" underscores the market's anxiety. Consequently, markets are keenly awaiting Nvidia's earnings report, scheduled for after the closing bell on Wednesday.

Another significant factor dampening market sentiment is the Federal Reserve's stance on interest rates. The probability of a Fed rate cut in December remains below 50%, according to the CME Fed Watch tool, further contributing to the negative mood.

The Link Between Bitcoin and Equities

Dirk, Head of Macro Strategy at City, explained the clear link between Bitcoin and equities. He noted that while the equity market was performing well, Bitcoin had shown divergences, which is rare. NASDAQ and Bitcoin generally trade with a positive correlation. Episodes where Bitcoin diverged to the downside have historically served as negative harbingers.

A back-tested analysis revealed that if Bitcoin trades below its 55-day moving average, the informational ratio of the NASDAQ is 0.5. Conversely, if Bitcoin is above its 55-day moving average, the NASDAQ's informational ratio rises to 1.5. While both are positive numbers, reflecting a prolonged bull market, the NASDAQ exhibits meaningfully better performance when Bitcoin is part of the bullish sentiment rather than diverging.

Explanations for Bitcoin Weakness

Dirk provided several explanations for Bitcoin's recent weakness:

Tightening Liquidity: One of the primary explanations is tightening liquidity.
Flash Crash and Retail Sentiment: A flash crash in early October, which saw Bitcoin drop 14% over two days (with some altcoins experiencing much steeper declines), appears to have "shell-shocked" retail investors. Following this event, flows into Bitcoin ETFs significantly changed, with outflows observed.
Institutional Trend-Following: Many institutional investors employ a trend-following mindset when trading Bitcoin. The breaking of key moving averages has reduced demand from this segment.
Treasury General Account (TGA) Increase: Liquidity, measured by bank reserves on the Fed's balance sheet, dropped by over $500 billion. This was due to the Treasury increasing its TGA at the Fed by issuing more T-bills. Two reasons contributed to the high TGA:
- Government Shutdown: During the government shutdown, the Treasury spent less, leading to a mechanical growth of the TGA.
- Increased T-bill Sales: The Treasury sold more T-bills than is typical.

Looking ahead, the liquidity squeeze is expected to improve as the TGA is anticipated to at least flatten out and likely decline. This is attributed to the reopening of government spending and the Treasury having already sold a significant amount of bills.

Federal Reserve Policy Divergence

Fed policymakers are not in complete agreement regarding future rate cuts. Fed Vice Chair Philip Jefferson advocates for the central bank to "proceed slowly," while Fed Governor Christopher Waller supports cutting interest rates next month due to concerns about a weakening job market. Further insights are expected from Fed Governor Michael Barr later in the day.

AI Valuations and Data Bricks

Concerns about AI valuations persist. Data Bricks, a data analytics firm that helps users ingest, analyze, and build AI applications, is reportedly in talks to raise funds at a valuation exceeding $130 billion. This valuation would represent a 30% increase from its September funding round. Data Bricks is considered a leading candidate for an IPO.

Home Depot Earnings and Consumer Weakness

Home Depot reported weakening sales growth and cut its financial year outlook. The company attributed its performance downturn to a sluggish housing market and weaker consumer sentiment. In the third quarter, sales for the home improvement giant rose by a mere 0.2%. Consequently, Home Depot shares fell over 3% in pre-market trading. Further retail earnings from Walmart and Target are expected later in the week.

ARM Holdings and the AI Opportunity

Ami Badani, CMO of ARM Holdings, discussed the company's strategy to capitalize on the AI opportunity. ARM has seen significant revenue growth, nearly doubling its revenue since going public. Royalty revenue reached $620 million, with a double-digit 21% year-over-year growth. This growth is driven by ARM's evolving business model, which has shifted from traditional IP licensing to focusing on "compute subsystems." These subsystems are in high demand from customers looking to accelerate time-to-market for their AI chips and de-risk engineering investments.

Badani highlighted ARM's historical strength in powering mobile devices, citing the Apple Newton as an early example. Today, ARM technology is present in 325 billion devices, spanning edge AI (mobile, PCs, industrial automation, home automation, wearables), physical AI (automotive, robots), and cloud AI (data centers). ARM anticipates powering everything from the smallest devices to the largest data centers in the next decade.

The company's core ethos is "power-efficient compute," which is crucial for AI. Badani introduced the concept of "intelligence per watt," emphasizing the need for highly power-efficient compute to drive future intelligence and superintelligence. ARM is positioned to provide this by enabling more compute within the same power envelope.

Beyond data centers, ARM sees potential in various devices becoming AI-enabled. This includes on-device AI capabilities in smartphones, home and industrial automation systems. Furthermore, a new class of AI-driven devices, currently unknown, is expected to emerge.

Addressing concerns about an AI bubble, Badani stated that the industry is "just scratching the surface" of what's needed for AI acceleration in science, climate change, productivity, and GDP growth. He believes the current compute capacity is far from meeting the "insatiable demand" for future AI. Drawing a parallel to the dot-com bubble, where many great companies emerged, Badani asserts that the AI boom is still in its early stages, with a significant need for more compute capacity.

Trending Tickers

Coinbase: Shares are under pressure again as Bitcoin slid below $90,000, wiping out its year-to-date gains. Coinbase's stock is clearly tied to the fate of the cryptocurrency market.
Klarna: The buy now, pay later giant is posting its first earnings report since its IPO. While analysts expect double-digit revenue growth, a net loss is anticipated due to heavy investment in expansion. Today's numbers are a key test for the Swedish lender.
Amer Sports: The owner of brands like Salomon and Wilson beat earnings predictions, showing strong growth across revenue, margin, and EPS. The stock is up over 8%, driven by direct-to-consumer sales and premium market positioning.
Axalta: Axalta and its Dutch rival AkzoNobel are merging in an all-stock deal worth over $9 billion, creating a global giant in automotive and industrial coatings. Axalta's stock is up more than 7%.
Lockheed Martin: Shares are in focus after President Trump indicated he would approve the sale of F-35 fighter jets to Saudi Arabia. The Prince of Saudi Arabia, Muhammad bin Salman, is visiting Washington, suggesting potential for further news.

Q3 Retail Earnings: Walmart and Target

Jessica Ramirez from the Consumer Collective provided insights into what to watch for in Walmart and Target's Q3 earnings reports.

Walmart: Ramirez believes Walmart has the upper hand, having consistently taken market share from Target. Walmart is well-positioned with its ability to attract high-income consumers while also catering to middle and low-income segments. The company has evolved its discretionary categories, with beauty and apparel performing well, making it a strong "one-stop shop." Walmart also benefits from its media arm and a ramped-up marketplace.
Target: Target is seen as more exposed to discretionary spending. While they have discussed lowering prices, concerns exist about potential dwindling quality, which could impact margins. Ramirez will be looking for signs of improvement in store experience and service, especially as the company undergoes leadership changes and potential staff reductions.

Housing Market Insights

Meredith Whitney discussed challenges in the housing market. A significant issue is that over 60% of homes are owned by individuals over 60, who are choosing to "age in place" rather than downsize, due to limited value appreciation and a preference to stay in their homes. This contributes to a "gummed up" market with less inventory.

Proposed solutions include:

50-year mortgages: Whitney views this as not a good idea, as it doesn't necessarily lower costs competitively and leads to paying down more interest than principal, hindering equity building.
Portable mortgages: The mechanics of this are unclear.
"Reinventing the American Dream Act" for Housing: This act, passed in the Senate Banking Committee, focuses on what the federal government can do, which is limited (20-30% of the problem). It aims to reduce red tape and encourage funding and grant programs for states to accelerate housing programs and build more housing.
Manufactured Housing: There is a significant emphasis on manufactured housing, which is over a quarter cheaper than site-built homes. This is seen as a key way forward for building more affordable housing.
Incentivizing Opportunity Zones and Smaller Lot Sizes: These are also considered potential avenues for improvement.

Whitney praised the bipartisan passing of the bill in the House Banking Committee, noting its move to the larger Senate and House. She considers this a more realistic approach than quick fixes like 50-year mortgages.

Market Wrap-up

The broadcast concludes with a market check:

Bitcoin: Remains in the red, though slightly better than in Asian trade.
Gold: Heading for another negative session, having fallen for four straight sessions as the dollar strengthened amid fading expectations for a Fed rate cut.
Asian Stocks: Sagged to one-month lows, with the heaviest selling in Japan and South Korea's tech-driven markets (both down over 3%).
European Markets: Opened significantly lower, with renewed concerns over AI-linked stocks.
Wall Street: Expected to open in the red again. All eyes are on Nvidia's earnings and the release of delayed labor data later in the week.

Conclusion

The broadcast highlights a challenging market environment characterized by a significant Bitcoin sell-off, concerns over AI valuations, and uncertainty surrounding Federal Reserve policy. While tech stocks are under pressure, ARM Holdings presents a positive outlook on the long-term AI opportunity, emphasizing power efficiency. Retail earnings are expected to reveal consumer spending trends, with Walmart appearing to have an advantage over Target. The housing market faces inventory challenges, with a focus on affordable housing solutions. Investors are closely watching upcoming earnings reports and economic data for further market direction.