Crypto Negativity Has Much More to Run: 3-Minutes MLIV

Key Concepts

• AI as a Macro Theme: Artificial Intelligence is identified as the dominant macroeconomic trend currently and for the foreseeable future.
• CapEx Bubble: The speaker believes the market is in a Capital Expenditure (CapEx) bubble, but not yet at the point of its ultimate bursting.
• Volatile Stage: The market may have entered a more volatile stage, but this is still debatable.
• "Flesh Wound" Selloff: The current tech selloff is described as minor, akin to a "flesh wound," with potential for further minor dips.
• Circularity of Investments: Investments in AI are creating a circular effect where increased valuations of some companies bolster the earnings of others, leading to problematic dynamics.
• Frothy Stage: The market is characterized by a "frothy stage" with concerning investments and behavior, particularly in data centers and among meme/momentum stocks.
• Crypto Boom-Bust Cycles: Bitcoin and the broader crypto market are inherently designed for repeated boom-bust cycles, making stable high prices unsustainable.
• Sustained Crypto Downturn: The speaker anticipates a sustained downturn in the crypto market, with potential for corrections exceeding 70%.
• Impact on Broader Market: While a crypto collapse will negatively affect meme stocks, marginal momentum names, and the tech sector, its direct feed-through to the broader market is limited.
• Wealth Effect: A significant downturn in crypto could eventually lead to a wealth effect impacting the broader economy.
• Bubble Burst Timeline: The speaker predicts the broader market bubble will burst next year, with crypto likely collapsing a couple of months prior.

Tech Selloff and Macro Implications

The discussion begins by addressing the current global tech selloff and its macroeconomic implications. The speaker, Mark, posits that Artificial Intelligence (AI) is the most significant macro theme globally and will remain so for an extended period. He believes the market is currently in a Capital Expenditure (CapEx) bubble, but this is not the point of its ultimate bursting. Instead, he suggests that before the final collapse, the market will likely experience a more volatile stage, and it's debatable whether this stage has already begun.

Mark characterizes the current selloff as a "barely a flesh wound," drawing a Monty Python analogy to emphasize its minor impact so far. He notes that the price action observed on the day of the discussion was "quite impressive," implying a resilience despite the selloff.

However, he expresses concern about the "circularity" of some AI investments over the coming months. This refers to how strong earnings from major tech companies like Amazon and Alphabet are partially boosted by increased valuations of their investments in other AI-related companies. This circular dynamic is becoming "really problematic." He highlights "really worrying kind of investments and behaviour and promises on the data centre side" from these AI companies, as well as from "meme stocks and these momentum stocks." This indicates the market is in a "more frothy stage."

While acknowledging the possibility of entering a more volatile stage, Mark does not believe the market is close to the "ultimate bursting" yet. He suggests that further minor dips of a couple of percent are possible, but he expects investors to "buy this dip for now."

Crypto Market Analysis

The conversation then shifts to the cryptocurrency market, which is deemed relevant to the broader discussion. The speaker observes that crypto trading experienced a drop in October for one reason, followed by another decline in early November for what appears to be a different reason, despite a slight strengthening that morning.

A key observation is that Bitcoin is trading below its 365-day moving average. This means that the average purchase of Bitcoin over the past year is currently at a loss. The speaker finds this particularly interesting given that it's one year from Donald Trump's election victory, as Trump was expected to be supportive of crypto. This suggests that Bitcoin has been one of the "worst trades of the of the Trump presidency," which could alter the narrative surrounding his support for the asset class.

The speaker attributes some of the downside pressure to the difficulties faced by "digital asset treasury companies," predicting further outflows from these entities. He firmly believes the market is in a "sustained crypto down wave."

He explains that Bitcoin is "constructed to have repeated boom bust cycles," stating that it "can't work with stable at high prices." Consequently, he believes that corrections of "60-70% plus" over a 17-year horizon were overdue, and the market is likely at the "start of the next 70% plus correction in Bitcoin." This downturn is expected to drag the entire crypto sector lower and negatively impact retail sentiment.

Impact on Broader Markets and Bubble Bursting

While acknowledging that a crypto collapse will hurt "meme stocks" and "marginal momentum names," and be "slightly bad for the tech sector," the speaker emphasizes that "real solid names at the core of the tech business" are not directly threatened. He views these negative impacts as affecting "marginal froth."

The speaker also notes that the downturn will "hurt the retail index" and could eventually "feed into a wealth effect on the economy."

He reiterates his belief that "all these problems are growing," leading him to conclude that the "bubble burst next year." He anticipates that crypto will likely collapse "a couple of months" before the broader market bubble bursts.