“Scratch any cynic and you will find a disappointed idealist.”
— George Carlin
Will Markets Ever Go Up?
I sometimes get asked what has surprised me about my move from TradFi to crypto. One thing I didn’t expect is that I miss sell-side research.
The research produced by investment banks is easy to dunk on: The price targets usually don’t work out, there's a lot of noisy maintenance notes, and you have to know that hold means sell, and sell means run for your life.
But I’ve worked with a lot of investment bank analysts, and they were universally smart, ethical and trying their best to be right.
Sorry, cynics, but there is no conspiracy to inflate markets with bullish analyst reports.
Nowadays, I get most of my information from Twitter, which is starting to feel like a conspiracy to deflate markets.
The sentiment on the bird app is so overwhelmingly bearish at the moment, it’s hard to imagine it could get any worse.
Which means it can only get better?
I know it doesn’t work like that — sentiment was awful in 2008, and markets turned out to be even worse.
But it’s also unusual for Mr. Market to let everyone be right. So, maybe it’s time to at least consider the radical possibility that markets could, maybe, by some dumb luck, go up?
I was reminded that there is a non-zero chance of that while listening to a podcast by RBC, whose US strategists have trimmed their year-end target for the S&P all the way down to 4,700.
That’s higher than now!
Most of you cynics will scoff at the idea that the market could finish the year higher (let alone at a new all-time high), but, with my aforementioned respect for sell-side research, I was happy to hear that there is still a sensible bull case to be made for risk assets.
I found it relatively convincing, as well.
In short, the bull case rests on the possibility that the US economy avoids recession, which is what RBC expects: Their economics team sees real GDP growing 2% this year and about 1.5% next.
That seems a little optimistic, especially if the Fed shifts into full-Volcker mode tomorrow. But it’s not impossible — which is interesting, because the market seems to be putting a zero percent probability on that not-impossible outcome.
RBC notes when net bullishness on the AAII survey is below 10% (it’s well below now), stocks are usually up more than 9% seven months out and more than 15% 12 months out.
That may not even be the best case scenario: Coming off of growth-scare lows (2010, 2011 2015/16, 2018) recoveries tend to be “fast and furious,” with the S&P returning to pre-crisis highs within four to five months and finishing 25% higher just seven months out.
We may be at a growth-scare low!
Probably not, but imagine if we were back to all-time highs in five months. That would mess some people up — which is generally Mr. Market’s favorite thing to do.
Will Crypto Ever Go Up?
What would a surprise rally in equities mean for crypto?
On the one hand, the price action in crypto looks pretty conventional: BTC has outperformed ETH and DeFi 1.0 has outperformed DeFi 2.0.
That, to me, looks a lot like the S&P outperforming Nasdaq and old tech (INTC, IBM, ORCL, ADBE, CRM) outperforming spec tech (ARKK).
On the other hand, I don't see the current crop of altcoins outperforming in a recovery in the same way you’d expect high-beta equities to outperform low-beta equities.
The 2022 sell-off in tech equities is not a particularly scary one. I’m confident that the likes of Apple, Amazon, Alphabet, Microsoft and many more will be great businesses for a long time to come, irrespective of what their stock prices are doing.
That was not the case in the dotcom bust of 2000, when tech companies typically had wobbly balance sheets and questionable business models — when stock prices crashed, it was game over for much of tech.
Crypto now is like tech in 2000 — I’m sorry to break it to you, but your altcoins (and mine) are almost certainly total busts like pets.com and not mega-winners like Amazon.
Perhaps I am being too much of a disappointed idealist, but if you saw the state of my altcoin portfolio, you’d understand why I think that even if equites were to shock the world with an unlikely rally, crypto will not be in for a quick turnaround.
Instead, to make money in crypto (outside of bitcoin and eth), I suspect we are mostly going to have to wait on a new generation of altcoins to develop.
Those new cryptos will have to create value: Airdrops are out, permanently; play-to-earn is out; yield farming is out.
All of which is good news: Easy money is fun, but it’s nothing to build a whole new industry on.
To build the new industry we are all hoping for, crypto needs less self-referential tokenomics and more real-world utility.
I think it’ll happen, but it will take time — even a big surprise rally in equities won’t bring the easy money back.
So, irrespective of macro developments or risk asset prices, here’s some official investment advice: Don't quit your day job.