"Risk-On" Assets

maybe not the best time for them or is it?

The overall market capitalization for the cryptocurrency space has been hovering around 2 trillion dollars for quite some time. As I’m writing this the cryptocurrency market cap is 1.86 trillion dollars. I thought now was a good time to offer perspective. I hope to answer a few questions in this piece. What is causing this capitulation? When can we expect our bags to start pumping? AND. . . Wen Lambo? (Ha!)

In 2020 & 2021 new investors poured into markets in record numbers. Those people have also been spoiled with “risk-on” assets driving enormous gains in the markets. Due to artificially low interest rates & the excess capital that entered the system over the last 2 years it has made it a very friendly environment for “risk-on / speculative” assets. Those Stimulus checks drove “Growth.” Unfortunately investors didn’t bother to look under the hood or notice what was driving the markets, or they did not care. Possibly they assumed it would always be this way? As we are learning in real time, it can not. I like Y.O.L.O trades as much as the next person & I’m no stranger to aggressive trading styles for out-sized returns. With that being said, as an investor I feel like it is my job to adjust to the environment.

Geopolitics and Macroeconomics have a long tail in terms of how they affect markets. We live in a very dynamic and complicated global system. So I would like to start by saying this is incredibly difficult stuff and I am not jealous of the people who must make these decisions. The system itself is far too complex to tackle in one article and I myself, am still working on mastering ALL the nuances, so I will do my best to oversimplify.

In the United States we have a Central Bank called The Federal Reserve (The Fed) which carries the duty of overseeing the economy. It makes policy decisions / adjustments that in theory facilitate healthy economy/markets. The Fed is also responsible for price stability. Interest rates are the most common tool used by The Federal Reserve to stimulate or slow the economy down. Using basic supply & demand principles The Fed adjusts rates which we will call “The Cost of Capital” when rates are low money is cheap and easily attained. Market actors are willing to carry more risk in this kind of environment creating the stage for “risk-on” assets to flourish. On the flip side with higher rates the cost of capital is more expensive and market actors favor value or “risk-off” assets. (This is a very general statement not absolute by any means.)

The government has been actively propping the markets up with Quantitative Easing (QE) since the 2008 crash with one exception for a brief time in 2018-2019 there were efforts made to tighten The Fed’s balance sheet. That plan was quickly abandoned when markets did not react favorably. The markets again rotated from growth to value recently when the whispers of Quantitative Tightening (QT) began in January. High Inflation numbers (CPI 7.5%) has The Fed’s back to the wall and they believe rate hikes can combat the high inflation. Markets priced in 6-7 rate hikes for 2022. The first was supposed to be in the mid March meeting. The consensus was rates are going up but it’s only a matter of 25bps or 50bps. I should say that was the consensus with Russia invading Ukraine that may impact the QT plan. The Fed may not be able to raise rates as aggressively as expected. After all inflation has been labeled public enemy number one. I normally watch what people do and don’t put much weight in what they say.

(CPI chart as a measure for inflation)

• Conclusion

The assets in your portfolio are not different assets from when you purchased them. If they are then you should probably sell them. I believe drastic changes to your portfolio during times of geopolitical crisis is inadvisable. Right now is a good time to sit tight and wait for more information. We probably won’t see speculative/ high beta take off again unless we see more QE which in my opinion is bad, like a drug. Which will be one of my next articles. First we have to see what The Fed does.