Beware buses and dogs. I thought the move of Boris “Big Dog” Johnson’s £350 million Brexit promise from red bus to bluster was relatively swift but then Floki came along. Who, what??? Well, the who bit was easy – Floki was the name of Elon Musk’s dog. The what bit was more convoluted. Bus adverts all over the UK and Ireland suggested Floki was the next “big dog” in a cryptocurrency market already consumed with the rocketing fortunes of Musk and another canine crypto meme, Dogecoin. And then they were gone, the ads and the currencies I mean. In more traditional financial market-speak they really were ‘dogs’. Dogecoin has lost 82% of its value while Floki has given investors the ultimate six month ‘WTF’ experience with a 96% implosion. At this point, you might be forgiven for thinking that this is an exclusively crypto phenomenon. But, you’d be wrong. Something much more fundamental is happening.
For years we have written about “other people’s money” and the risks of it being pulled suddenly from weaker companies, banks and countries in times of crisis. In the majority of cases fear and risk aversion prompted capital to be pulled but, for the first time in more than 40 years, the actual cost of money is driving the movement of capital/money. What cost? Simply put, interest rates.
I was reminded the other day that anyone working in financial markets under the age of 43 with a primary university degree has never really experienced an interest rate shock in their professional lives. Nassim Nicholas Taleb, author of The Black Swan, had a more brutal take on the post-GFC intake – “Those who entered finance after 2008, are basically, unskilled labour.” Oooft! Or should those be zeros in my exclamation? Here’s a few interest rate headlines we haven’t seen for a few decades:
US Mortgage Rates Hit 6% After Big Selloff in Bond Market – Barron’s
Australia Raises Rates By Most in 22 Years – Financial Times
ECB To Raise Rates In July for First Time In 11 Years – Sky News
Yes, the post-GFC environment of zero % interest rates (planet ZIRP) and, effectively, free money meant returns, income and yield hurdles across all asset classes were both compressed and driven lower. In a world where the financials of every traditional opportunity looked very similar, the story was king. The believers may have been new but the fables and red flags were all too familiar in recent crypto newsflow….
- Luna, its ‘stablecoin’ and its “Lunatic” investors watched $40 billion evaporate rather than earn the 20% annual returns promised. Yep, even on planet ZIRP …“if it’s too good to be true, it probably is” .
- Celsius was a $10 billion crypto one-stop shop offering custody, asset management and investment(staking) services to its clients. Sadly, those clients are currently unable to access their “assets” as investment/staking activities employed less-well-understood leverage(other people’s money) and all client assets are currently frozen. In reality, the assets(investments) are worth far less than the liabilities(leverage employed) and insolvency beckons.
- Tether is the largest stablecoin in the crypto ecosystem. Investor confidence is tied to the perception of the collateral backing, or pegged, with the Tether coin, and that confidence is slipping as other crypto ecosystems and funds (3AC ?) implode. A Tether collapse would be ugly given there are still circa 18,000 cryptocurrencies in existence with a total value which has just dipped below the $1 trillion mark. If we recall the credit crisis of 2008 collateral in the same asset class can suddenly be subjected to a buyer-boycott irrespective of quality. Think about high quality real estate and banking franchises which almost failed in that period.
“Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”