If you have been looking for a reason to buy a cryptocurrency, look around at what is happening with the threat of trade wars and the inflated price of stocks and bonds. The investment world hasn’t been this nervous in years.
I can make this statement after checking in on the VIX. Without going into the mathematical gobbledegook, the VIX index is considered as good a gage of investor anxiety as any. You can get a chart of the VIX from any source that offers stock prices.
When you look over the index, you will see that for most of last year when stocks were soaring ever higher, the VIX was slumbering around the 10-12 level. For point of reference, the VIX hit around 60 during the 2008 financial crisis.
Since the beginning of 2018, the VIX has spiked as high as 38 in early February and is currently hovering around the 23 level. In simple terms, traditional stock investors are twice as edgy. There is good reason for this.
The spontaneous eruptions from the White House and a bubbling economy are behind this. In the past few sessions, stock prices have become as volatile as bitcoin. The President’s bellicose over steel and aluminum tariffs is now expanding to other tariffs on Chinese robotics, IT, communication technology and aerospace.
To this the Chinese responded with a list of their own tariffs. The result is a stock market pullback of over 600 Dow points. By comparison, the crypto markets lately have been placid.
A full blown trade war may never develop. In these situations lots of sword rattling is common and with the present administration, it is practically guaranteed. But when the threats extend to the possibilities of China suspending purchase of U.S. debt, things could get serious. Currency markets will feel the force of these fears.
All Good Things Come To An End At Sometime
U.S. stock prices last year rose 27.4% based on the Nasdaq. By the end of the year GDP was moving up 2.9%, almost double 2016. Projections for 3% growth this year are common. Good economic news is coming out daily.
The point is we have just had the best year in stocks and the economy is running at full steam. All this good news is not a secret, we all see it everyday. After almost a decade since the financial crisis, things have steadly improved. This leads to complacency – even the feeling of economic entitlement. Almost universally, this is a danger signal.
Inflation is not a big issue at this moment but pressures are raising. The Fed is likely to face greater urgency to raise rates as this year progresses. That would put the kibosh on stock prices.
Crypto: Saving The Best For Last
I received a comment the other day that was very interesting. The reader believed that people were interested in finding reasons to buy cryptocurrencies. As easy as it is to understand this logic, given the collapse of prices, recent crypto news hasn’t provided much help. Yes, the general tone has gone from poor to mixed, but there hasn’t been much that is compelling. As the keynote speaker at last weeks Ethereum conference stated it, “we are in a war”. That is hardly inspirational.
There is no way of sugar coating some of the battles in the war. Nevertheless, it would not surprise me in the least if suddenly cryptocurrency prices began to perform better. We start to receive technical analysis about certain coins breaking through resistance. News stories start to find something new and exciting about cryptocurrencies and predictions start coming out of the woodwork once again about lofty prices.
The root cause of this is nothing more than relative value. In times of uncertainty and fear, investors seek a safe place to store assets. If stock and bond investors are nervous (remember the VIX) that sets the stage. If the price of these assets are suddenly tumbling, investors look for a hiding place. It could be gold or something less conventional like bitcoin, Ethereum, Ripple or a thousand plus other names.
There is a deeply held belief among institutional investors. It goes something like this: asset prices reverse direction for no apparent reason whatsoever. After this happens, we all scramble around looking for reasons. That is often how relative value operates.
As more institutional capital makes its way into the crypto market, as it will this year, relative value will become an important consideration. That day is coming.
Featured image courtesy of Shutterstock.