On The Margin
The Big Tech Bull Market, Not A Mania Yet | Round Up
Sat Jul 22 2023Description
This episode covers various topics including crypto market psychology, XRP and securities law, market sentiment and asset classes, bank earnings and economic stability, banks and lending, crypto and the future economy, the cyclical nature of crypto and market predictions, and challenges in market predictions.
Insights
Crypto Market Psychology
The sentiment in the market is not extreme and we are not in a mania or bubble. Large, reliable, stable companies like Apple, Microsoft, and Google are leading the way out of the period of bad returns. AI stocks may feel like a bubble from a sentiment perspective, but there are limited options for investing in them. The mania in markets now happens more in venture capital and private equity rather than listed equities.
XRP and Securities Law
XRP is never considered a security, but it can be part of a securities transaction. When Ripple Labs sold XRP to institutional buyers, it was part of an investment contract, making those transactions securities transactions. In traditional markets, the S&P 500 stocks have been performing well despite expectations based on rising interest rates. The NASDAQ's performance in particular has been surprising, almost reaching levels seen in 1999 during the dot-com bubble.
Bank Earnings and Economic Stability
Investment banks are not making a lot of money, indicating that we are not in a bull market or bubble. Return on equity for investment banks has been low due to failed business units and losses from consumer lending. Regional banks have seen deposits stabilize, but the cost of deposits has risen as risk-free interest rates increase. Credit performance in commercial loans and real estate loans has been good so far, despite concerns about commercial real estate values.
Banks and Lending
Banks want to make more loans if deposit costs are high and interest rates increase. Banks need to replace lower interest rate loans with higher interest rate loans to reprice their book and maintain net interest margin. The quantity and cost of deposits affect banks' willingness to make loans. Money market funds are buying more treasuries, reducing the amount of money in the reverse repo facility. Crypto sentiment remains bearish despite an improvement in prices.
Crypto and the Future Economy
The bulk case for crypto and DeFi is that we're still building out the infrastructure rails and don't know what they'll be used for yet. The next narrative could be AI, as AI bots will need to pay each other autonomously or get paid by humans for services. Paying for services directly with crypto instead of fiat can create a vibrant economy and give DeFi real use cases. In terms of a strong bull market, stocks are more likely than crypto at the moment.
Cyclical Nature of Crypto and Market Predictions
Crypto markets experience cyclical gyration from extreme optimism to extreme pessimism. Bitcoin tends to outperform speculative microcap coins in a bear market. The halving of Bitcoin production is seen as a signal for the start of a new bull market, but the sample size is small and it's hard to bank on this narrative. There is skepticism about predicting future macroeconomic trends and inflation levels.
Challenges in Market Predictions
Making big bold calls in the market can be risky, as being wrong can have negative consequences. Predictions and narratives are fun to follow, but beating the market consistently is difficult. Having a thought about a stock being underpriced doesn't count if you didn't act on it. Beating the S&P 500 over the long term is challenging even for professionals. The market rally has been driven by core stocks rather than overlooked ones.
Chapters
- Crypto Market Psychology
- XRP and Securities Law
- Market Sentiment and Asset Classes
- Bank Earnings and Economic Stability
- Banks and Lending
- Crypto and the Future Economy
- Cyclical Nature of Crypto and Market Predictions
- Challenges in Market Predictions
Crypto Market Psychology
00:00 - 07:25
- There hasn't been any new developments in crypto recently, except for some top executives leaving Binance.
- Binance is a centralized exchange, while crypto is decentralized.
- If Binance were to go away, it would be interesting to see if the volume would go somewhere else or if it's just happening because of Binance.
- Centralized exchanges like Coinbase are important as on-ramps and off-ramps between crypto and the banking system.
- The stock of Coinbase has been rallying due to the Ripple ruling, which declared that secondary transactions are not securities.
- Coinbase should be entirely off the hook from trading securities according to the judge's decision.
XRP and Securities Law
07:04 - 14:38
- Primary issuance is when shares are issued for the first time, while secondary issuance is when someone sells shares to another person.
- The analogy of oranges and orange groves has been used to argue that XRP is not a security, but it's unclear how this applies to XRP.
- According to securities law, a security conveys economic rights that allow one to profit from the efforts of others.
- XRP is never considered a security, but it can be part of a securities transaction.
- When Ripple Labs sold XRP to institutional buyers, it was part of an investment contract, making those transactions securities transactions.
- The institutional buyers received a promise from Ripple Labs that they would add value to the equity.
- In traditional markets, the S&P 500 stocks have been performing well despite expectations based on rising interest rates.
- Rising rates are typically good for banks and bad for tech stocks because they affect loan yields and future valuations respectively.
- The stock market's behavior shows that narratives and rules of thumb don't always align with reality.
- The NASDAQ's performance in particular has been surprising, almost reaching levels seen in 1999 during the dot-com bubble.
- In 1994, there was skepticism towards tech stocks until Microsoft's success changed perceptions. The dot-com bubble started with Netscape's IPO in around 1997.
Market Sentiment and Asset Classes
14:08 - 21:04
- The sentiment in the market is not extreme and we are not in a mania or bubble.
- Large, reliable, stable companies like Apple, Microsoft, and Google are leading the way out of the period of bad returns.
- AI stocks may feel like a bubble from a sentiment perspective, but there are limited options for investing in them.
- The mania in markets now happens more in venture capital and private equity rather than listed equities.
- There is potential for manias to develop in other asset classes like private equity, real estate, and venture capital.
- The sign of a bubble about to pop is when speculative companies IPO and start going down instead of up.
- The valuation metrics of companies like Microsoft and Nvidia do not indicate a bubble yet.
- Banks have shown differentiation between small banks, big banks, and investment banks during this earning season.
Bank Earnings and Economic Stability
20:35 - 27:37
- Investment banks are not making a lot of money, indicating that we are not in a bull market or bubble.
- Goldman Sachs issued a bullish press report on a company that went public in 2022, despite their earnings being down.
- Return on equity for investment banks has been low due to failed business units and losses from consumer lending.
- Regional banks have seen deposits stabilize, but the cost of deposits has risen as risk-free interest rates increase.
- Credit performance in commercial loans and real estate loans has been good so far, despite concerns about commercial real estate values.
- Bank earnings are lagging indicators and may not fully reflect the current state of the economy.
- The stability of the economy and credit depends on factors such as unemployment rate, GDP growth, and corporate profitability.
- High deposit costs may impact banks' willingness to lend and potentially affect the economy.
Banks and Lending
27:20 - 35:14
- Banks want to make more loans if deposit costs are high and interest rates increase.
- Banks need to replace lower interest rate loans with higher interest rate loans to reprice their book and maintain net interest margin.
- The availability of good borrowers and capital ratios are limiting factors for banks in making more loans.
- Higher interest rates have not discouraged banks from lending.
- The quantity and cost of deposits affect banks' willingness to make loans.
- Money market funds are buying more treasuries, reducing the amount of money in the reverse repo facility.
- Treasury yields are slightly above risk-free interest rates in the reverse repo facility.
- The decline in the reverse repo facility may not be the sole reason for the bull market in stocks.
- Fed-induced liquidity measures may not have a significant impact on stock markets.
- Crypto sentiment remains bearish despite an improvement in prices.
- Defi has not found a real-world use case yet but is still being developed as infrastructure rails for crypto.
Crypto and the Future Economy
34:44 - 41:48
- The bulk case for crypto and DeFi is that we're still building out the infrastructure rails and don't know what they'll be used for yet.
- The next narrative could be AI, as AI bots will need to pay each other autonomously or get paid by humans for services.
- Crypto is custom made for the coming economy of autonomous AI agents.
- There may be a concern that recreational players in crypto could lose money to front-running algorithms and bots.
- If AI agents start providing services, people will have to pay in crypto, which could bring more people into the space.
- Paying for services directly with crypto instead of fiat can create a vibrant economy and give DeFi real use cases.
- In terms of a strong bull market, stocks are more likely than crypto at the moment.
- Crypto had its everything rally in 2020-2021, but subsequent rallies will require something more substantial than just being crypto.
- There was an everything bubble in stocks in early 2021, but it may not compare to the dot-com bubble of '99.
Cyclical Nature of Crypto and Market Predictions
41:43 - 48:33
- Crypto markets experience cyclical gyration from extreme optimism to extreme pessimism.
- Bitcoin tends to outperform speculative microcap coins in a bear market.
- The ICO boom in crypto was short-lived compared to the more substantial rally in 2020.
- The halving of Bitcoin production is seen as a signal for the start of a new bull market, but the sample size is small and it's hard to bank on this narrative.
- Bitcoin may become less correlated with the rest of crypto as it establishes itself as a store of value and potential reserve currency.
- There is skepticism about predicting future macroeconomic trends and inflation levels.
- The soft landing call for the economy has been successful so far, but it remains uncertain beyond that point.
- Making big bold calls can be risky due to potential reputational consequences.
Challenges in Market Predictions
48:07 - 53:44
- Making big bold calls in the market can be risky, as being wrong can have negative consequences.
- The efficient markets hypothesis suggests that market moves are close to random.
- Predictions and narratives are fun to follow, but beating the market consistently is difficult.
- Having a thought about a stock being underpriced doesn't count if you didn't act on it.
- Knowing which ideas to size up and follow through on is crucial for making money in the market.
- Beating the S&P 500 over the long term is challenging even for professionals.
- Active bond managers may have a better track record than active stock pickers due to gravitating towards riskier assets.
- This year has been tough for active stock pickers as many popular stocks have performed well.
- The market rally has been driven by core stocks rather than overlooked ones.
- It's important to recognize that it's not always a stock picker's market.