Markets go up because there are more buyers than sellers and down because there are more sellers than buyers. Primitive but true.
But markets also will fall back fairly rapidly when excess buying pressure fades as they go looking for the next set of buyers. Asset markets are feeling a bit wobbly at the moment, not least as they pause for breath after a most extraordinary start to the new year. But is this where the “big one” begins and where everybody should be donning tin hats and heading for the bunkers? Hardly. I pointed two weeks ago as the new year’s trading began to the annual mis-read of early year price action, which tends to be turbo-charged by the banks rebuilding trading inventories, having flattened their books for year-end purposes.
Market stalls
The fading of the excess bid scares those who can’t understand where demand has suddenly gone and a little bit of panic tends to stalk the Street. This is an annual phenomenon that should have an eye kept on it but more often than not it provides a nifty bear trap in which steady and experienced traders teach their younger and less seasoned peers a few lessons. The extraordinary rally in US stocks during the past 14 months has all kinds of people feeling vertiginous and market historians and chart analysts pointing to never-before-seen phenomena. But just as we were taught at school that one can’t deduct apples from pears, so trying to draw pertinent comparisons between current chart patterns and similar ones in the past is a mug’s game. Debt levels are incomparable as is QE-affected monetary policy.
Overall we are now in virgin territory and discovery, whether price discovery or value discovery, will need to be undertaken on the hoof. Never has there been so much money sloshing around in the system and although tightening monetary conditions is very much in the mind of the central banks, they are finding that they are now in the shoes of the sorcerer’s apprentice and not, as they had once been, in those of sorcerer himself. The global financial crisis was the result of the ending of banks generating and the central banks permitting too much leverage. We are now in a world where the central banks have controlled both parts of the same game with themselves being the lunatics running the asylum.
As long as that remains the case, and we’re a long way from it changing, the base risk to markets remains limited. That does not preclude ups and downs such as the prevailing wobble but the probability of a serious reversal of fortunes has to be pegged as being limited. That is unless you’re long bitcoin.
Bit under the weather
Although I am now directly involved in the blockchain technology game I have, as I keep repeating, had nothing at all to do with bitcoin. I don’t understand it – I’m actually not sure that there are more than a few thousand people on the planet who really do – and therefore I refuse to trade it. Maybe every generation needs a bitcoin experience, the inflation and collapse of a bubble, in order to learn reason. To hear those who pissed away their savings in dotcom stocks and who are now the big hitters across the City and Wall Street speaking about the risks of cryptocurrencies makes me laugh just before I begin to cry. It is 17 years since the dotcom bubble burst and that followed 14 years after the crash of 1987. Maybe the massive boom and bust in bitcoin that we are experiencing at the moment is no more than a generational event, a rite of passage for the next generation of investors.
The real rise in bitcoin began in April of last year. Laying a channel around its trading pattern from the spring of 2017 and November 27, when the value gapped up and when the real madness began, gives us an upper value for bitcoin of roughly where it is now after the massive recent collapse. Chart analysts would insist that the November gap would have to be filled at some point and that is what now seems to be taking place. The trend channel would place a technical value at somewhere between US$7,350 and US$10,100. But that is merely technical. What it’s really worth is hard to tell and will only become clear when more actual business is transacted in it or maybe in one of the other cryptos which might, in time, prove to more user-friendly, more versatile and which will therefore take over as the benchmark. I reminded recently that in the white heat of the dotcom bubble America Online was the bellwether while Google, founded in 1998, was little more than a struggling start-up. Many a slip ‘twixt cup and lip and all that.
I would like to point out that it took bitcoin only half as long to get from US$10,000 to US$20,000 – or US$19,500-odd to be more accurate – than it has taken it to get back down again. However, having pored over the charts and having seen what I’ve seen, would I buy into it? Nope! There are too many gun-slinging millennials in the bitcoin space in the same way as the dotcom boom was driven by Generation X. The time for grown-up money to move in will come but as far as I can see it ain’t now.
Automatic for the people
Meanwhile the Detroit auto show is in full swing. The industry is putting on a brave face in the light of falling demand, softening used car values and an overall feeling that whatever the best might have been, we’ve already seen it. The tightening of consumer credit conditions cannot go unnoticed and the disappointing release of Ford’s 2017 finals cannot help. The simple message, as it missed analysts’ forecasts and pinned its 2018 forecasts below those of the same analysts, is that there’s no money in making cars any more. The key number was US$11bn, the amount that the company is preparing to plough into developing electric technology and delivering a full range of corresponding vehicles, an area in which it has been falling behind. I suppose it’s not easy to be focusing on that when your SUV business is on fire. How do you focus on electric go-carts when every time you build a bigger, heavier and more ridiculous all-wheel gas-guzzler the queues outside the dealerships get longer again.
For several decades Detroit has not known what it wants to be when it grows up. It went through a phase of trying to compete with the Japanese volume makers and failed. Then it took on the European luxury brands and failed again. Now it wants to go electric. I’ll leave it to you to connect the dots on that one. The car market remains, in the US at least, the canary in the economic coal mine and from where I’m watching it looks to be struggling for breath.