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Don’t expect recovery this year, says Hamish MKRAE

Crash! Last week was one of those classic, horrible trips to the financial markets that should make us think about what is of real value in troubled times.

The headlines were captivated by the cyber world: by Thursday morning, bitcoin had fallen from more than $ 34,000 on Monday to about $ 25,000, and had recovered to $ 30,000 on Friday.

It was worse. Among the big losers was Luna, named on Terra’s stylish website as “Terra’s decentralized reserve asset”. Buyers were urged to “gain access to the first successful decentralized algorithmic stablecoin.” By Friday, Luna had lost 99.9 percent of its value. Buyers tempted to join the “bright Terra ecosystem” and part with their money are entitled to be furious.

Strange days: this bear market may not follow the model of these two big ones

But in the broader scheme, what happens to cyber currencies doesn’t matter. They are too small an asset class. The collapse of Terra, according to US Treasury Secretary Janet Yellen, showed the danger of tokens that are allegedly pegged to the US dollar, but its collapse did not pose a threat to financial stability.

The worldwide market capitalization of the cryptocurrency, of which bitcoin is just under half, is about $ 1.3 trillion. This is less than the value of the alphabet, the parent of Google, and much less than Apple or Microsoft. The market capitalization of all listed US companies, even after the recent fall, is more than $ 40 trillion.

However, what is happening with the stock prices of high-tech American companies is of great importance, and according to the Nasdaq index, they fell this year by about 27 percent. The total amount lost last week alone was about $ 1 trillion. This is a vicious bear market. We are not seeing a decline on such a scale here in the UK, while while FTSE250, which covers medium-sized companies, fell 17 per cent this year, FTSE100’s largest companies fell less than 2 per cent. cent.

The fact that so much value has evaporated in the U.S. raises big questions about the nature of bear markets: how long do they last, how deep does the dive usually go, contributing to recovery?

The trouble is that although we know a lot about them, they are all quite different. This caused the end of free money. After more than a decade of very low interest rates, central banks have been forced to return to normal monetary conditions due to rising inflation.

We’ve never had such low interest rates before and haven’t had double-digit inflation in 40 years, so to some extent we don’t see that. The last two major bear markets, from early 2000 to late 2002 and from late 2007 to early 2009, were somewhat different.

The first followed the excesses of the dot-com boom, the second – the excesses that led to the banking collapse in 2008. However, I think these are better templates in which you can try to put what is happening now than the crash that occurred after the 2020 pandemic. The fall in the US market was then reversed in about six months, although here, when the decline was a matter of weeks, it took most of the two years to regain lost ground.

Indeed, Footsie is still slightly lower than in January 2020. It’s either a grim reflection of Britain’s unfashionable status in the global investment community, or a rare opportunity to buy solid assets cheaply, depending on how you look at it.

Taking 2000 and 2008 as templates, what can we expect – very conditionally?

The first thing to say is that markets are likely to fall even more, especially those that have risen the most, such as high-tech America. The Nasdaq fell 77 percent after a dot-com bubble, while the S&P5 lost about 50 percent of its value after a 2008 bank crash. So even if the current excesses are not as gross as in any of these periods, we may not yet pass this.

Time? In both of these cases the peak to minimum was approximately 18 to 20 months. So I’m afraid that this time we shouldn’t expect a general recovery until 2023, and no later than this year.

But of course, this bear market may not follow the model of these two big ones, so I’m afraid there’s no message “sell now and buy back in 18 months”. Now inflation is much higher. Perhaps this shortens the cycle. So my message is simpler: don’t try to measure cycle time, look for a price and don’t buy what you don’t understand.

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Don’t expect recovery this year, says Hamish MKRAE

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