It works until it doesn’t. Now all eyes are on housing.
By Wolf Richter. This is the transcript of my podcast of last Sunday, May 23, THE WOLF STREET REPORT.
The market philosophy and the overpowering strategy on how to approach the markets since last summer – and I mean the stock market, the housing market, the crypto market, the junk-bond market, and a bunch of others – was summarized eloquently for all eternity: “Just shut up and buy,” the guy said.
For a long time, I mean for months, this strategy worked, everything was going completely crazy, and people kept changing metrics to explain that this was the new normal, that this is how it would be from now on. It became a “raging mania” – again one of those highly accurate technical terms – and it practically didn’t matter what you bought, and at what ludicrous insane price you bought, because as long as you bought, you made money.
But then, the logic of “just shut up and buy” broke somewhere near February 12. Many of the most hyped segments of the whole rigamarole started cratering. We’re talking IPO stocks such as Airbnb, which is down 39% from the peak, Zoom, which is down 46% from the peak, Palantir which is down 53%, Snowflake which is down 45%, and many others…
EV stocks started cratering too, including Tesla which is down 35% from the peak, and SPACs – the special purchase acquisition companies – and especially the EV SPACs that are down 50% and 60% and some over 70%, such as Quantumscape, and a few are down over 80%, such as super-hype-nova Nikola, which is down 87%…
Or media-darling Cathy Wood’s ARK Innovation Fund which is down, well, only 34%…
And real estate outfits such as Compass, which had its IPO seven weeks ago, is down 37% from the peak on the first trading day, and Redfin which is down 47%. And Zillow, which is now flipping houses, is down 45%.
And there’s another market philosophy and overpowering strategy on how to approach the markets: “Just buy the effing dip.”
In these segments, people did just that, and they bought the effing dip, or rather every plunge that the standouts such as Nikola performed, and every time they bought the effing dip, shortly thereafter they got run over by another and even bigger effing dip. At some point, this is starting to hurt.
In other words, there is a bloodbath going on in these segments. And this bloodbath has been deepening and widening, and their market capitalization is in the billions of dollars, or hundreds of billions, such as Tesla, and the damage has started to bubble to the surface ever so gently even in the overall stock market indices though they track many trillions of dollars in stocks.
The Nasdaq is down only about 5% from its high, and the S&P 500 has stalled since mid-April and on Friday was down just 2% from the high. So people who are invested in the overall stock market have not felt the pain. But others that chased after the biggest super-hype-novas of the moment are getting crushed one stock at a time.
That’s how broader problems in the stock market start out.
Then there is the entire crypto space. There are now well over 5,000 cryptos. There are more cryptos than stocks. Everyone is popping them out, and there are new ones every day. I might make my own crypto too pretty soon just to properly mock the whole thing.
Well, that whole thing was once worth over $2.5 trillion, $2.5 trillion being nothing to mock, even today when we’re throwing the trillions around like there’s no tomorrow.
And at the moment, meaning less than two weeks later, that whole thing is worth about $1.2 trillion less. In other words, in less than two weeks, in just the crypto space, $1.2 trillion in imagined wealth evaporated into ambient air.
For some of these folks who traffic in these digital entities, the hated fiat dollar is going to blow up and disappear, and these thousands of cryptos are going to be around, and take the dollar’s place.
Bitcoin is currently at $32,000. It’s down 50% from the high a few weeks ago. That by itself wiped out $600 billion in wealth that folks thought they had and suddenly don’t have, poof, just gone.
By now, everyone knows that these cryptos are essentially useless for transactions in every-day commerce because they’re too cumbersome and expensive to buy stuff with, or transfer fiat money with, even internationally. There are much quicker and simpler and cheaper ways of doing it. And then there are the cryptos’ hair-raising ups and downs that make transactions super risky. And folks have now given up hailing them as the next payment system.
Instead the meme is now that they’re a “store of value” and a “hedge against inflation.”
So one heck of a store of value, has now lost 40% or 50% or 60% of its value in a few weeks. And one heck of a way of hedging against 5% or 6% or even 10% inflation by right off the bat losing 50% in a few weeks. That’s a huge plunge in purchasing power in just a few weeks. Something close to “crypto hyperinflation.”
“Just shut up and buy” works wonderfully until suddenly it doesn’t.
So folks buy the effing dip with these stocks or cryptos or whatever, and they get run over by the next and even deeper effing dip, and they do it again – all along jabbering about “store of value” and “hedge against inflation” and “collapse of the fiat dollar” – and they get run over again and again by more effing dips, and at some point they’ve had enough.
“Just buy the effing dip” works wonderfully until it suddenly doesn’t.
There is no guarantee that these things will come back.
Some of the stocks might go to zero. Others might plunge by 95% and spend the next 20 years down by 95%, surviving and not doing much.
MicroStrategy, a dotcom-bust survivor, is one of those. It is now a cloud services and software company, that massively bought into bitcoin in recent years and was able to run up its share price on the coattails of the spike in bitcoin, and at one point – well, on February 9 – its shares exceeded $1,300 bucks, but today they’re down 65% from the spike.
The thing is, even at its share price of $450 bucks as of the close on Friday, it is still down 85% from its peak in early March 2000, meaning 21 years ago, the moment the dotcom bust kicked off.
And it massively leveraged up to buy that pile of bitcoin. Over the past year, its long-term debt ballooned by a factor of 17, from $100 million at the end of March 2020, to $1.7 billion at the end of March 2021. If bitcoin drops below a certain level, this leverage may blow up the company.
And that’s a survivor, one of the lucky ones. Lots of dotcom super-hype-novas just disappeared and their shares went to zero. The Nasdaq crashed 78% at the time. The strategy of buying the effing dip got people wiped out on the way down.
Only a small number of dotcom creations survived the bust intact and thrived afterwards, including Amazon. And buying the final dip of Amazon’s stock and holding till now has worked out phenomenally well. But Nikola isn’t going to be the next Amazon.
Oh, and there was lots of leverage back then, and there is a lot more leverage now. Leverage is the great accelerator on the way up, and it’s the great accelerator on the way down. Most of the leverage is hidden, and it’s not reported, and even Wall Street firms don’t know where it is, and how much it is, and no one knows until something blows up.
We saw that when Archegos blew up. The biggest broker-dealers, such as Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley, and others provided billions of dollars each in leverage for its highly concentrated trades, and none knew of the others. Each broker-dealer knew only about its own exposure to Archegos. And they didn’t find out just how much leverage was involved until Archegos was in full collapse mode.
The Fed warned about this leverage in its Financial Stability Report released earlier in May. It warned particularly about the vast parts of hidden leverage among hedge funds and insurance companies. And it specifically pointed at Archegos as an example of what happens when hidden leverage blows up.
Given the amount of hidden leverage in the system, particularly among hedge funds, family offices such as Archegos, and insurance companies, we don’t know how much total leverage there is.
But we know leverage is crazy high. We know because the only measurement we have that is reported monthly is margin debt that brokers report to FINRA. So this is just the classic margin debt in brokerage accounts. And this margin debt jumped from historic high to historic high in recent months, and at the end of April had reached about $850 billion. This has shot up by 55% from February 2020, before all heck broke loose.
Leverage, once prices go down, causes forced selling, and then prices plunge further, which triggers even more forced selling. That’s why leverage is the great accelerator on the way down.
When cryptos started selling off, it was made worse by leverage in that space. And it turned into a full-blown crash.
And there is contagion: When highly leveraged hedge funds get in trouble with their cryptos, and they’re forced to sell, they’re going to sell what is the most liquid, and that’s not the cryptos. It’s stocks. So when they come under pressure, they might sell a mix of cryptos and other things they have that they can sell, such as stocks. And that’s one of the ways by which a crypto crash can bleed into the stock market.
Now all eyes are on the housing market. The same insanity that had befallen the crypto space and the SPACs, the EV SPACs, the IPO space, etc. – meaning the “raging mania” – is visible in all its glory in the housing market, where it manifests itself in crazy bidding wars by buyers who have looked at the house only on photos and videos, and who waved all inspections and conditions, and have no clue what repair and maintenance expenses they’d face.
Often, they have no clue what they’re buying, but they’re engaging in bidding wars over it. “Just shut up and buy.” That’s the philosophy.
But the strategy of “just shut up and buy” has a shelf life. And when that shelf life expires, it doesn’t work anymore and it gets very costly as we are now seeing in these other segments.
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