Things Are Not Fine

Last week, you could have been forgiven for taking a rosy outlook on markets, but this morning, investors around the globe have found themselves gripped with panic, leading many bulls to reassess their prior convictions.

Is it time to alter yours?

Ethereum lost nearly one-third of its value on Sunday, running stops from $2.9k all the way down to just $2.1k. In TradFi markets, Japan’s TOPIX banking index plunged as much as 13% and America’s tech-heavy Nasdaq 100 index opened cash trading down 5.4% from its Friday close, its largest gap down since COVID.

Although no major downside catalysts are abundantly evident at this moment and many investors are struggling to find motivation to sell assets at already depressed prices, the pandemonium is palpable.

Prior to its significant intraday reset, the VIX, an indicator for the expected 30-day volatility on the S&P 500, soared 42 handles to $65 as market participants scrambled to cover wrong-way bets at whatever cost. During the COVID crash, VIX topped out at $85, and the index has never managed to crack $100, even amid the worst days of the 2008 Global Financial Crisis.

On Friday, legendary investor Warren Buffet disclosed he sold half of his Apple stake, bringing Berkshire’s cash holdings to an unprecedented $277B, and over the weekend, The Information reported that deliveries for Nvidia’s next-generation Blackwell AI chips will be delayed by at least 3 months due to a production flaw, two major dings against large cap leaders in a market that had been priced to perfection just weeks ago.

Asset prices have continued to shrug off deteriorating economic data throughout 2024, with buyers optimistic that climbing unemployment and falling inflation rates were positive catalysts that would incite global central banks to loosen financial conditions through interest rate easing.

Unfortunately, while the near-term arrival of interest rate cuts seems more inevitable than ever before, their historical impact during recessionary periods has been minimal, and concerningly, it is unclear whether the Federal Reserve can actually cut interest rates at this precise moment in an emergency attempt to stabilize the faltering monetary system.

Last Tuesday, the Bank of Japan was forced to raise its anemic short-term interest rate target from 0.1% to 0.25% in order to combat yen destabilization and domestic inflation, placing immense pressure on carry traders – who previously managed to supercharge returns on dollar assets by borrowing highly inflationary yen at bargain interest rates – by squeezing both their net interest margins and yen short positions.

The following day, America’s Federal Reserve failed to lower its benchmark fed funds policy target, despite continually cooling economic data and rapidly declining US Treasury yields having justified their arrival in the eyes of many observers.

At the core of the Fed’s problem are the aforementioned carry trades: the arrival of interest rate cuts, particularly after the BOJ was forced to raise its own interest rates, would further compress carry trader net interest margin and structurally devalues the US dollar, squeezing yen shorts to place even greater pressures on long dollar asset positions.

The global economy is stuck between a rock and a hard place, and market participants are finally being forced to confront this disagreeable reality.

While many remain flummoxed by the move down in recent weeks, decisive indications of the downside to come were visible the day Nasdaq topped on July 11 after June CPI was reported to have slipped into deflation territory on a month-to-month basis.

Potentially confirming that the AI bubble has popped, that very day, investors rotated out of previously outperforming mega cap tech into underperforming small caps with historic vigor, and in recent days, sellside analysts at firms like Goldman Sachs have come to increasingly question the value proposition of AI technology as customers cancel deals citing high costs and a lack of results.

The AI/Crypto/Everything Bubble on Bankless

Our Senior Analyst gives his case for an AI crash, a crypto retreat, and bad times for the global economy.

BanklessJack Inabinet

 Big tech has been comfortable blowing billions on computer chips, but the market appears to have recognized the unsustainability of this approach in the absence of astronomical profits, a fact which threatens to derail the AI-lead capital expenditure cycle that predicted the bull market in traditional equities.

The death blow has been dealt to incite total collapse of our contemporary economic system, akin to a cocaine-fueled rat seeking out just one more hit of stimulus, and although panic has fallen out of fashion over the past year, it may be time to prepare for the greatest recession of our lifetimes, one that combines the worst aspects of the 1997 Asian Financial Crisis, 2000 Tech Bubble, and 2008 Global Financial Crisis collapses into a quite literally explosive package…