My favorite interview from last week’s Schwab Impact conference in Denver was with T. Rowe Price CIO Sebastien Page, who described what he sees as three stages of the bear market: inflation shock (rates), growth shock (earnings), and liquidity shock (which could mark the bottom).
Page’s deepest concern is that U.S. Treasury markets pose the biggest liquidity risk. That’s a huge problem, given it’s the precise market in which liquidity should be guaranteed. But after what happened in the U.K.’s bond market, it really should be at the top of the list. The central bank would certainly step in as the Bank of England did, but it’s unclear whether short-term solutions would permanently put the risks behind us.
A less disastrous, but still hugely problematic liquidity shock would be something more “traditional” in risk assets, like a sudden stock market collapse or big hedge fund blowup. In this category, the crypto industry is the leading contender. If that weren’t obvious by the purely speculative nature of the asset class already, Tuesday’s shock takeover of FTX by Binance should make it very clear that even the most ostensibly powerful institutions in this industry are extremely fragile.
There is still $900 billion in the crypto market, and it’s the only financial asset class that may be worth something close to zero. Yet people still dismiss it as a sideshow because previous crashes in bitcoin haven’t obviously destabilized the economy. Those aren’t the sell-offs that matter. The one that will matter is when those who say they’ll never sell finally capitulate and the market erases 50% or more in a single day. That would be like Amazon announcing bankruptcy tomorrow. You think other tech and consumer stocks would ignore it?
The crypto workforce grew 400% last year, faster than the broad tech industry, according to a LinkedIn study. The pain across stocks, and by transition the economy, will be real if it’s wiped out, and the odds of that reality just skyrocketed on news that exchanges are barely surviving.
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