Crypto and tech are the first dominoes to fall as stimulus liquidity dries up, says this fund manager. Here’s what could happen next.

Markets probably didn’t need another brick on the 2022 wall of worry, but got one anyway as FTX, the world’s third-largest crypto exchange, teeters on a potentially life-changing crash already fragile risk appetite.

Lily: Sequoia on its FTX investment: an upside surprise and a downside surprise

JPMorgan predicts a “cascade of margin calls, deleveraging and crypto company/platform failures” related to FTX that could last for weeks, and another 25% decline for bitcoin. On the positive side, strategist Nikolaos Panigirtzoglou says overall crypto success is likely to be lower than post-Terra, given previous deleveraging.

Lily: Technical Analyst Tom DeMark Says Bitcoin Low Could Happen As Soon As Friday

Our call of the day of Stock Traders Daily and portfolio manager at Equity Logic, Thomas H. Kee Jr., links the latest selloff in crypto and the selloff of tech names this year to the drying up of stimulus-related liquidity.

“When excessive amounts of liquidity flood the economy, excessive risk-taking is a natural by-product, but when the liquidity tap dries up, assets that have experienced irrational exuberance often quickly revalue to higher levels. cautious,” Kee told GameSpot in email comments Wednesday.

“Two obvious groups that benefited from the stimulus-influenced excess liquidity were big tech and cryptocurrencies. All of them are revalued now, as each of them was overvalued due to the stimulus, but these do not represent the whole market,” he said, adding that this sale could be a “precursor of conditions to come”.

“While crash conditions are isolated for stocks like Amazon AMZN,
when when,
etc., and virtually all cryptocurrencies, why this happens may affect other asset classes as well, but not as intensely or immediately. The broader market, housing, private equity, bonds, all of those assets are also dependent on new money inflows to appreciate, and the new stimulus money is gone,” Kee said.

What connects them all is that “new demand for these assets has dried up”.

Lily: Tesla Stock Removed From Wedbush’s Top Ideas List Due To ‘Twitter Train Wreck Disaster’

And with central bank stimulus no longer reliable for providing new inflows of money, demand for assets is now driven by natural flows. The amount of fresh cash flowing into the economy measured by the so-called investment rate, he said.

Dating back to 1900, this marker shows what happens when liquidity hits highs and lows. Kee notes that the peak marks the best time to sell and the troughs vice versa, for longer-term investing purposes.

“The immediate conditions in our economy today do not look like a crash, but assets that are overpriced, those that have little or no value, and those that have been hyped can no longer be supported by fabricated demand. This is why big tech is down, this is why crypto has been crashed, but this does not constitute a stock market crash,” he said.

Kee’s proprietary Evitar Corte pattern, designed to signal collapsing market conditions, does not suggest an imminent collapse environment at this time. But he says the repricing of risk he flagged in his December 21, 2021 Global Liquidity Report has happened. This report also pointed to higher volatility associated with low liquidity environments, also seen this year despite not being “not a stock market crash, at least not yet”.

“I expect it will spread eventually, but so far the economic data does not warrant concern. I will be watching the FOMC and economic data for signs that this will spread. I expect deflation to exist in retail,” he said.

On technology, Kee said valuations matter and “those with good valuations can do very well”. It has Google parent Alphabet GOOGL shopping recommendations,
and AppleAAPL,
(read what he said about Apple in September), but warns that crypto is “absolutely avoidable”.

“There was nothing to value in the crypto market, it was pure speculation, and when free money exists, speculation peaks. Now the free money is gone and speculators are no longer able to raise it,” he said.

The steps

ES00 Equity Futures,


are slightly higher, with bond yields TU00,

the trigger and the dollar DXY,
also softer. Oil price CL.1,

are down. Wall Street’s losses spread to Asia, with the Hang Seng HSI,
down 1.6%.

As for bitcoin BTCUSD,
The No.1 cryptocurrency was bouncing off lows not seen since 2020 but still down 8% in the past 24 hours after Binance confirmed it was not buying rival ETX’s assets.

Lily: Binance CEO in an internal memo: “I had very little knowledge of the internal state of affairs at FTX”

The buzz

It’s a busy economic day. At 8:30 a.m. we’ll have CPI data, weekly jobless claims and average hourly earnings, with the federal budget later. Economists expect headline CPI growth year-on-year to fall to 7.9% from 8.2% in September, and core CPI to fall to 6.5% from 6.6 %.

Shares of Chinese electric vehicle manufacturer NIO NIO,
is up after posting a bigger loss, but better delivery tips. Stock in Li Auto LI listed in the United States,
and XPeng XPEV,
are also up, after being hit in Asia by concerns over China’s COVID-19 restrictions.

Elsewhere, Six Flags SIX,
is down on a loss of revenue, WeWork WE,
reported a loss of $568 million and US Foods USFD,
said profit nearly doubled, although it was below consensus. After-hours earnings news is expected from Toast TOST,
Aurora Cannabis ACB,
and Leafly LFLY,
among others.

Shares of Apple Supplier GoerTek Inc. 002241,
fell again after the Chinese electronics group said it was ordered to stop producing a product for a major overseas customer. Analysts believe it to be AirPods Pro 2.

Fed Governor Christopher Waller has questioned the US government’s development of its own cryptocurrency. Fed chairs speaking on the economy throughout the day include Patrick Harker of Philadelphia, Laurie Logan of Dallas, Loretta Mester of Cleveland, Esther George of Kansas City and John Williams of New York.

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