May 25, 2022

Meltdown! Last week was one of those classic, terrifying helter-skelter rides for financial markets that should make us all ponder quite what constitutes true value in turbulent times. 

The headlines were grabbed by the cyber-world, with Bitcoin crashing from over $34,000 on Monday to around $25,000 by Thursday morning, before recovering to $30,000 on Friday. 

There was worse. Among the big losers was Luna, described as ‘Terra’s decentralised reserve asset’ on Terra’s stylish website. Buyers were urged to ‘access the first successful, decentralised algorithmic stablecoin’. By Friday, Luna had lost 99.9 per cent of its value. Buyers seduced into joining ‘the vibrant Terra ecosystem’ – and parting with their cash – have a right to feel furious. 

Strange days: This bear market may not follow the pattern of those two big ones

But in the broader scheme of things what happens to cyber-currencies does not matter. They are too small an asset class. Terra’s collapse, as the US Treasury Secretary Janet Yellen said, showed the dangers of tokens that purport to be pegged to the US dollar, but its implosion didn’t pose a threat to financial stability. 

The market capitalisation of the entire cryptocurrency world, of which Bitcoin is a bit less than half, is around $1.3trillion. That is less than the value of Alphabet, the parent of Google, and much less than Apple or Microsoft. The market cap of all quoted US companies, even after recent falls, is more than $40trillion. 

What happens to the share prices of the high-tech American enterprises, however, does matter a whole heap, and as measured by the Nasdaq index they are down by some 27 per cent this year. The total value lost last week alone was about $1trillion. This is a vicious, growling bear market. We are not seeing any declines quite on that scale here in the UK, for while the FTSE250, which covers mid-sized companies, is down by 17 per cent so far this year, the FTSE100 of the largest firms is down less than 2 per cent. 

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The fact that so much value has evaporated in the US raises big questions about the nature of bear markets: how long do they last, how deep does the plunge usually go, what supports the recovery? 

The trouble is that while we know a lot about them, they are all rather different. This one has been triggered by the end of free money. After more than a decade of very low interest rates, the central banks have been forced by the surge in inflation to move back to what would have been normal monetary conditions. 

We have never had such low interest rates before and not had double-digit inflation for 40 years, so to some extent we are flying blind. The two most recent big bear markets, from early 2000 to the end of 2002 and from late 2007 to early 2009, were somewhat different. 

The first followed the excesses of the dotcom boom, the second the excesses that led to the banking crash in 2008. However, I do think they are better templates into which to try to fit what is happening now, than the crash that followed the emergence of the pandemic in 2020. Then, the market falls in the US were reversed within about six months, though here while the decline was a matter of weeks, it took the best part of two years to regain the lost ground.

Indeed, the Footsie is still slightly lower now than it was in January 2020. That is either a glum reflection on the UK’s unfashionable status among the global investment community, or a rare opportunity to buy solid assets on the cheap, depending on how you look at it. 

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Taking 2000 and 2008 as templates, what might we – very tentatively – expect? 

The first thing to say is that markets are likely to fall further, particularly those that have climbed the most such as high-tech America. The Nasdaq fell by 77 per cent after the dotcom bubble, while the S&P500 lost about 50 per cent of its value after the 2008 banking crash. So even if the present excesses are not so gross as in either of those periods, we may not be through this yet. 

Timing? In both those instances, peak to trough was around 18 to 20 months. So I am afraid this time we should not expect a general recovery until 2023 rather than later this year. 

But, of course, this bear market may not follow the pattern of those two big ones, so I am afraid there is no ‘sell now and buy back in 18 months’ message. Inflation is much higher now. Maybe that shortens the cycle. So my message is simpler: don’t try to time the cycle, look for value, and don’t buy anything you don’t understand.