The last several months have been very turbulent in all markets. U.S. equity markets have been hit with volatility that many thought would not come. Several hedge funds with managers that knew that this short VIX trade would wear off eventually made over 6,000% in a couple days. Betting against the consensus put a few of these hedge funds on the brink of collapse, but a timely VIX unwind brought them back to life. Late in January, the VIX traded between $10-$14. By February 5th, the VIX spiked to $50 on worries of an economic slowdown.
Just as soon as market volatility kicked up, Fed officials lined up and gave a dovish tone on interest rate normalization. The dovish tone moved markets higher, as well as bad economic data. Any time some revision of GDP comes out lower or housing misses the mark, the market goes higher because everyone knows the Fed can’t do anything. Comments from Fed officials included more quantitative easing in case the U.S. returns to low interest rates. I have a distinct memory of meeting with someone I know personally who is very well connected to the Fed. We chatted about life, finance, and his experiences with the upper echelons of the economic order. I questioned the Fed and the statistics he touted. This was at the end of 2014, and in his office, I told him I believed that QE 4 was coming. He disputed this claim and regurgitated that the Fed was on a path to interest rate normalization. I agreed that they were on a path towards it but that they would not be able to finish the cycle before the recession occurred. For the Fed to balance the balance sheet, it would take so long that most of us on this planet would be long gone. Here we are 3 years later, with Fed heads warning us of more QE and negative rates. Do all academics live in a bubble? Elite publications have been warning us about this for years.
Questioning the validity of the economic system and how much longer it could be sustained was eye-opening, especially when he mentioned the blockchain revolution to me in that same meeting. On that note, cryptocurrencies have been extremely volatile, as Wall Street manipulation has made its way into this market. Futures contracts, government editorials undermining the space, and JPMorgan buying up revolutionary companies for cheap are all included. JPMorgan has done this for years, and one instance that comes to mind is that during the Great Depression, they came in to buy the distressed banks for pennies on the dollar. This week, Goldman Sachs’ company Circle bought Poloniex for $400 million. Poloniex is one of the biggest token exchanges in the cryptocurrency world. Circle released a statement on their website: ”Built upon a foundation of blockchain technology and crypto assets, Circle is on a mission to make it possible for everyone, everywhere, to create and share value. Circle Pay helps people around the globe connect to one another and share value just as they would share any other kind of content on the open borderless Internet; Circle Trade serves institutions and investors as one of the world’s largest providers of crypto asset liquidity, and our forthcoming Circle Invest App enables individuals to tap into crypto asset investment through a simple, seamless mobile experience.” If one puts the inner workings together of the blockchain space and large institutions, the two will be blended together in the months to come. What is and will always be the question is whether or not the big institutions will use their crony capitalism to outmatch the small investors on main street. Will they create market volatility to acquire tokens from the small guys that can’t stay in long enough? In my opinion, I believe the Fed and central banks are in such a dilemma that they are just trying to hold the system together long enough to allow blockchain tech to rebalance the imbalances.