Christopher Wood, one of the few analysts to warn the public before the 2007 global financial crisis and head of Equity Strategy at brokerage house Jefferies and bitcoin investor, warned that crypto valuations are vulnerable if the US central bank follows through on its plans to tighten money supplies.
Wood, a former journalist who also runs a weekly newsletter known as ‘Greed and Fear’, blamed the US Federal Reserve for caving in to political pressure by the Biden administration, and making an abrupt U-turn.
“On the Fed, well, they have this extraordinary situation where, as recently as late September last year, with more than half the governors were then saying that there’d be no rate hikes in 2022, to Fed governors and economists competing as to who can raise rates the most,” Wood said in an interview with a television channel today.
“If the Fed is serious about tightening, which at the moment it appears to be, then the crypto monetary class is going to be vulnerable while monetary tightening is happening, just as the high-beta, profitless tech sector is vulnerable, and just as biotech is vulnerable, because these are long-term growth stories without a lot of profit short-term,” he added.
He pointed out that the US Federal Reserve had never, in recent memory, been forced to make such a U-turn on monetary policy under pressure from the political leadership.
“..the reason why the Fed has turned so hawkish, is that by November last year, it became clear that there were political pressures on the Fed to do more about inflation and those political pressures have been coming from the Biden administration, and the Biden administration has been losing, based on the opinion polls, the argument to the Republicans because they are being as having created this inflation and therefore they need to be seen as doing something about it.
“So, this is the first time in decades that we have political pressure in the US on the Fed to tighten, and that is a big deal,” he added.
“Sell the Rally”
Wood, who had famously warned investors to “sell all exposure to the American mortgage securities market” a year before the global financial crisis took hold, today advised equity traders to sell into any rally of the so-called growth or momentum stocks. These are stocks of technology companies that are still in the cash-burn stage, but are expected to turn profitable after a few years and have borne the brunt of stock corrections in recent days.
He said such growth stocks, which have been driving the equity market rallies in the US and other markets over the last one year, would make a comeback if the Federal Reserve reversed its current stand on tightening the money supply.
But chances of that happening are small, he pointed out.
“If the Fed were to announce today that it’d stop tightening, all these areas would come roaring back in performance. But for now, we are looking at such a dramatic change in Fed position — I’ve never seen such a U-turn by a major central bank in my life that for now, — all these areas should be sold. If you’re a trader, you should be selling rallies in growth stocks,” he advised.
Dollar & Emerging Markets
Wood, who used to work at The Economist weekly early in his career, said most emerging markets — except China — would also feel the heat as the Federal Reserve turns off the money taps.
“Emerging market investors will be tempted to take money out of India because it looks expensive, because of the Fed tightening risk, and put more money in to China because China is easing, and the Chinese market is much more defensive relative to Fed tightening, than India. The reason is because the Chinese tightened last year, and the currency, renminbi, is rock solid and when markets correct on Fed tightening globally, China will outperform,” he said.
Interestingly, he pointed out, the US currency has not appreciated all that much over the last two months, when the US Federal Reserve ‘took its U-turn’ and started signaling rate hikes and balance sheet reduction.
This, he said, could indicate some level of skepticism whether the US central bank would carry through the tightening agenda.
“Logically, the dollar should be strengthening, given everything the Fed is saying and doing, but what is interesting to me is that the dollar has not rallied as much as the Fed has done a U-turn.
“There are two ways of looking at it, that the market have already discounted the four or five rate hikes that the economists are projecting, or the markets may be skeptical about whether the Fed is really going to be as tough as they say.
“While we have to pay attention to what the Fed is saying in the short-term and they can’t do a big U-turn, we also have to remember that — I call this the Dr Jerkyl and Hyde Fed — they are just as capable of doing a massive U turn in the next six months as they’ve done in the last two months,” he warned.
Wood, one of the earliest converts to the crypto movement from among the institutional community, said he continued to see long term potential in crypto assets.
“In the longer run, crypto is potentially a huge deal, because it potentially has the ability to disintermediate the banks with this whole approach of defi [decentralized finance], where people are lending money using the blockchain technology. It’s hugely disruptive. But that to me is a five-ten year story. It’s not going to happen in one year,” he said.
He also added that he saw bitcoin as different compared to other cryptocurrencies.
“To me, in a Fed tightening cycle, bitcoin will outperform other crypto vehicles because it is a store of value like gold, whereas some of these other crypto assets such as etherium, solana are the equivalent of high-beta tech stocks,” he said.
Wood also said he expects energy costs to remain high in the near future, as the leaders who are pushing for the transition from fossil fuels to renewable energy do not seem to appreciate the degree of dependence of the global economy on carbon-based fuels.
He said oil will go above the $100 mark per barrel and “probably much higher” as the current energy transition is an inflationary transition. He also identified expensive oil as one of the key risks facing the Indian economy.