When Will the Selling Stop?

Over the past six weeks, $1 trillion in crypto value has evaporated — yes, trillion. Since there is nothing of economic value driving the price of cryptocurrencies, only mass delusion, there is not much to cushion them. It was as if a giant bellows was blowing hot air into bitcoins and other things, and it suddenly stopped working. Fans shouting “store of value” and “fiat hedge” can’t seem to explain why bitcoin is falling as inflation rages.

This column noted a few weeks ago the risk of “algorithmic stablecoin” Terra, backed by the Luna token. Terra is designed to hold at $1 and Luna tokens will be issued to buy Terra if it drops below $1. Yes, it happened last week, dropped below 20 cents. So it took so many Luna tokens to be released that Luna’s price dropped more than 99% in 24 hours and it’s now worth 3/100 coins, down from $60 seven days ago. Noisy. Everything happened quickly. Remember last year’s initial public offering for Coinbase, the cryptocurrency exchange, which was trading at a valuation of nearly $100 billion? Now it is 18 billion dollars. Too many overstated investors who are late to the crypto party trade real money for fake money and lose.

The same goes for stocks, which are at least backed by future earnings. The sell-off in the market was horrendous — down, down, down for seven straight weeks. And it’s not just hype, mind you, new IPOs and SPACs, like DraftKings and Beyond Meat,

it’s the real thing. Facebook is running out of new customers. Netflix,

PayPal,

Lyft — all of which are prolonging incessant stock sell-offs. It’s certainly less hectic out there, but is it over?

I asked an old friend on Wall Street when we knew the sale was over, and I think I heard him say, “After we seek redemption.” I assumed he was right, so I asked, “You mean the spiritual awakening, atonement for overpaying Rivian and Carvana, freeing from the guilt of thinking that the NFT is real? Because . . . ” “No,” he interrupted, “what I was talking about was stopping the sale after we saw the buybacks.” OH.

We need to see surrender. That’s when new investors buy cryptocurrencies and stocks through Robinhood or accumulate in Cathie Wood’s new exchange-traded fund ARK, ARKK — and “hold dear life” with “laser eyes” and diamond hand” to use some Reddit lingo — eventually selling off what they own and vowing to the almighty Elon Musk to never buy crypto or stocks again. It is coming. By the way, Robinhood’s stock is down 85% from its August peak; ARKK is down 74% from its February 2021 peak.

In Wall Street voices, it’s called a bout of vomiting. It is the speculation of those who insist on selling at any price. When they dump their mutual funds, ETFs and dogecoins at any price, when we see buybacks run fast, that’s when we’re close to bottoming out.

On March 6, 2009, the sentiment was “Wall Street is booming – sell at any price” as the Dow bottomed out at 6470. The Federal Reserve’s zero interest rate policy ignited those that hot wind ever since.

Pull up the chart of any high-flyer over the past few years — Teladoc, Roku,

anything — and you’ll see a camel’s hump. Stock prices, up on hype and without hot air, are falling back to earth. End? I’m not sure.

Why the Fed overreacted to welcome zero remains a mystery, but rate hikes have ended the party. My guess is that we will see short-term interest rates between 4% and 5%. That could trigger a recession and then disappointing earnings could send stocks into another spiral.

ARKK, owns 4% Coinbase,

4% Robinhood and 12% Teladoc, maybe some hard work. High-performing funds that are on the upswing tend to attract gullible investors near their peak and eventually lead to buybacks when they fall.

Maybe Elon Musk should wait a couple of weeks and buy Twitter, I guess here $27 a share instead of $54. His $1 billion parting fee could save him $22 billion.

It rarely goes straight down. There will be relief protests. Cryptocurrencies may rise again. So it’s possible that many stocks once flew high, in what is affectionately known on Wall Street as a dead cat popping up. But some won’t. Peloton is borrowing $750 million to cover its losses — capital that exists. Others won’t be able to. Since the dot-com collapse, both Pets.com and eToys.com have died. I remember in previous cycles, investors were interested in how much cash companies had on their balance sheets. That could be back soon — and will be a bullish sign.

It was a strange time. After 40 years, interest rates will rise, possibly over the next two years, meaning bond prices will fall. Stocks, for now, are going down. Cryptocurrencies are going down, some to 0. There is no paradise. Sometimes cash is king, but not forever. Markets are looking to the future and will predict the end of inflation and the end of rate hikes before they happen. But the market did not anticipate infectious sales sentiment. Wait for vomiting.

Write to kessler@wsj.com.

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Alley Einstein

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