Options Adjusted Bond Spread

We’ve discussed that at this point in the business cycle the yield spread between treasuries and junk bonds usually increases to reflect the increased risk in the market. The chart below is a great depiction of the options adjusted bond spread because it shows the various percentile levels in the past 32 years. As you can see, with a 370 basis point spread, the high yield spread is near the 10th percentile. It got slightly lower in 1997 and 2007. The widening of spreads in 2016 came very close to recessionary levels which is why many thought a recession was coming even though the yield curve was positive. This chart makes it very clear that if you’re buying junk bonds, there’s not much upside and a lot of downside. However, we might see the final bit of upside before the selloff commences.

Cryptocurrencies Remain The Top Story

Even though I think it’s a terrible bet to put money in any of the cryptocurrencies at these current extreme levels, it’s still important to talk about them because the segment has become the top story of December in all of finance. It’s fun to talk about companies and assets which are volatile. It’s boring to make money consistently. The annualized standard deviation of the S&P 500 is 6 while the annualized standard deviation of bitcoin is 101. I’m guessing the alt coins have an even higher annualized standard deviation. Litecoin is up 10,604% in the past year. The chart below shows the various manias throughout history. The tech bubble in the 1990s barely registers on this chart which bitcoin now leads. Bitcoin is now at $17,200. If there was a chart for beanie babies, it would be interesting to compare it to bitcoin.

The fact that we are looking at the market cap of all the coins to find a potential limit shows how outlandish the action has gotten. The total market cap of these coins is $500 billion. Coinbase is the top downloaded free app on the App Store. There are 1,345 cryptocurrencies listed on the coinmarketcap website. I still don’t think there would be much of an effect if they all went to zero tomorrow. If Apple, Google, Microsoft, Amazon, and Facebook stock all went down 15%, it would be the same as all the cryptocurrencies going to 0. If those stocks fell that much the Nasdaq might fall in the high single digits or the low double digits. That would be a scary event, but it probably wouldn’t have much of an economic effect. When the cryptocurrencies get above $1 trillion, I will get more worried about the systemic risks of a crash. As you can see from the chart below, the trading in bitcoin futures on the CBOE fell 93% from the first day to the second. Most traders would rather not touch an asset which has little history and a lot of euphoric speculation. The blockchain is a buzzword just like artificial intelligence and gene mapping.  Unlike buzzwords of the past like 3D printing, cryptocurrencies have received a $500 billion valuation.

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