Economics

Will Crypto Correlate with Tech Markets?

That a 10% drop in the S&P 500 has pushed the VIX to 65% gives much to think about:

First, the facts: the only other times the VIX exceeded this level were:

- During the COVID pandemic, with global shutdowns and a 35%-40% market correction.
- In the 2008 financial crisis, with massive bankruptcies and a 50%-60% market drop.

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Before: "There is no risk of recession, everything is under control. Rates are dropping because inflation is easing, and the economy is strong."

Suddenly: "The FED must cut rates by 50 basis points in September and another 50 in November!" Some even call for emergency cuts in August.

This shows how fickle the investor's mind is.

Several defend that there is a "labor market collapse," but we have gone from 4.1% to 4.3% unemployment. Of course, it is cooling; the previous situation was absurd.

- Two job openings for every worker seeking employment. But if two-tenths in the unemployment rate lead you to talk about drastic stimulus...

...remember that employment is a lagging macro indicator; it does not anticipate a recession, it is the effect, not the cause.

It cannot be that with 4.1%, everything is positive, and with 4.3%, everything is negative. The deterioration trend has been visible since 3.4%, but there are still no worrying signals.

We've had all kinds of support from Central Banks and Governments since 2009, with rates at 0% or below, QE programs, and tax cuts in the USA. And since 2022, all these aids have begun to be withdrawn, which will have an effect. An effect that will filter into the economy slowly but inexorably...

...and we are not used to having those aids taken away.

But what terrifies me is the reaction to a simple -10% drop that we witnessed this week.

I don't even want to think about what will happen if there is finally a recession in the USA...

Now the analysis: that a 10% correction in the S&P 500 from all-time highs has spiked volatility to 65% indicates several things:

- The leverage among investors is immense, as a small correction causes significant damage.

The market quickly shifted from complete calm to panic.