The Financial Industry’s “Failure of Imagination”
Dan Morehead, the founder and managing partner of Pantera Capital, recently appeared on ‘Squawk Box’ to discuss various topics including Treasury rate trends, inflation, interest rates’ impact on equities, and the state of the cryptocurrency market.
The End of an Era
According to Morehead, the financial industry is currently experiencing a “failure of imagination” as most traders have never dealt with a rising rate environment. He believes that the era of the Federal Reserve bailing out the market by lowering rates for the past 40 years is coming to an end. Morehead had previously predicted that both the Federal Funds rate and the 10-year Treasury yield would rise to at least 5%. He now believes that rates will go even higher.
Inflation Concerns
When discussing inflation, Morehead highlighted that core inflation is currently at 4.4%, more than double the Federal Reserve’s target. He also mentioned that wage inflation is at 4.5% and increasing. Contrary to popular belief, Morehead stated that rates are not already too high as the Federal Reserve’s goal is to keep inflation under 2%, a target that has been significantly exceeded. He also noted that factors from two years ago will continue to contribute to inflation, even if housing prices remain stable.
Overvalued Equities
If Morehead’s predictions about rising rates are accurate, he warns that equities are significantly overvalued. Based on the S&P 500’s current valuation, he suggests that equities should be 20% lower. Morehead believes that there could be a downturn in equities for the next few years, not necessarily due to interest rates but rather other risk factors. He also mentioned that there have been historical periods where equities did not increase for 13 years, indicating the potential for long-term stagnation.
Cryptocurrencies and the Federal Reserve
Morehead discussed the correlation between cryptocurrencies and the S&P 500, stating that it is currently 0.2, and historically it has been 0.1. He believes that cryptocurrencies are cyclically affected by Federal Reserve actions. Morehead also emphasized Bitcoin’s resilience, operating without any downtime for 14 years and holding about 50% of the entire cryptocurrency market cap. He mentioned that highly leveraged platforms like FTX and Celsius had influenced the market in the past but described them as “once in a generation weird occurrences” that are now behind us.
Diversifying into Blockchain
Morehead advised asset allocators to consider diversifying into blockchain technology, which he describes as a trillion-dollar asset class. He suggests allocating a couple of percent of portfolios to blockchain, stating that most institutions currently have zero exposure. Morehead specifically forecasted that Bitcoin will more than double every year based on its average performance over the past 14 years.
Hot Take: Blockchain’s Trillion-Dollar Potential
Dan Morehead, founder and managing partner of Pantera Capital, warns of a “failure of imagination” in the financial industry regarding rising interest rates. He predicts an end to the era of rate cuts by the Federal Reserve, suggesting that equities are overvalued as a result. In terms of inflation, Morehead highlights current figures exceeding the Federal Reserve’s target, with future factors contributing to further increases. However, he sees opportunities in blockchain technology and advises asset allocators to consider diversifying into this trillion-dollar asset class. Morehead forecasts significant growth for Bitcoin based on its historical performance.
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