Reading · The Art of the Bubble

Welcome back to The Cypher!

It was quite a week. Treasury Secretary Scott Bessent signaled that Treasury is willing to lean against disorderly moves in long-term yields, and digital assets responded as though someone had finally located the adult supervision.

It is a large enough development that this week’s Art of The Bubble will focus on it separately.

For The Cypher, we wanted to look underneath the bond drama and ask a broader question: are the economic conditions surrounding risk assets actually improving?

To answer that, the team looked at three seemingly contradictory developments: the increasingly visible K-shaped economy, a crypto bear market that is statistically much milder than the last one but somehow feels worse, and a housing market where almost nobody is buying anything despite prices remaining near record highs.

As it turns out, none of these is quite as contradictory as it looks. Markets are merely doing that irritating thing where the details matter.

TL;DR: While the K-shaped economy is real, it is psychology that appears to be weighing on digital assets, while real estate is, in fact, acting just as your Econ 101 text book taught you.

COVID was good for your pocketbook if you were in the top 20%. Not so much otherwise. That cohort scooped up 3.7x its “fair share” of net-worth growth since 2019.

That sounds dramatic because it is. But there’s an important wrinkle: the top 20% already owned roughly 71% of the wealth.

Takeaway: What you’re seeing is what happens when wealth compounds through adverse economic environments: the people who already own the assets tend to capture most of the recovery. Read differently, the data shows that 20% of the population does have capital to re-direct towards other assets.

Relevant Tickers Impacted: SPY, RSP, QQQ, MAGS, IGV, XRT, GLD, IEI, TLT (Note that inclusion is descriptive, not prescriptive, as long duration instruments, such as IEF and TLT bear the most acute risks).

Psychologists have found that it can be easier to adapt to something dramatic than to a persistent minor irritation. Breaking your leg, for example, may be psychologically easier than tweaking your knee. Your “psychological immune system” mobilizes for the big thing. The annoyance just keeps annoying.

If we’re near a bottom, numerically, this bear market is much better. GDLC, roughly a composite of the top five cryptos, is down ~30% this year and ~53% from its peak. Last cycle: ~88%.

But GDLC is now an ETP and trades more efficiently, so the cleaner comparison is realized volatility (60-day): ~38% today versus ~86% last cycle.

Takeaway: If this is the bottom, it’s decidedly milder. And yet people seem to hate this bear market more. Psychologically, we may have traded the broken leg for the tweaked knee.

Relevant Tickers Impacted: BTC, IBIT, MSTR, STRC, COIN, GLXY (Inclusion is descriptive, not prescriptive; note that not all tickers are strongly correlated with BTC’s price movements.)

No one is buying, but it still costs a lot.

We’ve now completed roughly four years of exceptionally low sales volumes, last seen on a comparable basis around 2011. But prices sit at record highs.

Econ 101 can remain accredited. Crush both demand and supply, and price doesn’t necessarily fall. In this case, it rose, though, as last week’s data showed, not as fast as inflation.

Takeaway: So housing has achieved the unusual combination of being both expensive and difficult to sell. As always, the national picture hides plenty of exceptions. Specific metro areas are doing just fine, and some are flourishing.

Relevant Tickers: Z, RDFN, VNO, SPG, HD, LOW, ITB, VNQ, XLRE (Inclusion is descriptive, not prescriptive; some commercial names may decouple from sector trends.)

“Do I contradict myself? Very well then I contradict myself,
(I am large, I contain multitudes.)”
— Walt Whitman

Markets, apparently, contain multitudes too.

The three stories this week look contradictory only if we insist on describing each market with a single number.

The economy can feel weak while the top 20% continues accumulating investable capital. Crypto can experience a dramatically milder bear market while investors find it more psychologically exhausting. Housing can sit near record prices while transaction volumes collapse because sellers would rather stay put than surrender cheap mortgages.

None of this requires us to throw out the models. Quite the opposite.

Capital compounds. Psychology matters. Supply and demand still work even when both disappear at the same time.

The strange thing about this market may be that, underneath all the apparent contradictions, it is behaving rather normally.

Econ 101 survives another week.

We believe knowledge is power. If you learned something, share The Cypher. Help others before a CNBC anchor starts yelling at them in all caps.

Happy Trading!

The Team:

Sebastian Purcell, PhD

Julian von Loesch, PhD

David LaRoca, PhD

Elyse Purcell, PhD

Todd Mei, PhD

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The Economy Contains Multitudes

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