MAMOKETE LIJANE: Fed chair Powell partly to blame for Twitter saga

For a while now, investment commentators have been saying the US Federal Reserve would keep hiking until something broke. Fed tightening started on November 3 2021 when the chair Jerome Powell announced that it would begin to reduce or “taper” the pace of asset purchases in December.

The Fed has since reduced the size of its balance sheet and raised the Federal Funds rate by 3.75%. Financial conditions tightened, the US dollar climbed and asset valuations, including those of supposedly safe US Treasuries, tumbled.

No assets were spared in the 2021 rout. Yet few suffered losses as heavy as those seen in cryptocurrencies. The most famous cryptocurrency, bitcoin, is down 75% from its November 2021 peak. Tech companies’ valuations also saw heavy losses. The Nasdaq, the stock index most representative of the global tech sector, is 30% lower than where it was when tapering was announced.

I spent an inordinate amount of time on Twitter in the past two weeks. The first week of November I spent watching Elon Musk, the “Chef Twit”, flailing like a drowning bird as he tried to run a company he does not want to own. The Twitter product — those who tweet on the platform — do not like him. Twitter customers — those who advertise on the platform — don’t trust him. He has embarked on a mass firing campaign, so it should be safe to assume Twitter infrastructure — those who build and maintain the platform — hate him.

The fall in Twitter and Tesla valuations after he made his April offer to buy the company likely explain why Musk’s enthusiasm for the deal declined. That he has taken over the company in the middle of the biggest tech industry meltdown since the dot.com bubble burst in 2001 has not helped.

Though Powell cannot be blamed for Musk’s mismanagement style, he can be blamed for creating the overheated conditions in which such a character flamed up, and the cooling conditions that have him acting so erratically. Hopefully Twitter will survive Musk’s hubris, but I will always blame this sorry saga partly on Powell.

The second week of this month I watched the unravelling of the FTX exchange, one of the most important exchanges in the cryptocurrency ecosystem. The saga of the FTX meltdown is one of fraud, but can also be partially explained by large waves of liquidity and their reversal. FTX looks a lot like an elaborate pyramid scheme, where excess valuations of assets and suppressions of outflows were eventually uncovered, leading to a run on the exchange.

The crypto ecosystem has been under pressure this year as it shed its liquidity-fuelled excesses. Who remembers the sky-high valuations of nonfungible tokens? With the collapse of FTX, the fragility of the infrastructure underpinning this market has been laid bare.

Trust in the crypto ecosystem, while not that high, was still higher than it had ever been. It will take time for users and investors who have lost money, first in valuation and now in theft, to trust it again. When we talk about markets breaking we are talking about trading discontinuities that can leave markets fundamentally changed. Arguably, this is what has now happened with the cryptocurrency ecosystem. A similar dynamic is now  happening in the emerging market frontier debt markets.

The Fed is crashing things all over the place. As with the crypto, tech and frontier debt markets, these are arguably the things that liquidity built. We are not yet seeing the kind of contagion we saw when the US mortgage market collapsed the financial system in 2008, or when emerging markets defaulted on their debt in the late nineties. However, we are early in the painful cycle of valuation erosion and liquidity crunches.

Even if contagion remains limited, the destruction of market confidence will take time to rebuild. Like sand in the wheels, this might not stop growth, but will slow its momentum.

• Lijane works in fixed income sales and strategy at Absa Corporate & Investment Banking.