Dan Morehead, the founder and managing partner of Pantera Capital, appeared on ‘Squawk Box’ on 5 October 2023 to discuss a range of topics including Treasury rate trends, the Federal Reserve’s approach to inflation, the impact of interest rates on equities, and the current state of the cryptocurrency market.
Morehead expressed that the financial industry is currently experiencing a “failure of imagination” as most traders have never dealt with a rising rate environment. He argued that the Federal Reserve has been bailing out the market by lowering rates for the past 40 years, but that era is coming to an end. Two years ago, Morehead predicted that both the Federal Funds rate and the 10-year Treasury yield would rise to at least 5%. He believes that rates will go even higher, as the normal real rate for the Federal Reserve is 1% over inflation, a level not yet reached.
When asked about the current inflation rate, Morehead stated that core inflation is at 4.4%, which is more than double the Federal Reserve’s target. He also mentioned that wage inflation is at 4.5% and increasing. Morehead disagreed with the notion that rates are already too high, stating that the Federal Reserve’s goal is to keep inflation under 2%, a target that has been significantly exceeded. Additionally, he pointed out that an “owner’s equivalent rent” factor in inflation takes two years to fully play through. Even if housing prices remain stable, inflation will still go up by 1.1% due to factors from two years ago.
Morehead warned that if his predictions about rising rates are correct, equities are significantly overvalued. He suggested that equities should be 20% lower based on the S&P 500’s current valuation. Morehead believes that equities could experience a downturn for the next few years, not necessarily tied to interest rates but rather to risk factors. He also noted that there have been two 13-year periods where equities did not go up, indicating the potential for long-term stagnation.
Discussing the cryptocurrency market, Morehead stated that the correlation between cryptocurrencies and the S&P 500 is currently only 0.2, and historically it’s 0.1. He believes that cryptocurrencies are affected cyclically by Federal Reserve actions. Morehead also emphasized that Bitcoin has been operational for 14 years without any downtime, holding about 50% of the entire cryptocurrency market cap. He mentioned that the market had been influenced by highly leveraged platforms like FTX and Celsius in the past, describing these as “once in a generation weird occurrences” that are now behind us.
Morehead advised asset allocators to consider diversifying into blockchain technology, describing it as a trillion-dollar asset class. He suggested that investors should allocate a couple of percent of their portfolios to blockchain:
“We talk to asset allocators all the time. If you put money to work in bonds, it’s probably dangerous. If you put money to work in real estate, real estate is coming off of all-time highs. Equities are, I think, overvalued. That does leave a couple of asset classes like real commodities and blockchain. Blockchain is a trillion-dollar asset class. So, most institutions have essentially zero exposure right now. They should dial it up to a couple percent.“
Morehead specifically forecasted that Bitcoin will more than double every year, based on its 14-year average performance.
Featured Image via Midjourney