Markets are showing signs of frothing over
Crypto sponsorship deals could be an indicator of irrational exuberance
They may not ring a bell at the market top, as the aphorism goes, but perhaps sports advertising is worth watching as an early warning signal. In 2000, the Super Bowl, pinnacle of the American football year, was nicknamed the dotcom bowl when internet companies bought 20 per cent of all the television spots that aired during the game. Lehman Brothers, in 2006, decided it was a smart use of funds to sponsor the annual varsity rugby match between Oxford and Cambridge universities, presumably with an eye to recruiting would-be investment bankers. That same year insurance company AIG signed what was at the time a record-breaking sponsorship deal with Manchester United.
It is in this context that investors should view the news that Crypto.com, a Singapore-based trading platform, has paid $700m for the renaming rights to the Staples Center in Los Angeles. It joins AC Milan sponsor BitMex and Lazio sponsor Binance as well as Major League Baseball’s official crypto exchange FTX as crypto ventures making forays into the world of sport sponsorship.
Signs of froth abound in other risk assets, not just cryptocurrencies. All three major US stock indices — the S&P 500, the Russell 1000 and the Nasdaq Composite — reached record highs this month, as did the pan-European Stoxx 600, the German Dax and the French Cac 40. Much of this stock trading, too, is occurring through options, allowing retail investors attracted by “meme stocks” and who fear missing out to bet using borrowed money. Rivian, an electric car maker with no revenues and large losses that debuted on the markets this week with a capitalisation of $100bn, has similarly spurred debate about the irrationality or otherwise of current valuations.
Equities reaching such great heights sits oddly with the increasingly hawkish noises coming out of central banks. The extraordinary rally since the 2008 financial crisis — only briefly interrupted by the coronavirus pandemic — has been fuelled at least in part by expectations that interest rates would be kept low for a long time. Rising inflation has now led central bankers to begin talking about raising interest rates and accelerating their plans to taper asset purchase. Such moves will probably still leave long-term interest rates low by historic standards, but it is remarkable that stock markets have seemingly failed to react at all to the changing outlook.
The European Central Bank warned this week there were signs of “exuberance” in housing and junk bonds as well cryptocurrencies. The phrase echoes a remark by former Federal Reserve chair Alan Greenspan, who referred to the 1990s dotcom bubble as showing evidence of “irrational exuberance”. A small change in sentiment following a re-evaluation of central bank’s approaches could lead to a swift correction, the ECB argued.
Predictions of a coming market plunge, however, have been popular and frequent since the financial crisis. In 2016, for instance, the Royal Bank of Scotland warned investors to “sell everything”. The long bull market has frequently, and wrongly, implied that it is impervious to such doom-mongering — one reason why it has now tempted so many retail investors to pile in.
The spread of sponsorship deals is one piece of evidence that it is starting to get long in the tooth. Still relying on the signal is likely to require some degree of patience: Britain’s Northern Rock began sponsoring Newcastle United fully four years before it experienced the country’s first bank run for a century and a half. Bears may need to be content to watch from the sidelines for a little while longer.
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