Cryptocurrency- The tech boom is over, thanks to the pandemic receding and interest rates rising, Larry Summers said.
- The ex-Treasury chief predicted the FTX fiasco will lead to greater crypto regulation.
The tech boom is officially over, the FTX fiasco will spur a crypto crackdown, and investors shouldn't fear another financial crisis, Larry Summers has said.
The outsized success of tech titans such as Amazon and Microsoft, coupled with the pandemic boost enjoyed by the likes of Zoom and Peloton, created an "excessive euphoria in tech," he noted during a conversation hosted by The Information on Wednesday.
Now the virus threat has receded, and rampant inflation has spurred the Federal Reserve to hike interest rates from nearly zero to around 4% this year. The upshot is the outlook for tech stocks has darkened, Summers said.
"'Peloton equals Pets.com' is a very important equation for understanding what's going on," he said. Pets.com, an online seller of pet supplies, has become a symbol of the massive hype and absurd valuations that defined the dot-com bubble.
Summers is a Harvard economics professor, who previously served as US Treasury secretary and the director of the National Economic Council.
He warned some of the recent excesses in the tech sector won't return until the next speculative boom, if at all. Investors need to reset their expectations after years of venture capitalists subsidizing companies' user acquisition with zero regard for profits or sustainable growth, he continued.
"Part of it is not coming back," he added. "It's probably going to be a sobering period."
Summers also touched on the financial troubles of Sam Bankman-Fried's FTX and Alameda Research, which have roiled cryptocurrency markets this week.
"What's going on in crypto in the last few days is going to scare people and is going to scare regulators into action," he said. Some of the people charmed by Bankman-Fried are "looking and feeling fairly silly," he added.
The outcome could be more aggressive regulation, Summers predicted, echoing JPMorgan strategists who expect the debacle to result in greater transparency and risk management among crypto firms.
The veteran economist also gauged the risk of another Lehman Brothers-type collapse that sends shockwaves through financial markets and the economy.
"Low, because the banking system is better capitalized than it was," he said. "Because the Fed is on hair-trigger alert. And because, particularly after what happened during the early stages of Covid, we have more precedent and willingness to throw liquidity at leaks if it happens."
Summers may not be concerned about systemic threats, but he remains deeply worried about inflation. He recently warned the Fed may need to lift rates above 6% to solve the problem, and has cautioned that hiking on that scale will likely spark a recession and lead to millions of job losses.