Crypto Market Commentary
18 November 2019
Doc's Daily Commentary
The 11/13 ReadySetLive session with Doc and Mav is listed below.
Mind Of Mav
Recession Fears Subsiding? What Does This Mean For Bitcoin?
Let’s talk macro, the Fed, recession, and setting expectations.
Fed Chair Jerome Powell had a clear message for Congress in his testimony to the Joint Economic Committee last week: the Fed won’t be able to combat the next downturn alone. Citing the low interest rate environment, Powell raised concerns over the limited effectiveness of monetary policy without complementary fiscal stimulus and urged policymakers to address the “unsustainable path” of federal deficits to support the economy during the next downturn.
Negative worries aside, I’m actually bullish the S&P 500 will make new highs by March.
Here’s a few reasons why:
- Overblown fears driving consensus view of recession leads to people rooting for it
The biggest negatives within the macro picture are already fully-priced into the market, given how wide the narrative of yield curve inversion and recession worries have spread (Good Morning America proxy).
Looking at Google Search volume trends, searches for “Inverted Yield Curve” in August were almost 4x the former peak total set in December 2005.
More interesting, the total volume of Google searches for “Recession” this August actually matched the level set in January 2008, even though the later came 25 months after the spike in “Inverted Yield Curve” searches.
We can look at these patterns to indicate that August had hit full recession mania, and suggests that if the inverted curve is a false positive, or even still on its typical 12-25 month lag-time until recession, that the market has over-discounted the risks today.
Furthermore, I believe too many people stand to benefit from recession fears, and have turned to actually rooting for it. Mind you, this includes us as the consensus view within the crypto community is that weaker economic data, large debt loads, and Fed accommodating policy is favorable for Bitcoin.
If you stand back and look at it, a lot of people want a recession not because they think we’re due, but because they want to take advantage of it.
- Rate cuts are (unfortunately) bullish
Look, the timing of rate cuts, in relation to what part of the cycle the economy is in, determines the likely outcome for market performance.
Jerome Powell, chairman of the Federal Reserve, has stated America is on an unsustainable path because debt is growing faster than the economy by a significant margin. He said:
“The debt is growing faster than the economy. It’s as simple as that, in nominal terms. That is by definition unsustainable. Ultimately, you’ll have to get it to where the debt is growing not faster than the economy.
It’s growing faster in the United States by a pretty significant margin. So even with lower rates and even with decent growth, there’s still going to be a need to reduce these deficits.
That’s a need over time. We’re not in the business of advising [congress] of when to do that or how to do it, but it is inevitable that overtime we will have to do it.
Frankly if we don’t do it, what happens is our children will wind up spending their tax dollars more on interest than the things they really need, like education, security, health.”
Looking at historical cuts since 1970 (AKA when fiat was born), the five times the Fed cut while the U.S. economy was already in recession saw four out of five markets return negative three-month, six-month, nine-month, and one-year forward returns.
This is a sharp contrast to the six observations of the Fed cutting while the economy was still in expansion (what we currently are in), which has seen a 100% of observations return positive three-month, six-month, nine-month, and one-year forward returns (at an average +16.5% 12 months from the cut).
So . . . How does this relate to bitcoin?
Here’s my contrarian thesis for why Bitcoin will act as a risk-on asset in the coming year. Mind you, I argue that Bitcoin’s role (initially) is not as a hedge on equity market turmoil; instead I can see a lot of reasons that the S&P 500 can make new highs by March, and Bitcoin would soon follow (irrespective of short term volatility related to the supply halving).
But . . . why?
The emerging narrative is that Bitcoin can and will respond to specific crises, such as the Cyprus banking crisis in 2013, or the relationship between major currencies and daily Bitcoin price returns, e.g., BTC versus the Yuan devaluation in the first week of August.
So, Bitcoin works as a crisis hedge.
But it has a better (and more lucrative) usage: Bitcoin may work even better in a risk-on world.
While the narrative just hasn’t been there this year, I argue that Bitcoin can and will act as a “macro hedge”.
But wait! If that were true, you would expect Bitcoin’s price to do best when the S&P 500 has a bad year, and historically, that just hasn’t been the case.
In fact, the S&P 500’s best four years this decade coincides with Bitcoin’s best four years as well.
So far 2019 is no exception, with the S&P up ~20% on the year, with bitcoin up ~100 – 120% (vs last year’s ~75% drawdown).
I think that response misses the point — the S&P 500 has been in its longest (and one of the slowest) bull markets since Bitcoin’s inception.
Simply because we’ve seen the S&P endure some sideways or slightly down years, as well as coincide with the positive years, does not a bulletproof correlation make.
Bitcoin is still untested, truly, in a bearish macro trend.
So, even with all the “scary macro” that has surfaced over the past couple months, the market is still only ~2% off all time-highs. Since late July, it’s been a pause, wait, and see approach, i.e., “trend-less macro.”
In a world without trend, Bitcoin won’t see new highs.
But, in contrast, the next big catalyst for Bitcoin will come from a decisive breakout in equities.
Once that happens, Bitcoin will resume its course as a full-on risk asset.
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