There’s an optimism coming about, almost contagious. People have been continuously bearish for what feels like a long-time already (especially after a decade of up-only prices and short-lived retracements).
I’m not sold on it just yet but also happy and open-minded about the possibility of maybe settling into a bottom.
The dynamic is weird, though. For people who’ve been looking at markets for a long-time, you’ll recognise the bullishness that can come from bad news… because bad news can allow or force -depending on the time- central banks to pause rate hikes or even reverse them. The thing that could make that happen is a recession… so naturally you want to buy in a recession, right?
- Covid and fears about the global economy pushes central banks to lower rates and pump cash into the system, sometimes with outright cash in consumers’ bank accounts.
- The purchasing power momentarily increases and pushes people to spend.
- In parallel, global supply-chain and production issues push prices higher.
- Demand isn’t stopped as people have cash and prices rise further.
- Central banks pick-up on inflation and start to raise rates to push demand down and thus lower the rapid price increase. But the supply side of the equation isn’t resolved.
- With rising rates, valuations of all businesses need to be re-evaluated, because of what it means for business, demand, debt but also just the risk-free rate of holding bonds (whose real-rate is still not positive but less negative).
- But here’s the kicker: When we reach a point where a recession is looming, it impacts both consumer sentiment and central banks decisions to support the economy.
- This is made easier because with prospects of a recession, commodity prices drop and so the cost of production does too, to a certain extent… so now prices are going down by themselves, regardless of central bank yields (which should be resolving consumer purchasing style as well). Like, if there’s a recession, you could expect gas prices to go down, or lumber to be cheaper, etc. and so inflation gets resolved by the negative economic expectations.
- …and that might lead to less rate hikes, a pause or even a reversal and so the valuations of stocks that were pushed down to extremes (relatively speaking) can now go back up… so that recession and the potential reaction from the Fed could actually be good for valuation and therefore price action in the stock market, in the real estate market, etc. The below chart shows the extreme risk-off sentiment or the fact that it’s now become a crowded trade that can endure for a while but has also a certain likelihood of reversing
A nice example on the cost of goods is the chart below, which might be linked more to covid getting resolved in China than anything else but might also be linked to economic expectations. Things are getting cheaper, for production and supply chain.
Right now, crypto trades similarly to high-growth/tech stocks and so we can assume that if/when equities go up, so will crypto. Basically, everything deemed risky and that’s gotten killed in the past six to nine months is due for a move up or at least a pause in the incessant down-trend.
You can kind of the see the recent change of mood in the total crypto market cap chart (daily) and the technical indicators seemingly turning bullish. Careful though, for traders, those things can be misleading and change rapidly.
A quick note that touches upon both crypto and traditional markets is the extreme levels the dollar is reaching. With isn’t good or bad in and of itself but highlights the move from risk-assets to cash… but a move that eventually will reverse. This is a (weekly) chart of USD. If this goes back down, expect crypto and equities to move in the opposite direction -up.
I will conclude the post later down with some positive fundamental data and a summary of my investing behaviour but, before I get there, let me put a damper on all the reversal-bullish chatter —
Things can move fast and sometimes you need to react quick. I don’t think we’re in this kind of dynamic, though. The geopolitical issues are going to impact us for a long time, commodities might be reversing slightly but are -so far- in an undisturbed bull run, inflation might peak soon but it’s still very high, investors were spooked by the current dynamic, recession isn’t a “good thing” however you want to see it (although it might admittedly be a very “healthy” thing for market), cash is and will get more scarce than it was before, on a much broader and longer time horizon, a rivalry between the free world and other regimes is deepening, food shortages loom… all those things point towards a bear market not being done or, if it is done, a bottom taking a long time to form.
I’m just saying that to show the other side of the argument. And also to manage expectations. No V-shaped bottom for us, me think. It will -at best- remain range-bound until we can form a strong support. Or we will slowly trend further down until a rounded bottom on several months -maybe years- is formed and we can move up again in a sustainable fashion.
Here below is VEA (Vanguard’s Developed World ETF)… it looks like we’ll stay below that moving average for a while, maybe it will even act as resistance and we’ll need to cope with restlessness, boredom, capitulation, before we can see a real move back up.
Another chart that could send chills down any crypto investor’s spine is the below showing the ‘kill box’ that ends each major bear markets, before the next leg up…
Onto the promised bullish and supportive fundamentals for crypto, there’s actually some longer-term stuff that keeps me -as ALWAYS- bullish on the asset class.
It saddens me when I hear detractors rearing their ugly head when prices are down, as if “BTC is going to zero” because it’s going through its natural process of rise and fall. It’s fourteen years old, it hasn’t found its final footing just yet, and that’s OK.
Below, you can see the number of bitcoin addresses growing inexorably. The asset is growing regardless of current price.
The below chart, also from Glassnode, shows the number of ‘active’ entities which have retracted down in no uncertain term but continue up on a broader time horizon.
I think the deeper thing going on is explained by Arthur Hayes (Bitmex’s founder) in the below. In June, there was the whole issue with Celsius, Genesis, Babel, BlockFi, Voyager and all linked somehow to Three Arrows Capital (3AC) and previously the UST/LUNA collapse…. But here’s the amazing thing: centralised entities are suffering while the decentralised protocols are holding strong, operating as intended. Their token prices might be down and so feel bad for speculators and investors but the underlying tech works. We’re moving to DeFi; TradFi can’t compete and won’t be as relevant as it is today in, say, five or ten years.
On an even broader scale and to feed you the colour chart you so desire, here is a graph showing the growth of mobile phone and internet adoption relative to Bitcoin’s adoption growth. Unless there’s a sudden stop, we’re headed north. This is also not the time to think you’re smarter than the market and will optimise returns by actively trading. Buy into a core portfolio and hodl.
So how am I playing all this? I hate to sound like a broken record but I’m still just averaging into the asset. My game plan assumes another 3–6 months of pain or unexciting price action. This is accumulation time. No need to be greedy. I’ve bought much higher already (in the lower 30Ks) but also not that far off, in the mid and lower 20Ks. I’m still a buyer in the teens. And there’s more liquidity to continue buying, one small chunk at a time.
I’m doing the same thing in traditional assets, buying plenty of small chunks on VTI and SCHB, VEA, VWO and SCHE, FM, VNQ and VNQI, GLD, etc.
Disclaimer: none of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.