5-Min Monday Macro & Crypto: Oct 30th, 2023

Stocks sell off, bonds sell off, where is smart money flowing - crypto?

I spend hours reading, researching and talking to the smartest founders and investors every week. This is my attempt to give you a short 5-10 minutes summary on how I am thinking about Macro & Crypto markets and what lies ahead. Hundreds of hours summarised, so you don't have to.

Big wins tend to be accompanied by some combination of bigger decisions, more uncertainty, and greater risk.

You can avoid the swings, but you might be forced to play at a lower level.

1. Big Macro Picture - Reaccelerating Inflation = Higher for Longer Yields

• Macro - We advised some short term PUT insurance couple of weeks ago here, Good call. That call still holds as inflation is sticky- and paying 5.5% interest on $33 trilion isn't helping anyone.
• Data - FOMC and Non farm payrolls - I think there would be another “Hawkish Pause” maintaining their data dependent stance. NFP a could be a surprise. But no one knows.
• Bonds - Higher yields are here to stay. What if this is the new norm after decades of zero rates? With global debt so high, rates cannot be / should not be zero. Perhaps 5% or 7% is new normal for the 10Y.

• Stocks - Violently sideways - getting washed in that selloff again. Tesla and Nvidia are down 25% from ATHs. There could be a small bounce and we are back to where we were beginning of the year. But since Q3 we are in a downturn in stocks. It is difficult to turn around without any new narrative or push.
• Dollar - Strong amid global tensions
• Gold & Oil - slowly creeping up
• Bitcoin - darling of all assets as we have been advocating for few months now

Here is how I am thinking next 12-18 months:

Just like 95% of the market, I believe FED will maintain a hawkish pause for now. Think about it for a second - FED is tightening (QT) by about the $800mn a year right now, and that too amid historically high rates. But economy is taking that in a stride - Stable GDP, no massive layoffs and record employment numbers.

But banks and their stocks are starting to come off massively. So is tech. And if there is another SVB like scenario, I believe we will see some bank/s fail. That is when FED steps in. We haven’t seen that capitulation in stocks yet. But things are getting tough for banks balance sheets.

Basically, for FED to cut rates, we need to see another financial downturn like the dot-com bubble of 2000 and the Global Financial Crash of 2008.

2. Bonds, Fx & Rates - 10 Year Flirting with 5%

Basically the question is WHO IS INVESTING IN BONDS currently?

Here is what we wrote recently in our telegram channel and this sums it up very nicely:

I generally consider three fundamental elements: Supply, Demand, and Perception.

1. Supply: There has been a continuous influx of substantial bond supply, largely attributed to the United States, which is spending well beyond its fiscal means. Consequently, they have been resorting to accumulating debt in the form of bonds, thus contributing to the oversupply.

2. Demand: Interestingly, a significant scarcity in the realm of bond buyers has emerged. In fact, nations such as Japan and China have chosen to divest from bonds, as they aim to maintain the stability of their respective currency pegs. Their reluctance to hold excessive dollar-denominated assets stems from the cautionary tale of Russia, which faced difficulties when the United States restricted access to their dollar reserves. With an absence of substantial buyers, including the Federal Reserve, Saudi Arabia, and domestic banks already holding extensive bond holdings, a pertinent question arises: Who, indeed, represents the marginal buyer?

3. Perception: The international perception of the United States as an unassailable safe haven has faltered. The proliferation of geopolitical conflicts and an ever-escalating national debt have tarnished the once-impeccable reputation of the mighty United States. Consequently, entities now require greater compensation in the form of interest rates, resulting in higher yields on U.S. government bonds and corporate debt.

In summation, it becomes apparent that the United States is grappling with a dearth of willing buyers for its bonds, which constitute a substantial portion of its national debt. This, in turn, suggests that yields are likely to persist at elevated levels for an extended duration. Regrettably, such a predicament may have deleterious effects on both the national economy and corporate sectors in the months to come. The silver lining, for the moment, is the robust growth and employment figures. However, it is essential to recognize that the prevailing circumstances may change post-December, as the landscape evolves, resulting in potentially heightened unemployment. These developments will undoubtedly add a layer of complexity to an already intricate financial scenario.

I've begun to discern a pattern of common-sense thinking that the world had a comparatively modest debt load to contend with up until 2010. However, in our contemporary era, where the burden of debt has burgeoned significantly, the necessity arises for elevated interest rates; otherwise, the prospect of attracting new buyers becomes rather elusive. Much like the fiscal landscape of the 1980s, it appears probable that long-term interest rates will persist at elevated levels, enduringly so.

A valuable commodity like money should lack a corresponding price. Right? It implies that someone, or some entity, will eventually foot the bill for this price. In my view, it portends a scenario where financial institutions may encounter a conundrum akin to the situation faced by SVB in March, leading to the Federal Reserve opening wide the floodgates of liquidity. This matter was recently discussed in an ad hoc article below.

Meanwhile this is the Japanese Yen. Closed at lowest levels in 33 Years. Yes. 33 years. The short yen, long dollar trade continues for now as BoJ loosens first time in decades.

But I’ve learned the hard way - you cannot buy an over inflated asset. Markets are too long the USD. But that maybe just about be over as emerging markets are gradually moving to a non dollar trade, especially for necessary commodities. Hard to be much more bullish here. Coming that with FED hawkish stance, you’ve a stable to dovish dollar situation which is good for risky assets like Gold & Bitcoin

3. Stocks - Not Yet Fully Capitulated

Stocks are bruised but not down massively as prices are being repriced due to ‘higher for longer’ rhetoric. Remember, most DCF models for these stocks are based off 10Y rates.

But earnings are good & economy is still going strong. And as we mentioned last couple of weeks ago, this is the best seasonality of the year. Stocks will stay volatile till either:

• 10Y rates stabilise around 5% or so
• A bit more capitulation so that prices get even more attractive
• everyone gets greedy EoY

4. Crypto - Smart Money’s New Outlet

Bitcoin - What Else Can You Ask For?

• Biggest Asset Managers of the world filling for ETF (and buying BTC in already)
• Digital gold and inflation hedge coming back together as flight to safety sets precedent.
• Everything is losing value - fiat, bonds, stocks - smart money is rotating back to crypto
• We are poised for an early rally pre-having in an election year

All these factors led to a clean breakout to $35K where BTC is consolidating nicely

Two paths from here:

• Either we go straight to $40K from here - more likely in my opinion, as asset managers and smart money continue to accumulate. There are not many sellers today except the miners.
• Or we consolidate here between $32-35K before we continue again.

No one knows how much liquidity is sitting on sidelines to enter back again but one thing is for sure, BTC bulls are back.

However, keep an eye on yields, and banks - if markets dump, BTC will dump atleast once alongside. Either stay in spot BTC or have tight stops. And don’t forget to keep some firepower in case it dumps along with market.

ETH - Next in Line

ETHBTC has been hit as VanEck ETH futures volumes have been very disappointing. But I think ETH will come back and once this BTC rally has subsided a bit, it will be ETHs time as the next ETF narrative

5. Some Interesting Stuff

• Ray Dalio on the path to International War

THANKS!