November 2022 Flash Report

The MSCI World equity index surged 7% in November on continued optimism that inflation is decelerating, and interest rate hikes are near an end. The mid-month lower than expected CPI report and FED Chairman Powell’s policy speech on December 1st were both positive signals inflation indeed is on a moderating path. If continued evidence emerges supporting a return to Central Bank’s targeted interest rate band, rates should stabilise and possibly be cut in late 2023 or 2024. The US rate curve now predicts peak rates below 5% and forecasted cuts will bring the FED funds rate back to under 3% by the end of 2024. The below chart shows the current rate curve and changes since the end of October from Blomberg.

Market sentiment post the September CPI report was that rates may need to increase above 6% before inflation is brought under control. With employment and jobs still relatively strong but other price indicators coming down, a scenario of the improbable soft landing the FED espoused might be occurring.

In 2020 and 2021 pandemic inspired monetary and fiscal policy stimulus was deployed globally to remedy the reduction of economic activity from global lockdowns. In hindsight, policymakers’ aggressive response was significantly greater than what was required and spurred the record inflation seen in 2022. The historic rate hikes (400-500bps in 18 months) since then are sure to produce a severe recession and stress overleveraged sectors of the economy. Many economists and FED board members acknowledge that this swift policy action could “break things” but they considered out-of-control inflation was a greater long-term risk to economic stability, so they chose to act.

The final month of 2022 will be dominated by the FED’s policy rate decision on the 15th. Passive flows from calendar year-end tax selling will serve as a headwind to any strong rally as 2022 is the most substantial negative performance since 2008. Any signs of corporate earnings stress, layoffs and potential problematic debts will be closely monitored this month and into 2023. Relief from geopolitical tension might further offset the ill effects of higher rates by reducing supply chain price pressures and energy constraints. A risk-on environment may mean a shift up in the range-bound market apparent in the second half of 2022.?This will be a welcome outcome instead of the severe recession many forecasted with the steep tightening of monetary policy.

We have witnessed one of the darkest months in digital asset history, caused by centralised participants exploiting the sometimes opaque and unregulated nature of this nascent asset class that is ironically built on decentralised and permissionless values.

FTX, SBF, and Alameda will deservedly go down as one of the worst frauds in not just the digital asset sector, but also the broader financial industry. Specific details about how and why these events unfolded are still coming to light, but most surprisingly, mainstream media continues to paint SBF in somewhat of a positive light, a massive contrast to the derision Bernie Madoff received in the press following his downfall.

Various industry native media outlets have provided notably unbiased and detailed recounts of the events – David Z. Morris’s article on CoinDesk, “FTX’s Collapse Was a Crime, Not an Accident” is one such example, as well as the?Twitter thread?from popular industry personality “Punk6529”.

Expectedly, digital asset prices followed the fall in market sentiment following the FTX events. The entire crypto market cap (as calculated by Trading View) was down 15.6%, losing ~$151Bn in value. Bitcoin finished the month at $17.1K, down 16.4%, and Ethereum finished at $1.3K, down 17.8%.

Whilst current price action paints a bleak picture for the space, uncovering market participant behaviour following the FTX events reveals a small silver lining. As covered in our weekly market commentary, Bitcoin supply held by entities holding 1-10 and 10-100 BTC saw a noticeable uptick following the FTX events, driven by holders wanting to verify ownership of their coins by moving them out of custody into a unique wallet they control.

Amongst constructive investor accumulation across multiple cohorts, we have also noticed a historically significant Bitcoin indicator cross into strong value territory. The below chart plots both Bitcoins realised price, which is the aggregate price at which all coins were last spent on chain, and the short-term holder realised price, which pertains to transaction outputs younger than 155 days. Based on the chart below we note that sustained bearish price action results in newer investors owning Bitcoin at a lower price than the broader market realised price. This environment typically signalled the initiation of a bottoming phase during macro-Bitcoin bear markets.

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