Crypto Markets are Trading Heavy
As equity multiples continue their march towards new all-time highs, crypto multiples contract and continue to trade as heavy as a bag of hammers. Bitcoin’s slow decline is a continuation of themes that have developed since this summer -- volumes are low, no new money is coming into the ecosystem, there is a lack of new digital assets to excite investors, and stocks/bonds/gold are all up double-digits YTD, giving the non-crypto world less reason to focus on this emerging asset class. Bitcoin and other digital assets fell 7% last week, but the downward price action has less to do with negative events and more to do with a lack of positive catalysts. As such, traders are bored, and money is being re-allocated out of BTC into “alt-coins” -- which are bobbing up and down in a zero-sum game, creating no overall value.
Why Do Crypto Investors Focus So Much on Equities / Recession?
Digital Assets take many shapes and forms, and there are many factors affecting price movements. But Bitcoin is still King when it comes to overall sentiment and inflows, and lately, that sentiment has shifted negative while the exact opposite is happening in Equities.
Why does this matter if Bitcoin has proven to be uncorrelated to equities?
The answer may have to do with Bitcoin’s duality. Many believe Bitcoin is a risk-asset, and as Central Banks around the world push investors and savers into riskier assets, Bitcoin will be the ultimate beneficiary of the stretch for yield. Others believe Bitcoin can be a safe haven, and will protect (and enhance) investors’ purchasing power should a recession occur and/or we see continued destruction of fiat currency valuations. Perhaps both are true. Regardless, despite a near zero correlation, Bitcoin’s success does seem tangentially related to what happens to equity markets.
Unwavering confidence in a trade deal, Fed easing and the so-called “Trump put” have allowed investors to shrug off weakness in global trade, capital spending, manufacturing, corporate earnings, business confidence and recession signals such as the inverted yield curve. Bulls note strength in services and the US consumer, but now these pillars don’t look so sturdy either. Deterioration in manufacturing seems to be spreading to services, consumer confidence is flagging and labor market vulnerability is emerging. The odds of recession are unequivocally rising. A recession need not be severe or punishing for stocks, but expectations need to reset and risk premiums expand. Escaping the cyclical bear market requires one last capitulation on earnings and valuations. Stay patient and defensive.
The wonderful thing about sports is that there’s a score and nobody can craft a narrative that the winner is a loser. The score is the score. Liverpool’s win over Man City this weekend is indisputable. In markets, however, narratives are everything. There is no one, decisive metric – no single score. The WSJ discussed the rapid expansion in term premium noting that “the yield curve, in fact, completely uninverted this week for the first time since November 2018, meaning shorter-dated benchmark Treasurys [sic] all yielded less than longer-dated ones.” The Journal’s author further suggested that “the reversal gives comfort to investors, because an inverted yield curve has proved to be one of financial markets’ best predictors of recessions.” O contraire! This un-inversion is precisely what one might expect preceding a recession. We must ask why the curve normalized and how that relates to recessions. To the first question, the answer is that most of the curve’s steepening has come from the Fed cutting three times! Historically, this kind of late cycle cut after a deep inversion (as the curve just experienced) is indeed followed by recession. We wrote on July 11th that “a look at history should be creating considerably more dissonance for market participants than it is right now. Late cycle cuts, no matter how masterful any Fed maestro might be, tend to be followed by recession within several months. Risk assets tend not to perform well during such periods.” So, our conclusion would be that the rapid expansion in term premium is precisely what should give market participants even more concern – not less.
Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, legal advice, tax advice, a research report, or a recommendation. Any decision to invest or take any other action with respect to any investments discussed in this commentary may involve risks not discussed, and therefore, such decisions should not be based solely on the information contained in this document. Please consult your own financial/legal/tax professional.
Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed are those of the author, and are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca disclaims any obligation to update or revise any statements or views expressed herein. Past performance is not a guarantee of future results and there can be no assurance that any future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which is believed to be accurate, but has not been independently verified. Arca and/or certain of its affiliates and/or clients may now, or in the future, hold a financial interest in investments that are the same as or substantially similar to the investments discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities, or a solicitation to provide investment advisory services.