“I am wearing bull market socks. The bitcoin bull is back, baby, and I’m not going to call it quits. But if we surpass 21.9% on this kind of third rally, we’ve made three successive higher lows off the 17-5 week. I’m starting to feel like spring is coming. They said, “There’s not a hedge against inflation because inflation was 9% and bitcoin didn’t go up”. Wait a second, in the last two years the Fed, this big spike on the chart, printed 50% of all the dollars in the history of the republic 256 years ago. Interesting, if you print 50% of the dollars that means you basically devalued by 100% because you’ve doubled the money supply. Bitcoin’s up precisely 100% in that two-year period.”
Mark Yusko, an American investor, hedge fund manager, and bitcoin bull, believes we are at the end of the bitcoin winter and gradually approaching a massive spring period. Yusco is the founder, CEO, and managing director of Morgan Creek Capital Management, a firm that caters to pension funds, endowments, and wealthy individuals.
In a recent interview, the veteran asset manager gave his outlook on bitcoin and the traditional financial markets for bitcoin. Yusco predicts an upcoming rally. He also establishes that prices are not as bad as we believe. He bases this assumption on the dollar’s devaluation caused by the Federal Reserve’s excessive money printing during the pandemic. When the central bank prints more money without a corresponding increase in the production of goods, there is more money to chase the few available goods. This means prices start skyrocketing and the dollar gradually loses its value.
According to USCO, the devaluation of the dollar has brought down the price of bitcoin but not its actual value. On the other hand, the former senior investment director at the University of Notre Dame, believes traditional asset classes, especially the stock market, will have a very hard time getting back to a bull market. He compares the situation in the stock market to that of a dot-com bubble and points out the many similarities between what happened then and what the market is experiencing now. This interview promises to be an enlightening one, especially from the macro point of view. Let’s dive right in on the positive side.
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“When you have higher lows and higher highs and you have markets that chop right, markets don’t go straight up. They don’t go straight down. They chop because human beings react to greed and fear, and there are two types of markets: winter and summer. Those are distribution markets. People are selling, distributing, and acculating markets when people are buying. And signs of acculation are when you get a low. Then it starts to go up and then people get afraid, so they start selling and pushing it back down. But then there’s more buying pressure, so it doesn’t go as low. So you make a higher low and then you go up again. And then you start to come down and you make another higher low.
That pattern of higher lows is the formation of which you’ve heard. It is called a bottom rounding bottom and if people say “Well you’re drawing lines on charts doesn’t do it”. It doesn’t predict things, it doesn’t cause things, but it lets us see patterns of behaviour in a better way. So again, it’s not about prediction precisely, it’s about directionality and pattern recognition, and it’s just because human beings.
Yeah, the key thing is, I sent a series of tweets yesterday about this on the traditional market and then relative to the bitcoin market, you know, the traditional market has not done it. It’s got a long way to go, and the problem is too much leverage. There’s still a massive amount of leverage. We corrected the amount of leverage that was higher than 18%, which is orders of magnitude higher than 2008.
There’s so much margin debt in stocks that needs to correct, and as it corrects, you know the problem for stocks is that they are still overvalued 54% relative to fair value. They’ve only been this expensive once, only 7% of the time in all of history, in 140 years of history. Only 7% of the times have US equities been more expensive than right now. That includes the drop this year on the flip side. In its long-term history, Bitcoin has only been cheaper 2% of the time. 2% of the time, stocks go up. Over the long term, stocks go up. Why is inflation right? Our currency gets weaker, so the value of assets goes up, right? Companies actually earn money and grow. There is economic growth. Those three things make that red line go up about 6% compounded in real terms in a year.
The problem is that prices reflect greed and fear, and the greed is when we’re above the red line and the fear is more below the red line. You can be above or below for a long time, but we’ve been above for a very long time and to get back to fair value requires a 54% drop from here. It’s crazy. This is not PE like today. This is called “PE 10.” This is 10 years of average earnings, which smooth’s the peaks and troughs. People are saying “The PE should be higher because companies make more in a low interest rate environment”. That’s a specious argument because low interest rates are a sign of economic weakness, not strength. So your future earnings growth is probably lower if you take a 10 year cycle.”
At the beginning of the pandemic in March 2020 there was a sharp drop in the U.S. stock market. But the recovery was even more dramatic than the drop by the end of 2021. The stock market was up almost 50% from its pre-pandemic level, with record high inflation and interest rate hikes. If it gives up some of those gains in 2022, if it loses all those gains and possibly more because of the current macro environment and geopolitical tension. There could indeed be a bigger drop within the next 6 or 12 months. In his interview, Yusko compares what we are experiencing now to the dot-com bubble in 2000. He adds that since 2000 was just a warm-up for the final bubble burst, we can expect the same chain of events now.
“This is a 2001 redo. You know, I’ve talked about this and talked about it ad nauseam. People forget that 2000 was not a bad year. 2000 was the warm-up. 2000 was when people went, “Wait a minute, this is stupid,” and we started to go down. But then we had this relief rally where the Fed said we’re going to save everyone. We’re going to print more money because the Fed had printed half a trillion, half a half of them, actually not 10 trillion. But when the world didn’t end, people looked at stock prices and went, “Geez, these are pretty high.”
So on March 24th, that was the top, but then the Fed came back in that first quarter of 2001 and said, “No, no, we’re going to provide liquidity. We’re going to save us. We only ended up down 6 % for 2000.” But in 2001, when Stan was getting whipsawed, you had this rally. We went all the way back, almost to equal, I think, from one point down, 14-15%.
So, it was a vicious rally from kind of the middle of November, through December into January and then the stuff happened. All the stuff Stan describes led to earnings revisions so famously, and this is also happening right now. You had companies like Cisco that couldn’t sell their inventory. They wrote it off and literally started selling it again later at zero cost, which is just so insane, but they played it off. They said we have to restate all of our earnings from the last five years because we kind of exaggerated. It led to the discovery of fraud.
2002 was a really crappy year. That was down 22. So you still had plenty of time. And if you look at a traditional bubble chart, you can maybe attach it to the show notes. It goes and has that false bear trap, where it kind of falls. And then it kind of goes parabolic to the top. Then it rolls over. And then you have the last cathartic kind of turn up. It’s called a return to normal as everybody says, “No, no, no, it really is new paradigms” which means anytime someone says, that just run away. And then you have the drop, and the drop accelerates through capitulation and fear, and then you get to loathing on the other side.
And if you remember the first quarter of 2003, right before we invaded Iraq for the second time, that was when people were like, “I’m done with stocks.” I just never wanted to see a stop again. Institutions were like, “We’re not going to invest and that was clearly a good time to buy them.” And war, but war, war too.
I mean, everything’s the same. I was making the case that bitcoin is a good asset, and we are so early in Michael’s career. These people, like one woman, came up to me and said, “I disagree with everything you said.” This is a Ponzi like. Well, look, if you don’t know the difference between a Ponzi and a pyramid scheme, then we can’t even have a conversation, because by definition it is not a pun, not a punch. You can call it a pyramid. If you want, just like any other currency in the world, which is built on faith and belief and foundation, but you can’t call it a Ponzi. But this audience wanted nothing to do with bitcoin.
Now, remember, this is the Pacific Northwest. This is from Amazon and Microsoft. And we’re rich because we’re smart. And they won’t have anything to do with anything, but what I said is that they said, “There’s not a hedge against inflation because inflation was 9% and bitcoin didn’t go up”. Wait a second in the last two years. Okay, this big spike on the chart means the Fed printed 50% of all the dollars in the history of the republic 256 years ago. Okay, if you print 50% of the dollars that means you basically devalued by a 100% ISH, right because you’ve doubled the money supply. Bitcoin’s up precisely 100% in that two-year period.”
Meanwhile, another bout of the crypto market’s infamous volatility has brought bitcoin below $23,000, for what seems like the 10th time in just a week. As of press time, the world’s largest crypto asset is trading at $22,297, a 5% decrease over the last 24 hours. The price decline has also affected other top cryptocurrencies. Ethereum has dropped by more than 7% and is now trading at $1,522. Within the last 24 hours, Binance, Solana, Cardano, XRP, Polkadot, and Dogecoin have all lost between 5% and 10%. The overall crypto market, which only just got above $1 trillion, could go under again if the decline continues. This latest decline could further weaken sentiments and send prices tanking again. What do you think about Mark Yusko’s interview and the latest price decline? Do you think we will get another bottom or a brief drop followed by more consolidation?
[This article is a transcription of a video made by Savvy Finance]
[Original video: https://youtu.be/ATkned9oe1o]