We have to talk about the CPI figure that came out yesterday, which was even higher than expected inflation. It is off the charts, but what does the market actually think about this now and going forward? How is that going to affect the price of Bitcoin and altcoins? I’m going to think about that. I’m going to think about how the market is pricing in what is going to happen over the next six months, even though the figure is very high at 9.1%. The market is thinking that that’s essentially the peak. That is what the market is saying right now. They may be wrong, but they’re saying that they think that over the next 6-12 months, the rate is starting to come down again and that’s what’s being priced in right now, which is maybe part of the reason why a lot of people were asking “Why did Bitcoin actually go up yesterday?” Well, it came off. There was a big sell-off on the news, but then later in the afternoon it actually rallied. So what is going on and how are the market and the bond market affecting this? We’re going to look at that.
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Rates
First of all, what we can see with bond yields is that the yield curve is now inverted, which means that the bond market is predicting a big recession essentially in the next 6-12 months. Obviously, we’re basically in a recession now. But you can see that the market is saying that the Fed is going to raise and raise and raise and inflation’s actually going to come down a lot. That’s what the market is pricing in and that is why Bitcoin is going to react to that as well, because Bitcoin is not a stock. We’ll get on to what stocks are going to do, but Bitcoin is not a stock and it has no earnings. It’s a commodity in itself. So it’s going to react in tandem with what rates are now. It’s also going to act in tandem with the Nasdaq because it has a correlation there and so there are two different factors that affect the price of Bitcoin, not just earnings because it doesn’t have any and so you have to look at this.
So when we go back to Bitcoin, you know what it’s going to do here. Well, let’s have a look at the trend. This is the day chart here. We are very clearly still in a downtrend and we are not really breaking any resistance barriers, so you have to look at that.
If we look at the four-hour chart here, we can see the 200-period moving average, and this is a four-hour moving average. As you can see, we’re actually coming up to meet this, so we have over the next couple of days quite an important level because of what’s been happening on this four-hour chart. As you can see, every time that we’ve gone through the resistance, we’ve sold off.
So you know, is that going to happen again or are we actually going to break through at this point? We’re actually going to meet that meet in the next few days.
What happens? But how is it going to react? Let’s look at yields. You can see this is the two-year yield on the US two-year right. So the U.S treasury two years and you can see that essentially this has gone from zero and it’s pricing in all of the rate hikes that are coming from the Fed.
In fact, the market believes that the Fed could raise rates by one full basis point at this point. You can see that right here and how it’s changed.
So for the July meeting on July 27th, you know, you’re starting to see a few banks come out and say, “Can they raise 1%?” This has gone up from those 75 basis points. You can see over the last few weeks the market was right here 89.5% of the market thought that they would raise 75 basis points to bring us up to this level, but that has changed over the last day. You can see now we are actually going over to 77.4%. You can see that that’s changed dramatically from one day ago to now. The market is now essentially all of them. 77%, saying, “I think they’re going to raise 1% at the next meeting. Why not?” Because those inflation figures were so high. However, this is priced in right now. This is getting priced in and now you can see that the U.S. 10 year is right. So, in the United States, this is 3.1% after two years. If you look at the US 10-year, this is actually below. So we’re going to go for US 10-year yields and see that this is actually below the 3.9%. So the yield curve is inverted, saying that rates are going to be higher in the short-term and then they’re going to come off the market.
The bond market believes that the Fed is going to raise rates substantially to spark that big recession and then when the official recession comes towards the end of this year, we’re kind of in one already, but when that happens, when the demand really shows like all of the commodities have fallen off, inflation is down, they think that will ease. So the market looks out 6–12 months in anticipation of that now.
And you’re seeing these rates of expectations come down over the kind of long term or the medium term for the next 10 years. Bitcoin is going to react to that as well, because Bitcoin does react to yields and the cost of money as well.
Rate expectations
Here are the rates of expectation. It’s the five-year break-even point. So this is a way we can see what the market thinks inflation is going to be, and you can see it’s just coming down, down, down. So, there could be a 1% move in the terminal rate. The important thing is that rates have already gone up.
It doesn’t really matter what the Fed does, it matters what the terminal rate is before starting to come down again. The market thinks that the Fed is just going to raise interest rates and do all of it to spark the recession and then start easing again. So you can see that the market is thinking inflation is going to start coming down from here.
Current conditions
How does that affect Bitcoin? And how does the stock market going into a recession actually affect Bitcoin? I don’t think it’s positive. How can it be positive? But we’ll start to see earnings revisions to the downside coming. This is not positive, in my opinion, for Bitcoin. Even though Bitcoin isn’t priced on its earnings, the nominal buyer of Bitcoin is retail, and if stocks are not doing well, that means a recession’s coming and people are losing their jobs. So there’s just less money to go around investing in something like Bitcoin, but what we’re seeing here is the earnings revisions are going to come down a lot. You can see the price action yesterday when it went up. This is difficult to truly analyse because moves with liquidity stuck at its lowest level seen in years obviously can’t be analysed because liquidity is low. So these moves aren’t really pricing in what the bulk of the market is doing, potentially just sitting on their hands or not investing, staying in cash, staying in dollars because the dollar index is the highest it’s been in years, right, so maybe they’re just low voles. You can see the sell-side analysts, okay? These are analysts that give price estimates. Some forward price estimates are scrambling to get ahead of Q2 earnings over the last five days. They’ve downgraded more than 500 names on a net basis.
What does this mean? Well, basically, now we’re getting into earnings season and all of these stocks are going to downgrade their earnings because what they think of as a recession is coming. As earnings come down, the price of the stock market may come down as well.
Here is some research on this. The price to earnings ratio back in the ball run was way over 20 across the whole market, which is typically quite high. Usually, it’s around 16 times earnings. We’ve actually come down; the stock market’s come down, and now we’re at a level of around 15 times earnings. The market right now is priced accordingly. So it’s normally priced considering earnings that have come in the past. The problem is that during a recession, earnings for forward earnings estimates come down around 20%, and we’ve barely got any at this point. So what does that mean? Well, there are two things that can happen. You can see Goldman. If they think 2023 estimates for earnings are too high, they have to come down. Two things can happen here. Those earnings estimates can come down. But prices remain the same, meaning that the price to earnings ratio gets higher. But why would that happen? It wouldn’t in a recession or when pre-earnings estimates come down and it keeps a 15x multiple and then earnings come down. So the price comes down because that multiple stays the same, so pro stocks come down in tandem with that.
I do not believe that that is bullish for Bitcoin. Even though there are no earnings and it looks like in the next 6-12 months rates will be getting lower, which is good for Bitcoin. So you have those two kinds of contradictory factors with the price of Bitcoin that are trying to fight it out right now. If we are to see any rallies in Bitcoin and all coins as well, it is because the market is pricing in rate cuts right now. That’s been priced in. The market looks out 6–12 months and says, well, if rates are coming down, that’s an easier environment for something like Bitcoin because interest rates are lower, the economy will ease a little bit, and the fed won’t be raising as much. So that is why you may see Bitcoin rally a little bit here and there because the bond market is telling us that the problem is that the bond market may be wrong, someone like Bill Ackman, as you can see here now.
Slug
Bill Ackman is a slug. So you must take everything with a pinch of salt because he talks about his own trades, and so you have to read in between the slops. However, he came out with this tweet and was basically saying; the market appears to assume that the Fed will act as it did in the last three recessions, which means that they essentially cut extremely quickly. The Fed just cut rates extremely quickly to ease the economy, and that’s massively bullish for stocks and hugely bullish for Bitcoin. And that is what the market is pricing in right now. The market appears to assume that the Fed will act as it did in the last three recessions by immediately easing when the economy goes into recession. While this seems intuitive, the lessons from the stagflationary periods of the 70s and 80s suggest different policy responses.
He is probably short bonds and so wants bonds to remain higher in terms of their yields because, if he’s short bonds, he wants rates to remain higher so he can make his money. So read in between the slops here, but I hate comparing now to the past. In the 70s, the economy was totally different. We had none of the technology we have today. We have none of the ways that we can react to these things today. So I’m not going to compare anything to the past. I don’t like that, but he at least thinks that the rate cuts that the bond market is pricing in now are wrong. He thinks that bond yields will remain higher and prices will remain sold off for a bit longer, keeping the recession in and digging it in. And that’s obviously not bullish for stocks and Bitcoin because as we’re looking at price to earnings multiples, they have to come down, potentially the rates have to come down, and then obviously we’re looking at Bitcoin as well. This is, you know, a little bit like property in that if everything’s great and people are doing well, the price will go up, and in a general sense, if people aren’t, then you can’t really be bullish on Bitcoin. So those are the two factors that are playing out right now for the price of Bitcoin.
Opportunities
So how do we play this? Because obviously, you can’t predict what’s going to happen at the tail end of this year. Is the Fed just going to cut straight away and really ease the economy, or are they not because they’re just so afraid of inflation? Inflation’s coming down. We can see this in the commodity indexes. So take this for what it is. You can look at broad-based commodity indexes, so we want the Bloomberg commodity index futures to see if this has come off so much. So when looking forward, we’re saying is inflation going to carry on? Probably not. Look at the commodity index. This is a broad-based commodity index showing that prices are not continuing up.
So I’m looking forward to this. That’s why the bond market is pricing in these cuts because it just simply sees this and says there’s no reason to stay elevated at those rates. So how does this feed into Bitcoin and all coins? If we think the recession is going to keep prices low, then you know, just look at the fundamentals of some altcoins. Most altcoins don’t make any money, so why would you invest in them unless they have a good business? Token Terminal gives you all of this for free, so you can see the price to earnings ratio. ETH There is a 100+ to earnings ratio. I don’t believe that there is any monetary value in ether. I don’t believe its money, but I believe it’s a protocol that makes a lot of money, 100 times earnings that could still come down. You can do this fundamental analysis quite easily by looking at other altcoins. You’re seeing some that actually appear to be fairly decent value, especially compared to what they were in the past. For example, you know, we have them here trading at 72 times price to earnings. The thing with these and looking at their price to earnings is that their earnings can easily double or triple within a few months when people flood back in to actually using these protocols. You know, we have to look at all the insolvencies that are happening and realize that, when voles pick up units, they will double. It’s kind of like earnings don’t make earnings, it all goes to liquidity providers, but you get what I’m saying. So, they could easily double their earnings. The two on there could literally double or triple their earnings, and then with those earnings, the price to earnings ratio starts to come down to like 25-30 times, which is not expensive even compared to stocks. These protocols make money. So you have to look at these opportunities to say “Look, I don’t know where the price is going to go,” but some of these opportunities are here, and during a recession, if prices get lower, you just average into actual protocols and all the coins that are making money.
[This article is a transcription of a video made by MoneyZG]
[Original video: https://youtu.be/OEEUB6vcgoY]
