Corroborating evidence is that crypto started going up and many of these tokens rose a hundred percent in a week and a half or two weeks now. They broke these patterns where everybody was expecting another leg lower much like they are in equities which makes me slightly suspicious of equities. I don’t like being short but crypto did really well. It’s now overbought, we’re putting in like D mark nine patterns which tend to be a short-term correction now do we go back to retest the lows based on the growth numbers and other stuff. I don’t think so, so I think we’re more sideways consolidation than another rip higher, but it’s not clear to me. But, I think the base is in and I’ve been saying that for a while now because crypto is a very forward-looking asset. It will look further ahead than anybody else and it’s sniffing out the change in bond yields.
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So, that brings me on to the most important part which is bond yields. Bond yields are now rolling over as I’ve been forecasting they’re about to break a head and shoulders top pattern. So, Brian. If you can show the head and shoulders top pattern which is this chart here 275 in 10-year bond yields. If it breaks that then we should start to go down below two percent. I think somewhere around 175. So, that’s not what the market expects but if you think of what that does to grow the assets. It’s taking down the future discount rate and if that means that inflation is coming lower then you’re taking some of the inflation expectations out. So, things like what I refer to as the exponential age stocks further out the growth curve things like Scottish mutual trust in the UK which I’ve just interviewed on the real vision they’re amazing some of the best tech investors in the world. They’re going to be coming on. But, also whether it’s the semiconductors, whether it’s ark, whether it’s robotics and all of this I’ve got a whole basket of these should start to stabilize and do okay.
We’re starting to see that now. But, it’s still early days because they will be slightly behind crypto in terms of forward-looking. So, we’re at this massive shift where inflation goes, growth goes and bond yields start to fall. So, Brian, if you can show the chart of the GMI kind of financial indicator. So, this is the financial conditions index that we put together, pleased to announce Julian Bittle, who many people know has joined global macro investor as my head of macro research. He put this chart together and so what this shows is financial conditions. This is the rate of change of the dollar rate of change of yields. The rate of change of commodities are showing a massive decline in growth. It’s and it leads -ism by nine months which tells us that in nine months-time. Ism will have bottomed because it’s already ticking up so when we map assets across them and if anybody gets my Twitter feed today you’ll see that all assets correlate to ism except crypto which i’ll come on to.
So, they all correlate all macro. It’s all about the business cycle. If you don’t understand that then it’s really difficult to navigate yourself around this world because you’re flying blind but when you look at it this chart. What it’s saying is bonds are the most mispriced of all assets. They’re actually pricing the ism at 65 which is not where it is today it’s in the mid 50s or mid to low 50s then it’s high yield spreads. Then it’s small caps then it’s cyclicals they’re all kind of roughly in line with ism so these could move lower s p 500 as I said is leading the ism it’s at 45 the NASDAQ is getting down to 40 and that GMI exponential age basket is already pricing ism at 35. I it’s massively discounted so what is a chart like that tells you is that you should be looking to acquire the long end of growth. If you think inflation is going to be less of a concern and rates aren’t going to be as high so our job is to live 12 to 18 months in the future 12 to 18 months, we should have had a recession rates should have come lower inflation should be lower. Therefore, these stocks should be higher that’s kind of how you need to think about macro and bonds well.
If they’re not pricing in the recession right now. Then they give us a gift of an opportunity which is the by bonds debt where diamonds theme where bond yields have lagged, where the economic indicators are because of the reallocation out of bonds because of inflation fears that have happened massively. So, I think that readjusts and people panic back into bonds finally crypto. So, if you bring up the final chart. Brian is crypto, isn’t driven by the business cycle. But, it’s driven by global liquidity, so this is the global m2 um deviation from trend. So, it’s the rate of change of m2 and how far. It is away from trend and it’s about one and a half standard deviations away from trend and it’s turning higher that time it ever happens both at the top and the bottom leads to the turn in the crypto markets because liquidity drives crypto. Remember, this is not a cyclical asset.
So, it doesn’t go back to where it was like oil and commodities. It’s a network adoption model that goes up and to the right over time with these big volatile bands. Now a lot of people had the narrative that this was driven by that halving now maybe the halving which is a reduction of supply every four years in bitcoin is a factor because it’s correlated with liquidity. So, what you’re doing you put more liquidity into the markets. It leads to more people being able to allocate capital into this, into a low supply environment which is halving.
You don’t need the halving as a necessary precursor and Ethereum is about to have a triple halving event. I’m gonna do a whole update over the weekend to going to film for real vision members about all of this the macro crypto. The Eth merge, Eth yields wide all matters. But, the point being is macro is the driver of everything. Once you understand that you understand where the world should be going. So, what you’re doing is using the global economy as a forecast for asset prices. You’re looking for dislocations mispricing’s or opportunities based on that. So, normally, how we look about this is the business cycle. The business cycle is the ups and downs of GDP that economists never forecast because they use linear models. But, once you understand that the economy is cyclical you understand.
It’s forecastable because usually when it rolls over from a peak. It goes to a trough which is a recession after recession you go to recovery that cycle you can show a three-year-old kid. They go well the economy goes up and down, you ask an economist at the fed. They say it’s linear as do all economists – it’s crazy. It’s crazy that people model this which is why macro based investors tend to use the business cycle because it gives us an edge and why. All economists tend to be very wrong at turning points and these acceleration points. But, tend to be right over a longer term time horizon when you look at averages. So, when you start using these you realize that it actually drives all asset prices. So, the year and year rate of change of copper oil gold equities, credit emerging markets bonds. Everything is, basically, related to the business cycle which is global supply and demand. So, once you understand how to use the business cycle and what it is and then how to look at asset prices against it. It opens up this magical mystery world. That is so confusing until you do this and once you do this you’re like. I get it now, it’s all correlated to you.
This article is a transcription of a video made by Jamie Tree
Original video: https://youtu.be/ZN58C8nBiFU