Bitrue Macro Outlook July 2022
By Whitney Setiawan, Research Analyst — Bitrue
- Macro is the key theme for investing in crypto this H2 of 2022
- Macroeconomic environment has not been doing well ever since the supply side cost push inflation caused by the COVID-19 pandemic, it has urged the Fed to go down the path of monetary tightening.
- There are two things to watch for in July: signs of inflation peaking, or a concrete signal of recession. Any signs of the two above showing could lead to a more bullish sentiment for the market in general, as market participants expect a Fed pivot.
Backdrop of macroeconomic environment:
2022 has been quite the ride for us in the crypto space, BTC price has been going nowhere but down ever since November of 2021. Everytime we get a bit of a rally, a steeper decline is always soon to follow. There was a significant period of sideways movement in prices of crypto by the end of May, as investors were in an intense debate on whether the markets have fully priced in the Federal Reserve’s promised rate hike to curb inflation. In the end, it’s a pretty much clear victory for the bears, as BTC dropped further from its major support at the $30,000 mark, accompanied by ETH falling from its $1700 support.
Right now, all of the eyes are on the Federal Reserve’s monetary policy and nothing else. While investors previously would center their focus around each web3 project’s moat, utility, tokenomics and such, the focus has clearly shifted to the macroeconomic environment as prices deteriorate even further. With the amount of speculation and hype causing both retail and institutional investors piling into the space, at present, the price action of major cryptocurrencies strongly mimics that of traditional risk assets.
For further perspective, BTC and NASDAQ moves parallel to each other, both are on a downward trend as growth technology stocks, which was the star during the 2020 bull run, is butchered mercilessly as financial conditions tighten. (Cathie Wood must be having a hard time)
Aside from being closely correlated with the S&P 500, BTC has also formed an inverse correlation to the Dixie, such characteristic is highly resembling a risk-on asset.
To tell you the truth, we would have been much better off if cryptocurrencies do not share the same behaviour as equities, but reality is what it is, cryptocurrencies are now officially a risk-on asset, and the constant monetary injections from central banks are what keeps valuations of risk assets intact. Bad news is, the current macroeconomic condition is without doubt very very dire, and the Fed has stated repeatedly that we won’t be getting more cheap money to get the market pumped for a while.
To trace back the source of such horrendous economic situation would instigate a very long list of years of mistakes and bad leverage from many parties, with market prices solely relying on the availability or rather the expectation of central banks’ loose monetary policy, many economists have forecasted this disaster years before, but back then hardly anyone could pinpoint what exactly will be the trigger for our overleveraged financial system to unwind.
In 2008 when the markets were crashing, the officials decide that they couldn’t afford to have a prolonged bear market and thus introduced the concept of quantitative easing, or simply put popularized as money printing (it’s not exactly how it works but we’ll leave it there for now), to slosh money down the system in order to counter the effects of a declining economic growth. Although the notion that the economy has fully recovered since then is debatable, what is obvious to us is that the stock market has been soaring ever since then.
Economists and investors who are skeptical of this unconventional take on traditional central banking tools would argue that QE alone won’t be able to sustain the price levels of these assets, and if the underlying economy is not structurally fixed, it is only a matter of time before the market will give in to the invisible hand of the economy, and demand for goods will naturally weaken, leading to a deflationary, or worst recessionary period. To them, the Fed is only kicking the can down the road.
When the COVID-19 pandemic strikes in 2020, a lot of people thought that it’s finally the long awaited end of a secular bull cycle, but the Fed has once again defied our expectations by once again coming to save the day with another round of quantitative easing, this time amplified with a lump sum of fiscal stimulus. Doing QE is one thing, but QE+fiscal is a whole different beast, whereas QE injects money into the economy indirectly through the process of credit creation, stimulus checks dumps money directly to the pockets of average Joes.
Things went on smoothly at first, that is until real economic problems started to surface, namely inflation. Although the Fed and most central banks have a fair share of control over the demand in the markets, we were taught on the first day of economics class that there are always two sides of the equation, and the other one being supply. The pandemic has caused a massive disruption in the supply chain, with movement of people and goods being extremely limited, and the shutting down of the world’s manufacturing powerhouse, China. China has taken an extreme measure of dealing with the pandemic, implementing a zero Covid policy, where major Chinese cities were locked down for months, resulting in a much lower output of goods as well as supply chain bottlenecks due to ships being unable to leave the ports of the Chinese cities.
In other words, the demand for goods from the people is doing well (kudos to the stimulus package), but there are simply not enough goods out there to accommodate these demands, causing a demand-supply imbalance, resulting in a classic textbook supply side cost push inflation. Adding the Russia-Ukraine situation into the mix, as sanctions imposed on Russian oil have constrained global crude supply, causing prices to shoot up to astronomical levels. Oil is an essential commodity that has a domino effect on the production of various products, as logistics always require petroleum. While the Fed injected the money into the markets back in 2020, the supply side is not able to keep up with it, causing a mismatch between demand and supply, thus resulting in uncontrollable inflation.
When the problem of inflation first arose, the Fed was quick to dismiss it as transitory, and was slow to react to it. The result is inflation being left unattended and CPI now sits at 8.4% as per May 2022. Granted, the Fed has started to raise rates and gradually shrink their balance sheet as an effort to combat inflation in March, but the effort was futile because by the time they set the gears into motion, consumer sentiment is already deteriorating. What is there left to slash when the market demand is already severely wounded?
To make matters worse, on a fundamental level, the Fed does not have the luxury of being able to raise rates too much without causing a recession. As a comparison, people would often refer to the 1970s where the then Fed chair Paul Volcker is famously known for hiking rates to push back inflationary pressures. However, there is one main difference between Volcker’s era and the present day US economy, as emphasized numerous of times by famous macro guru Lyn
Alden, the US was a trade surplus country back then, while now it is running a deficit, where a tightening of monetary policy is not ideal, as it will cause the cost of debt repayments to surge.
The Fed’s approach to handling the situation is adding salt to the wound, as it has caused a massive selloff in risk assets, while it has done nothing to tone down inflation and bring back consumer confidence. The dilemma is whether to rate hike even further and risk a recession, or to continue with QE and drive the economy to hyperinflation. The Fed has stated repeatedly that the goal is to engineer a soft landing which won’t lead to the above two scenarios, the key is to hike rate just enough before continuing down the road of balance sheet expansion. Although the Fed historically never done really well at this, recent conditions seem to show a glimmer of hope for them.
What to expect this July:
Now that you have understood what is going on with our current situation, let’s have a look at what the month of July has in store for us;
July is a jam packed month for the Fed’s officials, with FOMC being scheduled for the 26th and 27th. To start off the month, we have the ISM manufacturing PMI, results exceed expectations with 56.1 point, higher than the forecasted 54.4, indicating an improvement in manufacturing activities. However, it’s important to note that the PMI fell by 3 points in June, a sure signal that the interest rate hike is punishing the economy.
CPI, PPI, Non-farm payroll, unemployment rate, retail sales, consumer sentiment, services PMI, and FOMC minutes results are soon to be announced this month , all lining up in anticipation for the FOMC statement and fed funds rate decision by the end of the month.
Assuming that you are long crypto, there are two vital things that you must pay extra attention to this July, which would be shown in the series of data presented above.
First, we are looking for a sign of inflation being tamed. While initially it is true that the supply constraint, mainly from China, is what caused this chaos, Chinese lockdowns are now lifted off, and supply chain issues are slowly subsiding, with the bullwhip effect now being the center of attention. As Big Short’s Michael Burry pointed out in his recent tweet, suppliers have overestimated the customer demand,due to the shortages they have been facing, they decide to hoard excess goods, and now plenty of goods are in excess glut, which would naturally lead to a deflation in prices.
In addition to that, President Zelensky has talked about the Ukraine-Russia war ending before winter, another signal that inflation could be slowing down soon.
Secondly, one could argue that we are in a “bad is good” financial regime, where any indicators pointing to a recession is seen as a bullish signal. Although it sounds counterintuitive at first, the logic is simple, the faster we are to get a recession, the faster will the Fed reverse its course and pivot. This is why each time the Fed proposes a higher rate hike, the market seems to react positively to the news. There are many reasons as to why the market has placed an utmost belief in the Fed pivot, one possible suspect is because the Fed historically have always decided to rescue the markets before anything else, and also the fact that a recession is certainly to be avoided, given the house elections coming up soon, from a political standpoint, a recession will be a nail in the coffin for the Democrats.
When observing the Fed, as well as other central banks’ movements, we must keep in mind that they are a lagging indicator, as the actions they take are based on data of events that have already happened, and they will never implement a policy based on a forecast of the future. Therefore, the Fed has always been following the markets, and never the other way around. The current smart money asset title is bestowed upon the bond market, most believe bond market traders to be the smartest guys in the room. Now, the bond market says that inflation is over, and that deflation is soon to come. Don’t believe it? Take a look at the recent plunge in bond yields.
Despite the signs starting to emerge here and there, both JPow and Janet Yellen have not confirmed a recession and until then we should still expect some market volatility in the upcoming few weeks.
Overall, macro will still be the key theme in the second half of 2022, and until the foundation of the financial system itself is repaired, it will still be a long way until crypto assets will finally be able to reach its own price discovery, with valuations aligned to the product’s actual value. In the end,a bubble is less likely to happen to technology assets like blockchain and web3 tokens, as they are still far away from realizing their full potential. In the long run, these assets have the most upside potential, and it is macro-heavy environments like these that will allow investors to earn big bucks. However, as timing the market is a task that is almost impossible to get correctly all of the time, it’s important to know your risk tolerance and manage your portfolio accordingly, as volatility in crypto certainly won’t be kind to you.
A little bonus — a look on BTC & ETH based on the charts:
For those of you who are technical geeks and prefer to have a more quantitative approach to reaffirm your beliefs regarding the bunch of fundamental facts and theories that are thrown at you in this article, here is a look at how BTC, being the gold standard of cryptocurrencies, and ETH, the reserve cryptocurrency given its extensive network effect, has been performing and how its future might look like:
The scene on both charts are brutal as the two bluechip cryptos have confirmed a double top pattern, with a high chance of going into a free fall to $10,000 & $660 price levels respectively. Both assets are way below their 200 days moving averages, something that we have not seen since April of 2019 . If there is any optimism shown on this chart, it is that there is some support on the $17,000 mark on BTC, and $1000 on ETH. When a fibonacci sequence is retraced on the daily charts, we can see that both assets are disturbingly close to their 0.786 fibonacci levels, the last hope before a nosedive back to the 2019 price levels.
Regardless of that, some might argue that both assets are already forming a bottom, with El Savador buying 80 BTC at $19,000. Aside from Nayib Bukkele, MicroStrategy’s Michael Saylor remains as bullish as ever, accumulating another 480 BTC over the past two months.
To sum up, the game of investing has always been about setting up the most fool-proof strategies to make calculated bets against the markets, and given the relatively smaller market capitalization of cryptocurrencies, the game is investing on steroids, more thrill, more grief. Despite all that, crypto is here to stay, with the amount of involvement from institutional investors, it’s hard to imagine that such an industry would be bound to fail. The crypto scene greatly differs from 2018, where investing in crypto was considered to be anti mainstream. At present, we are no longer early adopters of the technology, rather we are just a part of the early majority. So sit back, relax, DYOR, and buckle up for what might be the ride of your lifetime.