5-Min Monday Macro & Crypto: Oct 2nd, 2023
Stong stocks, rising yields, Uptober in crypto, hot narratives
Hello. Thanks for signing up. I’m Sankalp. You can join our telegram channel here for more macro & crypto live updates
I spend hours reading, researching and talking to the smartest founders and investors every week. This is my attempt to give you a short 5-10 minutes summary on how I am thinking about Macro & Crypto markets and what lies ahead. Hundreds of hours summarised, so you don't have to.
"The person who tells the best story rules their corner of the world.” - James Clear
1. Big Macro Picture - All eyes on bond yields
Bonds are dropping and 30 year yields touching 4.7%
Stocks - slid first half on rising yields, but then rose second half of the week as markets absorbed the news on back of continue economic strength. Can equities bounce back after a bad Q3 and even worse September?
Dollar rose with the yields and that trend should continue in October I think.
China PMIs came in a tad stronger
US Govt shutdown delayed for another 45 days amid drama to remove McCarthy. See you back with the popcorn soon.
UK inflation is cooled down to 6.7% in August, down from 6.8% in July. BOE kept rates steady at 5.25%. Consequently , Pound declined further as rate differential between UK and US is expected to widen with less BOE tightening.
Japan continues to face persistent inflation at 3.1% in August, with core-core at 4.3%, exceeding its target. Yen continue to weaken hitting one year low on track to 150. Good for Japanese exports.
While Q4 is structurally a stronger quarter, and the US economy is still strong, the US debt & yield surge is starting to bother me a bit (more on that below). Debt & yields are soaring at an alarming rate. This could lead to a credit squeeze eventually as explained below. I am not sure when because
Treasury can continue to issue more T- Bills and borrow at higher rates for now
FED has ammunition to scale back rates if they foresee any such events
It’s election year next year. Dems need to look good short term
With so much new money (read debt) entering the system, there is good growth for now. However, I am going to stay hedged and I am going to keep some cash ammunition ready in case of a major credit event.
Usually bonds are a precursor to equity. Why is this time any different?
On the data front, we have U.S. Initial Jobless Claims on 5th Oct & U.S. Non-farm Payrolls / Unemployment Rate on Oct 6th - a key to health of US economy and FED decisioning thereafter.
2. Stocks - Uptober or Doomtober?
We stated last week:
Growth is strong in US. Now that there are no more FED hikes in the horizon, a little correction in stocks is healthy for now. Markets don’t like FED’s uncertain hawkish stance. VIX jumped over 17 as fears of higher interest rates being the dominant factor. S&P 500 is down around 6% from its high in July - that is a healthy pull back for now.
As we enter Q4, markets are heavily short (fear of higher yields and a hawkish FED), but this week we saw support hold very strongly. I believe we could see a somewhat sustained rally in October but a lot depends on FED member statements, PMI, CPI and other growth numbers this week and next.
3. Bonds, Fx & Rates
There are two risks for holding a T-bond:
Liquidity - in case you need to sell your bond at a loss. Market is worried that US government deficits are increasing at alarming rates and tax receipts are dropping like flies - thanks to your esteemed politicians.
Inflation - is greater than bond’s yield. Why hold the bond when you are getting a negative real rate of return?
This creates a never ending debt spiral:
Less tax revenues → higher deficits → more borrowing (debt) → more interest payments → even higher deficits & higher rates → even higher deficits → Russia, Japan and China dumping UST Bills →Investors continue demanding higher rates
A strong supply of incoming bonds is essentially that is creating this premium in yields. We wrote about this in our telegram channel as well here:
Last few days, everyone on the street is hopping on the yield rise bandwagon. Why are the yields exploding in US treasures? What’s happening? What are the options and what are the consequences?
Some Friday morning thoughts
1. In the end, every asset price boils down to demand vs supply. In other words: buy vs sell pressure. One can make it as complicated but the US govt needs to fill in $10bn plus of treasury over next few months (read borrow).
2. Lenders are not ready to lend unless they get some bang for the buck - that is some more moolah for their risk. Hence yields jump.
3. If you look back last 2 years, FED guidance and message has been very clear. QT QT QT. And they remain hawkish. Market sees that. Accepts that. And hence equities are feeling the pain. I think there could be more pain but there is also an underlying suport now as economy remains strong. FED is not going to turn dovish just yet. A little bit more pain. 10%? 20%? No one knows but Q4 is generally strong and we could start to see reversals soon.
4. This, coupled with decent growth, housing, employment etc - we become even more cautious, albeit with a FED support.
5. So what do you do? Either sit in cash for now. And relax. Or sell some puts if you think 20% discount from here is a good level to get back in. DYOR NFA
Consequences of Higher Yields and Unending Debt Spiral
Basically bond market is broken. We could see another 100-150 bps increase in yields but beyond that FED has to step in. Market knows that and hence the stocks reversed second half of the week.
More debt = higher GDP as consumers spend more as US economy is still strong.
Higher inflation targets (4% instead of 2%?)
Higher mortage rates for long term mortgages. Less buyers, more sellers
More savers putting money in short term T-Bills - leading to less credit
More long term T-Bill issuance by treasury - rates go further up (debt spiral)
I believe we should be very much prepared and hedged for a credit event.
On one side we have stable growth and good earning, on other we have spiralling debt and rise in inflation expectations. Stocks usually follow bonds. And the debt numbers that we are seeing are just too doomsy right now.
There is one thing that I see pundits never bring up - we are no longer in a peaceful world. Egos create wars. In the name of these wars and those egoes, politicians will mess up economies, thereby creating recession (or depression) at the cost of normies. That is what I fear. That is when you need cash (and balls) to deploy.
Meanwhile, China September official PMI Manufacturing was at 50.2 (Est.50.0 Prev.49.7), Non-Manufacturing PMI was 51.7 (Est.51.6 Prev.51.0, Composite PMI was at 52.0 (Prev.51.3) - all of them looking a tad better. But it is too early to call it a U-turn IMO.
Consequently, DXY should remain mildly stronger vs its major counterparts. While many harp on the fact that oil is going up and that should pressurise DXY. We forget that since 2019, US has been a net exporter of oil. This move to net energy independence has leads to massive selling of dollars, not buying.
Good growth - USD bullish
Tech rallies & innovation - USD bullish
Good economic news - USD bullish
Risk on safe haven demand - USD bullish
Oil - Ripping higher - USD not bearish anymmore
Unless there is a severe recession and both China and EU do very well, USD seems very strong to me.
4. Crypto - A promising Q4
Bitcoin - Making solid moves this “Uptober”
Bitcoin is showing renewed strength as we enter Q4. Does someone know something wrt ETF news? Or someone buying spot bulk in anticipation of some other factors? Whatever the reason, I am convincd that next bull run is going to be wild. If the top for last bull run was 70K ish, then we are easily looking at 100K in the next bull.
This is not financial advice but apart from a major credit event, october is looking strong as most of these buys are spot. And that is always encouraging.
That is exactly what we said last week:
However, I am starting to see some light at the end of BTC tunnel. We have been steadily holding above $26K which is a bit bullish as it seems that most holders are HODLING tight, with improving on-chain fundamentals, SEC losing to inspect Binance US (again) and a lot of FUD on crypto twitter regarding Binance. $BTC held quite well.
But we need some good news and some macro blessings to really take us higher. Smart money knows that macro environment is risky right and uncertain FED has addd to that anxiety. In the short term, as long as the $26K support holds, I am looking at $28K and then $31K.
ETH & Majors
ETH is on a tear rebounding from 0.060 on ETHBTC. That is primarily led by ETH ETF news set to launch this week, first by Valkyrie, and then others. But unlike BTC, most of this pump is led by futures (perps) and that is not so healthy IMO. I would be hedging some risk above 1750.
Arbitrum Season is back: with new Arbitrum proposal to distribute grants to the ecosystem projects. Not only Arb is up 10%, but also its projects like $JONES, for $GRAIL, $MAGIC, $PLS, and my favourite $RDNT.
We said last week that I am accumulating these. Turned out to be a good call. We said:
Revenue Generating coins for long term accumulation - $FXS, $UNIBOT, $GMX, $DyDx (large unlock though) - I like FXS here that brings RWA narrative, and soon we will have frxETH V2 which will boost demand for frxETH. Price is almost at the bottom. Wait for macro to settle in a bit though. I also like $MakerDAO & Radiant. $RDNT is launching on ETH mainnet in October and has a yield booster (Radpie) going live in September. This should help boost TVL & a potential LayerZero airdrop. $AAVE and $MKR, had an awesome week as some hedge funds publiclly went long
Crypto Narratives & Trends
SocialFi - TVL & interest continues to grow in this hottest new category as we explained last week
Friend.Tech - on Base has the largest mindshare. Users are farming in anticipation of an airdrop.
Star Shares on AVAX assigns a wallet upon signing up
Post Tech = Twitter + Friend Tech airdrop points is for all users & creators.
RWA narrative is continuing in full swing with:
$MKR among top gainers this week (> 15%). As long as FED is hawkish, this narrative should be fine.
I believe $FXS, is a great buy here as Frax V3 goes live in October (plus over crypto plus macro strong Q4, plus Frax bringing RWA on-chain in their stable coin).
Also keep an eye on $CFG - an omnichain credit market with over $242M into their pools so far.
Ondo is another one for liquid exposure to an ETF of short-term U.S. Treasuries where its USDY provides access to tokenized notes backed by short-term US Treasuries and bank demand deposits.
Goldfinch is a decentralized credit protocol that enables crypto borrowing without needing crypto collateral. Instead, loans are fully collateralized off-chain.
Telegram Bots: are here to stay
$UNIBOT is my favourite and has been for months now. It allows users to snipe, utilize limit orders, and copy trade wallets.
$BANANA has some key features like anti-rug monitor, MEV/Private Transactions, and Re-org Protection.
Maestro has no token but has three good products - whalebot, wallet tracker, and buy bot
$LOOT is great for frictionless looting airdrops and revenue share paid in $ETH is live for a few months now
5. Some Interesting Stuff
My most used framework for crypto trading by oxKyle
Web3 Consumer App Thesis by Manifold Ventures