5-Min Monday Macro & Crypto: Oct 9th, 2023
War unraveling, yields historic highs, growth and employment still strong
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.
"Don't fear failure. Not failure, but low aim, is the crime. In great attempts it is glorious even to fail." - Striking Thoughts
1. Big Macro Picture - Yields + War = Volatility
Let’s go down the memory lane. Not too far. Just a year ago. We were all facing down the doom and gloom gutter. FTX, Luna , 3AC & Celsius leaders had ruined us. They are all in jail btw. And there is your lesson right there.
Macro was looking bad back then. We were all scared of the approaching 2023 winter ahead - except that yields were manageable and no one was talking about a WW. Those two factors have suddenly changed our world in last few weeks. I believe next 3 months are going to be very volatile and extremely interesting.
Here is a snapshot of this weeks macro:
Macro - mood is ominous, and this latest Israel - Palestine escalation is not helping. Some short-term PUT insurance is advisable in case things get ugly.
Data - Leading indicators are up, earnings are up. And we had a good headline NFP (Non Farm Payrolls) number touching north of 300K (triple the expectations). Even with a lot of part time workers - this was not horrible. The employment scenario seems just OK.
Bonds - yields are just historic. Going from 0 to 5.5% in 18 months is enormous. However, as stated last week, we believe they are oversold and we could soon see a turnaround, before it starts to effect global markets, and not just the US.
Stocks - are seeing a selloff agin. They have now erased almost all YTD gains on most indices
Dollar - Stays strong amid global tensions and its weaker dollar counterpart (Japan, China, Europe)
Gold & Oil - rallied today on the unfortunate escalation over the weekend. We could see another move up from here if things deteriorate. No one knows.
Bitcoin - has been very sturdy in face of rising DXY. This new war rhetoric puts BTC at par with Gold - the new “digital gold moment” for BTC. I don’t see a rush yet, as long as dollar stays strong. or unless an ETF is approved.
This Week - Bank earnings, CPI on 12th, FOMC minutes, SBF drama continuing
We are no political pundits here but a weekend like this effects us all in some ways. Some common sense thoughts, and prayers.
First of all, whatever is happening - is simply awful. Sides are being taken already, with some calling this Israels’ Pearl Harbour, or 9/11 or some sides calling Palestines’ prison escape. Whatever it is, this seems horrible for all sides.
In all probability, this is not going to get solved. This seems to have potential to grow to something very large. Markets will be volatile, oil should bounce back and Gold could rally another $200. I am not sure what happens next week, when dust settles & the war premium comes off. Perhaps a Gold and Oil pullback. Perhaps more escalation. No one knows. Will update more next week.
However, this is the type of an event that could cascade into a mutually destruction event, aka World War. I hope not, but everyone knows this has the potential to escalate big. Maybe cooler heads will prevail, but other countries are already getting involved (Lebanon, Iran, Russia, Saudi etc.) Many themes emerging - East vs West, China vs US, Global South vs West, Russia vs West. This escalation is just a step towards that. Especially when we were seeing some progress in the region between Saudis and Israelis.
This escalation in Middle East had not yet started last week, when I wrote:
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
My friendGeo Chenhas a great write up on this already. Man, he is fast.
2. Stocks - FED + Macro uncertainty = Volatility
As macro gets uglier, and long term yields are rising faster than the short term, its creating a tightening in credit markets. In other words, banks lending is going to get tighter. Markets see that, and that is why the CDS spreads for the big banks are rising. Borrowing costs could go higher and that is what FED wants. Bring down asset prices and bring down inflation by pushing rates higher. Have they let you down before?
Consequently, what I anticipate is a very volatile Q4 with VIX crossing 20, and staying there. However, even if a credit event triggers, FED has enough ammunition and Jamie Dimon has enough money to buy everything back up. I don’t believe things will get very ugly but any credit led, or any war led event, is an opportunity for your politicians to start loosening again, aka QE.
Meanwhile something to keep an eye on - U.S. Bank losses on held-to-maturity assets that have soared to an ALL-TIME HIGH of $400 Billion
So what’s the plan boys and girls?
Let’s not start catching falling knives yet.
The Middle Eastern situation is new and everyone is uncertain of its trajectory
FED is an unknown and uncertain. We will know more this week after FOMC minutes
Earnings are also an unknown, for now
Employment is a known and stays strong
Uncertainty means that stocks might not have much upside from here, and given this new escalation, there is a good probability of downside ugliness. Good to be buying some put protection IMO.
In case there is ugliness, due to war or credit, FED will (as usual) resolve this with its’ four B’s as Campbell says:
Bubble
Bankruptcies
Bank Failures, and then
Bailouts
In a world that is not peaceful anymore and clearly divided into 2 (or 3) camps, there are chances we fall into a recession but as stated above, FED has the ammunition to bring back asset prices at the cost of inflation. Aka QE. Owning risk assets at that stage or DCA’ing slowly into them with a hedged portfolio makes good common sense to me right now.
3. Bonds, Fx & Rates - Historic yields leading to a cap on asset prices
We wrote last week about the consequences of higher yields:
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.
I believe we should be very much prepared and hedged for a credit event.
Basically, over the last few weeks, the long end of the curve is rising. Interest rates were expected to peak and the market expected the FED was going to slow down. Markets rallied on that thought earlier in this year. Long end was doing OK then. Now we see that long end of the market is starting to move.
Bond prices are dropping dramatically. Clearly we have debt issues but this is unprecedented since 2001. The problem, is that this could break global markets as well, not just the US. That is not what FED wants.
Yield curve its flattening as long ends are rising. This creates budgetary issues for US and for the world. Everything is priced of US10Y T-Bill. That is the risk free rate used for all assets - discounted cash flows, valuations leading to lower asset prices if rates are higher. That means the value of the collateral falls. Banks will ask for more collateral and lend less. Hence their CDS is spiking.
DXY stays strong, primarily as yields are rising and its counterparts have nowhere but to rush to King Dollar. So much for the demise of Dollar dominance. Nothing has changed from last year when we said:
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 anymore
Yen, on the other hand, is teasing 150 levels and we clearly saw some intervention this week. A message from BoJ to some hedge funds - we can intervene, we will. We are BoJ and we have more ammunition than you do. In reality, they cannot do much in the long term if US yields stay high and the carry trade is wound off.
I am counting on a counter trend rally soon. That is - USD starts to fall and yields start to fall. There are always cycles. Our job here is to catch those peaks and troughs of those cycles. I am watching very closely and itching to buy some TLT’s or bonds.
4. Crypto - Staying strong in face of ugly macro
Bitcoin - sudden correlations
BTC has performed well YTD actually and even with this stock sell off, it has held quite strong. However, in case of a credit event or a situation such as in the Middle East could force every asset class to flee for cover, likely causing a massive downside shock.
Maybe BTC sees one more dump that would be very much correlated to macro as explained above. But I see the floor at $24K and hopefully, we will not see $20K as many are hoping. And then FED intervenes and from there - up only.
ETH & Majors
ETHBTC has been hit as VanEck ETH futures volumes have been very disappointing. But I think ETH will come back soon but not before a BTC rally led by ETF news. I am certain that BTC ETF will get approved by 2024. The tired is to long BTC till then and immediately sell upon a God candle move. ETH will follow next, and perhaps SOL thereafter. Having all three would make you a lot of money in next 12-18 months IMO.
Arbitrum STIP voting is live. That should attract more inflows into the Arbitrum Ecosystem. I’m focusing on some native tokens with less market caps like $MUX & $GRAIL. This could be risky but worth a quick bet.
Solana was up 15%+ this week and has consistently outperformed on pumps this year. More to come IMO.
Crypto Narratives & Trends
5. Some Interesting Stuff
Peter Zeihans view on this war and how this could engulf other nations into it.