The US, and Global Market
There is no doubt that the U.S. markets have been an incredible superpower for the last ten years. Following the economic crisis of 2008, the federal reserve set the U.S. base interest rates to all time lows, and injected trillions of dollars as a stimulus package into the economy. While controversial, it’s obvious that the debt crisis of 2008 was met with a beautiful deleveraging of the economy. For the last 10 years, debt has been very inexpensive to leverage, large and small corporations have been able to flourish, and the U.S. economy has outperformed almost every developed and western power. While growth in the economy and stock market stems from a variety of factors, I’d argue that the most critical of these factors in the U.S. stock market today is the base interest rate set by the federal reserve. Chairman of the Federal Reserve Jerome Powell has attempted to raise rates since coming into office, but with large backlash from political parties, the stock market, and popular opinion. The fed really shouldn’t be controlled by the stock market, because the fed is designed to control the economy – but now the economy controls the fed. Powell recently capitulated on his stance of raising interest rates, and has indicated that they will not be raised significantly.
While the volatility of the market throughout 2018 and 2019 has been erratic, and constant news of trade wars, sanctions, and tariffs are blasted through the bedlam; most of this has much less to do with the stock market than is perceived. These artificially low interest rates combined with quantitative easing are one of the biggest factors behind the relentless rise of U.S. stocks and GDP, and will continue to be until they are changed. This is the indicator to watch.
The SP500 has been volatile but very strong, if the month of June were to end near the all time highs, it’s likely the SPX will hit 3000.
The Global Market – The Dollar is King
The economy has drastically changed over the last 100 years and has effectively globalized over that period of time. This global market is sustained by many currencies, the majority of which are backed by central banks. There are both problems and great efficiencies created by central banking; on one hand, this method gives countries the ability to control their money supply, economic stimulus, and interest rates; which allows them to manage the economy for better or for worse. On the other hand, it generally creates inflation, debt, and long term consequences from bad monetary policy. This stretches the definition of value – as the dollar is backed by the central bank itself. Central banking has undoubtedly created a sort of debt bubble, and while all debt cycles eventually correct and deleverage – this still may be past the horizon. The reality of this situation is that the United States has the largest share of world debt, but this also gives it the most leverage and economic power over other countries, which arguably has led to the dollar becoming the current reserve currency of the world.
The dollar is currently the most traded currency in the world, and U.S. treasuries are one of the most popular assets for foreign markets and domestic markets to be invested in. That combined with the U.S. having the majority of the worlds debt creates a unique situation. The world economy essentially revolves around the price of the dollar as most countries are forced to use our banks, our currency, and our financial institutions.
The U.S. has economic strength, but what is the dollar really backed by? What do fiat-backed currencies with a supply determined by a centralized authority imply? Ultimately, a currency is only as strong as the country or countries that back it, and the dollar dominance and economic strength of the U.S. is remarkable. However, the ability to print money at will leads to inflation; something that has turned a $3 tank of gas into a $30 dollar tank of gas in the last 60 years. So in a fiat system, the worst investment asset is cash. This leads into the unique concept behind Bitcoin creation: Proof of Work.
I’m now more than ever under the impression that Bitcoin is nowhere close to being used as a currency. However, I think we’re residing in a unique opportunity to be apart of one of the greatest deflationary assets ever created. There are other coins with more fungibility and transaction speed that are attempted to become currencies, but I don’t think this is the road Bitcoin is following currently. Bitcoin has enjoyed one of the most amazing 10 year trends of any asset class ever, and that is a big part of what makes Laissez Faire successful. Bitcoin has become a economic microcosm of electricity and computing power being converted into a store of value.
The Proof of Work concept is that Bitcoin cannot be created without work (electricity and computing power via mining). Unlike USD, Bitcoin has a finite supply, and takes work to create, thus cannot be printed into circulation infinitely. Bitcoin miners were the first individuals involved in the Bitcoin space, and their role is the most vital in the Bitcoin world, because they are what determine the total, and circulating supply of Bitcoin. Miners risk their electricity and computing power to process Bitcoin transactions, decentralize the network, and create new Bitcoins; and they are rewarded for this utility in the creation of those new bitcoins.
Hard coded into the Bitcoin blockchain is what is called a block reward halving. Roughly ever four years the reward per block mined (a block is a bundle of transactions processed by miners) is halved. In the beginning the block reward was 50 BTC, then 25 BTC after Dec 2012, then 12.5 BTC after July 2016. The halving is intrinsically deflationary because of three reasons:
2010: Block Reward, 50 BTC, Price of BTC/USD: $0.12
2012: Block Reward, 25 BTC, Price of BTC/USD: $12.00
2016: Block Reward, 12.5 BTC, Price of BTC/USD: $700.00
2020: Block Reward, 6.25 BTC, Price of BTC/USD: $???
This is an even longer conversation to be had, as adoption has been steadily increasing by 3x every year for the last 10 years as denoted by transactions on the block chain, google search trends, and money flow. However, simply said; Bitcoin will continue to enjoy a parabolic rise as long as adoption continues (which it is very likely to) because of it’s intrinsic deflationary properties, scarcity, and demand as a digital asset. Bitcoin is transforming into something never seen before.
Price of Bitcoin – Exchange Driven Pumps, Not Much Apparent Adoption, but a Bottom is Likely In
Presently the market price of BTC has outstripped organic investor flow unseen since the bull market mania phases of 2013 and 2017. Never before have we seen such a divergence so early in the bull market.
With on-chain investor volumes in the normal range, the only explanation is from short term trade activity on the exchanges. This is a quant fund driven short squeeze devoid of any true investor volume.
The mechanics of short squeezes 101:
1) When the market is majority short, there’s too much money to be had to allow them to win.
2) Large accounts keep buying up the market until the shorts get liquidated.
3) At liquidation the short seller has to buy back at market price, thus sending the price even higher.
4) A tidal wave of buys cascade through the orderbooks, a chain reaction, the price goes vertical.
5) Payday. The big accounts that bought up the market shepherding the price up now dump their positions at profit.
6) Blow-off. The price comes down to its organic levels.
All this happens without any on-chain activity. As it’s an exchange driven game, no real investors are buying into the rally.
If you have sufficient capital. You can keep buying to liquidate the bears. It’s extremely profitable. You only stop when it’s no longer profitable. At the $8k-9k mark the market switched from short to majority long. This put a cap on the profitability of short squeezing.
Now I think it’s likely we’ll be supported by organic growth at some point after the price retraces out of it’s parabolic state, and when the organic growth enters from new investors there will truly be a strong case for a bull market – and Laissez Faire will profit from this immensely.
The likelihood of a bottom being put in around the $3000 price range is more and more likely now, and many indicators and fundamentals have developed a bullish posture. If any of you are holding BTC outside of Laissez Faire – I’d be looking for longer term buys around $6300-6800, and then more around $5800.
The only scenario where we’d be in danger of continuing an extended bear market would be a break of the $5000 area and then $4250. It’s likely this strength will continue however, and I’m not looking for new lows at this point.
Another Laissez Faire conference will be held before the next opening period in July and we’ll be able to talk about these exciting things in more depth!