Is Bitcoin Going to $250k?
Darius sat down with Anthony Pompliano last week to discuss the outlook for Bitcoin, global liquidity, reducing portfolio risk, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Our Models Indicate Bitcoin Is Likely to Remain Bullish Until At Least Mid-Year
The 42 Macro Weather Model is currently generating a bullish outlook for Stocks, Bonds, and Bitcoin over the next three months. These bullish signals suggest each asset class is likely to experience above-median returns over the next three months relative to baseline.
Given these favorable conditions, now is an excellent time to take risks in the markets – a stance we have advocated to our audience since November.
2. China Has Been A Dominant Driver of Global Liquidity This Year
In mid-December, we authored a view that China would front-load policy support at the beginning of this year.
That is what we have witnessed, as the PBOC has been actively implementing monetary policies to support the economy. Its balance sheet is expanding, claims on banks are rising, and it is reducing various policy rates while committing to providing additional lending to specific sectors of the economy.
However, we believe the positive global liquidity impulse is likely to dissipate in the second half of the year. To stay on the right side of market risk, investors must identify these shifts in global liquidity in real time and position their portfolios accordingly. Our Macro Weather Model and Global Macro Risk Matrix are among the best available tools for that.
3. Bitcoin Is Best Managed In The Context of A Traditional Multi-Asset Portfolio With Risk Management Overlays
Bitcoin ETFs have seen record-breaking volumes since their launch in January. As of the market close on February 28th, ETFs reached a volume of $7.6 billion, surpassing previous records.
However, investors in ETFs lack the risk management overlays offered by our 42 Macro KISS Portfolio Construction Process. As a result, many may find themselves max-long Bitcoin during significant drawdowns. Bitcoin has experienced four drawdowns of -75% or more and another two in excess of -50%. That is six times investors could have lost half-to-four-fifths of their money in the asset class.
In contrast, our KISS portfolio, a 60/30/10 trend-following portfolio comprising SPY, AGG, and FBTC, has delivered an average annual return of +13% since 2018, with a maximum drawdown of -11%. Without our risk management overlays, investors would have seen similar returns in a 60/30/10 SPY/AGG/Bitcoin portfolio with a maximum drawdown of -26% and three crashes in excess of -20% since the start of 2019.
That’s a wrap!
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Will Global Liquidity Push Bitcoin To All-Time Highs?
Darius sat down with Anthony Pompliano last week to discuss the outlook on asset markets, global liquidity, Bitcoin, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. While There Is An Elevated Risk of A Short-Term Market Correction, The Outlook For Asset Markets Remains Bullish Over The Medium-Term
The 42 Macro Positioning Model indicated that retail positioning had been heavily overweight stocks.
However, after the recent correction, that overweight positioning has dissipated. Despite this, current positioning data from commodity trading advisors (CTAs) and market-neutral hedge funds suggest the possibility of a further short-term market correction.
Looking ahead, the medium-term perspective is likely to be more optimistic. We are still in GOLDILOCKS, and the 42 Macro Weather Model indicates the Top-Down Market Regime has a high probability of remaining in a risk-on condition, either GOLDILOCKS or REFLATION, over the next three months.
2. Global Liquidity Heavily Influences Asset Markets
The 42 Macro Global Liquidity Proxy, an estimate for Global Liquidity, is calculated by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold.
The 42 Macro Global Liquidity Proxy is highly correlated to most assets, including corporate bonds, treasury bonds, crypto, and stocks. Only trend stationary markets like currencies and commodities fail to have a significantly high degree of correlation and/or correlation to the 42 Macro Global Liquidity Proxy.
Understanding the drivers of global liquidity, such as potential shifts in central bank policies, variations in credit growth across different economies, and other pivotal factors, is crucial for investors. By closely monitoring these drivers and tracking leading indicators of global liquidity, investors can better position themselves to navigate market risks and capitalize on emerging opportunities.
3. Bitcoin Is Likely To Appreciate Significantly Due To Fourth Turning Tailwinds
The flows into the various Bitcoin ETFs over the past couple of weeks suggest growing investor confidence in Bitcoin’s viability. We believe this momentum is likely to continue.
In the context of the Fourth Turning regime, which is likely to span the next decade, our research suggests an environment marked by structurally elevated inflation and budget deficits. These conditions are likely to spark a surge in demand for alternative assets like Bitcoin.
Although there will be periodic downturns, we maintain a long-term outlook that Bitcoin’s value is likely to appreciate significantly.
That’s a wrap!
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Navigating Bullish Horizons
Darius sat down with Erik S Townsend and Patrick Ceresna on Macro Voices last week to discuss our systematic portfolio construction process, corporate profits, fiscal policy, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. A Rebound In Corporate Profits And Productivity Growth Suggests The Probability of A Soft Landing Remains High
The 42 Macro Corporate Profitability model, which tracks the spread between Gross Domestic Income growth minus the spread between Unit Labor Cost growth and Productivity growth, shows that corporate operating margins bottomed a few quarters ago and have improved since.
This rebound indicates that corporations have a reduced need to shed costs through layoffs or to increase prices for consumers.
This recovery in corporate profits, along with the sharp recovery in productivity growth, suggests the economy may remain resilient, and the probability of a soft landing remains high.
2. Although It Is Shrinking, Fiscal Impulse Is Still Positive At The Margins
The fiscal impulse peaked earlier in 2023 and has shown signs of moderation: the budget deficit on a YTD, YoY basis was up $834 billion in June, $535 billion in August, $255 billion in October, $320 billion in November, and $364 billion in December.
Contributing factors to the fiscal dynamics of 2023 included unique events such as the reduction in individual income taxes due to tax collection disruptions in California and Hawaii, alongside a significant cost of living adjustment spike last year.
These specific drivers are not likely to recur in 2024 – meaning the fiscal impulse is dissipating at the margins. That said, it is unlikely to fall off a cliff.
3. China’s Fiscal and Credit Dynamics May Lead to An Uptick In Global Commodity Prices And Emerging Markets investments Over The Medium-Term
China’s credit growth and fiscal spending typically peak in the first quarter of the calendar year, as Beijing often front-loads its policy support.
Moreover, according to our 42 Macro China Liquidity Proxy, January marks the third consecutive month in which China’s liquidity impulse has shown a positive trend.
Furthermore, Chinese economic growth has stabilized, with the China Composite PMI climbing to 52.6 in the latest reading. This stabilization, particularly when set against modest expectations, may lead to an uptick in global commodity prices and emerging markets investments over the medium term.
That’s a wrap!
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What Should You Expect From The Bitcoin ETF?
Darius sat down with Anthony Pompliano last week to discuss the Bitcoin ETF, global liquidity, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Our Wall Street Clients Are Closely Watching The BTC ETF Approval
BTC’s price appreciation throughout 2023 has fueled the excitement among Portfolio Managers and RIAs.
Generally, reception from our institutional clients for the BTC ETF has been warm, and we expect BTC to perform well over the long term as a result.
2. Favorable Market Conditions And An Increase In Tax Efficiency Support Flows to BTC
Many institutional investors have avoided BTC due to the complexities of tax reporting.
An ETF is a tax-efficient investment vehicle, so we expect it will increase inflows into the asset class.
With a vast multi-trillion dollar pool in investment advisory allocations, we believe there will be a shift at the margins from traditional alternative investments like gold, commodities, and real estate towards BTC.
Additionally, we believe the current GOLDILOCKS regime will support inflows into the asset class over the short term.
3. We Expect Global Liquidity to Continue Increasing Over The Medium Term
Over the past two quarters, our 42 Macro Net Liquidity model, which is calculated by taking the Federal Reserve Balance Sheet and subtracting the Treasury General Account (TGA) Balance and the Reverse Repo Program (RRP) Balance, has maintained an upward trend.
Similarly, our 42 Macro Global Liquidity Proxy, which is derived by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold, has also shown an upward trend in the past few quarters.
This model is particularly significant for projecting asset market performance.
In addition, there are a number of leading indicators that support robust private-sector liquidity creation.
Based on these factors, we anticipate a continued increase in liquidity over the medium term.
That’s a wrap!
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A Crude Reality for Stocks?
Darius recently sat down with Maggie Lake to discuss the energy sector, the labor market, the resiliency of the U.S. economy, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. The 42 Macro Weather Model Suggests Investors Should Be Operating With Average-to-Below Average Position Sizes Across All Asset Classes Except Cash
Our 42 Macro Weather Model projects the three-month outlook for stocks, bonds, the dollar, commodities, and Bitcoin by analyzing specific indicators within the following ten components of macro:
- Growth
- Inflation
- Unemployment rate
- Corporate profits
- Fiscal Policy
- Global Liquidity
- Credit
- Interest Rates
- Fear
- Greed
Currently, the Weather Model indicates a neutral three-month outlook for stocks and bonds and a bearish three-month outlook for the dollar, commodities, and Bitcoin.
Our daily systematic scoring of key fundamental and technical indicators suggest this is not a great time to be taking a lot of risk in financial markets.
2. The August Jobs Report Will Likely Perpetuate Additional Right-Tail Risk In The US Equity Market Specifically
In the August jobs report:
- Private Sector Employment accelerated to 2.3% on a three-month annualized basis.
- Private Sector Average Hourly Earnings decelerated to 3.9% on a three-month annualized basis, right around the pre-covid trend.
- Private Sector Average Weekly Hours accelerated to 0.0%, the highest reading since March.
- Private Sector Labor Income, the broadest measure of wages and salaries the labor market produces, accelerated to 6.2% on a three-month annualized basis.
In its current “Goldilocks” state, the labor market is too hot to spark further tightening from the Fed but too cold to raise recession fears.
We can persist in this state for several months, which may create additional right-tail risk in the equity market as underperforming professional investors stare down career risk heading into yearend.
3. Near Record Cash on Household Balance Sheets Is Supporting The Resiliency of The US Economy
Our Cash on Household Balance Sheets calculation tracks the Federal Reserve, flow of funds, checkable deposits, and money market fund exposure for both the household and corporate sectors.
The household sector maintains 3% of total assets, or $4.5 trillion, in checkable deposits – approximately $3 trillion more than its pre-COVID values.
The corporate sector checkable deposits also sit around 3% of total assets as well.
Including money market fund exposure, we are currently witnessing the highest levels of cash on the private sector balance sheet as a % of total assets since the 1950s.
That’s a wrap!
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Turbulent Markets Ahead?
Last week, Darius sat down with Paul Barron to discuss global bond markets, #inflation, #bitcoin, and more.
If you missed the interview, we have you covered. Here are three takeaways from the conversation that every investor needs to see:
1. Volatility Has Returned to Global Bond Markets
Over the past month, there has been a striking shift in bond market volatility:
- The US 10-year yields have increased by 48 basis points
- The UK Gilt 10-year yields have increased by 43 basis points
- The German Bunds have increased by 22 basis points
Incremental confirmation of the economic resiliency in the US and Japan and the resiliency of inflation in the Eurozone and the UK have been the driving factors of this uptick in bond market volatility.
2. The Resiliency of The US Economy Will Likely Cause Inflation to Persist
Since last fall, inflation has declined in an “immaculate” way; historically, inflation has only broken down two to three quarters after recessions begin.
But the US economy is not in recession – in fact, it is booming in some respects. The latest estimate for Q3 GDP per the Atlanta Fed’s GDPNow model is a whopping 5.8%.
The strong US economy will likely cause inflation to stabilize at levels higher than the Fed’s price stability mandate.
Within the next 3-6 months, we expect the narrative to pivot from ‘immaculate disinflation’ to ‘sticky inflation.’
3. The Path to Bitcoin’s Next Bull Market Will Likely Remain Volatile
Historically, Bitcoin experiences several 20 to 40% corrections in the years leading up to halvings. We experienced an 18% correction over the past ~month – something we have warned our audience about since April.
We foresee two major tailwinds for Bitcoin in the next year:
- The Bitcoin ETF will eventually get approved, bringing institutional interest with it.
- After the recession begins, which will likely occur in the first half of next year, we anticipate a surge in global liquidity.
We believe these two tailwinds will push Bitcoin north of $100,000 by December 2024, but the path to get there will continue to be rocky and likely back-end loaded.
That’s a wrap!
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Asset Markets And Global Liquidity
Earlier this week, Darius sat down with Anthony Pompliano to discuss all things global liquidity.
If you missed the interview, we have you covered. Here are three takeaways from the conversation that have significant implications for your portfolio:
1. Private Sector Liquidity Is Driven By Currency Volatility And Interest Rate Volatility
There are two key drivers of private sector global liquidity:
We track the US dollar and FX volatility via the USD REER and CVIX, respectively. Both of these measurements are inversely correlated to global liquidity.
Interest Rate Volatility is also a driver, where global liquidity usually lags behind movements in interest rates. Additionally, global liquidity typically follows bond market volatility, as measured by the MOVE Index.
Much of global liquidity comes from the private sector. Generally, net international investment creditor economies like Europe, China, and Japan supply a large amount of liquidity from the private sector.
But risk aversion among those entities weighs on global liquidity in times of interest rate and currency volatility.
2. Global Liquidity Typically Lags Cyclical Movements In Growth And Inflation
Whereas currency volatility and interest rate volatility typically drive private sector liquidity, cyclical upturns and downturns in growth tend to drive public sector liquidity – meaningful slowdowns in growth generally result in increases in public sector liquidity and vice versa.
Inflation also plays a key role in determining public sector liquidity trends, where meaningful cyclical upturns in inflation usually result in a decline in global liquidity and vice versa.
So, from a public sector perspective, central banks generally increase liquidity after slowdowns in both growth and inflation and remove liquidity after observing the opposite conditions.
3. Yes, The Liquidity Cycle Bottomed Last Fall, But Recovery Is Not Linear
Our 42 Macro Global Liquidity Proxy, the $ sum of global central bank balance sheets, global broad money supply, and global FX reserves minus gold, shows that we are in a liquidity cycle upturn and that October 2022 marked the bottom.
However, since April – when we explicitly told investors to book gains at ~$30k Bitcoin – we have been preaching that recovery is not linear like it usually has been in previous cycles. The global liquidity impulse has been negative ever since.
In recent months, the 3-month momentum impulse of global liquidity, we saw a $4 trillion decline in global liquidity in June and a $2.4 trillion decline in July.
Although those readings do not indicate an environment beneficial for asset markets, they are improving at the margins.
All told, 2023 is a great reminder of something we have been preaching all year: liquidity is not the only driver of asset markets. Look no further than the divergence between Bitcoin and the S&P 500 over the past few months to understand this very important point.
That’s a wrap!
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New Headwinds for Asset Markets
Last week, Darius joined Nicole Petallides on the TD Ameritrade Network to discuss market headwinds, tailwinds, inflation, and more.
In case you missed it, here are three takeaways from the interview you need to know:
1) Asset Markets Face Three New Headwinds That Arose Over The Past Few Weeks
We have seen a lot of recent volatility in asset markets as they digest three new headwinds that arose over the past couple of weeks:
- The Bank of Japan (BOJ) tweaked its Yield Curve Control (YCC) policy and will allow interest rates to rise more freely
- The Treasury Department positively revised the number of treasuries that they will supply in Q3 from an estimated $733bn in May to $1.007 in August
- Fitch downgraded the US credit rating from AAA to AA+
2) We Believe The Existing Asset Market Tailwinds Will Push Stocks Higher Over The Next Quarter
In addition to the “Resilient US Economy” theme and the high likelihood that the immaculate disinflation trend will continue, two additional readings that came out last week contribute to our theory:
- Jobless claims, the number of people filing weekly to receive unemployment insurance due to not having a job, came in at 227k and well below its recession signaling threshold when analyzed on a three-month annualized basis
- Continued claims, the number of people who have already filed an initial claim and who have experienced a week of unemployment and then filed a continued claim to claim benefits for that week of unemployment, came in at 1.7M and well below its recession signaling threshold when analyzed on a three-month annualized basis
Although a few of last week’s readings disprove the Transitory Goldilocks theme, specifically the ISM Services PMI coming in at 52.7, a 2-month low, and the ISM Services Prices PMI coming in at 56.8, a 3-month high, we believe the Transitory Goldilocks theme is likely to persist well into Q4.
3) The Return of Inflation Pressure Will Cause The “Risk On” Regime to Dissipate
The large amount of immaculate disinflation we have seen since Q4 of last year has been a key contributor to the Transitory Goldilocks theme and asset market performance.
Last week, we received incremental inflation data that supports further immaculate disinflation:
- Unit Labor Costs came in at 1.6% QoQ annualized, the lowest number since Q4 of last year
- The Median Annual Pay for Job Changers slowed 110 basis points to 10.2% YoY, the lowest number since July 2021
However, we expect the immaculate disinflation process will conclude within 3-6 months.
Any threat to the “immaculate disinflation” narrative threatens to unravel the “resilient US economy” narrative because market participants will start to come around to the view that the Fed needs to engineer a recession to achieve its price stability mandate.
That’s a wrap!
If you found this blog post helpful:
- Go to www.42macro.com to unlock actionable, hedge-fund caliber investment insights.
- RT this thread and follow @42Macro and @42MacroWeather.
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