Macro Weakness Weighing On Bitcoin

I'm a little late with this update - sorry

Tweet by @JesperKroul.

(I’m a few days late, this went out in the full Bitcoin Capitalist letter over the weekend, but the action this week indicates my belief that we’re crazy oversold and because of the wider macro situation.

I will also note that since the weekend edition, the spot ETF flows turned positive this week after five weeks of outflows)

Bitcoin continues to experience weakness, down over 30% off its most recent all-time high, and yet “things are tough all over”.

The stock market experienced its worst one-day sell-off in months on March 10, with a reported $1.7 trillion in market cap being vaporized on the day.

The VIX, while elevated - currently (March 11) around the 30-handle - is still relatively subdued compared to the sea of red across the markets. We have not yet had any kind of “capitulation event” in the wider stock markets, and by all rational measures, we could have a long, long way to go still.

Markets have been overvalued for years; Lawrence Lepard cautioned that this has the vibes of a March 2000 collapse, wherein the S&P500 got cut in half and the Nasdaq went down 80%:

Via @LawrenceLepard

The two big questions in my mind are:

1. Are the people calling for a significant, 50% or more correction in wider markets right? And,

2. Will Bitcoin remain correlated with the wider markets all the way down?

On the first issue, I personally don’t think we’re in for a 2000 or 2008-style drawdown - and that is simply because the global financial system cannot handle another crisis of that magnitude.

The worse this stock market rout gets, the closer the central banks of the world will be to restarting the liquidity engines in earnest.

While I still believe that the debt (bond) markets are far more of a preoccupation for the central bankers than equities - should the latter completely implode, it will destabilize the debt markets anyway.

The system is held together with spit and twist ties and though stocks really are overvalued and still trading at nosebleed levels, we can never get down to a “fair” valuation so long as we are measuring them in fiat terms.

It’s hard for a value investor to take, but a core pillar of our macro thesis has always been, and continues to be: we have to pay attention to the denominator (the fiat currencies) more than the numerator (the assets they measure).

This is difficult to wrap one’s head around, because for most of economic history - you don’t even think about the denominator.

This is not one of those times.

There could still be a lot more pain ahead for the wider markets. With uncertainty around the Trump tariffs, the US government facing a possible shutdown on the 14th (they won’t) - and things seeming to become unglued elsewhere across the world:

• China is firing up the liquidity engines already - injecting $55B USD into their banking system

• Germany is planning on increasing its budget deficit by €500 billion

• Canada is just running around with its hair on fire - but the plan is to provide “emergency stimulus” to people whose jobs are being impacted by the on-again/off-again tariffs.
  
  The Bank of Canada also cut rates by another 25bp March 12th, its 7th cut in a row.

A recent Zerohedge article posed the question “is Trump pushing the US economy into a recession on purpose?”. There’s been a few other speculations on this front.

Right now he has a window of opportunity to push the markets to the limit, blame everything on the terrible economy his administration inherited from the Dems, while forcing the Fed’s hand in cutting rates.

That would enable the US government to refinance $7T in debt coming due over the next six months at lower rates:

Via @amitisinvesting

As per Amit Is Investing (from the above graphic):

“The way to do that is to create massive uncertainties — aka tariffs — which can slow down growth in the short term, get the bond market to start BUYING bonds ASAP because of how scared they are of touching stocks (causing yields to fall which is what we need to refinance the debt) and then that gives the Fed the authority to lower rates which continues to bring yields down.”

So far, everything I’ve seen in this pullback for Bitcoin has to do with the macro situation and not Bitcoin itself (in fact, as we’ll examine below, I think we’re sitting on a launch pad of maximum pessimism right now).

Current Outlook: Bitcoin

On to the question of how far down will Bitcoin follow the wider markets?