Hey there!
July was a big month. We saw quite a bit of volatility spike up for many good reasons! There were quite a few pronounced moves in markets that laid some clues on potential market direction and overall mindset as we lead into the back half of 2021. Throughout the volatility though, we are on the cusp of closing out yet another positive month on the year with index gains to date showing some solid return on investment throughout 2021! (See below)
Let’s talk about the various market factors in play and what you should be thinking about in this environment.
First though, these newsletters are meant to be informational and educational only. They are not financial advice, and I am not a financial advisor. Always do your own research before investing any of your hard-earned money into something!
Monthly Highlights
· Inflation is here
· The Federal Reserve & US Government set the tone
· Volatility is picking up in markets
· Bitcoin & crypto ready to rally
Index Year to Date Gains Through End of July
· S&P 500 +18% (+2.85% mo./mo.)
· Nasdaq +16.65% (+3.6% mo./mo.)
· Dow Jones +14.5% (+1.5% mo./mo.)
· Russel 2000 +19.6% (+1.8% mo./mo.)
· Bitcoin +40% (+14% mo./mo.)
· Ethereum +208% (+2% mo./mo.)
Inflation is Here!
That’s right, and it’s not going away anytime soon. Earlier this month the June CPI report (shows data from previous month) indicated inflation rose higher than expected year over year and rose to 5.4%. This was the biggest monthly gain since August ’08. This is exactly what I wrote about in last month’s letter. The height of inflation is yet to be seen. The trend is certainly up and when the July data comes out in a few weeks I fully expect the rate to surpass the August ’08 rate. That’s not good!
Based on the Federal Reserve expectations reiterated by Jerome Powell this past week, “Inflation could turn out to be higher and more persistent than expected.” A full 180 on initial projections of “Inflation is temporary.” Laughable.
For one, the CPI metric is flawed. I’ve spoken about this numerous times. The real inflation rate is actually much higher.
Second, inflation is devaluation of currency. If you didn’t receive at the very least a 5.4% pay raise in the past year, you are falling behind to inflation based on current data. Even if you did, the trend is up. You would more likely need to receive over a 10% raise this year just to keep up with the rate in which the currency is being devalued through inflation based on CPI. That is also if you are only taking the CPI data at face value. (You shouldn’t) This should make you angry. You are working harder for less.
So, what is the Federal Reserve and Governments plan to rein in inflation? I mean this can’t go on forever.
Well, the Federal Reserve for now is maintaining the current course. What that means is that interest rates will remain near zero for an extended period of time. Additionally, they will continue to pump billions of dollars monthly into treasuries and mortgage-backed securities at the current rate until stronger jobs data is presented.
A.K.A continue to print billions of dollars, expand the monetary supply, devalue the currency.
The idea of tapering these purchases is just starting to emerge in Fed language. Based on Jerome Powell comments again from this week, the Fed will be maintaining the current course and will maintain discussions over the next few monthly meetings on the exact course of tapering.
This is a huge clue. The fact they are looking to discuss over multiple meetings indicates things will continue as they are for several more months, taking us towards year end for more clarity.
Not surprising in my opinion. The Fed is in no rush to taper. The market is still fragile and there are numerous outside factors that may impact the trajectory. For one they are looking for strong job recovery data. With unemployment benefits set to end in September, you would anticipate many more people returning to work full time.
Ok so the Fed wants to see this data first. Second, the delta COVID variant is making a lot of people nervous. If further lockdowns or restrictions are put in place, this will certainly stall recovery projections.
So, we are looking at late 2021 for clarity on tapering. With that, the actual tapering may not start until mid-2022. That’s still a ways off and a lot of money yet to be printed!
And how about the government? Well, their current solution is to continue to print more money! Joe Biden thinks printing more money will actually make inflation go down! Seriously! Take a look at the comments he made at a townhall this past month in the tweet below.
It’s hilarious but the government is looking to print even more money outside the Fed through an infrastructure package. Whether infrastructure package is warranted/needed is another topic. The fact of the matter is the monetary supply will be expanded to fund the endeavor. Even if tax adjustments are made in order to offset some of the cost it won’t be enough.
For the record, the government has collected a record amount of federal income tax revenue every single year since 2009. Each year they collected more tax revenue than the year prior, yet the deficit has continued to increase.
Could you imagine being able to borrow unlimited amount of money and also openly take 37% of everyone’s paycheck and then still be broke? That’s our government. The US doesn't have an income problem, we have a spending problem.
With that said, the solution for monetary expansion of the US dollar is yet to be determined.
Volatility is Picking Up in Markets
We saw quite a bit of volatility in July. After a very strong June, markets continued to rally through mid-July. That is until the June CPI data was released. Markets got spooked. The fears of the delta COVID variant also began to become more prevalent with many fearing further lockdowns/restrictions would slow the economy’s recovery.
Further uncertainty has also crept into the market on unprecedented regulation crackdowns on Chinese technology companies implemented by the Chinese government. Keep an eye on this and trade relationships between the U.S. and China. If things turn sour this could be another wrench thrown into the mix of market factors.
All and all, after a strong run up I think the markets were looking for a reason to correct and sell off mid-July. We didn’t really get a sustained drop or sell off though. After a sharp drop over several days, we quickly recovered and are actually ending the month up higher.
What occurred was further digestion of inflation expectations from investors coupled by further re-assurance from the Federal Reserve that they would not be tapering soon. Plus, I think some investors are easing expectations on the impact the delta variant will have on the recovery.
Investors are becoming cautious though. Markets could turn quickly if they get spooked. Inflation, jobs data, COVID restrictions, Chinese turbulence, and company earnings reports are all things that may flip market sentiment negatively.
At the end of the day though, as long as the easy monetary expansionary environment persists, asset prices will continue to appreciate. What we need to pay attention to is a more aggressive attempt to ween off the easy money. When that occurs, markets will react strongly in a negative fashion. This will occur when strong jobs data is consistently presented and clarity on the tapering effort becomes visible perhaps in the later stages of this year. It would not surprise me to see a continued run up through most of August followed by a strong correction into the fall. Take note that September is one of the weakest months of the year historically.
Bitcoin & Crypto are Ready to Rally
Bitcoin and crypto investors alike have been in a lot of pain over the past 15-weeks. Since mid-April, Bitcoin fell 55% from its highs ultimately touching just under $29,000. Over the past 10-weeks, Bitcoin has been trapped in a range between $30,000 - $41,000 with most of the range spent closer to $30,000. During this time, we have seen a massive deviation from the stock to flow model presented by PlanB. See below depiction.
In fact, many have started to question the validity of the model. The model itself attempts to value bitcoin from a supply/demand asset with absolute scarcity similarly to one would gold, silver, or an asset like a piece of land. Based on this you get a set S2F ratio. As you can see from the image, the S2F ratio has BTC way undervalued. I am a strong believer in this model.
Luckily for the HODLers, we got a strong bounce at $30,000 on July 21st after testing this level several times in the weeks prior.
As we end the month, we are currently up 34% from the lows sitting just below $40,000. With a bit of resistance above at $41,500, it will be crucial for BTC to clear this level with strong volume to the upside before we can fully confirm the bull run is back on.
Whether it is sooner or later, bitcoin will eventually breach the descending resistance and will begin to recover more in line with the S2F model. I suspect the end of the year will see much higher prices for the digital asset.
The negative price action over the past few months has been met with long term holders buying the dip, accumulating larger and stronger handed positions. These long-term conviction buyers understand the importance bitcoin plays in the current and future monetary environment.
Remember, inflation is here! Bitcoin will prove to protect your purchasing power over time.
Something else I find really interesting is the massive onboarding of new users to the network. The graphic showing the pace in which the internet was adopted compared to the bitcoin network today is very telling.
Adoption is currently higher now than the internet had at the same timeframe. Arguably the internet network allowing for BTC to operate allows for a quicker adoption pace. Still though, its early for bitcoin in terms of adoption.
Broader Crypto Markets
Ethereum is extremely bullish. On August 4th, ETH will be upgrading the network with the “London EIP-1559” protocol. This is a huge milestone for the project.
The big piece of this protocol is the implementation of a token burn in which the ETH supply will actually start to decrease over time. Scarcity is good for price as the network continues to grow like a weed. It also puts ETH one step closer to the long-awaited full ETH-2.0.
Regardless, when bitcoin gets moving the broader crypto market will follow shortly after. I see a lot of upside in the crypto sphere. Do your own research before getting into any project!
Final Thoughts
Be patient in your endeavor to put your money to work and stay diligent in your understanding of market sentiment. Inflation is here and should be paid attention to. Expect volatility to increase as we get closer to the back end of the year.
Continue to take the time to learn about Bitcoin and the impact it is going to have on the world. It is here to stay. Zero exposure to the asset is the wrong answer.
With that said, we live in an age where education and information on anything we want to know is accessible at our fingertips through the internet. You owe it to your future-self to become educated in money management.
By signing up for this newsletter you have already taken steps to accomplish that. Stay consistent on your journey and don’t stop learning.
Thank you for spending the time to read this month’s newsletter!
Bryan Craig
Lefty Group Capital Chief Investment Officer
(P.S. if you like what you read here, please share with your friends and family!)