Hey!
What the heck is going on in the stock market?! After a shaky December, markets have entered 2022 with vengeance, currently sitting in chaos mode as all risk assets have been selling off. The Nasdaq and crypto have been getting hit especially hard as investors have begun to focus on the shift in tone on U.S. monetary policy and inflation.
Let’s talk about the various market factors in play and what you should be thinking about in this environment in 2022.
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!
Letter Highlights
· Monetary Policy & Inflation
· Future for Bitcoin
Index Year to Date Gains
· S&P 500 -10.5% (-7.5% mo./mo.)
· Nasdaq -14% (-14% mo./mo.)
· Dow Jones -7.6% (-3.6% mo./mo.)
· Russel 2000 -12% (-10% mo./mo.)
· Bitcoin -26% (-40% mo./mo.)
· Ethereum -40% (-48% mo./mo.)
Monetary Policy & Inflation
Well if you didn’t know before, you certainly know now that inflation is here and is quite high. Current CPI data shows the inflation rate at 7% year over year through December. That is the highest inflation has been in 40 years! The impact is clearly evident as consumers nationwide face steep price increases on just about everything out there.
With everything much more expensive and the stimmy checks long spent, consumers are starting to feel the pain and have begun to cut back on purchases. Data shows that consumer spending fell 1.9% December, much more than expected as surging prices took a big bite out of spending.
Consumer Spending December 2021 Report
To fight inflation, the Federal Reserve intends to tighten monetary policy by raising interest rates and reducing their monthly QE asset purchases. Currently the market is expecting 4 rate hikes by December 2022. When easy money tightens, money reacts.
With tighter monetary policy now expected, investors are aggressively rotating away from high growth and high valuation names in technology, unprofitable or lack of revenue producing companies and away from speculation in small caps and cryptocurrency. With indexes in correction mode, many individual names are well off their 2021 highs. Investors left and right have been trampled by the selloff which has been starting to look like March 2020 all over again.
This puts the Fed in a tough spot. It’s become obvious that the Fed cannot allow markets to completely crash, but what can they do? Inflation will continue to remain high if the Fed does not normalize its balance sheet with intent to raise interest rates.
Investors are anxiously awaiting this week’s FOMC meeting in which we will get commentary from Fed Chair J.Powell and a better sense of direction in which the Fed intends to walk the line between fighting inflation and accommodating the market. With 4 rate hikes currently expected by market participants, any doveish tone or walk back of that pace should provide a relief rally for equities.
However, without some reassurance from the Fed, risk assets may certainly continue to falter to find footing. As the year progresses and the Fed’s interest rate hike plan fully takes shape, expect increased volatility as the markets try to figure themselves out. I expect 2022 as a whole to be a tough year for many investors who are poorly positioned to handle what could be some violent swings in either direction.
I would urge investors to try to think on a longer-term horizon and look at the steep draw downs as buying opportunities in well thought out investments. Dollar cost averaging into an investment is the best way to grow wealth over time.
Future for Bitcoin
With Bitcoin now nearly 50% off its all time high, what happens next? As most consider Bitcoin to be a hedge against inflation, the attempt by the Fed to reign it in seem to lessen the need to bet against the US dollar. While the Fed has made it clear it intends to normalize its balance sheet and raise interest rates, they aren’t out of the woods yet. They still have an extremely long way to go.
As we’ve already seen, markets are acting extremely negative to the Fed’s plan to aggressively tightening and raise rates. With fear gripping the markets, how long will it be before the Federal Reserve’s hand is forced to ease up through steep declines in equities? With the Federal Reserve set to meet Wednesday and Thursday this week, the market is definitely looking for any signs of a slowing of pace to ease tensions. At the end of the day, it is in no one’s best interest to let the stock market completely crash.
The Federal Reserve is pinned on monetary policy. I believe it’s only a matter of time before we see the Fed reverse their course on their planned tightening. When this happens Bitcoin will soar as investors wake up to the reality of the inevitability of persistent currency debasement.
Your goal as a capital allocator is to maintain and grow your purchasing power across time. The mechanics of Bitcoin all but guarantee this.
With any commodity-based product, when its price rises, producers flood the market with new supply to capitalize on this rise. With Bitcoin’s programmed halving cycles and difficulty adjustments, the supply is inelastic with new supply actually decreasing over time. The market cannot be flooded with new supply. Regardless of anticipated increased adoption and demand, the cost of producing new coins is going to rise forever, thus driving up the price.
We’ll have to see how this plays out but with 4 rate hikes anticipated this year, I can certainly see the Fed reversing course if the market continues to act sour.
With increased adoption by large funds over the past year, BTC has increasingly acted like a correlated risk on asset to the market rather than its own entity. This means that when the market is selling off, BTC will be as well, if not more.
Given its infancy, BTC is typically associated with speculation and high risk. This lends will to increased selling pressure in times of large market drawdowns as investors look to deleverage speculation.
I further believe the recent 4 month sell off has escalated due to investors abandoning the stock to flow thesis model which predicts an average cost of $100,000 per BTC for this halving cycle (2020-2024).
The model also assumed a parabolic run up in December of last year based on past historical data. This has seemingly broken as we know that did not occur. I believe some speculators in this thesis may be exiting their positions in anticipation of a bear market. Keep in mind that when most of the market believes something is going to happen, it usually doesn’t.
I personally don’t think the model is invalidated when considering a longer-term view and Bitcoin’s basic supply demand economic principles. Valuing the cryptocurrency as a store of wealth the same as you would gold, real estate or bonds is legitimate and makes sense. Bitcoin’s scarcity, irrefutable ownership and long-term supply demand programming make it a better option than any of the traditional store of wealth assets.
For example, gold is heavy, locked in vaults and is not easy to move around or transact with. The global supply of gold also cannot be fully verified. Who knows how much fake gold is sitting in vaults around the world. The current gold market cap sits at about $9 trillion.
Real Estate is tough long term too. Even with low mortgage rates, hidden costs like upkeep and maintenance, renovations, insurance policies, ever increasing property taxes and mortgage interest eats away at your long-term gains. With home prices skyrocketing over the past few years, first time home buyers are finding it harder and harder to even save enough money to make such an investment. Not to mention, real estate isn’t always exactly liquid. Selling a property is a process that can take months and isn’t always ideal for investors looking to move wealth around. Currently the global market cap for real estate sits at over $330 trillion, making it the world’s most significant store of wealth out of all equities.
Bonds make no sense to me either. Real bond yields are negative when factoring in inflation data. You’re literally losing money sitting in bonds long term. This is a $120 trillion global market sitting in a losing bet.
The market for global investable assets is currently over $550 trillion. Bitcoin is currently less than $1 trillion of that market and a drop in the bucket in the grand scheme of things.
I believe long term BTC will outperform the traditional stores of wealth as adoption world-wide grows and the importance and need for a digital hard money asset becomes more and more evident. Bitcoin is still in the very early innings of its adoption where even a small percentage of the global wealth being reallocated to Bitcoin would see its market cap drastically rise. As time progresses, it makes sense that the stock to flow model could be further utilized as a one of many reference points in which Bitcoin can be valued.
In terms of when the bull market returns, conditions are still favorable, with approximately 81% of supply sitting in the hands of long-term holders. That means a limited number of coins are available for sale. Supply means nothing though without demand. Bitcoin needs to see an uptick in demand for the supply crunch to really pick up steam and matter.
Is more downside on the way? Possibly, and if equity markets continue to tank, Bitcoin will continue to be correlated to the downside.
From a valuation perspective though the average cost basis per coin is at $24,000. A flush to those levels would be an extraordinary buying opportunity. With the price now sitting at record oversold levels not seen since March 2020, it would seem the bottom may be close.
The reality is that there are trillions of dollars sitting in a losing bet with bonds. On top of that the U.S. dollar is all but guaranteed to continue to be devalued over time. As investors slowly realize this, we will continue to see capital flow out of bonds and into Bitcoin.
Given all this, I view this significant draw down in price as a pristine buying opportunity for increased accumulation over a long-term horizon. The optimal strategy for majority of investors is to passively allocate by dollar cost averaging over time. The increased volatility is an excellent opportunity to buy the dips.
Final Thoughts
With increased pressure from the Federal Reserve to raise interest rates, markets are in panic mode. High growth and speculation have continued to get wrecked. Market participants will continue to pay close attention to inflation data and the Federal Reserve’s intended monetary policy moves.
With the FOMC meeting scheduled for this week, expect markets to look to bounce off some reassurance from the Fed on the pace of their plan. If this doesn’t come though, high growth and speculation may continue to remain under pressure.
A lot of monetary policy moves with big implications are expected this year. 2022 looks as if it will be quite volatile and a lot tougher to navigate.
Don’t let the fear and panic get the best of you. Passively allocating to smart investments will yield the greatest returns over time. Use the fear and volatility as a tool to accumulate smartly.
I urge you to consider Bitcoin and its value proposition with a larger macroeconomic framework and a longer time horizon. The inevitability of Bitcoin’s growth and adoption is right in front of us. With a limited and programmatic supply, Bitcoin offers certainty and fairness to anyone that adopts it, enabling them to save and build wealth for the future, regardless of what policymakers choose to do next.
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.
Catch ya later!
Bryan Craig
Lefty Group Capital Chief Investment Officer
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