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| By Juan Villaverde |
Isn’t it hilarious how often we collectively don’t see the forest for the trees? Case in point: Almost exactly a year ago, the U.K. gilt market crumbled, and not in a cute way.
The situation was so dire that Bank of England Governor Andrew Bailey had to ditch a speech about the virtues of interest rate hikes just to rush back to the office.
Instead of preaching about rising rates, the BoE had to pivot, announcing a limitless bond-buying program.
Why?
To avoid the U.K. going bankrupt overnight. Who'd have thought?
But while central bankers love to use the fancy term "financial stability" to justify these bond-buying programs they are in reality never-ending bailouts for the government.
The BoE’s pivot was a tree.
Similar chaos was seen in Tokyo a few months later when Bank of Japan Governor Haruhiko Kuroda made a wee tweak to Japan’s bond-buying program … one that resulted in the bond market plummeting.
And the “rescue mission” resulted in hundreds of billions of U.S. dollars’ worth of newly printed yen.
Another tree.
Here’s the forest: Western governments have been living way beyond their means for far too long. It’s an untenable situation … and it’s starting to crack.
We’re seeing the same effects here in the U.S. The U.S. bond market is currently on a roller coaster.
Long-term bond yields? They're skydiving without a parachute, while short-term T-bills seem to be on a Zen retreat.
And that's a red flag.
Why? Because if history has taught us anything, it's that such bond market hiccups force central banks to intervene before the whole thing goes belly-up.
But every cloud has a silver lining. When bond markets throw a tantrum, monetary superheroes come to the rescue. The Bank of England and Bank of Japan did their bit last year.
Now? It's Federal Reserve Chair Jerome Powell's moment in the spotlight, as was the case in March of this year.
But let’s bring this back to crypto. Because no matter what happens next, long term, this could work in its favor.
That’s because this bond market fiasco won't settle down without the Fed jumping in and turning on the printing press. Again. And additional liquidity means more will eventually trickle into the crypto market.
What if the Fed doesn’t pivot, though? What if Chair Powell breaks from his international colleagues’ precedent and doesn’t flood the market with liquidity? After all, he said after the latest Federal Open Market Committee meeting that he wants rates to stay “higher for longer,” which certainly didn’t help ease any of the current bond market stress.
Then it’s still a good look for crypto. After all, when the bond market struggles, investors turn to alternate opportunities for long-term investments. Historically, gold has been a popular choice.
But now, crypto offers another, more decentralized and trustless, opportunity.
And all this is bringing eyes to crypto right as we round off 2023 … and look ahead to the next potential bull run, which our Crypto Timing Model suggests could be just around the corner in 2024.
Alex Benfield’s Notable News, Notes & Tweets
- There are some conflicting reports about the odds of a Bitcoin ETF approval. Cathie Wood of Ark Invest seems to think the odds are increasing, but Kevin O’Leary of Shark Tank thinks the odds are very low.
I tend to lean on the side of approval, as the Securities and Exchange Commission has continued to lose in court and needs to appear at least somewhat neutral on crypto after its recent poor track record.
- Speaking of the SEC, how is it protecting investors now? Oh, looks like it’s focused on suing Elon Musk for the purchase of Twitter.
- Presidential candidate Robert F. Kennedy Jr. is a vocal Bitcoin (BTC, “A-”) advocate, here he is talking about the dangers of central bank digital currencies, or CBDCs.
- Interesting trend to keep an eye on, gold has been declining in value for nine straight days, although it is slightly up and finding support at its 200-week moving average at the moment of writing.
Gold has been a leading indicator of Bitcoin for the past year or so. Although the correlation isn’t perfect, it is noteworthy.
What’s Next
Our short-term forecast suggests another price correction might be on the horizon for the crypto market, especially since it looks like the latest rally we’ve been enjoying is on its last breath according to our Crypto Timing Model.
But the underlying indicators, coupled with central bank actions, paint a promising picture. Within the next six months, the makings of a robust bull market in crypto appear to be taking shape, presenting both opportunities and renewed optimism for seasoned and new investors alike.
As investors, we’ve been very patient for the past year. But remember, let the market come to you.
Best,
Juan
