Market Lab Report / Dr. K's Crypto-Corner
by Dr. Chris Kacher
The (R)Evolution Will Not Be Centralized™
Cryptos and stocks: crash averted?
Nothing is immune to record levels of debt and soaring inflation. On Monday June 13, 2022, everything including gold sold off. It reminded me of late 2008 when all assets sold off. Gold which was the first to bounce in late 2008 did drop like a stone for a number of days when the markets crashed.
President Biden is on the Fed's side to fight soaring inflation as the top priority, so it is highly unlikely Powell will turn dovish until we see an S&P 500 down at least 33% to 50% off its peak. This would put the major low somewhere in the range of 3228 to 2409.
The Fed chair reinforced the notion that an inflation target of 2% will restore the economy. He does not think we will have a recession. Yet historically, once inflation is >5%, it has never come down until Fed Funds rose above the CPI, and a recession always resulted. To make his claims even more questionable, he also said he is "not really sure how [mortgage rates] will affect housing prices" proving he is intentionally plays dumb. The 30-year mortgage rate has soared from 3% to 6%. This has and will continue to dampen demand on housing.
The revised dot plot now suggests 50 bps rate hikes at each of the next meetings to meet the target of about 3.5% by the end of the year.
Goldman Sachs expects a 75 bps hike in Jul, 50 bps in Sep, 25 bps in Nov, and 25 bps in Dec. Fed CME futures see a bps hike in Jul, 50 bps in Sep, 50 bps in Nov, and 25 bps in Dec. But such hikes underscore the continuation of the sharp downtrends in stocks and cryptocurrencies. Plummeting stock market major averages will eventually force Powell's hand to reverse his hawkish stance.
This suggests cryptocurrencies can fall much further before they too find major lows. Both stocks and crypto should remain highly correlated to moves the Fed makes in the coming weeks. The Fed became hawkish in both 2014 and 2018. Bitcoin halved in price roughly 3 times (Off peak: -50% then -75% then -87.5%), falling respectively 87% and 84% from its peak. Alt coins typically lost between 95-99%. Those two years had YouTube and mainstream commentators with their massive followings trying to call the bottom several times, failing each time, losing massive sums for their subscribers.
2022 is no different. I went on record warning of major headwinds in Nov-2021 when Powell removed the word "transitory" on inflation. He then went full hawkish in Dec-2021. We have sent out multiple reports since then suggesting to go to cash or to short. Shorting cryptos is one of the most risky things one can do, thus I advise against it unless you have figured out a method that works with your risk profile and trading personality, thus the Crypto Picks list took profits across most names in Jan-2022 and was fully in cash by Feb-2022.
Those who followed our suggestions of moving to mostly or all into cash starting last Dec-2021 or shorting the market have not been bloodied but instead are in a much psychologically stronger position to take advantage of buying when the time is right. That time will most likely occur when the Fed Chair becomes materially more dovish.
Crypto and stock market bottom when?
This begs the question as to when stocks and cryptos will find major lows. A few metrics of note including the on-chain cost basis ratio which compares the short term and long term holder cost basis’. The ratio of the two is the dark blue line. Whenever long-term holders’ cost basis crosses above short-term holders’ as it did at major lows in Jan-2015 and Dec-2018, Bitcoin has reached an area of generational buying opportunity. It did not cross the horizontal green line in Mar-2020 because the Fed stepped in and aggressively started printing money. Until they signal some sort of dovishness, the dark blue line is likely to cross the green line, pulling down the price of bitcoin further.
Another metric is the MVRV Z-Score which is the market value to realized value ratio. When it crosses below zero as noted by the faint green horizontal zone, sellers are selling at a loss. It is likely Bitcoin will get pulled down to that green zone once again as it did in Jan-2015, Dec-2018, and Mar-2020.
HERE is the report sent Tuesday June 14, 2022.