When Will the Bear Market End?
Things are dire across the board so I lay out potentially bullish catalysts
Currently, Europe, the world, and the markets are crippled by fear. We are in the midst of a global conflict after Russia’s despicable invasion into Ukraine, and are on the brink of a potential World War. Uncomfortably, this is only the latest reason equity and crypto markets have been sagging lower.
Bear Market
Since late last year, signs of reckless monetary policy have been popping up through record breaking inflation numbers. The culprit was large amounts of new currency ($USD and others) printed by various sovereign nations to combat the crippling effects of the Pandemic on the economy. It seems it’s time to pay the piper.
How bad has it gotten for the average consumer? According to CNBC, 64% of Americans are living paycheck-to-paycheck. This is shocking to see in the wealthiest nation in the world.
Commodity prices are also through the roof. Brent crude continues to push higher as Russia’s oil supply has been cut off by the US government. Gold, wheat, and even nickel have been setting 10-year highs due to increasing prices and supply concerns with the war.
So what does this all mean and what steps are being taken by the Fed and Treasury to alleviate inflation? Historically, quantitative tightening (QT) is used to clamp down on the rampant spending. This is done through interest rate increases, which makes it more expensive to take loans and buy more things:
Investors and traders reduce leverage because of higher fixed costs
Borrowers think twice because of the cost of the loan, and buy less stuff
Creditors hold more cash because they can make money on lower risk investments (loans e.g.)
The Federal Reserve is expected to raise interest rates 6 times over the next 8 fiscal quarters to achieve a reduction of rising costs/inflation.
Equities are now in a recession after two consecutive quarters of economic decline. The Nasdaq and tech stocks (FAANG) were the darlings since the 2007-2009 Great Recession through mid-last year, but have declined more than 20% since November, ‘21. The party appears to be over for now.
The market has priced the majority of the Federal Reserve policy, inflation, and WWIII risks in. It’s priced in so much that even news that’s ‘less bad’ than expected is interpreted as bullish. Should the inflation data continue to break records, the Federal Reserve’s hand could be forced to make emergency rate hikes, which could spur a massive deleveraging, which includes selling everything from selling stocks, property, and of course crypto.
Bullish Catalysts
Now that we’ve addressed the strains, let’s take a look at potentially positive catalysts that give investors confidence to resume taking risk in the markets.
The most bullish development for the economy would be seeing an end to the fighting in Ukraine. As of today, Russia is opening up a 12 hour cease fire window to allow Ukrainians to flee to safety. It does not appear to be going well in Mariupol.
A prolonged cease fire and arbitrated talks between the two countries would be a step in the right direction. Companies and retail are nervous to make investments and take risk due to the uncertainty surrounding Eastern Europe, so a peaceful path forward would be good for markets. Ironically and sadly, Russia occupying Ukraine would also provide greater certainty, although it would be an awful outcome for democracy and the people effected. This would also only a temporary reprieve before Putin takes his next shot at further escalation.
The next inflation data report is released tomorrow (Thursday 3/10) at 830am Eastern. Should the CPI come in lower than the market expects, that would be a step in the right direction. We’ve set records the previous two year-over-year inflation updates. The market now expects this to continue, but any sign of a slowdown in prices would be good news. I don’t believe this is going to happen.
A continued positive for markets has been the move towards full employment. This news is strangely counter what a typical recession looks like. We’ve seen consistently lower unemployment figures since peak COVID pandemic, while a typical recession sees rising unemployment due to rising costs. Perhaps this is a sign of things to come, but continued hiring is a good thing for the economy. We can hope this continues.
What kind of bullish developments could catch the crypto markets off guard? I’ll refer to my original post about 2022 predictions:
All things considered, cryptocurrency has held up better than many would have expected during a macro recession. This is the first time cryptocurrency has existed during a broad downturn, so it’s a major test and, so far, achievement for the legitimacy of the space.
On-chain Data
On-chain Bitcoin information is neutral to bullish. Here are a few charts that illustrate how Bitcoin holders and tokens are moving.
The number of wallets with >100 BTC (Whales) has increased since January. Smart money is accumulating.
Longer term holders, who are typically more convinced BTC is here to stay, are holding more of the supply. Short term holders, who are typically speculating and buying the top, are capitulating and selling at a loss.
Centralized exchange inflows and outflows are neutral from exchanges as prices slowly grind up from the recent lows. We aren’t seeing large green spikes up (coins moving into exchanges to be sold).
Thus far, there hasn’t been a large scale capitulation or cascading liquidation event. Historically, crypto markets reset after leverage is removed as there are no coins or positions left to be sold by speculators. Open interest never got as low as it did mid-Summer 2021, but this is a dynamic market. We now have multiple ETFs around the world that will be long only forever.
Funding rates are fairly even between negative/positive. Nothing too telling, and unlikely we see a big short squeeze.
Another positive is retail interest is waning, which is often a good countertrade signal. When your mom asks how to buy crypto, it’s usually time to get out! When retail thinks the trade is dead and crypto was just a scam, that’s historically the best risk/reward for investing. Retail are paralyzed by fear, and are quickly losing interest.
Conclusion
In summary, there is too much uncertainty and fear to see a rapid resumption to the ‘up only’ bull market for crypto and other risk on assets that we’ve grown accustomed to over the last decade. However, the above mentioned catalysts or ‘less bearish’ policy events could prevent a continued downtrend. A close friend and colleague posed the rhetorical question, ‘how can it get worse?’ Markets are efficient and very bad news is mostly priced in.
My take is if we haven’t seen a dramatic capitulation and liquidation event yet, we are unlikely to see one at all. I am in this space full-time because crypto will continue to provide outsized returns for those who are informed enough on where and how to invest and utilize DeFi protocols. We will weather this financial storm and continue to build.