The first three weeks of 2022 have been brutal for risk assets including stocks and crypto. Long forgotten is the traditional Santa rally and suddenly cheerful $SPX 5,000-5,300 price targets seem much farther away. The culprit can be multifold: Midterm seasonality, profit taking on last year’s winners, continued capitulation on last year’s losers, a long overdue technical correction, but more importantly and perhaps more profoundly the realization that the asset bubble brought about by excessive monetary intervention has started the process of imploding all around us as the Fed is now forced to raise rates and end QE having completely misjudged the persistence on inflation. In short, carnage:
— Sven Henrich (@NorthmanTrader) January 21, 2022
The Fed may well try to engineer this market correction with hawkish talk versus hawkish action to produce a soft landing to lead to further rallies as alluded to in the 2022 Casino, but the tape highlights the devastating damage that is now inflicted on the exuberant investors of 2021 and again the now obvious point:
It’s almost as if the stock market is all about the Fed and not earnings.
— Sven Henrich (@NorthmanTrader) January 20, 2022
The monetary dominance over all things price discovery with all their dreadful consequences is again playing out in front of us and yes, my repeated contention last year of correlated liquidity flows is playing out with the 50% crash we’re currently witnessing in Bitcoin:
A point I made repeatedly last year: given directional flow correlations there will be a test when the liquidity comes out.
This test is unfolding now.
It’s brutal but I’m of the view this will present a long term opportunity. I’ll post more on this later. https://t.co/2XBtV6kvzr
— Sven Henrich (@NorthmanTrader) January 22, 2022
Heck small caps and $RUT currently have a 93% correlation on the weekly chart:
You’d think this price action may prompt a “told you so” type article, but rather I find the macro backdrop actually steer me in a different direction, that of becoming a Bitcoin supporter which seems odd given that currently my notion of the everything bubble apparently beginning the process of playing out.
Which brings me to the point of this article: (R)evolution. Revolutions are a rebellion against the status quo. Sometimes they are done for nefarious purposes, sometimes out of necessity against relentless and unjust oppression. In a political sense they can be violent, in the intellectual sense rebellions can be of the mind. Evolution is adaptation to changing circumstances. Both terms I sense apply to me in assessing the world we live in.
Specifically I am referring to my evolving views of our global monetary system and in contrast the efforts undertaken by many to create an alternative, Bitcoin being the current dominant expression of such an alternative.
I’m not writing this piece to push any particular agenda, rather I’m sharing my macro assessment to highlight how I’ve become a supporter of Bitcoin. In my discussion last summer with Michael Saylor I’ve called it a highly emotional space and it continues to be. I’m not a FOMO guy or relentless cheerleader, my personality is too analytically wired for that, hence my focus to call things as I see them and I’ve charted Bitcoin for a couple of years now publicly offering my as objective as possible view (see also The NorthCast).
Many people call it a scam, a bubble, others are fanatical supporters that aggressively attack dissenters and of course there are tons of scams around a new tech space that has filled many minds with greed and promises of easy riches. And riches have come to fruition for some while the volatility and massive price drawdowns also have resulted in massive financial pain for many others.
It’s a young space filled with emotions, greed, and lots of opportunities. But because it is young it is also immature. The relentless cheerleading in the recent year without discerning price flow and technical structure analysis has led many people off the cliff. Slogans are no long term substitute for analysis.
Frankly in many ways it all reminds me of the wild days of the 2000 tech bubble. Many companies also proved to be fantastic long term investments but the early over excitement of the day also ended in -90% drawdowns that wiped people out. I’m not a making prediction here, but just for reference such an analog drawdown could bring Bitcoin back down $7K. So entry points and exposure matter, but so does a long enough time horizon and vision to see past the growing pains and search for opportunities that can change the status quo in a major way in the long term.
My relationship to Bitcoin specifically has been observational for the past few years and I’ve certainly taken my own potshots at the craziness of the explosion of this new industry with its flamboyant characters and classic type bubble actions we’ve seen in recent times.
But taking potshots is easily done from the cheap seats with no exposure and this is what I intend to change for myself. I want exposure. Not as a trade, but as a long term allocation as I see many macro changes taking place that frankly affect all of us in one way or the other. And to this end I’ve continued to explore, assess and to educate myself.
As I am writing this article markets are going through its first larger correction since the March 2020 lows. And it’s a brutal one. Absolutely carnage in the celebrated funds and meme stocks of 2020 & 2021 and the majority of the general stock universe . Small caps down 20% from the November highs, many individual stocks down 50%-80% from last year’s high. Carnage. And yes Bitcoin along with all other crypto currencies is getting mauled as well.
I’ve long spoken about the liquidity correlation and have questioned the validity of the hedge argument. At this stage Bitcoin has not proven itself yet to be a hedge again inflation or market selloffs or excessive money printing, I would argue it’s been a beneficiary of it as has all crypto. Think stimulus checks. Think unprecedented artificial liquidity that seeks a return.
But yes, while my evolution in thinking may have left me miss out on some opportunities I also feel validated by my liquidity analysis and I would argue I haven’t really missed much in the last year from an investment perspective only from an opportunistic trading perspective. But I’m viewing all this through the lens of a long term investment.
So with rate hikes coming and the Fed supposedly rolling off it balance sheet will Bitcoin not continue to suffer? It may well do that and for me that then offers a long term entry point, as I sense the correlation dynamic will change in due time, but I’ll get to that point later.
As readers know I’ve been of the view that excessive central bank liquidity has driven the largest asset bubble in our lifetime. The one trick pony of ever more intervention successfully and repeatedly employed by central bankers time and time again is seeing the previous denied consequences unraveling before our very eyes and the events of the last few months were really the last straw for me.
You intervene to rescue the system from a crisis. Fair enough. No problem with that. But if you keep relentlessly intervening despite the larger crisis being over you are inviting disastrous consequences and we see vast structural impacts now. Wealth inequality has taken on obscene extremes while rampant inflation is now hurting the middle class and the poor with consumer confidence in the proverbial toilet. No, the institutional arrogance of central bankers have hurt people. Look, it may well all be that they see themselves as the saviors with all the best intentions in the world. Although the revelation of insider trading by several Fed officials last year should dispel this self anointed notion of them being the good guys. Greed and profit motive runs deep at the Fed, the supposed public officials serving the public interest. After all, recent Fed presidents have made it a point of cashing in big time pig time by collecting millions of dollars in speaking fees from the very institutions they were previously in charge of regulating.
And be clear: Fed leadership has revealed itself to not only be self serving, but also grossly wrong about key issues facing the economy with disastrous consequences for the public. The housing bubble was easy money induced and the threat from subprime openly denied by Bernanke caused millions to take the bath for that costly mistake. The Fed mandate of full employment as a cause celebre to keep rates low was revealed to be a straw man as the Fed cut rates 3 times in 2019 when unemployment was at a 50 year low of 3.5%. And now the inflation fiasco, stubbornly insisting on a transitory inflation narrative while growth was exploding higher and fiscal stimulus was flooding the system, through all of it they kept relentlessly printing exacerbating the asset bubble we see imploding around us.
The Fed, the supposed lender of last resort, has devolved into a creator of a repetitive boom and bust cycle with a proven track record of perversely benefitting only the few often at the long term expense of the many. And in process they have debased the monetary system and distorted all normal functioning of price discovery under the illusion that they can keep it going consequence free.
Actually it’s not an illusion, they know exactly what they have done. After all Powell in April 2016 highlighted what was to come to pass:
“it’s plausible to me that rates will have to remain very low for a very long time to achieve stable prices and full employment, but that such low rates will drive excessive credit growth and create irresistible upward pressure on asset prices, including real estate prices. I’m thinking of a situation in which a broad range of asset prices are moving up well beyond what fundamentals would justify; where the other tools we have don’t seem to be addressing the problem or have failed to do so; and where low interest rates are pushing up asset prices and driving credit to excessive levels, probably over many years, and thus are a principal cause of the threat.”
The very threat we now face, an asset bubble bursting, having made housing unaffordable for many, the rich richer and leaving the less well off to take the bath for what is to come.
Indeed it was during the same meeting that the Fed’s Williams warned against the Fed to lose sight of it price stability mandate:
“In thinking about monetary policy, I am drawn to the Hippocratic Oath of doing no harm. Our primary focus should remain on our dual-mandate goals. We know from the history of central banking that when you lose focus on price stability, that has very significant costs to society. But assuming that we are in the vicinity of our goals, we should take care that monetary policy does not inadvertently contribute to fostering the emergence of imbalances in the economy, because the cost of trying to use monetary policy to tame imbalances after the fact are simply too large.”
And here we are, the Fed having lost focus on price stability with very significant consequences to society with imbalances too many to count.
They did this, they knew better, but they did it anyways even though they were urged my many to ease off last year. They didn’t.
And citizens have absolute no say in this incompetence imposed upon them. You and I have no say, but now we’re all stuck with higher prices whether year over year inflation will come down or not doesn’t matter. Prices are not coming down. And Powell knows this too:
Never forget: Those price increases are not coming back down, you’re stuck with them. Powell already told you so.
July 2021: pic.twitter.com/0eSnxyujq0
— Sven Henrich (@NorthmanTrader) January 12, 2022
They knew in 2016, they knew in 2021, and now they are chasing their tails trying to fix last year’s policy error.
I don’t pretend to know where this journey is going. All I know is that they’ve expanded money supply and by extension facilitated a historic debt expansion by ungodly amounts and that everything is historically imbalanced and consumers are now taking a bath for it with coming monetary tightening possible causing a recession as a result of the asset bubble bursting. Imagine:
At this rate the Fed will put the US into a recession without ever having raised rates.
— Sven Henrich (@NorthmanTrader) January 20, 2022
And so yes, it is frankly very hard to want to trust these monetary unelected regimes. Be it in the US or in Europe with the arrogance of ECB president Lagarde not even wanting to pretend to want to stop QE or to raise rates in the face of the European citizenry taking the bath for higher prices. Yes, year over year inflation will eventually prove transitory, but the long term damage inflicted on society could last a generation.
Which brings me to the revolution part. We have no say. I can rant against the system all I want, but it won’t change a thing I can only control my behavior and my allocations. And I want an alternative in my allocations versus the institutionalized system intent on devaluing my hard earned cash and purchasing power. Something they can’t touch. What other alternatives do we have? Real estate? Already have a nice house, thanks. Not interested in buying into a monetary induced housing bubble. Been there, done that. Thanks. Bonds? You jest. Gold? Yea I like it technically and there’s a possibility if you have the patience of a glacier. Stocks?
Markets, despite the recent correction, remain historically horrifically overvalued:
A secular bottom must be close.
I mean, look at that dip! pic.twitter.com/KC3OwYma8w
— Sven Henrich (@NorthmanTrader) January 19, 2022
Yes there will be rallies, heck maybe even new highs still, but downside risks remain vast for years to come and the recent obliteration of many individual stocks serves as a stark reminder that last year’s bubble warning were well rooted in fact.
Which brings me to the unproven hedge argument from earlier: While crypto and Bitcoin has rallied with everything in recent years equity allocations last year took on historic proportions. I propose that the coming long valuation adjustment in the broader market will have current holders of equities eventually seek for an alternative and Bitcoin as a digital asset class will offer such a long term venue. There is a hell of a lot of more money in equities than there is currently still in Bitcoin. And heck, perhaps my own conversion process is sign of things to come. Or perhaps I’m pulling a classic Isaac Newton and join the party late just before it all blows up for good. But I don’t think so because I’m not coming here near a top, but rather with a view to patiently look for entry opportunities in the year ahead letting technicals be my guide.
No, the revolution may still be in the very early stages and it may yet have to suffer a much larger drawdown in time versus the current 50% shellacking from the November highs. After all the Fed hasn’t even started to withdraw liquidity and regulation is still outstanding which brings me to other points in favor of Bitcoin:
Regulation is coming but it’s not coming in the form of a ban, institutions are looking to invest but they hate uncertainty and regulation will give them certainty. While retail may have gotten burned to a certain degree by shorter term leveraged trading strategies institutions will have a longer term horizon and more stamina to withstand drawdowns.
The final point is a human component. Yes, there is all kinds of craziness in the space and scams and bots, but my impression is there are people, many of whom much smarter than me, who generally care about making a contribution to changing the world for the better by creating an alternative to the monetary North Koreas that rule our financial world. Jack Dorsey strikes me as such a person and his effort with CashApp is such an example.
I don’t know personally many people in the space but I’ve had the opportunity to speak with Michael Saylor at length twice now, including a bit outside the podcasts. While he, like myself, gets a lot of hate and derision on social media, he strikes me as very earnest in his conviction and arguments. Doesn’t mean he is right, or that I am right. Only time will tell. He has now got more skin in the game than anyone I know. I can’t speak to his investment strategy, nor is it my place nor is it anyone else’s. We are all responsible for our own decision making and our investment allocations and I am making a choice of wanting to seek exposure into Bitcoin this coming year.
As I’ve pointed out earlier I’ve been charting Bitcoin for a couple of years now and I find it technically very appealing and precise, hence I aim to keep charting it to find entry points to start accumulating. Feel free to follow my chart process in The NorthCast, it’s free. As I said I’m not pushing any agenda just sharing my thoughts as incomplete as they may be, but these are my main points.
The revolution is a conscious choice to find an alternative to an imposed monetary system, the evolution is to come to the conclusion that Bitcoin is such an alternative. So to fans of Bitcoin I say this: One of you. To those that are not: Don’t hate, appreciate ;-). That’s what makes a market.
On a final note, Michael Saylor and I have recorded another in depth discussion this week and you may find it of interest for your own decision making process:
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