Forecast 1/10/22 - Bet on Positivity
A rose amongst the ashes
Welcome back to the final week of free content. There will be 2 more free posts before the paywall goes up.
Please refer to the Backdrop Post and trade with mindfulness.
Please refer to Definitions page for any terms or abbreviations that I use that you don’t understand. If a term is missing, please let me know.
Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
All times given in this update are in US Central time (UTC-6 clock)
Song of the Week - Big Hawk and the SUC on a freestyle with DJ Screw
I love this video because every single one of these guys was basically nobody when they shot it. And now they’ve almost all become famous or own record labels. But here they were just friends who hung out on the weekends and after work at each others houses and made music to vibe out with each other. All big things begin in humble places. Love the places where you find yourself, they may soon grow into much more.
Table of Contents
Mindfulness of Risk
Economic Calendar
Central Bank Speeches & US CPI
Crypto Macro Update
Conclusion
1. Mindfulness of Risk
I usually reserve a mindfulness segment for the end of the week, but we’re going to have it today instead of on Friday.
Last Friday, I issued a question and a challenge, of which Tall Texas Imbecile 2 won a free years subscription to the substack by being the closest to the right answer while also being the first to respond. The question was:
Pretend you happen to be holding the asset in the image above. You bought it with a small amount of ETH, it has now quadrupled in price against ETH. You are staring at a quick 4x profit, what should you do now (guess what did I do about 14 hours ago)? I will provide the answer on Sunday, and will gift 1 year comped to whoever the first person is to give (what I consider to be) the right answer.
The answer given was:
Answer: Sell 1/2, put 1/4 in your pocket, 1/4 back into ETH
What did I actually do? I sold 1/4 to get my initial investment back and held the other 3/4 as a moonbag. My macro outlook at the moment is not pointed towards withdrawing cash as I set up most of my cash outlays for this year already. The project ($CFT) is only a few months old, it has a lot of promise as an NFT marketplace and was recently as high as #8 of all NFT marketplaces for trading volume in a 24 hour period; and its around the corner from offering a daily profit share of a portion of the revenues to the governance token holders.
However, crypto is a fickle industry, and what you see and know today may very well be left behind tomorrow. There are a lot of projects I have invested in that I have abandoned, and many that have lost the current interest of the public. This is very much a “what have you done for me lately” market in terms of how others treat it. Just as we trade the Federal Reserve’s statements in the present, and not based on the inevitable math that we know, we also trade crypto partially based on present hype and not fully on our future expectations. So how do I insulate myself from this risk, and how should you?
If you’ve invested in something that you don’t quite understand and it’s money that you might miss; and you’ve watched a 2x, 3x, or 4x you should sell 1/2, 1/3rd or 1/4 and take back your initial capital. You now have a risk free position, that you can hold without any adverse affects on your emotional state. More than anything, as an investor, you have to protect your emotional state so that you don’t make an emotional decision in any given moment. If the money is small enough to you that you don’t care about it, then sure, keep the entirety of your position. But if not, you need to pull back your initial capital.
Similarly, when your entire crypto portfolio starts to represent a significant amount of your living expenses, say you have 10 or 20 years worth of money in crypto, then you also should be taking some profits and turning it into cash so as to calm your emotions. The longer you ride a wave, the further to the edge it frays your emotions. If you aren’t emotionally balanced and patient in your outlook you can absolutely ruin a great position. So it’s absolutely important to take something off the table if you ever feel any sort of spike in emotion. Just right away, take a small portion off the table. Never sell to 0, but if you need to sleep easier, pocket 20% or whatever that amount is, it will make you stronger.
2. Economic Calendar
Refer to Economic Calendar Settings Post for filter settings used.
This is a relatively light news week. The items worth watching this week are the speeches from central bank heads (Europe, USA, and Japan), and the CPI (inflation) in the US.
3. Central Bank Speeches & CPI
From the Central bank speeches, I expect them all to be discussing some form of Tapering. Japans taper is probably the most necessary, but also the most precarious. However Japan has a much tighter grasp on the financial discussion surrounding the BoJ’s activities.
As far as their economy is concerned, they are far and away the worst in terms of Debt to GDP. Even their central bank holds more assets than the entire GDP of their country at 128%. In order for Japan to taper, they will have to spend decades selling assets back into the markets and driving prices down of basically all national investments since the BoJ is also the largest holder of stocks on the NIKKEI (Japans version of the S&P 500). This is political suicide, and the official figures Japan puts out for CPI claim prices in Japan are falling. I don’t live there, haven’t looked too closely at how they calculate CPI, I suspect that claim isn’t true and they are also experiencing significant inflation due to negative interest rates and a money printer that has been on for over a decade, but I can’t say for sure.
I expect all 3 central banks to be speaking about how they expect their taper plans to be successful. It’s easy to speak like that in the early days of the taper, before anyone has really felt any of the pain of a taper yet.
Short term, the markets will believe these statements. You’ll see prices continue to trend down or flat for investment assets as people believe the statements made by the central banks. And the central banks will watch the bond markets begin to feel the strain in the background. Remember, the treasury bond market is what is directly funding the governments for all 3 of these countries. They all want to walk the tightrope of cutting inflation, maintaining investment value, and funding government deficits. But they can only do 2 of the 3 at any given time. So like a magician, they distract you from looking at whichever segment is under the most pressure. A wave of a hand, a point of a finger, it’s all designed to keep attention away for long enough for the central banks to move on to the next crisis without anyone really picking up on whats going on. Further, in the US, its an election year and the Federal Reserve is beholden to the political success of the party currently in charge. If we see a stock market collapse of 20 or 30 percent ahead of the election, there will probably be further pressure in order to maintain the wealth affect (Section 4 of this post).
And finally we will be looking at CPI. Current expectations are for 5.4% YoY, which is lower than last months 6.8%. I expect us to over-run the expectations again, but whether we will print a higher number than last month remains to be seen. As far as markets are concerned, we are still in a holding pattern awaiting the termination of the Feds narrative. Another high inflation print would apply further pressure to the Fed to stick to their accelerated taper, but… conveniently, Jerome Powell’s speech is slated for the day before the CPI release, meaning, he probably won’t have to talk about it or answer questions about it while the number is fresh.
For the time being, I expect the currencies that are tapering, and those that are pretending they will taper to gain a bid and continue to show strength. But the wheat will be separated from the chaff in time. Over the course of this year, I expect to see significant growth in GBP (UK pound) against almost all other currencies, with the Canadian Dollar also outperforming. For those swing trading, over longer periods these can be used as excellent levers against those countries that are pretending to taper. Entries for GBPUSD were given last month in this post.
From my chart below you can see that we are currently priced at 1.32. Some nice buy entries may present themselves around 1.314-1.316 during or around the interest rate decision for a long position for the next swing. The dark green trend line is a Daily trend, purple is monthly, and there is a significant demand zone in green with lots of buying occurring in these areas.
We saw a low put in of 1.31601 before a 400 pip push by GBPUSD. At this point I would look for a pull-back to 1.3355 before this move continues as the narrative between these two central banks continues to diverge. I genuinely expect this pair to rise all the way to 1.6 this year and I genuinely expect the interest carry to shift more in the favor of a long carry, making this a profitable hold as you will be paid swap fees1 every day due to the intervention of the central banks.
4. Crypto Macro Update
Over the past week, LINK and ATOM have both performed well, as many in blockchain are now turning their eyes towards interoperability (As I outlined in Section 4 of this post). It’s likely that we will see the protocols that focus on this and on creating more decentralized bridges between L1 protocols that don’t require CExes to act as middlemen will probably see significant adoption. And as I stated on Friday the Layer 1 protocols that integrate with these bridges first will benefit from the access to liquidity the most. In this period where the sector is flat or dropping, it can certainly be of benefit for investors to have some exposure to interoperability protocols. Being mindful of what I outlined in Section 1, you could certainly deploy a small amount of your own BTC or ETH to one of these protocols to see if you can catch a quick 2x or 3x and then secure your original investment back into BTC or ETH for a risk free moonbag. But of course, if you are new, you can’t forget my advice from the FAQ.
5. Conclusion
The central banks will keep talking for as long as people will listen. Tamp down your impatience. Focus on your own personal finances while maintaining a safe and regular investment into crypto with what you can spare. You have time, you’re still early. We are still watching to see where the next bottom gets put in on this sector. I don’t think the bottom is imminent (its not next week). But I genuinely believe that the the taper cycle will fail, and we should see mid-term lows put in where and when that cycle fails. Whether its an election bid for mid-terms, or a bond crack up, or the treasury being unable to cover expenses at the interest rates. The current debt ceiling bill that was signed in December 2021, only allows for enough spending to get us to fiscal 2023 (which begins October 1st 2022), but its quite likely that we will hit the limit before that. Without any cut to federal spending, its an inevitability that demand for US bonds can’t meet our spending, and that the treasury can’t afford to pay the interest rates that will come from a successful tapering program in the US. Meaning that turmoil in the bond markets is a foregone conclusion, and that a new mid-term bottom is inevitable. The federal government and central bank simply lacks the conviction, and care for their progeny to endure personal pain and do the right thing. As sad as it is, the bet we are making in crypto is that the government will do the wrong thing and lean headfirst into fiscal collapse.
Betting on negativity can wreck your emotions, which is why I focus so much on the positivity that can be built in this space amongst the wreckage. All of the new dApps, and new financial functions that are arising, seemingly from nothing are incredibly hopeful. I suspect that when the separation of church and state finally happened after centuries of internecine wars that it must have been a relief for people to finally have religions that were not so strongly entwined into politics so that people could believe what they wanted to without it having an affect on the lives of their neighbors. Similarly when finance is finally separated from the state and you can not only save, but do business in whatever manner you choose without being exposed to the profligacy of a government that wishes to live at your expense, I expect it will provide a similar relief to all those on the planet when it occurs. That is the hopeful future I look towards. I recommend to you all, that you come up with and envision a hopeful ideal of the future that is in line with your investment strategy. Be realistic (he says, after dreaming of the rise of a new reserve currency), but also idealistic and find where the two meet. But there should be something larger that is positive and associated with your investments performing well. The worst kind of investment is one where you bet on despair and loneliness. It’s a lose-lose, you’re either wrong and you lose money, or you’re right and society collapses. I know that people invest in Chewy because no one is really having kids and are instead using pets as surrogates, but I would never invest in that, because that’s not a future that I want to see. Similarly, I would never bet on the failure of the best of our species. I often say that I don’t trust people who cheer against Tom Brady for the same reason. Wanting our best to fail, is akin to wanting yourself to fail, or worse identifying with the profane. I would never align my life, my finances, or anything with someone who has such an outlook on life. And I am dead serious about that. People like that will bring you down when you begin to succeed. Don’t short Tesla, Don’t cheer for Brady to lose, Don’t bet on the failure of our species. Just as the words we use to describe ourselves have power, so too do our investment choices. Bet on positivity, and more positivity will find you.
In ForEx, you are actually borrowing treasury notes from 1 currency to buy treasury notes in another in a perpetual contract whenever you make a trade. Essentially you pay the interest on the note you’ve borrowed, and you receive the interest on the note you’ve bought. So when there is a significant difference in interest rates, and you are leveraged 500:1 or 1000:1, you can actually rack up a non-insignificant amount of daily interest if you are long a currency with higher interest rates than the currency its paired with. This is called a “Carry Trade,” and these types of trades are attractive on their own. When two pairs have interest rates that move in such a way as to create a carry trade, where none previously existed it can attract significant capital as there are many risk averse players in the forex markets that do nothing but seek out carry trades with extremely safe positions. Front-running the creation of a carry trade can be a significant way to establish a safe position.
Congrats to Tall Texas Imbecile senior for birthing a true winner
Excellent work per usual. I always look forward to the Macro, it has helped me notice patterns in my construction contracts, and how the actual smart people are gamifying the “free” loans to build properties that may never pay back the loan.