Review 12/20/21 - Holidays & Giveaway

Continued Taper Talk

As I stated in my forecast post from before the holidays, I took a brief break from the weekly macro posts. I am now going to review those predictions and the state of the market today, as well as updates on Macro-news that occurred as well as a treasury bond market update.

I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.

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Table of Contents

1. Mindfulness of our place in time

2. Federal Reserve Taper Update

3. US Macro Events

4. Global Macro Events

5. Treasury Bond Update

6. Crypto Macro Update

7. Conclusion

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1. Mindfulness of Our Place In Time

There is one issue that many new investors have wherein they feel a rush to get into the market. Some people call it FOMO, or Fear of Missing Out. It can often cause people to believe that if they don’t invest now that they will be left behind. This is simply not true. It is very rare that you will see a market, where the asset hits a massive bid and pushes up in a vertical manner.

This happens among micro-cap projects, like the $CFT token above. This does not happen with mid-cap, nor large cap project like Bitcoin and Ethereum. It is very important for you to be mindful of what you are able to buy, and what you are able to sustain long term. If you over-extend yourself today and you have to sell something tomorrow which you didn’t want to sell, then you have ultimately taken 1 step forward and two steps back.

Lets play a game in the comments. If there is a winner, I will give them a 1 year subscription comped for free whether they are free subscribers or have a monthly subscription.

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.

Now back to our mindfulness…

Regardless of what it is you are hearing from anybody else, take a second, close your eyes, and breathe slowly for as long as you can keep your eyes shut and your mind still.

Still here with me? Lets take a trip down memory lane to the year 2000. Everyone agrees that the internet is revolutionary tech, but many people are disillusioned by the crash of the .com bubble, take a look at Amazon stock. It looks pretty dire doesn’t it?

Some people could be down as much as 90% in 2001. That isn’t going to happen again in crypto large caps like BTC or ETH, but this is just for perspective. Was someone that paid $100 for Amazon shares in January 2000 an idiot? That depends on your perspective. If you have the perspective from the year 2020, then they’ve probably retired and look like an absolute genius. If you have the perspective of 2001, then yeah, they look like idiots.

Now lets pretend that you live in 2001, and you know how amazon stock will perform by 2020. Are you going to be rushing or freaking out about how you have to buy as much as you can as soon as you can? No. You’d probably just be putting whatever extra money you have on a monthly basis into the stock, while making sure your finances are secure enough that you don’t have to sell any before it’s at $3,500 a share. Are you going to be very concerned about what price you got in at? Probably not. The 2001 market crash is barely a blip in this chart. I covered the Bitcoin token emission schedule in Section 2 of the Beginners Guide to Crypto, as well as the emission schedule for US dollars.

There is some inevitable math that those two charts present. Mainly that the price of BTC will continue to increase at an exponential rate, this will not be forever of course, because eventually means of exchange back to USD will be disrupted or distorted, at which point the price of goods and services in Bitcoin or other crypto will re-price and no longer be tied to the exchange rate. Perhaps I need to make another post about that, but there are credible examples of this from Venezuela, Zimbabwe, and several other countries. Governments will eventually force an exchange rate, while a black market exchange rate exists that matches the real market. And what happens is that vendors offer discounts if you pay in the preferred means of exchange.

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2. Federal Reserve Taper Update

Now lets zoom back to where we currently sit. We exist within a market that is trading the short term rumor that the Fed will taper their bond purchases. This isn’t mathematically possible, but as I’ve stated earlier, being right when the rest of the market is wrong, looks the exact same as being wrong. So we trade with the market, and try to anticipate what they will do, rather than trying to make the fundamentally correct trade. In the current market, we will continue to see prices move flat or sideways as I stated in the conclusion of this post from last month. My recommendation during that time is to maintain a DCA into the bluechips, BTC and ETH if you are new. If you have considerable allocation to those already, you can consider diversifying your DCA into alternative L1 smart contract platforms. If the narrative falls apart in the way that I think it will, we will see some very similar action to March 2020 except an even more violent and short lived bottom will present itself. If you can, you want to be holding some dry powder (cash ready to buy) for that point in time. I can’t tell you when it will happen right now, but I can tell you that as we monitor the bond markets on a weekly basis, that we’ll know before everyone else does, and we’ll move before everyone else does.

The minutes of the FOMC meeting from December came out earlier this week, and despite saying absolutely nothing new from the December meeting that I covered last month, the markets reacted violently. Why? Well… you, and most westerners would probably be surprised to know just how many robots there already are in so many different industries. Most major written journalism is AI assisted or AI generated entirely.

The second significant area AI is used in journalism is for “reducing variable costs.” That includes tools that automate the process of transcription, tagging of images and videos, and story generation. The category of projects that used AI for “optimizing revenue” — including dynamic paywalls, recommendation engines, and the digitization of a news organization’s archives — ranks third. 

Most financial outlets have bots that are automatically filtering through text released from major financial institutions to pre-write stories for journalists to then review and modify before pushing along to an editor. They work much better at filtering stories out of text, than they do at filtering stories out of live video. And so a story that is new to nearly nobody can be repeated. Further, there are trading algorithms that do nothing but troll financial news for keywords and then trade based on that.

So in some cases, an algorithm is writing a story, and then another algorithm is immediately trading it. Due to this perverse feedback loop some very interesting market distortions occur. Primarily one where the Fed, and others can talk the market into doing something that doesn’t make much sense. And most financial journalists have been weakened by their dependence on AI-assisted tools to write their stories and lack the ability to even critically assess the math behind what they are being told.

A similar feedback occurs in the hiring and interview process for most jobs. A system called ATS (Applicant Tracking System) is used to filter out resumes that don’t have specific keywords in them. But you as an applicant, can simply feed their job description into a very similar AI to spit out a resume that the AI will rate very highly. And so you can take advantage of a very similar feedback loop when job-hunting to get more interviews. The AI re-writes your resume, for another AI to read and sort to the top of the pile.

Anyways, we are still watching for the same 3 factual promises that the Fed made.

1. Doubling the rate of taper on January 15th

2. Concluding the net purchase of assets with printed money by March instead of in June

3. Three rate hikes in 2022 so that the overnight rate is 0.9% by the end of 2022

I suspect that the first one of these promises will be kept, but I highly suspect that the second promise will be pushed back from March 15th, and may possibly never be concluded depending on how the bond markets handle the drop in bids and the rise in interest rates that will occur. If rates get unaffordable for the US treasury, the Fed will have to act, there is no other option or source of funds to cover the government deficit.

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3. US Macro Events

We’ve got a little to catch up on over the past few weeks. Primarily, we have the Durable Goods number from the week of Christmas, and we’ve got the NFP (non-farm payrolls) from today.

My prediction for US Durable Goods had been for a continued trend of decreasing production. We, however did get an increase, but Core durable goods were down 0.1%. Core excludes volatile sectors and mainly is an indicator of business investment. Overall this is a better report than I had expected, but still shows continued weakness in the private sector.

NFP is the other big watch, it is essentially a measure of how many new jobs are being created. It is, of course an intentionally broken measure because the government has to put their finger on every single scale by which they measure themselves. Instead of waiting for new businesses to add job listings, the BLS (Bureau of Labor and Statistics) makes a guess about how many new businesses were started and then makes a guess at how many seasonal jobs were create based on the guess of how many new businesses were started, and they add this number to the amount of job listings they find in their surveys. Yes seriously, they make up a number and add it to the job totals.

With this in mind, this statistic is mostly useless except in comparing it to the previous months to get a rough idea of if things were better or worse. The numbers provided are mostly meaningless. But the market trades them as if they are not, why? The markets believe that the Fed has dual mandates; stable prices, and full employment. So the markets are exclusively trading their beliefs about what will impact the Feds decisions on monetary policy. Stable pricing, means the markets trade CPI and inflation as if it affects the Feds decision making. Full employment means the markets trade NFP as if it affects the Feds decision making. We know that this is not what actually affects the Feds decision making. But what we know does not matter, all that matters is what the market will do.

So, on to NFP. There was a general consensus for 400,000+ new jobs, but this morning we were told that actually we only got just short of 200,000 new jobs. The markets trade this as if its a sign that the Fed needs to raise interest rates soon, and we see a further push out of momentum plays and towards value plays. The market essentially trades a bad report as if we need to change monetary policy, and a good report as if monetary policy is fine. Both conclusions are meaningless, but this is how the market trades.

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4. Global Macro Events

You’re in luck. There were no relevant global macro events (strictly speaking from the perspective of central banks), for us to review here. However there were many large scale global macro events that occurred over the holidays.

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5. US Treasury Bond Update

You can generate and download the reports from the treasury HERE (note: many “financial guides” charge $100 a month for this data that the gov. gives you for free at this link), the “competitive PDFs” are what you want.

Looking at this chart as it starts to fill out, I am tempted to remove the 4 week auction and create a separate chart for this note as its auctions are much more volatile and makes it harder to see what’s going on with some of the longer term auctions. Of note, we still do not have data on the 3 year, 10 year, and 30 year auctions that occurred this week. And for further clarity of this chart, the longer term bonds have auctions once a month, while the short term auctions are once a week. So those changes to this chart will promote readability for everyone.

Of note, shorter term Bid to Cover ratios are slightly down, while longer term are flat so far. I suspect these numbers to change significantly in the February auction which will occur after the first acceleration to the planned taper on January 15th.

Below are the interest rates for those same auctions. This data is usually shared when the auction resolves so we have all of that data for the past week.

January Long term rates have not come out yet.

Short term rate auctions occur on a weekly basis, and we are starting to see a trend emerging here of interest rates trending up. This is an initial sign validating my hypothesis, but we will need to see it sustained and especially reacting to the accelerated taper. If and when the Fed loses control of interest rates, we will see it alongside an initial emergency measure. But, because most financial literature is AI driven, the larger markets will not pick up on it right away, the same way they totally missed out on September 2019’s move. This cycle will terminate much quicker than that one though, so I would suspect only 1 or 2 weeks notice before the market moves on this next bond market crash and it spreads into the wider field of assets pushing them up. An uncontrolled spike in interest rates will likely be followed in 1-2 weeks with a new mid-term bottom on basically all financial assets.

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6. Crypto Macro Update

In my post prior to the holidays I did say to expect a drop across the markets sometime between December 22nd and January 3rd.

What this adds up to is an interesting opportunity for a limited spot purchase of the assets you want. If we were to see an extended holiday dip, I suspect some decent short term buys could present themselves around $3,433 and $3,304. Below is my chart with a simple markup of significant levels on ETH for supply on the orderbooks. The first arrow terminates on Christmas. The second arrow terminates on new years eve.

I even included a chart highlighting my targets. I was wrong about the timing and the lower target. The drop actually occurred on January 5th instead, and over-ran my targets.

That’s fine of course, because we understand the macro-narrative here which is for the sector to be bearish as long as the narrative from the federal reserve holds up. Which is why I say that right now you have time. ETH and BTC are the savings account for any investment you make into the crypto sphere. From this savings account, you can then buy in to other projects you wish to take a chance on. But regardless of if these projects go up in US Dollar terms or not, if they can’t beat ETH or BTC, you were better off just staying in ETH or BTC.

As stated in my initial crypto macro-update. The main trends for this year will be interoperability. That means two things. The protocols that facilitate interoperability will go up. And all L1 smart contract platforms that have bridges to ETH and Binance Smart Chain will benefit from the additional liquidity. New bridges equals a pump in price as liquidity from ETH will chase yield with lower gas costs. That will likely be the theme of the entire year of 2022 as we move away from using Centralized Exchanges.

Expect most crypto prices to keep trending down or flat for now. I will call the bottom, or I will die trying. When that moment occurs, the investment strategy has to change with it. For now you just want to DCA and keep yourself in a sustainable position where you can cover your cash expenses and have enough saved to float yourself for a few months if the worst happens.

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7. Conclusion

Short, sweet, and to the point. Be patient. Be diligent. Be mindful. Our time is around the corner, but for now, don’t overextend yourself as if the bottom is in. The bottom isn’t in yet. Markets will continue flat or down until the bond markets collapse. That will only happen when the narrative surrounding the feasibility of tapering falls apart. At which point, just like CovID vaccines, they will probably tell us that the taper was never supposed to work in the first place and that the money printer was always intended to stay on forever. The math behind what they’re doing supports that conclusion. I would prefer that they took it on the chin and cut spending, but I am reminded that what men want does not matter, time takes us where it will. And with that I leave you with a quote I enjoyed from the “Song of Ice and Fire” novels.

Ser Corliss Penny gave the clan chief an incredulous look. 'Do you want to die, Wull?'

That seemed to amuse the northman. 'I want to live forever in a land where summer lasts a thousand years. I want a castle in the clouds where I can look down over the world. I want to be six-and-twenty again. When I was six-and-twenty I could fight all day and fuck all night. What men want does not matter.