Week 1 12/6/2021 Macro update
Pre-week assesment
Thank you all for joining me. This is the first of 6 weeks of free content and should give you a feel of what the main purpose of this substack is.
I will outline all of the coming Macro events focused on the US for next week, the day and time they will come out, as well as an assessment covering what the market expects, how the markets will interpret that news, and then what the truth actually is, and how (or if) you should attempt to trade that news.
Please refer to the Backdrop Post and trade with mindfulness.
All times given in this update are in US Central time (UTC-6 clock)
Song of the Week - Let Me Find Out - MO3
Table of Contents
Economic Calendar
High Impact Events
Brief FX Global Macro Predictions
US Bond Auctions
Crypto Protocol Reviews
Crypto Macro Update
1. Economic Calendar
The calendar I like to use is the FXStreet Economic Calendar. It identifies all upcoming news, the date and time of its release, and has great filtering options for you to keep up with the areas you are interested in. The app works well and I recommend it for doing this on the go.
We will be using several different filters here and I will step through them once here, and after that I will make a reference post that you will be linked to in all further weekly updates.
The first filter we will use will be for the high impact events across the 8 major currencies. Below are my filter settings.
If you want to see additional events for minor and exotic currencies, you can do so, but that is of less interest to us. We will, of course, be only focusing on the US macro for the most part as the markets we trade were built on top of that.
2. High impact events
As you can see, there are only a few high impact events occurring this week. Where the US is concerned, we will only be paying attention to the CPI print. CPI (Consumer Price Index) is the governments measure of inflation, it is probably significantly wrong, and I will make a post at a later date explaining why, but its safe to presume that it is an underestimate of inflation, and if I had to guess based on my gut, I would say that the relationship between CPI and inflation is probably closer to a square function.
I will do a deeper dive at a later date where I actually attempt to identify the real shape of inflation and will use some examples from the basket of goods that the government is attempting to measure with the CPI, and we will see if we can identify the actual shape of inflation. I will also explain hedonic quality adjustments, and other formulaic changes that the US government uses to tamp the CPI print down. But that is for another post.
US CPI will be something for us to watch now that the IMF and other outside forces are applying mild pressure on the US FOMC to raise rates to combat inflation. October Year over Year CPI was 6.2%. If the current trend of CPI increasing continues (which it likely will), then we will see this outside pressure continuing. Some traders may start watching CPI, but the Year over Year Release is on Friday at 1:30PM CST, and most global markets will be closed at this point, even the institutional traders at the NYC desks will be closing up after lunch and not likely to be opening any new positions.
I suspect that this release will be traded by the market as if its indicative of a US rate hike incoming. Which means the markets will go further long USD. Of course a rate hike is not coming, but this does mean that if you have some leveraged long positions in stock, leveraged short USD in fx, or leveraged long crypto, you could consider exiting briefly ahead of this release. I wouldn’t exit any unleveraged positions, but if you are looking for more crypto spot exposure, a decent short-term buying opportunity could present this coming weekend. For reference, when the previous CPI report was released (11/10 2021 8:30am EST), ETH rose going into the news release, and then dumped on the news release (buy the rumor, sell the news), as evidenced in the chart below.
That was with a higher than expected CPI release. In general the markets trade high inflation as if its a sign that the Fed will be able to successfully raise rates in the near future, and they trade it as if its beneficial to the dollar. Nothing has changed fundamentally to expect CPI to break the existing trend. And so I would expect some whipsawing leading up to the news release, and after with a return to normality within a day. Most news events are like this. Very few news events have long lasting affects on the market. The best strategy is to manage leverage so that your position does not get wiped during the news release, and to understand the long tail outcomes these events will lead to.
3. Brief FX Global Macro Predictions
The interest rate announcement in Australia will probably not move the market, but if you are trading any AUD FX pair, be wary that on Tuesday at 3:30am US CST, The Royal Bank of Australia will be announcing their interest rate decision. They are in a similar spot as the US Federal reserve. They cut rates significantly to boost housing prices and are now experiencing rising inflation while unwilling to allow housing prices to crash. So they cut rates all the way to 0 and are now walking a tight rope trying to pretend that they will raise rates while not actually doing it. If they were to surprise the market and raise rates, there would be a significant short term crash in the Aussie stock markets, while the value of the Australian Dollar would probably rise on the news. This isn’t going to happen.
Almost no financial news out of Europe will ever be relevant. You can ignore. The only thing that drives the Euro market is how, when, and if they will ever taper their money printing. They are in the same bind as the Fed, except its been going on for much longer and they have already conceded for higher inflation, but are still speaking about Tapering. The only Euro news that the markets react to these days are ECB meetings, and inflation.
Canada is a bit more interesting in that they have ended QE, and the statement they make after their rate decision will be relevant to the CAD markets if you trade that pair. If the statement made by the Governor of the Bank of Canada (Wednesday, 3pm CST) is in support of their schedule to raise rates early next year, then we could see the USD/CAD pair take one last swipe at 1.3 allowing for some good long term short entries for swing traders with lower leverage.
4. US Bond Auctions
The next filter we are going to run is for upcoming bond auctions.
The US treasury has to fund the spending deficit through ongoing treasury bond auctions, and we run auctions often. This is the first place where we will begin to see turmoil as a sign of the US macro narrative coming apart. This week I will just outline which auctions are occurring and when. At the end of each week, I will review all of the bond auctions and outline if any trouble occurred or not. Typically trouble manifests when the bid to cover ratio drops. If the treasury needs to sell $1 million worth of bonds, and $2 million worth of bids comes in, we can say that the bid to cover ratio is 2:1. Treasury bond auction bid to cover ratios rarely ever get that low. The issue of course is that Treasury interest rates are set by the price of the highest winning bid. This is essentially marginal pricing, and when the bid to cover ratio begins falling, it typically results in higher interest rates, because with less entities bidding, the highest winning bid price, will often fall. The government cannot afford to pay higher interest rates on $30T of bonded debt, so they are highly motivated to intervene if the markets result in interest rates spiking. This section may seem a bit incoherent at the moment, but as we start doing weekly reviews of the bond auctions you will fall into the swing of things.
As covered in the overview post, the Federal Reserve is currently committed to buying $80B in treasury bonds a month. And they want to cut the rate of purchases by $10B a month. The very obvious consequence is that this significant decrease in purchase volume will significantly affect the bid to cover ratio. And we will see when this trouble starts to manifest a few weeks before it gets bad enough for the Fed to intervene. Fed intervention will spook the markets and start another round of buying. These present buying opportunities for counter-inflationary assets. And that is the value I will be providing. On the other hand, in the off chance that purchasing volumes are able to keep up in the treasury markets, we’ll be able to see that too, and we’ll be able to identify that, in which case it may be better to be moving into more cash equivalents. If you are in the crypto markets, then this means the stablecoins and DeFi money markets will be the place to be allocating a portion of holdings to. As I monitor the health of the bond markets, I will include a summary each week with basic overview of what happened for those looking for a TL:DR, and it will be at the top of every Friday review for those less interested in the details.
5. Crypto Protocol Reviews
I will be reviewing several crypto protocols over the next few months with my thoughts and assessments of each as well as future outlook. I will try to keep all metrics of review static so that different L1 protocols can be compared apples to apples using my reviews. I would also like to add, that probably 90% of all social media crypto content is paid for. We are still very much in the wild west, below is the media kit for BitBoy Crypto. A popular crypto youtuber. Nearly all content you see in this sphere has been paid for.
And the same is true for social media. Below is data that was collected by a marketing team for a L1 crypto protocol of different twitter/youtube influencers to pay to create what seems to be grassroots support for crypto. There are very few genuine influencers that aren’t making money through fabricated opinions and assessments. When I review protocols here, I will not accept money for it. I also will be showing you, all forms of revenue that I create from this substack. When I use affiliate links, I will tell you, and I will even have a post about Amazon Affiliate sites, how to make them, and how to make money from seemingly reviewing items for sale so that you can copy this if you choose to do so.
That youtube ad revenue isn’t paying the bills anymore. Looking at these prices, I’m sure quite a few of you are thinking about career changes. I’m also sure that some of you that are more analytical (who am I kidding, thats everyone here) are probably realizing how much each follower is worth (almost nothing).
If you’re good at anything, never do it for free.
6. Crypto Macro Update
Many of you probably saw some carnage late Friday evening after most conventional trading desks had closed for the week. This sort of pattern only really comes from one place. Crypto is a 24 hour market, but just like all other markets, there are times in which it is more active and there is higher volume, and there are times when volume is much lower. It is much cheaper to move prices significantly during periods of low volume than it is to do it during periods of high volume. In general, the larger institutions don’t like paying market price for anything. The pattern for market manipulation they have always used has been to come in on weekends, or the Sunday night Tokyo session with uncharacteristic volume profiles to push price down large enough to trigger a cascade of stop losses. Here is the 4 hour chart of ETH/USD from this past friday.
We can see two volume impulse candles that are far and above what is normally seen on Friday and Saturday. The first right at the close of the last trading desk in NYC at 4pm CST Friday. The second volume impulse at midnight CST. This same pattern also occurred across BTC at the exact same time. If I had to guess, I would suspect that the larger institutions are loading up on BTC and ETH. They’ve already expanded into this space, but don’t have the kind of exposure they want yet, and drove the price down, because these institutions do not like paying full price. Right now, I haven’t done the work to prove that this is what happened during the impulse down on Friday, but I firmly believe thats whats going on, and I tend to believe its a good sign for the sector as a whole.
Within crypto, I would consider BTC and ETH to be bluechips, and if we are talking about ideal weighting for the future. You should be overweight on ETH. All protocols you value in the crypto space should be compared to BTC and ETH. If they can’t outperform BTC and ETH, then there is no point in owning them since they present a higher risk profile than BTC and ETH. Many people often refer to the xxx/USD chart as proof that what they own is a decent investment, but in reality, USD is trash, everything that isn’t also complete trash will outperform it. If you are in crypto and you aren’t managing to keep up with ETH and BTC, you are underperforming. This should really highlight just how badly the stock market is performing. And this isn’t to make you feel bad, its just to show you how large my disdain is for the stock market. You should have at least pulled a 5x from March 2020 to now (ETH is 40x, BTC up 13x). Outside of 401k’s from my day job, I have zero exposure to the stock market, and I will probably never have any such exposure, thats just the way it is. And as such, the way I value things in life has to be in terms of Sats and gWei. Yes, you can buy VET, CRO, LSK, or whatever protocol you want, but if it is not outperforming BTC or ETH, then you have to reconsider your investment. What is it offering that BTC and ETH aren’t? I will get into that more in a later post when I share the true value proposition that is fueling the ETH vs. ETH killers debate.
Later this week I will share my macro outlook for the crypto sector as a whole and the trends that I think will be big winners for 2022. A hint for now - interoperability.
📝🔥
hell yeah dude