bitcoin and the great stock market asset bubble
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Anyway, it’s been a while since I covered stocks, mostly because of the fact that the meme ‘stocks only go up’ seems to be playing out to the letter. However, now that the Federal Reserve is in the middle of creating an equity bubble within a recession, it might be a good idea to give this one some attention.
The great stock market bubble
Back in 1929, the S&P had rebounded between 50% — 62% before continuing its downward trajectory into economic depression territory. Today, the S&P has retraced around about 80% of the decline from the all time highs. Even the Russel 2000 has rebounded back beyond the 62% level. In layman terms, the 62% area is a historically significant macro technical indicator which can dictate whether asset prices continue to inflate or in this case, resume the downwards trend for the foreseeable future.
The question is: what have been the key drivers for stocks?
Well, share buybacks have been postponed for companies who took loans through the corona crisis and are expected to be down around 50% on the previous year (quarter on quarter). Of course, this is a good thing, as share buybacks literally create no value and amplify zombie company valuations without fundamental backing.
Still, around $65 billion were issued during Q2, mostly by companies driving the Nasdaq 100 to its new all-time highs, in part due to an acceleration in growth in their businesses.
Shadow banks, which are essentially hedge funds who have provided much of the liquidity over the last decade (after investment banks were forced out of the market-making space via regulation), were quickly restored in spectacular fashion by the central banks like the Federal Reserve. This kick started quantitative easing on a scale that completely dwarfed those same efforts during the 2008 crash.
The Fed also announced infinite support for the corporate bond market, which has further helped to not just stabilize markets, but propel them into an inverse relationship with the real economy.
The Fed’s actions have been so dramatic and unprecedented that every time there was even a wobble or a slight retrace, they intervened to ensure that stocks only go up, with the latest coming a few days after the 5% decline in mid-June.
As the meme catches on, retail investors have been piling in in droves. In fact, over the last couple of weeks, retail has been pouring money into stocks, with several bankrupt companies like Hertz and Chesapeake Energy pumping nonsensically as a consequence.
This euphoric rise epitomised by bankrupt companies rallying by orders of magnitude has the markings of an asset bubble.
Clearly, the “buy the dip” and “don’t fight the fed” narratives have worked to great effect so far. However, the Fed appears to be creating an asset bubble within a recession, both of which are technically apparent.
Rising equity prices, just like rising house prices are non-productive unless individuals lock in returns — which doesn’t happen en masse and often results in eventual capital destruction. It’s a lot easier to get into assets than to get out, and given the complete discrepancy between markets and the real economy, this story is now entirely dependent on central bankers maintaining infinite support with a backdrop of corporations and retailers who are now fully aware of their strategy.
As you can imagine, this spawns all sorts of moral hazards and problems which will trickle down to the real economy one way or another. Of course, timing this eventuality is the billion dollar, or should I say trillion dollar, question..
However, now that there is a clear influx of retail traders and an acute sense of mania in the air, it’s safe to say that the risk of a bubble pop is growing. In fact, US domestic fund inflows have clearly been on the rise, with retail investors inflows skyrocketing when compared to February according to Refnitiv Lipper data.
The crucial point here is the difference in sentiment. When the equity markets were at record all-time highs in February, the sense of mania that we’re seeing today wasn’t there. There were other reasons to be bearish about stocks, most notably the corona virus, but mania hadn’t gripped the market. If the bubble deflates, it will take a lot of the stimulus with it and that stimulus is unlikely to fall into the hands of retail Robinhood traders.
Bitcoin growth goes viral
An interestingly timed CoinDesk article revealed that PayPal and Venmo are expected to offer bitcoin purchases to 325 million users soon. If you’re in the space even a half as much as I am, then you’ve probably heard this story even from your neighbour, as traders and crypto enthusiasts ride on optimism of an imminent bull market.
Speaking to CoinDesk reporters, an unknown source said: “My understanding is that they are going to allow buys and sells of crypto directly from PayPal and Venmo. They are going to have some sort of a built-in wallet functionality so you can store it there.”
It is unclear which or how many cryptocurrencies will be available though, and the industry ‘source’ said they expected PayPal “would be working with multiple exchanges to source liquidity.”
A second source confirmed that PayPal is looking to offer buying and selling of crypto and said the service could be expected “in the next three months, maybe sooner.”
In effect, PayPal has abandoned Facebook’s centralised Libra project to join bitcoin — now there’s a telling narrative if I’ve ever seen one.
With all this bullish news taking the limelight, it might worth revisiting bitcoin’s exponential wallet growth data, which has shown no signs of slowing down over the years.
In fact, on June 12th, bitcoin reached another milestone — not in price — but in the number of wallets created, which is now above 50 million. If anything at all, this puts to rest any past or present claims that ‘bitcoin is dead’, when in fact, mass adoption has only just begun. We are still early.
Technically speaking
Bitcoin was finally able to make something of a modest push to the $9,800 level after having traded at around $9,300 for just over a week. As I’m writing this, it appears that bitcoin has more or less retraced it’s gains and is currently trading just above $9,300 at the time of writing.
While it pains me to say it, this is dangerous territory, and a break below the $9,300 pivotal area could see a follow-through sell-off to $8,600 at the bottom of the range.
Lower Time Frame 4-hour at an important level
The TD-sequential 9 on the 4-hour showed signs of a reversal on this time-frame. Typically, a 1 to 4 candle correction can be expected before resuming the bullish trend. However, given the dramatic bearish engulfing sell-off, this puts into question whether bulls have what it takes to push through to $10,000. Bitcoin is currently trading below both the 50 and 200 EMAs and has now crossed into bearish territory on the RSI.
A 4-hour close above the $9,300 level could print a bullish divergence which would be another opportunity for bitcoin zealots to push beyond $10,000 again. On the flip-side, a close below $9,300 will concertize signs of weakness that would put the ball in the bear’s court. A sell-off to the bottom of the range at $8,600 is still a distinct possibility, and a series of higher-time-frame moving averages and indicators would provide a relief rally here at the very least.
For all intents and purposes, bulls have to hold $9,300, otherwise fresh buying pressure can be expected at the $8,600 level.
Check out the last newsletter for higher-time frame details!
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As always, thanks for reading and have an excellent day!
Read More: Deflationary event: US citizens hoard cash in their bank accounts
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Christopher Attard
Founder of Chris on Crypto
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Originally published at https://mailchi.mp.
