#957 - What Are the Market Factors at Play? With Noelle Acheson

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0:34What are the market factors at play? And boy, are there a lot of them. Welcome to Real Vision Daily Briefing. I'm Ash Bennington. It's Monday, January 22nd, 2024. I'm joined today by Noelle Atchison, editor of Crypto is Macro Now, a sentiment we discuss a great deal here on Real Vision. Noelle, welcome back. Thank you so much, Ash. Great to be here with you. Well, it's always a pleasure to have you with us, but especially today, so much happening, US equity markets at or near all time highs, lots happening in the Bitcoin story, geopolitics know out. Where do we begin? Where do we begin? I ask that every single day, and I have yet to figure out the answer.

1:12But a fascinating point to start with is stories. I mean, everyone loves stories, right? And what are the stories driving markets? My big concern at the moment is, well, plenty of concerns, but the main ones are the complacency that we're seeing in the stock market combined with some of the conflicting narratives driving the Bitcoin market at the moment. And if you like, you start with the stock market, the complacency we're seeing rates expectations recalibrate and yet stock markets continue to go up. We're seeing geopolitical tensions escalate pretty much everywhere. And yet we're seeing stocks continue to go up.

1:44And there's a lot that investors are not taking into account. My theory is it's because they don't really understand the risks. Therefore, they're just not going to think about them. Well, let's break them down one at a time. Noelle, you talked about geopolitical risk. You talk about rate repricing. First of all, what's your big picture thesis on where we are with the Fed and the interest rate environment. Let's start there. Well, finally, we're getting some signs of a bit more common sense from the markets. Just at the beginning of this year, Ash, you remember that the market was pricing in a 100 % probability of the first rate cut coming in or before March, and that's two months from now.

2:22That is absolutely insane because there has been no indication whatsoever from the economic data or from Fed officials that this is even on the table. And the only reason the Fed would cut so soon if things were so bad and why on earth would stock prices go up if they're that bad. They're not that bad. The economic data is showing us that. And yet, while that means that there is less likelihood we'll get a rate cut in before March, there is a greater likelihood that the economy is doing just fine. We're seeing stock markets go up for the first time in ages. This actually shows that good news could be good news.

3:00Do you remember back when every single positive information piece we'd get from the data reporters, it would be a bad news and the stock market would decline. Well, now we're back in good news is good news, but it's all very, very confusing because the outlook for risk assets, including stocks, is not great. Yeah, we had this entire generation growing up to think that good news was bad news and bad news was good news when it came to central bank activity and U.S. risk asset prices. We're finally over, well, actually, we're over 410 bps right now in the U.S. Treasury. We cracked the 4 % mark, I guess it was last week.

3:33Talk a little bit about that pricing in terms of the cash market for U.S. bonds. We're seeing yields go up again. Finally, they were way too low for a while there. And we're seeing stock prices go up again. Something is just not adding up. It's not even the necessary, you know, the discounting and the valuations that should be affected by this. It is the alternative returns. I saw a chart this morning, Ash, that showed that for the first time since 2002, the current yield on the S &P is round about the same as the yield on the 10-year treasuries. That makes absolutely no sense. In other words, the equity risk premium has disappeared, and you've got to ask yourself why.

4:14So what's your answer to that hypothetical, Noelle? What could it be? I don't actually have one other than complacency. The investors, as I mentioned earlier, I think there's overlooking the economic risks and they are especially, as you alluded to earlier, Ash, overlooking the geopolitical risks. So we've got intensification in Gaza this morning, which is heartbreaking. We've got the Ukraine war spluttering along with more loss of life on both sides. We've got Iran and the United States closer to war than they have been in decades, and it is now looking increasingly likely that Trump will be the Republican nominee as well as probably the next president of the United States.

4:52And that is triggering unease around the world, but not only from countries that the U.S. is not that friendly with, but even from U.S. allies and bringing it back home, Ash, from U.S. multinationals. Trump's foreign policy has been so far erratic, to say the least. And these levels of risk are just not being priced in. We've seen this in the sharp reaction to rates expectations, which was pretty much price for perfection. Stock market is just not registering that yet. Yeah, so let's take the political piece in just a second, but let's focus on the geopolitical aspect of what we're seeing in terms of conflict.

5:28Obviously, some terrible human tragedies going on all across the world on a human level. But let's talk about it in the context of markets, which is what we're here to do. By the way, it's official. Dow Jones Industrial Average closing above 38 ,000 for the first time ever. S &P also breaking a new record high today. So where do you think about your thesis for how you can see this disconnect between clearly rising geopolitical risk versus all-time highs on major US equity indices? I mean, is there a flight to quality? Is there some logic behind this? I don't think it's really logic. I do think it is a very human instinct, which is actually common in markets.

6:07What we're living is not particularly out of the norm. A very human instinct of, If you don't understand something, let's just ignore it. And that's not unfair because the geopolitical risk that the world is facing at the moment is very hard to quantify. I mean, nobody really wants to spend a lot of time thinking about this because there's so many causalities as well as coincidences, as well as correlations intertwined here. We don't really want to go down that rabbit hole that much. So let's not even bother with including that in our valuations. Let's stick to what we know. We know earnings. We know rates expectations.

6:37We know liquidity measures. So we're focusing on that. The danger is there is risk out there. And the danger is what is going to cause that to change quickly? Well, actually something happening to disrupt oil supplies, to disrupt global trade, to disrupt some of the trade alliances that have kept the global commerce functioning for so many decades. There's a lot of risk out there, arguably more than there has been in recent decades. The market is so far ignoring that. You know what? That is understandable. That is not necessarily incorrect either, because when you put yourself in the shoes of professional investors, well, their clients or their trustees don't really want to hear you talk about everything that is going wrong.

7:16They want to hear about manageable risk and manageable rewards. So the market is continuing to ignore the risks that are building. I think the bond market is starting to reflect them slightly better now. The oil market popped above$80 for the first time this morning in quite a while. So the markets are telling different stories. And of course, we're seeing totally different narratives over in the crypto market as well, which I could argue are perhaps reflecting better some of the larger macro risks of them. Well, let's talk about that because, boy, that's an interesting story what's happening over there.

7:47Obviously, we are now in the post-Bitcoin spot ETF world here in the United States. I'm looking at my screen right now on the ticker. Looks like Bitcoin has just dipped below$40 ,000. Big story out today from Coindesk suggesting that GBTC selling over at FTX as a consequence of this bankruptcy and unwind might be driving prices lower. CoinDesk a place where both you and I worked and in fact met many years ago. Give us your sense, Noelle, on how that could be affecting this market and the broader context for where we are in the post-Bitcoin spot ETF world. I'm going to take a view on this, Ash, that is perhaps not shared, not really consensus at the moment.

8:26And I think the BTC drop that we're seeing at the moment is not as tied to the GBTC outflows as many think. I do think it is more of a macro story as well. Bitcoin, as you and I have talked about often, Ash, is still a macro asset. It is not correlated, obviously, to equities as it used to be, but it is driven by liquidities and it is driven by geopolitical concerns and it is driven by rates expectations. Now, going back onto what you were referring to earlier on the GBTC and the story out on CoinDesk today that FTX estate has been selling roughly$1 billion worth of GBTC into the market. That's actually good news, Ash.

9:05That's good news because it shows that about a third of the GBTC exits were from the FTX estate and did not rotate into the other newborns. Let's call them that. That means that the net flows actually were higher. What we've been doing so far, Ash, is subtracting the GBTC outflows from the inflows into the newborns and taking that as the net flows. Well, I think we should take the FTX flows out of that equation because they were not sales by traders. They were not sales from investors rotating into a different product. So this means that the net inflows were actually greater. And that means that the interest is strong.

9:44And that means that we will start to see the benefits of that going forward. I think the GBTC, sorry, I think the Bitcoin drop that we've seen today is to do with the building concern that we're seeing in the bond markets, as well as some of the geopolitical risks around the world. By the way, as soon as you started talking about bullish sentiment on Bitcoin, Noel, it ticked up about$40 ,000 again. I'm sure entirely not a coincidence. I have that effect on the market, obviously. So let's talk a little bit about the relationship between Bitcoin and the U.S. bond market. It's great to have you on to talk about this because you really do know both sides of the equation.

10:19What's the relationship? How do you think about the relationship between crypto and U.S. treasuries in the bond market more broadly? Well, obviously, crypto is not Bitcoin. Let's focus on that. It's not a yield bearing asset. So when yields are high and they safe assets, then that does have a relative. It's relatively attractive compared to some of the higher risk Bitcoin. Now, there's two threads to pull on this, Ash, and they're very interesting. And it shows how fascinating the crypto market is. I said, I mentioned earlier, and I'll stick by that, that Bitcoin could be reacting to some building concerns in the macro environment.

10:52And as we're seeing through the bond yields creeping up, that is because the things are getting risky. You want a safe asset. U.S. treasuries are safe. You want to hold dollars as well. They're safe. So we could be seeing some rotation from Bitcoin into U.S. treasuries and dollars from U.S.-based institutional investors, for instance. Now, let's step back and look at broader geopolitical risk, which tends to make Bitcoin even more attractive. We have a lot of elections coming through this year. Roughly half the world's population will go to the polls this year, Ash. And we're seeing at the same time an inaudible march towards greater authoritarianism in many of the regimes that will be holding elections.

11:36There was a poll published in Bloomberg, I think it was just last week, that showed, it was a poll taken across the African continent, which showed that roughly 60 % of respondents do not have faith in democracy anymore. And this is just mind-blowing, especially for us who are sitting in fairly comfortable democracies. 24 African countries are going to the polls this year. So we're seeing similar trends here in Europe, distressingly. We should watch the upcoming elections very closely because if we do see greater march towards more authoritarian regimes, then that is a strong case for Bitcoin.

12:11That is a strong case for individuals anywhere who want to maintain not just their savings, but also their financial access and independence. Geopolitical risk is good for crypto assets such as Bitcoin. But at the moment, the flows are being dominated by institutional investors, by traders, and they are focusing more on the short-term impact, the short-term alternative of higher yielding, safe U.S. treasuries and dollar deposits. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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13:52Yeah, it's so interesting when you talk about the rise of authoritarianism. For those of us who are in the middle of our careers, who came of age between that magic window between the fall of the Berlin Wall in 1989 and September 11th, it really did feel as if the world was only going in one direction toward democracy, toward greater liberalization of markets, et cetera, et cetera. And boy, has it been a rude awakening when you cite statistics like 50 % of the global population does not have faith in democracy. Yeah, well, I don't know about the global population. This was 60 % of those responding to the survey across the continent of Africa.

14:25But 50 % of the global population do go to the polls. And this survey doesn't even take into account what's been happening in Indonesia or in India, even more importantly. Russia is going to elections today. I wonder what Putin's chances are. So again, the march towards authoritarianism, it's distressing, and this is not even taking into account a potential resolution of the war in Ukraine, which may not have the ending that we all fervently hope. Noah, while we're talking about global geopolitics, the big picture, and Bitcoin, I want to run a clip. This is from a piece that I did called The Comprehensive Guide to Bitcoin Investing between Brian Estes of Off-Chain Capital and myself.

15:06This clip's a little bit longer than usual, but it really sets up a lot of the broader, bigger picture points that we're talking about here. So we wanted to bring you this clip. Let's take a look. So economics 101 for Bitcoin. So the supply of Bitcoin is fixed at 21 million. The issuance of Bitcoin and how Bitcoin gets created, it's on a predetermined software algorithm. And so when it started, it was 50 Bitcoin every 10 minutes. and then it got cut in half to 25 Bitcoin every 10 minutes. And that halving is every 210 ,000 blocks. And it takes about 10 minutes to create a block. So 210 ,000 times 10 minutes is about every four years.

15:55So about every four years, the supply, the reward that gets sent out to the people who clear the transactions on that work, that reward gets cut in half. So I went from 50 to 25 to 12 and a half. Right now it's six and a quarter Bitcoin rewards every 10 minutes, which is about 900 Bitcoin a day. And then in April, it's how I get cut in half again, the three and an eighth. And then in 2028, it's how I get cut in half again. And that's how I keep happening.

16:32There's all the Bitcoins created. Right now, there's been 19.6 million Bitcoin created and rewarded out to the people clearing the transactions out of the 21 million. 93 % of all the Bitcoin that can be created has already been created. It's going to take about 120 years to create that last 7%. That's the supply of Bitcoin. If we look at the demand of Bitcoin, and a good way to do with this is look at the number of Bitcoin wallet addresses. Bitcoin wallet addresses since 2012 have been growing at around 60 % a year. And so if you have the number of demand going up at 60 % a year and you have the supply decreasing, the only other variable is the price.

17:22And that's why the price goes up. It's just simple supply-demand economics. Well, that was a great segue with what we were just talking about. Brian Estes talking about the underlying supply and demand of Bitcoin and the dynamics thereof with everything that's happening in the broader world. Give us your sense on those points and pick up wherever you like. I have two threads to add to that. I mean, there's one excellent explanation from Brian, one of the smartest people in crypto. To add to that, Ash, there is another liquidity crunch for Bitcoin. It's not just the reduction in the selling pressure that we will be having after halving.

18:03It's also the percentage of Bitcoin that is sucked away in longer term addresses. 70 % of Bitcoin, over 70 % of Bitcoin in circulation has not moved in over a year. Of course, some of this Bitcoin could come into the market as prices rise and holders take profits. 60%. 60 % has not moved in two years. 40%, Ash, hasn't moved in three years when those holders could have sold at a handsome profit at any time over the past 12 months. The point there is that Bitcoin heading into longer term holdings is steadily increasing. And that means even less Bitcoin will be available for new entrants into the market.

18:48So it's not just the supply-demand balance that will shift drastically after the halving that Brian was talking about. There are other forces going on here. And the second thread, Ash, to tie this into what we were talking about before, if Bitcoin is a hedge against craziness in the world, a hedge against economic uncertainty, a hedge against authoritarianism, if you like, then that infers, that implies that more Bitcoin will be heading into savings holdings, into longer term holdings, which means that the percentage that does not move is likely to continue increasing at an acceleration. pace as the world gets just a little bit scarier.

19:28And that's not even taking into account some of the sovereign interest we're starting to see in Bitcoin for similar and other reasons. Well, let's pull on each of those threads one at a time. So the suggestion here that long-term holders of Bitcoin seem increasingly unwilling to part with the Bitcoin they already own suggests that the supply and demand dynamics are influenced by that. The idea here being essentially that you have an anchor on the price and that you have the potential for more upside momentum in pricing, particularly, obviously, given the fixed supply and the halving schedule. Yes.

20:00And it's worth remembering, Ash, that Bitcoin is pretty much the only asset that is traded in liquid markets today, the only asset whose supply is not affected by the price at all. No matter what the price of Bitcoin, the supply will not change. You can't say that about stocks. You can't say that about bonds. You can't say that about real estate even. And you even can't say that about gold. If gold were to get up to$50 ,000 an ounce, suddenly there would be new types of mining. We'd be mining on asteroids and from seabed. Suddenly the supply would shift. I might quit my job at Real Vision and grab a pick and a pan if gold were to$50 ,000 an ounce, right?

20:37I mean, but to your point, this idea that it's the only asset that we have in the world, at least major traded asset, that has a completely fixed supply schedule. It doesn't the price is always going to rise, but it is an unusual dynamic. Absolutely. And the reason the price isn't going to always rise is because there is no cash flow. There is no fundamentals on which to establish a consensus value, if you like. It is always going to be narrative based. And that is going to, in my opinion, that is going to make Bitcoin always a volatile asset. Many say that with greater liquidity, we're going to have lower volatility.

21:11And I disagree. I do think volatility is actually a feature of Bitcoin, not a bug. It is why many people do come into the market. And it's also why many of the market makers are working hard to provide the liquidity that the institutional investors need today. So Bitcoin, narrative-driven, hard supply. It is fairly unique in that respect. It is also unique, Ash, and this is significant given some of the ructions we could be seeing in markets this year. It is traded globally 24-7, 365. There are very few other assets that can say that. We're going to take another quick break to hear a word from our partners.

21:45We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:53Yeah, well, as you know, I'm fascinated by Bitcoin. But let me play the skeptic here and pull on the second thread, this notion that geopolitical uncertainty could increase the price of Bitcoin. Certainly one thesis. Flip side of that argument, we've seen geopolitical challenges. What we see is Bitcoin correlated highly to the price of money here in the United States. In other words, when the Fed is accommodative, the price of Bitcoin rises. When the Fed is not accommodative, when they're constricting the monetary supply, it has often fallen. The idea here being that Bitcoin is a hedge against inflation would seem, at least during those phases, call it 2020 to 2023, would seem to suggest that maybe the correlation runs in reverse.

22:36First, is there any evidence of Bitcoin as a true geopolitical risk hedge that we can point to directly? Yes and no. I'll take the no part first. The geopolitical risk has been constant, especially since 2020, but arguably it is starting to accelerate now. So we haven't really seen that tested. That can be argued. There's been conflict going on, but we haven't really had the superpower tension that we have today. So no, perhaps, and that we don't really know yet. I will say yes. Do you remember back in the banking crisis in March of last year, Bitcoin spiked because suddenly the fragility of the US banking system was exposed?

23:19So yes, there is evidence that it could be a hedge against fragility in the banking system. Let's hope we don't go through that kind of thing again. Longer term is when it really matters. And this is where the amount of Bitcoin available for new investors comes in again, Ash. Longer term, if you are uncertain about your ability to access your savings, then you're going to just put whatever you can into Bitcoin steadily going forward. This is also especially important in times of currency turmoil. I saw today an article saying that the Naira is at record lows and people are scrambling for dollars.

23:54We know of many other countries in which citizens and businesses are scrambling for dollars. And sometimes even governments can't get enough dollars to pay for the oil that they need to help their economies run. Now, what if, Ash, what if there were an asset that could be held by individuals, businesses, and even governments that could be converted into dollars at any time 24-7, 365, an asset that is not beholden to the monetary policies of third countries and cannot be confiscated according to your allegiances? All right, Noel, you are obviously a fan favorite because we have more questions coming in than I think we're going to have time to answer.

24:29But I wanted to just dive in and touch on these because we've got some good ones. First question comes to us from David Stiles. Good afternoon. BTC is so close to breaking 40 ,000. He means on the downside. If it does, is 35 ,000 possible? He's asking about a support level here. Give us your sense on whether that is something you think about. There is definitely potential for it to go lower than 40 ,000. It would be unfortunate, but it would be temporary. It did break down well below 40 while I was watching it this afternoon, thinking, what is going on? It bounced again, which showed that 40 could be the support.