Is Crypto a Bull Signal for Risk Assets?

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0:54Is crypto sending a bull market for risk assets? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Kevin Kelly, the co-founder of Delphi Digital. Hey, Kevin. Welcome to the Daily Briefing. Great to see you, Maggie. Happy to be here. So it's your first time on this show, but you are no stranger to Real Vision. You do a monthly chat with Raoul on our pro-crypto tier and been to our events and all that great stuff. And I understand that you spend time in traditional finance markets before turning your focus to crypto. So why don't you share a little of your background for viewers who may not be familiar with it?

1:29Yeah, absolutely. I've been privileged enough to be on Real Vision quite a bit over the last few years, but never this program. So I'm really excited. But yeah, no, my quick background, I actually came at crypto from more of a global macro background, given my experience myself. I was in a prior role before starting Delphi, was an equity strategist, covering primarily the US, but really global equity market trends for a bunch of institutional clients. And the way in which I kind of came across Bitcoin actually was from more of a macro lens. I thought when I first stumbled upon it, it was just one of the most unique macro assets I'd ever seen and ever come across.

2:08And so that kind of was my cue to dig deeper and kind of fall down the proverbial crypto rabbit hole. But no, come from, to your point, more of a gold macro background. And so the intersection of macro and crypto is really where I spend a lot of my time. Yeah, well, it's a perfect juncture right now because we are really seeing them intersect. It's getting so interested. We know it was a tough year. By the way, what's interesting is we know sometimes people live in silos and they're really focused on crypto, really focus on macro. It was a really difficult year for everybody last year, right? I mean, it was tough.

2:41But we've had this sort of pivot. We had a powerful rally in equities in November, sideways action for the start of this month. But US equities back on the rise today, the Nasdaq up 1.3%, but gains across the board. Nasdaq really outpacing the rest of the indices, though. We've seen treasury yields fall pretty significantly over the last month or so on bets that the Fed's next move is lower. We get a big nonfarm payroll number tomorrow, which is going to feed into that narrative or not. We've got a Fed meeting next week. And then, of course, we're watching crypto. It's been one of the best performing assets this year, but it's really been moving, especially the last two weeks when everything else is kind of stalled.

3:19It seems like it's in a holding pattern. We've just seen crypto continue to march higher. So just curious, big picture, how you're thinking about this market environment right now? Yeah, it's a great question. And I think still, I mean, to your point last year, the last probably 18 to 24 months has been extremely challenging, I would say, in global macro right across different asset classes. Big picture, taking a step back, I think one thing that's important to kind of clarify at the top of this is when people think about crypto specifically, right? And I'll get into risk assets more broadly because there's a number of parallels and correlations that are important to note.

3:56So when it comes to crypto, and we use Bitcoin as that ultimate proxy, Bitcoin isn't this inflation hedge that I think a lot of people assume that it is, right? It's not a hedge on consumer price inflation. It's not a hedge on CPI. It's really a hedge on currency debasement. And in some ways, you can think about it as almost the purest bet on monetary inflation. And so this currency debasement is really driven by liquidity cycles, has a strong correlation to liquidity cycles, specifically central bank liquidity. And so it's no surprise that when you actually take a step back and look at how crypto trades, every crypto market cycle is really tracked liquidity cycles very, very closely, right?

4:35It's not, you know, the Bitcoin halvings or some of these other more idiosyncratic events that, you know, some people point to that are the kind of catalyst for these bull markets. It really is all about liquidity. And so what we know is that when we talk about central bank liquidity in these up cycles, risk assets more broadly, right? Crypto, stocks, they all tend to perform well and outperform in that type of environment. And it's one of the reasons why you've seen crypto and equities, for example, hold such a strong correlation. There's points where they deviate, but in general, directionally, develop a strong correlation over time because they have the same big macro tailwind or headwind, right?

5:13As we saw last year, you know, pushing up against it. And what's interesting is that the question around is crypto rising bullish for risk assets? We saw in late 2021, Q4 2021, Bitcoin actually peaking several weeks before the S &P and the broader stock market. As the liquidity expansion that we saw that propelled asset markets significantly higher, as the writing started to be on the wall around that liquidity expansion starting to slow down and even roll over, right? which was one of the reasons why we had such a painful drawdown in risk assets last year. We saw something similar, though, on the opposite side, where stocks and crypto both bottomed in Q4, around Q4 2022, as that reversal in liquidity started to make its way into the market.

5:59And that's also been, I think, a big reason why the two have outperformed this year, because liquidity conditions have been more supportive for risk assets. So to make a long story short, I think you can think about crypto and Bitcoin almost as a pure gauge on liquidity conditions and the expectations for future liquidity conditions. And it's one of the reasons why earlier this year, we saw periods where the two diverge, where Bitcoin actually trailed stocks, you know, towards the middle of the year as we saw global liquidity start to roll over. But there was the whole AI hype that really drove, we'll call it the more fundamental move in stocks, right?

6:30Or as people started to price in, what that would mean on a fundamental level for equities, especially big kind of mega cap tech. But it is a very pure kind of gauge on liquidity conditions. And so if crypto is rising, And that's because there was a more bullish liquidity outlook. I think that also obviously is bullish for risk assets more broadly. That's such an interesting point, Kevin. I want to talk about that. But I think this is why, and Roger, this is why we've been talking about crypto all week, because you just pointed out, Kevin, we had Dale Pinker point out, we had Peter Brandt on the platform point out, you know, long time traditional finance people looking at this as an indicator of exactly this.

7:07And we know how important liquidity is. I want to run a clip from Raoul, who's been sort of talking about this. I know both of you have talked about it. For anybody who saw the fireworks today on Pro Macro Insider Talks with Julian, and I heard there were fireworks lines, they were also discussing this idea that how important liquidity is when we're trying to figure out what's going to happen with markets. Let's play Raoul's summary of his thesis, and we'll talk on the other side. So where are we in the macro cycle? Well, everything went down a lot last year. That usually is the indicator that the markets saw a recession and economic weakness.

7:44We had high inflation. That is all behind us. The markets mainly are now being driven by liquidity cycles. That's the dominant force of all assets now. It never used to be the case, but it is super dominant. Because the world reset interest rates in 2008. Everybody had basically a debt jubilee, which was, we'll forgive all interest payments and make them zero. Everybody reset their debts in this three to five year time horizon. So we've now got this rolling four-year cycle that we're all sucked in, the NASDAQ, crypto, everything. So that's the cycle we're in. So where are we in that cycle? Well, most of that was priced in last year.

8:20So we're in what's known as crypto spring or macro spring. Crypto spring, macro spring is like spring. One day it's rainy, one day it's sunny. Then there's a frost. Then it's really hot. You can't really figure it out. But when you look back, the weather's got better every day. You look back and you look at Bitcoin's up 70%. ETH's up 35 or so, Solana's up 140. It's like, oh, wow, okay, yeah, that's spring. So to drive macro or crypto spring to macro crypto summer, which is what we actually all care about, what you need is more liquidity and a recovering economy. So my forward-looking indicators in terms of economic growth have all turned higher.

8:59So we're in the kind of latter stage of the economic slowdown. Also, forward-looking indicators suggest inflation falls quite dramatically, unemployment rises a bit, giving the Federal Reserve and every central bank around the world a chance to lower rates. So from that, it sounds like you and Raoul are sort of very aligned on looking at that. So what are you seeing when it comes to liquidity conditions in the market? This is sometimes hard. There's not sort of one easy VIX-type thing to look at. I mean, there's some indication. So it's a little hard for, I think, investors maybe to always get a sense of that.

9:37So what are what are you seeing when it comes to liquidity conditions? Yeah. And I was smiling during that clip because anybody who's a pro crypto subscriber and listens to Terrell and I kind of ramble on every month. We've been talking about exactly that for, I would argue, probably the better part of last six to nine months because it is it is that important. Right. Not to be to that horse on this whole liquidity concept. But it really is the thing that drives just about everything. It's a great question, though, around, you know, what do you track? What do you look at? What are we seeing right now with liquidity conditions?

10:07There's a number of different metrics you can look at. Like we track, for example, all the major central bank balance sheets and aggregate those and look at, importantly, the changes, right, in those central bank liquidity conditions. You can look at things like, you know, Fed liquidity, which has become a more popular one. I think, honestly, and this is something we've talked about for probably three or four months It's now maybe even longer because we're starting to see signs that China, and specifically China's PBOC, is also a huge contributor to global liquidity and liquidity conditions and actually has pretty significant impacts on changes in liquidity there, have significant impacts on changes in asset prices, specifically risk assets.

10:47And so I think China's PBOC is a big one, will continue to be a big one to watch. And we've seen things like not just the balance sheet of the PBOC expand, but you can track things like some of their open market operations, liquidity injections that they're actually putting into the market. So those are probably the two biggest ones to track. But major central bank balance sheets is a really good metric and proxy because, again, if you put that over year over year or even six-month changes in not just Bitcoin, crypto assets, even stocks and risk assets, the correlations really kind of make you question why you would track anything outside of that, because it really does boil down, I think, to changes in liquidity and, importantly, expectations for liquidity going forward.

11:33Hey, 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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12:45on that issue of expectation. So, you know, there, there is a, a, a school of thought or a narrative out there that, okay, listen, the market is pricing in all of these rate cuts next year and they're ahead of themselves. They're, they're, they're too aggressive on that. Um, so that's like the expectation game, but you're saying, if you look at indices, you're seeing global liquidity increase. So do we follow the flows and ignore that sort of fight about, are we ahead of ourselves or not? Because it sounds like liquidity is loosening up. Yeah, it's a really important point. The way in which I think about it is, and I think actually the market is, especially if you look at Fed fund futures, for example, I think the market may be getting a little over its skis in terms of how drastic, and we've seen that change very quickly, right, in terms of how many rate cuts the market's pricing in for next year.

13:41I think actually those expectations might be a little bit overblown. If you just listen to what central bankers are saying, right, policymakers are saying, it doesn't indicate that we're going to get four or even five cuts next year unless something arguably kind of extreme happens, which we can get into in a minute. But I do think that typically why the two people look at rate cuts and they also look liquidity is typically what you have is those two indicators, right, tend to move together, right? Fed, when let's say there's an economic shock or even significant economic weakness or a recession, you're trying to see policymakers come in and cut rates, but also reverse, let's say, a quantitative tightening stance, right, or actually provide more liquidity to the market to try and jumpstart risk appetite.

14:27What you could wind up seeing next year, and we don't have a ton of examples of this, But what I think could wind up actually making quite a bit of sense if you are a policymaker and you're sitting at the Fed is I can see a scenario where rates don't necessarily come down as far as the market is pricing in right now in terms of cuts, right? But Fed's still on pause. Maybe they're keeping rates, quote unquote, higher for longer. But on the back end, they're reversing a lot of the commentary and the actions they're currently taking around quantitative tightening. So you have this environment where on the liquidity side, it's more supportive.

15:01but you still have rates relatively high compared to where the market's pricing in. And I do think there's no crystal ball, but I do think that that's an environment where risk assets can certainly still perform well and potentially could outperform. So here's an interesting, both you and Noel yesterday brought up a point that I think is, we haven't talked enough about. So when you're talking about risk assets and we understand liquidity is driving. This is why we're seeing the NASDAQ. I'm sure the beneficiary of that more so than, say, value and crypto move higher. But you just said before that when we have that AI distinction, right, crypto doesn't have earnings.

15:44They don't have some of those fundamentals to pay attention to. If you're right on that scenario and we have the Fed holding rates higher at central banks, maybe trying for reputational purposes as well, hold the line on that to take out insurance against inflation, but behind the scenes providing liquidity. Does that benefit crypto more than it does stocks? Because higher rates, if you have to refinance or you're facing a refinancing cliff, that's an issue. That's more of a fundamental real economy issue than presumably crypto has to deal with. Or am I wrong on that line of thought? No, no, I think you're right on that line of thought.

16:18And there's a couple of reasons for that. One, like we talked about, Bitcoin, and by extension, the broader crypto market, right? I'll refer to Bitcoin. The correlations between crypto and Bitcoin are still extremely high, right? So when one moves, if Bitcoin's moving one direction, the rest of the market's moving that direction. I think Bitcoin being that more pure gauge on liquidity conditions, I think could outperform because it might not face those same potential headwinds or additional factors like earnings growth concerns or even potential for another earnings recession, even though we're just kind of getting out of one more recently.

16:50that scenario could certainly benefit crypto over stocks. And I don't think that it really takes a lot to move the needle or for, let's say, Bitcoin in this crypto asset class to really see pretty significant gains, right? It doesn't have to be the same type of liquidity expansion that we saw coming out of COVID and that extreme type of event. You don't actually need to see a ton of central bank liquidity for there to be big moves or sustain big moves in crypto because I think also the reallocation as this currency to basement narrative, I think starts to gain more traction as we're seeing more people talk about liquidity, right?

17:26Even the last 12 to 18 months, as that currency basement narrative becomes more popular, especially among larger investor circles. And we have things like, you know, potential approval of more investment products, like a spot Bitcoin ETF, and then eventually probably a spot ETF not too far after that, the ability to actually now take a position and express that thesis in a compliant way in a way that should have quite a bit of liquidity to it. Also could see a reallocation of capital flows into the crypto market, even if, again, you don't see these types of extreme scenarios. The currency debasement point, another really important indicator to watch is the dollar, right?

18:04I think that's up there with one of the most important metrics and indicators to watch because it's one, also another proxy or gauge for liquidity conditions. It's very quite literally at the core of this currency debasement argument. And you could see a scenario where if the Fed's on pause, maybe it's providing a little bit more liquidity support. You've got other central banks that now have a bit more of a buffer, right, because the Fed isn't continuing to hike rates really aggressively where they have to keep pace. They now have more of a buffer to be supportive or more accommodative, right, for their own domestic economies and their own support, their own currencies.

18:38It could give a little more leeway for more, we'll say, global central bank liquidity to continue to flow into the market. And the dollar may not, the Dixie, for example, may not see a huge drastic sell-off or move lower relative to big major currencies like the euro or the yen. But when you compare that to asset prices, right, and again, we're talking about risk assets here, that denominator getting debased is what really winds up driving higher asset prices in general. So interesting. So we've got a ton of questions. Do you want to just make sure we round out this part of the conversation before we dive in?

19:16Can crypto rally if there is a recession?

19:24It depends on how deep and impactful that recession is, right? There's a number of reasons why we talked about potential for a hard landing earlier, right, or some extreme scenario. I sit, at least in my base case, I sit in the camp that I don't think we're going to experience a hard landing. And if we do experience a recession, I think it'll be rather shallow, in part because I quite honestly don't think that the U.S. can actually afford to go through a real deep recession, right, or a real hard landing at this point, because it just exacerbates a number of problems or challenges that we face today.

19:58Most notably, it just causes fiscal deficits to ramp up even higher. I mean, this is probably no surprise to anybody who watches this show religiously, but the fact that we're running fiscal deficits at the level that they are today without a recession, a recession only makes that, a deep recession only makes that all worse. So if we were to experience some type of hard landing major shock, right, which usually it's some type of predator liquidity crisis that causes a hard landing in the first place, if we were to see that, I think one, policymakers would be pretty swift to act as they have in the past and they've proven, right?

20:27You just look at what happened earlier this year with the banking sector as, I think, a great proxy or example of that. In that scenario, though, there's definitely the potential for crypto because crypto is a bet on not just liquidity, but it's also a liquid asset to a certain degree where people, when you're trying to get out of the market, when you're trying to basically stash or shore up any cash that you have, crypto could be the first thing to go, right? And we've seen this in the past again, that post-March 2020 COVID sell-off, crypto took a massive, massive beating. So long-winded way of saying if we were to see that type of hard landing scenario, I think crypto actually could sell off even further than risk assets or other risk assets like equities.

21:11But I think the sell-off would be violent but relatively short because I think policymakers would have to step back in. If we were to experience a more shallow type of recession, the liquidity conditions will remain supportive and even potentially were ramped up or dialed up a bit because we're seeing data that is showing more of an economic slowdown, which typically is what drives or is the catalyst for more central bank liquidity. That's a scenario where I do think Bitcoin and crypto could perform well. Yeah. So I want to pull some of these questions in. Dan asking, do you think the ETF news is in and will we have a sell-off once it's approved for Bitcoin?

21:56Yeah, I do think that a lot of it is, a lot of the anticipation is certainly priced in. The interesting thing about this type of event is the actual flows that would come into that ETF, right? Or suite of ETFs that once you do see an approval. it's tough to argue that that's priced in because by definition, right, those flows seem to come in and will drive or impact, you know, the actual buying or purchasing of the underlying, right, which in this case would be Bitcoin. So I don't think the actual flows themselves are priced in necessarily. What I will say, and this is, and we're coming to an interesting point, because if you look back at how Bitcoin has traded this cycle with prior cycles, we've talked about why they're very, very remarkably consistent with one another.

22:42Bitcoin so far has retraced just over 50 % of its PG trough drawdown, right, from this prior cycle. What you typically tend to see is Bitcoin usually finds a bit of a topping pattern right around here. Sometimes it can get up to that, if you're looking at Fibonacci levels, can get up to that 61.8%, right, which in this case would be just shy of 50K on Bitcoin. But once it hits that level, it usually goes through a period of a bit of a pullback and a period of consolidation before continuing its uptrend higher. What's interesting about that and coming out to ETF news is that could all very well play out right around the expectation of the timeline for us getting potentially a spot ETF approval.

23:26And so you could actually see maybe Bitcoin continue to rally into year end, hit these kind of important technical levels. we see a bit of a sell the news type of event that forces a pullback and some consolidation. So I would say I'm a bit less bullish on the short run. Let's call it three to four months, obviously much more bullish on the longer term outlook, especially as you get into the latter half of next year and into 2025. But I do think that could be a confluence of events that causes this market to some of this this, this, this buyer enthusiasm to turn into exhaustion right around the same time when, you know, we're expecting to get some pretty big news on the ETF front.

24:07We're going to take another quick break 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.