In this article, I take a look at the current (21/08/2022 – 03/09/2022) market conditions under three different perspectives:
Let’s jump into it.
Macroeconomics analysis
Last week, Q2 GDP data was released. Previously it was reported at -0.9%, it was revised upper, although still in negative territory to -0.6%. Recession deniers thought it’d be revised into positive territory, and hence the “technical definition of a recession won’t hold”. You probably must have read in my previous issues, somewhere else, or heard from the financial media that a “two consecutive quarters of real GDP growth” classifies as a technical recession.
Don’t want to re-hash the debate of whether we’re in a recession or not, that’s up to the National Bureau of Economic Research (NBER) to decide. It’s not like NBER declaring a recession would change anything.
What I want to highlight is the divergence between Gross Domestic Income (GDI) and Gross Domestic Product (GDP). We got the GDI report alongside that of GDP. You can look at GDP as what a country produces and GDI as what they earn. Everything being equal GDP should be equal to GDI. Although, there are certain times they do deviate – not for long though. They do trade in tandem historically.
US real GDI growth for Q2 was reported at +1.4%. While that of GDP was -0.6%. This is the second quarter in a roll that GDI has outperformed GDP. In Q1 real GDP contracted by -1.6%, while real GDI grew by +1.8%.
Looking at the ratio between real GDI/GDP shows the greatest disconnect in the last 70 years+
This ratio shows how much the US earns versus how much they produce. they are earning ~1.04 more than they would, from things they produce.
Real GDI YoY% change has fallen off a cliff since its peak in 2021. but it’s still in the expansionary territory – it hasn’t gone negative yet. GDI is one of the metrics that NBER tracks to tell if the US is in a recession or not.
The recent GDI data shows that the US isn’t in a recession – at least based on NBER standards. Although, we could be heading towards one.
Another key economic data point that got released, that signals a slowdown in the economy (contrary to what GDI suggests) is the Purchasing Managers Index (PMI).
US composite PMI came at 45. This is the first “below 50” reporting since Covid. PMI above 50 shows that the US economy is in an expansionary phase, while below 50 shows a contractionary phase.
PMI is being classified as a coincident indicator. This is a representation of demand destruction taking place. Monetary policies take between 3 to 4 months to reflect in leading indicators, longer to reflect in coincident, and forever in lagging. The good news is that; we’ve already seen a slow down in the economy via leading indicators and coincident indicators are beginning to follow suit. The bad news is that; the Fed makes policy looking in the rearview mirror. They’re super reliant on lagging indicators like unemployment. That’s we will have to brace ourselves for more pain ahead, till the lagging indicators begin to show signs of weakness. As the famous adage says “don’t fight the Fed”.
Housing front
Being following Charlie Bilello and his housing works. All the housing charts are from him. The work he does there is phenomenal. He and EPB Macro are people I follow to get a sense of what’s happening in the housing market.
In the last issue, I discussed US Existing Home Sales and the NAHB Housing Market Index. I want to touch on other parts of that sector, in this issue.
Below is the US Housing Starts, it tells us how many houses are about to come online. How many homes would commence building soon (hence the name Housing Starts)
In a burgeoning economy, there’s more demand for housing. Primarily due to low mortgage rates, lower borrowing costs, the cost of commodities, labor etcetera. There are various things at play that could incentive the building out of new homes, but central banks’ police are the main driver. Interest rates are the primary factor, while the rest are secondary. So far this year, the Fed has jacked Interest rates up and started QT and that has influenced most parts of the economy – including the housing market. Mortgage Rates are the first derivative from Interest Rates on the housing front. And that is up 93.4% YoY% change. That alone can cause a slowdown in the housing market like we’re seeing now.
New Home Sales have declined, since peaking back in August of 2020. It’s at 511,000. It’s the lowest level since January 2016.
Existing Home Sales can be seen as a display of supply and demand, while New Home Sales are a more accurate representation of the industry and the economy at large.
Existing Home Sales might have a few changes that interface with the economy, while New Home Sales have everything to do with the economy. It’s highly sensitive to central bank policies or any other external factors.
Take for example, what goes into building a new home; lumber, steel, oil, and commodities in general. A rise in the price of commodities would see a slowdown in the building of new homes. In addition to that, rising interest rate that increases the cost of borrowing and other too numerous to mention factors. In a healthy economy, there’s a demand for housing due to low mortgage rates and the supply is there – thanks to low-interest rates and commodity prices, labor is cheap and the cost of durable goods is low due to low inflation. The reverse happens in an economy that is slowing down (like the one we’re in now).
Data for Core PCE was reported last week Friday and came in at 4.6%. Down from its peak of 5.3% back in February. Core PCE is the “Fed’s preferred inflation metric” – this only holds (in my opinion) when CPI is under 3%, not north of 8%. Core PCE has declined for 5 consecutive months, based on historical standards, the Fed would have taken their feet off the gas pedal assuming CPI was under 3%. This time begs to be different.
It’s could be that inflation has peaked, and likely begun to abate, but that hasn’t been reflected in CPI yet. Food and energy are the primary drivers of CPI and every American interfaces with that. If foods and energy prices are still high, the average American citizens would still think there’s inflation. People believing there’s inflation tends to make inflation sticker than they usually would.
I think in this hiking cycle, CPI would be what the Fed pays the most attention to. They can larp all they want, but Core PCE would take the back seat. CPI is what the driver here.
Last Friday’s Jackson Hole meeting put an end to the rally we’ve seen in risk assets since mid-June.
J-Pow spoke for 8 mins – half the normal time of 15 mins. His speech was direct and clear, with no form for ambiguities. The market assumed J-Pow’s comment of being data-dependent in June’s FOMC to be dovish. There were even talks of a Fed pause being the pivot on Twitter. Markets truly got over their skis. Powell used Jackson Hole to set the record straight. Here are some quotes from J-Pow’s speech;
‘‘We will keep at it until we are confident the job (i.e. killing inflation) is done.’’
‘‘sustained period of below-trend growth and softness in the labor market as these are the unfortunate costs of reducing inflation’’.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses”
Markets got the memo and acted accordingly. Since J-Pow’s speech, the major indexes are down, with Bitcoin(BTC) taking the most hit
$SPX: -3.29%
$NDX: -3.60%
$DJI: -2.99%
$RUT: -4.74%
$BTC: -9.05%
Labour Market
We got JOLTS data for July.
- Total openings were 11.239M, an increase from the previous month.
- Quits rates came in lower at 2.7% versus 2.8% the previous month.
Top = JOLTS
Bottom = Quit rates
This shows the resilience of the labor market. Bet the Fed’s looking at this and be like “there’s no way we’re going into a recession, with such a tight labor market”. This gives them leeway to continue their hiking spree.
As I’ve discussed in previous issues high job openings lead to high quit rates, as you are more likely to get better pay at your new job than a pay raise at the existing one.
Both job openings and quits rates are off their local high. This is a step in the right direction, as it is disinflationary.
Initial Jobless Claim’s latest print came in at 232,000, declining from its recent highs of 261,000. IJC has declined consecutively in the last three weeks. This is another testament to how strong the labor market is.
The US Dollar set a new 20-year high this week, tapping the $110 handle having exceeded its recent high of $109.
DXY has been on a tear since the start of the year and doesn’t seem to be slowing down anytime soon.
The Atlanta Fed GDPNow estimate for Q3 2022 has been revised back up to 2.8%.
Equities analysis
US10Y bond yields have re-visited their all-time high of 3.24%. The move in yields from 2.7% is inversely correlated with the decline in equities we’ve seen in the past 3 weeks.
Nasdaq is down ~12% since its peak in August. Price is at a level that has acted as support going back to 2021. If $12K can hold this time around, this would be the higher low that transcends us into a bull run. Otherwise, a drop to its June lows of $11.3K is very likely.
Don’t see how the price gets there and suddenly reverses. If the rally we’ve had in the last 2 months is sustainable, this dip would most likely end here, if not – this was just another classic bear trap, and Nasdaq would make a new low.
Bitcoin(BTC) analysis
Technical Analysis
Bitcoin(BTC) is forming a price structure similar to what it did months back. Price has been ranging between $24.3K and $19.8K for 2 months+. The previous range formed between $47K and $36K lasted 4 months, after which the price dropped ~50%.
Assuming history were to repeat itself, the next leg down for Bitcoin(BTC) would be between $10K and $12K. Not saying it must happen, but it could. And for that to happen, $19.8K must stop acting as support. And that is likely as the price faces resistance at
- Realized price: $21.7K
- LTH cost basis: $23K
- STH cost basis: $21K
- 200W MA: $22K
- Range high: $24K
On-chain and Derivatives Analysis
In Issue #18, highlighted how Puell’s Multiple has exited the green zone. You can read #Issue 18, to see how this metric works. Bitcoin(BTC)’s price action has set a new low since I wrote about that, and as a result, Puell’s Multiple has fallen back into the undervalued area (green zone).
This is the flaw with oscillators – they have nowhere else to fall/rise to when they’ve reached their lower/upper boundary. The oscillator could be at the lower boundary while the price falls another -50%, and likewise could be at the upper boundary and price rallies an additional +200%. It’s why I don’t subscribe to the school of thought of overbought and oversold. Something could remain overbought/oversold for a long time.
With that said, still think dollar cost averaging into BTC when Puell’s Multiple is undervalued has been a good buying opportunity. In other to avoid catching a falling knife – just because you think Bitcoin(BTC) is undervalued, it’s best to wait for Puell’s Multiple to begin exiting the undervalued zone to continue DCA. It’s best to be late and have your thesis validated, then early and be wrong. Personally have paused DCA, need to see strength to continue.
Above is Long Term Holders (LTH) cost basis (blue) at $23K and Short Term Holders (STH) cost basis (purple) at $25K.
Historically, a crossover between both, to the downside has marked BTC’s secular bottoms. I don’t know for sure if this is going to happen in this cycle, but if history is anything to go by, it should. Price would either have to fall or move sideways in the coming weeks, in other for this crossover to happen.
This metric suggests that we chop around for some time or there’s another leg down for Bitcoin(BTC).
Miners’ capitulation ended on August 19. Historically, this has marked Bitcoin(BTC)’s secular bottoms. Despite price putting in a new low, the spread between the 30-day MA hash rate and the 60-day MA hash rate has continued to widen.
Below are previous miners’ capitulations that coincided with Bitcoin(BTC) bottoming out. Other miner capitulations (not included below) were caused by political (China mining ban) or environmental (China rainy season) reasons.
- January and June 2015 – marked the $200 bottom
- August 2016 – halving and Bitcoin(BTC) started its bull run to $19k from $500
- January 2019 – marked the $3k bottom
- April 2020 – marked the $6k bottom
- July 2020 – halving and Bitcoin(BTC) started its bull run to $69k from $9k
- August 2022 – TBD
