Over the last couple of months we have seen an influx (without any effort or marketing from our side) in our retail analysis package. I personally am flattered as I take it almost as a recognition of what I freely share over Twitter and a couple of other places.
Due to the fact that the team remains fairly small and our primary jobs is to trade we have limited the availability for people to sign up for our retail package. We will e-mail clients that have opted in for retail subscription once we are able to increase the scope of our operation.
Unfortunately, as things stand our focus with regards to analysis is in our institutional & brokerage package and we don’t want to compromise quality because we are unable to handle the overall work flow.
Undoubtedly, the biggest talk in town last week has to be the rapid rise in the US 10 year yield. We saw markets pricing in interest rates (10 year) at 1.5% and of course that had it’s relative effect on Gold, which went sharply lower, the US Dollar, which reversed 1 week worth of losses across the board and sharply so, S&P500 saw some declines. This is obviously all logical, however, there is one core misunderstanding as to the reason yields are going up. Most people seem to think that yields are raising because the market is pricing in a quicker recovery and faster tapering, in reality, rates are raising because of QE. We saw this in the Great Financial Crisis with each new round of QE raising rates fairly sharply. The reasons are of course fairly straight forward, the one, which is considerably more realistic this time around is inflation expectations, the second is of course that the flood of cheap money will undoubtedly speed of at least some sort of a recovery.
We make one important point above. We say this time around inflation expectations going higher are more realistic? Why? Because of the fiscal stimulus. You see QE is extremely misunderstood by the general population. What QE really is not money printing, it is creating reserves at the Federal Reserve. That means that unless the banks start handing out loans massively those reserves that sit in the Federal Reserves actually never enter the monetary supply, thus, never really making it to the end consumer and thus can’t cause real inflation. Instead that money just creates asset price inflation. This point, is unfortunately, not even well understood among many professionals who continued to expect extreme inflation and instead outside of asset prices we only really saw deflation, which, can be even worse. However, this is exactly why, the fact, that we are seeing a combination of fiscal and monetary stimulus this time around makes the situation vastly different.
We are already seeing some of the unintended effects of the fiscal stimulus. Just look at what happened in the so called meme stocks like GME. The issue it appears is that when you combine asset price inflation with handing out helicopter money to people who end up depositing it into brokerages to try to make a fortune, well you get a financial market that is most definitely broken, void of any real price discovery and instead fueled by large margin positions and wild west type of speculation. It is ironic that people in Congress know so little about markets that they can’t realise the market was virtually a step away from catastrophic failure. If only all of those retail traders with huge call options required delivery on GME stock the system would have virtually blown up. It is also ironic that Congress is failing to see how the regulations with regards to margin requirements to clearing houses literally caused market manipulation. It wasn’t Robinhood that stopped the GME rally it was the Clearinghouses. The biggest irony of it all is that was all possible because of regulation, and those same people in Congress who are clearing showing they have no understanding of markets are crying more of.
Pardon the short detour, but we believe it is an important one. The reason we had to mention the GME situation as an example above is that Yields are definitely raising quicker than when QE 1/2/3/4 was announced. It took 9 months after the first round of QE in the US in 2008 for rates to raise by a 100%. It has taken 9 months for from 2020 for rates to raise 300%. (See the charts below)
What people often forget as well about markets is that rate of change is often more important than actual magnitude of change and this is surely a lot more aggressive. It also shows an attempt by the market to self correct. Of course we will see a lot more inflation due to fiscal stimulus this time around, but we also have to recognise that while COVID was terrible for a lot of businesses, a lot of businesses namely in tech & services thrived. What the bond market is attempting to do is to tell the Fed “hold up”, we are on the brink of a failing system a result of your policy and we need to reintroduce price discovery into the game. We believe the raising rates will very much continue for as long as we see QE going forward. The question is, will the Fed take the hint in times this time around and allow for free market prices to work, or the next time stocks are begging for a bailout, will they continue on the same path and surely imminently result in something catastrophic.
As for the actual effects on different instruments, we expect raising rates to have mild effects on the US Dollar and stocks but ultimately it is unlikely, especially in stocks, to see actual bear market (mind you 20-25% corrections are reasonable) without the Fed shifting its policy to a hawkish one. What we do hope for is for a better read of the music by the people in our Central Banks but we doubt it. We suspect rates will continue to raise and the Fed will likely remain dovish which ultimately will generate the slow down of the economy, because in their fear of allowing stocks to go lower and cause a panic, they will just make the bubble worse and sharply increase the level of bad investments and bad capital allocation, which in turn will eventually lead to rates going lower (as the Fed won’t raise when they need to) which in turn will result into more QE.
The point we are trying to make is simple, rates are raising because of QE & fiscal stimulus combined, which is in turn speeding up the recovery, however, if that means actual tapering – quicker raising of rates, that is the the unknown question.
We recommend people to pay attention to yields and how the Fed reacts to that, because there will be the real clue of what is to come. However, if we are to be naively optimistic, assuming things continue on this path and the Fed allows for price discovery to work and tapers when the markets tells them too, we could be on a road to a healthy market in a couple of years time.
Bitcoin, or as many like to call it, digital gold, has really managed to knock down all skeptics, hasn’t it ? It has now “survived” at least four notable bear markets during which mainsteam media was very quick to call it the end of the cryptocurrency. Yet, naysayers are yet again proved dead wrong and Gold supports while somewhat vindicated considering the rally of 2020, can’t be too happy with the lackluster performance of Gold when compared to cryptocurrencies or even S&P500. There are plenty of people on both side of the fence, but we do want to take a moment and explore some key ideas with regards of both assets and explain our views on both.
First of all, let us start by saying that we have been advocating for at least a 10% allocation in Gold since late 2018 when Gold was under $1300 and we were one of the first to identify the bottom in Bitcoin at the $3000 mark. It is fair to say we find both instruments valuable in this crazy MMT world but perhaps for different reasons.
Let’s be clear, Bitcoin is in a mania at the moment and we can almost be certain that when the mania ends for one reason or another, it could be draconic regulation, it could be nothing at all, we expect at least an 80% correction from the $3,000 lows posted in early 2020. However, we firmly believe that just like every bear market before us, it will be just that, a restart for the next bull-run. Let’s explore some of the extremely important, yet often forgotten qualities that make Bitcoin valuable:
Full control over your funds.
Ability to send money to anyone with a Bitcoin wallet that can’t be censored or blocked. While, this can be used by certain unwanted elements of society its benefit greatly outweight potential downside as in it’s core immutability is the best way to tackle bad actors & corruption.
Contrarily to popular belief it is perhaps the most transparent financial system out there. Each transaction is stored forever and can’t be manipulated.
Probably the most secure form of money. Cannot be confiscated.
All of the characteristics above are not present in Gold. Gold is very insecure from perspective it is very easy to confiscate as we have seen through various times in history happen, from conquering nations to governments. It is virtually impossible to easily transact in something like Gold coins as even if you could find willing buyers you would likely still need to verify authenticity, quality and other such things. A considerably bigger market and a lot more difficult to manipulate.
Here are some of the qualities that Gold shares with Bitcoin. They are both slow. They are both expensive to buy and mine. They have both proven, Gold considerably more so, to historically outperform currency devaluation.
What both Gold & Bitcoin are not – inflation hedge. The concept of Gold being a hedge for inflation has been around for centuries. However, when looking at the facts it has done a very poor job at doing that. Instead it is a lot more fair to say, Gold is a hedge against currency devaluation. We actually consider both Bitcoin and Gold absolutely superb in those qualities, but we find that due to their nature of causing literal “Gold rushes” it is extremely important to time the accumulation in either of those in periods of depression in their price, rather than during manias.
Is Gold still valuable and worth holding? Absolutely, and it might be even worth pointing out that buying investment gold in the form of coins or small bars is actually a good decision for a good retirement plan. However, it is absolutely normal that the new kid in the block with so much more potential will outperform the age-old Gold. That being said, this has a trade off, and that trade off is volatility and risk. Gold is considerably less risky and even in its worst bear markets it has rarely ever lost over 40% of its value after huge parabolic runs.
Is Bitcoin more valuable than Gold? We find that a fools question. They are both valuable but they each represent different risk and reward potential. Importantly, they both serve one specific purpose, which is to try to provide a safety-net against currency devaluation.
How does Bitcoin have value, it is not backed by anything? Our core argument on this has been one that is fairly easy to understand. In our day and age all of our lives are digital, as a matter of fact we would argue that that even 99% of the monetary supply is all digital. We spend our time on our phones & monitors starring at pixels. For many of us, our life, our job, it is all digital. Thus, ask yourself in a world that is almost entirely digital, does a currency not backed by anything make no sense? In the end of the day a lot of the properties of Bitcoin explained earlier are positive to society and even needed. Mind you, Milton Friedman himself predicted the coming of Bitcoin in an interview in 1999. Watch here : https://www.youtube.com/watch?v=leqjwiQidlk
What about Bitcoin’s value? How do we justify that? This is a fair question and honestly as this is literally a market that puts a price on the instrument completely based on what the other side of the market is wiling to pay it is a difficult and important question. However, there are some thing we do know about Bitcoin. It will always have a fixed supply of 21mln. We also know how competing markets such as Gold have a market value of roughly $7 trillion USD. If we assume both of these assets in their different ways serve a function to protect us against currency devaluation we can reasonably assume that at some point either % of the market of value in Gold will swap to Bitcoin or Bitcoin can at least reach the market value of Gold. At $7 trillion market cap, Bitcoin will be roughly valued at 385k per 1 bitcoin. This is not a price prediction, but we certainly view it as a possibility.
So what to do? As we have said we do and like owning both instruments in one’s portfolio. We believe the approach for either of those is reasonable risk management with the most important aspect being identifying a good entry point and taking profit along to way to make your initial investment “risk-less” from the profit you have taken.
COVID-19 is perhaps the last thing anyone could have imagined that would lead to the bear market everyone was waiting for. Yet it happened, and unfortunately with very real circumstances to the real economy.
We stand now 2 months later after it hit Europe and US and trillion dollars added to the balance sheet of FED, ECB and BoJ. The market has bounced 35% from the lows and we are at a critical juncture. It is very difficult to imagine new all the time highs at this point as we are set to see declines of 5 to 15 % in Real GDP across the globe, yet we see stocks relentless rallying.
Why is that?
Yes, the economy is going to take a big hit and so are company earnings, but if we think about it after trillions of Dollars, Euro’s and Yen’s being pumped into the economy around the world as free-money what’s is the value of 1 single unit of each of those fiat currencies now vs then? It is impossible to measure the effect of that properly as we all race for the bottom but it is fair to say that as Central Banks print and print, there will be a normal Price to Earnings ratio inflation a result of one simple fact, a dollar yesterday will be worth more than a dollar today, thus investors will scramble to buy stocks and gain exposure to real assets instead of holding a bunch of debased currencies.
Sure every crisis originally gets people swinging to cash, we saw that, we even saw Gold sell off with stocks as people were moving to cash. However, it is our opinion that seeing S&P500 move towards the 4,000 rally is not ludacris. We urge newbie traders to be careful when they try shorting and we urge permabears to keep our words in mind. Reality depends on a lot of things, and in the end of the day we are edging closer to MMT which makes our central banks the primary game in town.
We already saw far too many lose money trying to short this rally underestimating the power of the Fed don’t be one of those. If 3000 breaks we will more than likely get new highs.
Risk Disclaimer. This post does not constitute investment advice and should be considered for educational purposes. Node Prime is not liable for any losses that might occur to readers on the basis of the information provided here.
Table of contents: Macro overview of the GDP print, EURUSD, Bitcoin, Gold and Bonds.
On Friday the US reported a GDP print of 3.2%. From that print only 1.1% was CapEx and Consumer Spending, the rest was government spending and inventories. Thus, 2.1% of the GDP print is reliant on factors that won’t be present in the next quarters, inventories will get sold off as companies overproduced and government spending will decrease substantially. However, there is also another thing to take into account when looking at this GDP number. It is the Inflation deflator that was used. The presented deflator was 0.64%, if we used the inflation number reported from the US government via CPI the GDP print would be about 1.6%. That is a big difference isn’t it ? Taking into account the already mentioned factors of inventories and government spending, real GDP growth will come to about 0.4%. That is what you call a really bad number and one that brings us close to recessionary levels. That is also exactly why Bond Yields plummeted significantly.
The economic situation is not rosey and the only reason stocks are where they are is the extremely sharp decline during December that left investors scared and allowed algo’s to completely take over as the Fed did a complete U-Turn. We expect the next 5% move to be to the downside and we expect that to happen fairly soon. To support our bias we present the following evidence:
Short interesting approaching record lows with VIX shorts by Hedge funds at record highs. We last saw this before we crashed Q4 of 2018.
2. Both DeMark count and Elliot Waves point to a correction. In terms of Elliot Wave our base case is the completion of an ending diagonal that should give us a sharp move to the downside.
We suspect that longs will achieve their targets @ 2950 and perhaps even extend a bit further to 2970. However, we don’t expect a significant break out to occur and instead we suspect that a significant correction should occur. We have reached a point where being long at these levels is surely a risk endeavour.
We need to take into account and remember that we have the Fed next week. Considering the levels we are at on indecies we believe the market vastly underestimates the possibility of Fed leaning hawkishly again. It is unlikely that they will go really hawkish, however, should they entertain a hike more seriously this should have its mark on markets. We indeed have expected that the next rate move would be lower, however, consider the fact the Fed has made it abundantly clear that their rate decision policy is based on the level of S&P 500, they might in reality be forced to hike soon to avoid further reckless risk taking and increases in bad debt. Truth be told, they are in a difficult spot. The contrarians we are, we do think now, having changed our mind, that the risk of a surprise hawkish tone is increasing as we are breaking to new highs daily.
What will be the cause? Who knows. Do you short blind? No. What needs to happen is to wait for confirmation by a break out of the triangle. Once we believe we have established a series of shorts we will let you know.
There is one more component to this which should bear reminding which is DXY. DXY appears to be attempting a breakout and we pounder how long can indecies sustain this high with DXY breaking out and EM’s getting crushed. The rumors and stories of dollar shortages are only increasing and we believe it is a logical question to ponder over. While, USD strength hasn’t put much of a dent in this rally, in the event of real dollar strength one can reasonably expect this phenomenon not to persist. However, this brings us to our next chart, which actually suggests some short-term dollar weakness might occur soon, which ironically aligns with a turn in indecies as we have seen that in the short-term we have a positive colleration been risk and dollar until real risk aversion kicks in. This became rather evident in December.
Next up we have EURUSD.
After countless sleepless nights of pondering over what EURUSD wave count was we have not become convinced EURUSD is completing a 5 wave decline with an Ending Diagonal, we particularly enjoy this possibility due to the fact that our long-term short targets on two big daily shorts target the bottom the triangle @ 1.108.
Considering the event risk this week from Spain with elections we believe that should a good gap up present itself we should short it expecting 1.108. However, should we have a gap down into those levels, we suggestion initial caution before turning long. While this is a very good setup we do not to take our chances because should risk-aversion kick the dollar can really scream. That being said like with S&P500 positioning is in our favour, so we indeed consider the risk of being long EUR at these levels as lower than being short in the immediate term. Invalidation of this view would be a sustained close under the bottom of the triangle.
Speaking of EURUSD and DXY it’s time for us to take a look at Bond Yields. The chart below explains is 10 Year Treasury Yield.
Bonds are following a series of 50% shorts of the highs and the recent advance from the 2.345% came into the next in the series short and was tamed by a trendline from the highs. We now expect yields to further go down and reach their profit targets at 2.237 unless the Federal Reserve shifts significantly hawkish. Regardless of that it is safe to say that the GDP print we had on Friday wasn’t taken well by smart money and the bond market called “bull” on the 3.2% reported GDP.
Now let us take a look at Gold.
We remain intermediate term bullish on Gold as long as price stay above 1230. The equality of waves from the highs comes at 1253 and further short-term weakness can be expected. Should however, none such present itself look for a break out of the wedge off to highs to signal a bottom. Our main view is that we should at least get a push to the 1360’s before we can make a conclusion on the daily triangle that has developed on the daily timeframe. The one thing we can say with certainty almost is that in the longterm timeframe 10 years + Gold will indeed be going up. For this to change we would need to fix our debt problems which seems like an impossibility. We suggest readers that can purchase physical Gold to do so anywhere between the 900 and 1100 mark should we see further extension to the downside.
In the meanwhile, as we await for these setups to unfold we believe that some of the best trading opportunities have come from the unlikely space of Crypto. We focus on BTCUSD specifically, but should another interesting setup present itself we will post it.
Below you will find the interesting case of BTCUSD which is trading same anchor new high for the 3rd time in a row.
This same anchor new high setup is coming from an anchor 4190.5 and has now traded twice to target. We do not take the Tether scandal lightly, but we also need to be aware that only the market knows what really means. The report do seem to suggest it overblown for now, but as new information presents itself who knows what will happen. Thus, we believe the way to view the situation is that this rally lies upon this long setup. We believe that BTCUSD is bullish above 4.7k and if have a break under the 4.7k level we could see a move back to the lows of the year of 3.1k and even extend further down the 2500 level. This view aligns with the fractal similarity of this rally with 2015, which suggest we get a sharp move to the downside that consequently gets reversed.
Risk Disclaimer. This post does not constitute investment advice and should be considered for educational purposes. Node Prime is not liable for any losses that might occur to readers on the basis of the information provided here.
Table of contents: Macro overview of the GDP print, EURUSD, Bitcoin, Gold and Bonds.
On Friday the US reported a GDP print of 3.2%. From that print only 1.1% was CapEx and Consumer Spending, the rest was government spending and inventories. Thus, 2.1% of the GDP print is reliant on factors that won’t be present in the next quarters, inventories will get sold off as companies overproduced and government spending will decrease substantially. However, there is also another thing to take into account when looking at this GDP number. It is the Inflation deflator that was used. The presented deflator was 0.64%, if we used the inflation number reported from the US government via CPI the GDP print would be about 1.6%. That is a big difference isn’t it ? Taking into account the already mentioned factors of inventories and government spending, real GDP growth will come to about 0.4%. That is what you call a really bad number and one that brings us close to recessionary levels. That is also exactly why Bond Yields plummeted significantly.
The economic situation is not rosey and the only reason stocks are where they are is the extremely sharp decline during December that left investors scared and allowed algo’s to completely take over as the Fed did a complete U-Turn. We expect the next 5% move to be to the downside and we expect that to happen fairly soon. To support our bias we present the following evidence:
Short interesting approaching record lows with VIX shorts by Hedge funds at record highs. We last saw this before we crashed Q4 of 2018.
2. Both DeMark count and Elliot Waves point to a correction. In terms of Elliot Wave our base case is the completion of an ending diagonal that should give us a sharp move to the downside.
We suspect that longs will achieve their targets @ 2950 and perhaps even extend a bit further to 2970. However, we don’t expect a significant break out to occur and instead we suspect that a significant correction should occur. We have reached a point where being long at these levels is surely a risk endeavour.
We need to take into account and remember that we have the Fed next week. Considering the levels we are at on indecies we believe the market vastly underestimates the possibility of Fed leaning hawkishly again. It is unlikely that they will go really hawkish, however, should they entertain a hike more seriously this should have its mark on markets. We indeed have expected that the next rate move would be lower, however, consider the fact the Fed has made it abundantly clear that their rate decision policy is based on the level of S&P 500, they might in reality be forced to hike soon to avoid further reckless risk taking and increases in bad debt. Truth be told, they are in a difficult spot. The contrarians we are, we do think now, having changed our mind, that the risk of a surprise hawkish tone is increasing as we are breaking to new highs daily.
What will be the cause? Who knows. Do you short blind? No. What needs to happen is to wait for confirmation by a break out of the triangle. Once we believe we have established a series of shorts we will let you know.
There is one more component to this which should bear reminding which is DXY. DXY appears to be attempting a breakout and we pounder how long can indecies sustain this high with DXY breaking out and EM’s getting crushed. The rumors and stories of dollar shortages are only increasing and we believe it is a logical question to ponder over. While, USD strength hasn’t put much of a dent in this rally, in the event of real dollar strength one can reasonably expect this phenomenon not to persist. However, this brings us to our next chart, which actually suggests some short-term dollar weakness might occur soon, which ironically aligns with a turn in indecies as we have seen that in the short-term we have a positive colleration been risk and dollar until real risk aversion kicks in. This became rather evident in December.
Next up we have EURUSD.
After countless sleepless nights of pondering over what EURUSD wave count was we have not become convinced EURUSD is completing a 5 wave decline with an Ending Diagonal, we particularly enjoy this possibility due to the fact that our long-term short targets on two big daily shorts target the bottom the triangle @ 1.108.
Considering the event risk this week from Spain with elections we believe that should a good gap up present itself we should short it expecting 1.108. However, should we have a gap down into those levels, we suggestion initial caution before turning long. While this is a very good setup we do not to take our chances because should risk-aversion kick the dollar can really scream. That being said like with S&P500 positioning is in our favour, so we indeed consider the risk of being long EUR at these levels as lower than being short in the immediate term. Invalidation of this view would be a sustained close under the bottom of the triangle.
Speaking of EURUSD and DXY it’s time for us to take a look at Bond Yields. The chart below explains is 10 Year Treasury Yield.
Bonds are following a series of 50% shorts of the highs and the recent advance from the 2.345% came into the next in the series short and was tamed by a trendline from the highs. We now expect yields to further go down and reach their profit targets at 2.237 unless the Federal Reserve shifts significantly hawkish. Regardless of that it is safe to say that the GDP print we had on Friday wasn’t taken well by smart money and the bond market called “bull” on the 3.2% reported GDP.
Now let us take a look at Gold.
We remain intermediate term bullish on Gold as long as price stay above 1230. The equality of waves from the highs comes at 1253 and further short-term weakness can be expected. Should however, none such present itself look for a break out of the wedge off to highs to signal a bottom. Our main view is that we should at least get a push to the 1360’s before we can make a conclusion on the daily triangle that has developed on the daily timeframe. The one thing we can say with certainty almost is that in the longterm timeframe 10 years + Gold will indeed be going up. For this to change we would need to fix our debt problems which seems like an impossibility. We suggest readers that can purchase physical Gold to do so anywhere between the 900 and 1100 mark should we see further extension to the downside.
In the meanwhile, as we await for these setups to unfold we believe that some of the best trading opportunities have come from the unlikely space of Crypto. We focus on BTCUSD specifically, but should another interesting setup present itself we will post it.
Below you will find the interesting case of BTCUSD which is trading same anchor new high for the 3rd time in a row.
This same anchor new high setup is coming from an anchor 4190.5 and has now traded twice to target. We do not take the Tether scandal lightly, but we also need to be aware that only the market knows what really means. The report do seem to suggest it overblown for now, but as new information presents itself who knows what will happen. Thus, we believe the way to view the situation is that this rally lies upon this long setup. We believe that BTCUSD is bullish above 4.7k and if have a break under the 4.7k level we could see a move back to the lows of the year of 3.1k and even extend further down the 2500 level. This view aligns with the fractal similarity of this rally with 2015, which suggest we get a sharp move to the downside that consequently gets reversed.
