Come again?
Everyone is expecting the worst. And let’s face it: when everyone expects one thing, it usually never happens. But what if raising interest rates actually kick-started a bullish reversal? Surely not. But hear this out: it’s a sign of economic strength. Only a robust and healthy economy is able to withstand it! Pure hopium? Let’s find out.
- Why the optimism?
- Strong BTC and tech stock correlations.
- Historical trends are bullish!
The Fed has a task on its hands!
Inflation isn’t transitory, and it’s a real problem. And with Fed chairman Jerome Powell undergoing a stunning transformation from dove to a hawk during his Federal Open Market Committee (FOMC) press conference, the question is: How is he going to bring this overheated economy back to earth, without crashing the plane!
A series of rate hikes are expected. They’re priced in. But is it really the end of the world? After all, the markets are forward-looking by nature. How much lower can this sell-off go on the back of anticipated rate hikes? For an illuminating perspective, check out this superb Twitter thread from Tedtalksmacro.
The picture is different this time
What do higher rates actually mean? Usually, risk assets suffer first, as ‘safer’ alternatives become more attractive. Hence why stock and crypto markets have suffered in recent weeks. But perhaps the picture is different this time.
As this Charlie Biello thread suggests:
The markets have already taken a tumble. History doesn’t always repeat itself, but it tends to rhyme. And it shows that previous rate hike campaigns have gone in tandem with a powerful bull run (and subsequent peak!).
A weak economy couldn’t sustain a series of rate hikes. The fact that it intends to needn’t be a bearish sign. Mr Powell during his speech also alluded to ‘other forces at work’ that could stabilize the economy.
Not something you usually hear, but it’s a solid point: If you’re bullish, you shouldn’t dread rate hikes, you should welcome them!
So why the big sell-off? Did the market overreact?
Wow, what a chart. A history of taper tantrums! And it suggests the recent dump could have been a premature, knee-jerk reaction. Hopefully, investors are reframing their perspective, recognising that the market can absorb these rate hikes without any major disaster! Remember: smart money bought previous ‘tantrums’ and reaped the rewards for years to come. Question is: Will history repeat itself?
Risk on, risk off.
For better or worse, investors have been treating Bitcoin (and crypto in general) like a tech stock. The crypto market has become aligned with traditional market indexes such as the NASDAQ and S&P 500. Any hopes of a decoupling seem few and far between right now!
The inflation narrative has classified crypto and stocks alike as risk-off assets. As a result, we’ve seen these huge corrections across the board.
Does that mean if stock markets recover, crypto will too? Probably. Let’s have a look.
Are tech stocks recovering?
Source: Trading View.
The NASDAQ has enjoyed an impressive rally in the past 24 hours.
Meanwhile, the S&P 500 is attempting a possible reversal.
In fact, it’s the biggest two day increase in years.
As Zhu Su suggests, the Nasdaq could be oversold and primed for a major recovery.
It certainly is compelling stuff! If history is on our side, this dump could just be a bump in the road within a long and sustained bull run.
Crypto to follow suit?
Crypto has been acting in sync with legacy stock markets, and as these traditional markets start to show signs of life, what else can suggest crypto will follow suit?
There’s no other way to spin it: Bitcoin is almost as oversold as it has ever been, and if history repeats itself, the springboard is primed for a reversal.
Often, a piece of news can rock the markets, only for them to settle down again before resuming the trend. A shift in interest rate policy (from neutral to hawkish) could be such an example. In isolation, it’s generally viewed as bearish, but the signs of recovery from traditional markets and crypto markets point to stronger forces at work and more nuanced interpretation.
$315k you say? Thanks Kamil, we’ll keep an eye out for that!
Banter’s take
In spite of macro adversity, the markets could continue with a powerful move higher. The explosive growth may slow, but continue up and to the right nonetheless. With fear nearing all-time highs and everyone expecting the worst, we could yet see the most favorable (and surprising) outcome as the markets are already positioned for the Fed’s tighter monetary policy in 2022.
Hard as it might be to believe, perhaps Mr Powell knows what he’s doing after all!
