This is something I want to write, but am highly underqualified. I want to be clear that I am not a financial advisor and have no qualifications when it comes to the field of macroeconomics, this is just something I have been trying to learn for the past year or so and over the past 4 months it seems a lot of new crypto folks have been trying to understand how the macro economy may impact their positions.
Hopefully, this newsletter can give some understanding of what to look for in the macro to avoid huge position drawdown, what could be the turning point for the market as a whole, and when to move into cash-heavy allocation. As I mentioned, this is something I am still relatively new to learning so please do excuse any mistakes.
PA = Price Action, HTF = High Timeframe, LTF = Low Timeframe, S/R = Support/ Resistance, ATH = All-Time High, ATL = All Time Low, EQ = Equilibrium, DCA = Dollar Cost Average, MC = MarketCap
Crypto is just US stocks on Cocaine
First things first, cryptocurrency is probably the most risk-on asset in existence at the time of writing this newsletter, you can think of it as a leveraged general market position as we are now pretty correlated to what happens in the US stock market.
So we can technically extrapolate that anything that happens within the US markets is going to happen in crypto with a much higher volatility impact. This of course is also just a rough estimate, the crypto market is still so new, and we have only recently (past two years) been starting to correlate with traditional markets as we have grown in MC.
Interest Rates
Interest rates (when it comes to the US), are the general market rates on how much a general consumer has to pay interest on lending money from the government. So for example, if I want to purchase a car, I take a loan of $10,000, if the interest rate is at 5% then I am paying back $10,500 when completing my loan agreement.
The higher the interest rates, the less lending is happening within an economy.
The lower the interest rates, the more lending is happening within an economy.
The federal reserve of the US has to determine the best rate, this best rate trying to be a number that balances the economy well. Interest rates usually fall in a recession as loan demand declines and investors seek safety, but start to increase as investors feel more risk and consumers feel safe in a stable and safe economy. If you think about it, it’s obvious that people want to buy houses and cars when interest rates are lower, they pay less, have better terms, and can afford to make the purchase.
Likely you have seen lots of talk about the FED for the past few months, FOMC meetings, and basis points for interest rates (bps). To put it simply the FOMC (Federal Open Market Committee) will set a targeted federal funds rate eight times a year which is what you are seeing with people talking about basis points on Twitter. Exactly 8 times a year, the FED will adjust interest rates to be able to balance the economy into a ‘healthy state'. The past FED meeting happen just last week, and the outcome was a 0.75% increase in interest rates in the united states of America.
Inflation/CPI
Inflation in its most simplistic form is the decline of spending power over time within a certain currency, for example, 20 years ago a loaf of bread might have cost you $0.50, and now 20 years later that same loaf of bread might be $1.50/$2.00. Why?
Inflation is calculated by looking at CPI which stands for Consumer Price Index, this is the measurement of the monthly change in prices paid by U.S. consumers for a select basket of goods. The US follows a select number of key goods and services such as food, energy, apparel, services, travel, etc to determine how the average US consumer is spending, is it increasing or decreasing every month?
The further goods and services increase over time, technically means the less of these goods and services we can buy with each dollar, this then has a knock-on effect, wages have to be increased to keep up with inflation and higher prices, and then good and services need to increase to pay higher wages. Luckily to keep this under some type of control, we also have deflation which is the same except when the CPI drops.
The biggest factor as to why inflation gets such large increases over time is because the government that is backing the currency such as the United States simply prints more and more money. For example, for COVID the united states printed $5.2 trillion dollars to help get the economy back on its feet after the economy closed. It’s impossible to print $5.2 trillion dollars out of thin air and then expect not for repercussions later down the line, now we will get nasty inflation, recession, and even possibly a depression where CPI decreases dramatically (spending slows), prices of goods and services increase and interest rates are at huge premiums.
Gross Domestic Product (GDP)
Typically calculated on a yearly basis the GDP is the "total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. So generally we can tell how much production is being finished and completed inside of the ‘US’ for example, and we can use this to determine how healthy the economy is, in terms of production and product.
For example, growth and production in the US have been climbing at an incredible rate since the last major recession that took place in 2008, but in 2020 when businesses, factories, and industrial entities had to close for weeks and months on end, the GDP took a nasty nose dive due to production being halted.
The GDP can be used to get a good picture of production and the overall size of an economy but technically nothing much more, this data set does not take into account any living standards or population. So a country that has a massive population is obviously going to have a larger GDP and we cannot compare country to country to determine health, but just studying the US and how it might affect the economy can give us some good data on recessions or macro hardships that could be on the horizon.
If you did to compare country to country in terms of GDP, you would need to calculate the GDP per capita which is simply the GDP divided by the population. This allows us to take a look at the general standard of living, how and countries population is working and earning, and how that GDP is compared to similar countries.
US Crude Oil
Oil is used day and night in pretty much every part of our economy, that being from travel, production, goods, or services. The most obvious and practical use for oil is likely to run a household car, and the price of oil at a household level has a pretty heavy effect on the consumer’s budget and savings. The higher the oil prices, the less an average family has to spend on other services, and it tightens the average budget.
On a more macro level, oil prices indirectly affect the costs of transportation, manufacturing, energy, and travel. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers making everything in the economy more expensive. Oil prices need to be affordable and balanced if you want to see a healthy economy, every time we have seen major fluctuations in the price of oil things get tough on all aspects of the economy.
So WTI oil prices can be charted and studied to determine the current conditions of the macro economy alongside CPI and other spending data. If oil prices continue to climb to new levels while inflation is already on the rise then likely this will indicate an increase in interest rates, but historically if oil starts to come back down to more standard levels of deviation then the effect on interest rates will be much lighter.
Unemployment Rate
This one is relatively straightforward but this is important data you will hear about from the US over the next few weeks and months, and as mentioned previously is just another data point that can be easily used to determine when a recession could be on the horizon which in turn means when economic growth will halt. (bad time for stocks)
The unemployment rate is just simply the % of the working population out of a job.
When jobs and plentiful and companies are aggressively hiring we can determine a healthy economy is currently taking action, the unemployment rate will decrease as more and more of the workforce are working. On the flip side, when an economic downturn is approaching companies will swiftly put a halt on hiring and when it comes to recessions we see companies letting go of working at a swift rate.
Recession
A recession is a significant decline in economic activity that lasts for months or even years, and technically can be validated by two consecutive quarters of negative GDP. Recessions are times of economical downturn and struggle in the majority of sectors, spending is low, prices are high and general industrial production takes a major hit.
Economies are like life itself, you have ups and downs, peaks and low points and there is usually a middle ground of balance between them for sustained periods. Obviously, events such as COVID, when the US was forced to print more money than ever before, this adds huge strain on the macro economy, technically just giving away ‘free’ money. Economies need to be able to expand and contract over time and allow room for growth, a recession is just one of those negative moments in an economy when times are just generally tough on all market sectors and the general public.
Investors in this environment are extremely risk-off, due to the lack of growth in the economy in general there is a major lack of trust that stocks and companies can perform well, most market participants who manage their portfolios will try to get into cash as soon as possible and just adapt their plan just to be able to survive, this obviously has a negative effect on stock price and general market sentiment.
Summary
Most of this newsletter felt pretty repetitive but I wanted to put a few descriptions of a few key defining data points that I have personally been watching for the past 5/6 months and some of them for the past year; I think all of this data can give someone who is relatively isolated to crypto markets another way of finding possible long entries for macro positions. Using these data points from the US will make trying to find the bottom of the stock market a little bit easier, you can gauge the general health of the economy and start placing more calculated bets, this also has a knock-on effect on the crypto markets and just general life, I think its important and worth the share.
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Well done. Very comprehensive summary, good writing style. Now I better understand the context of everything. Thanks for that and please more of that content if possible.
Thanks!