Weekly MacroSlate: Fed scores a hat-rick of 75bps hikes as currencies start to collapse worldwide against the DXY including Bitcoin

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Macro Overview

Fed scores a hat-trick

The fed deliv­ered its third con­sec­u­tive 75 basis point hike accom­pa­nied by high­er fore­casts of future rates, push­ing the dol­lar index and fixed income yields to new highs. Volatil­i­ty across all asset class­es had picked up, which had seen the ten-year minus two-year yields even­tu­al­ly close the widest since the year 1988.

The FOMC’s 75bps hike took the tar­get range from 3% to 3.25%, with fore­casts for the bench­mark pro­ject­ed to reach the end of 2022 at 4.4%. Unem­ploy­ment for 2023 increased to 4.4% from 3.9%, with rate hikes expect­ed to cool the labor market.

As a result, the Euro hit its low­est point since 2002 vs. USD (0.96). The pound dropped to 1.08, and USDJPY had smashed through 145, with 10- year Japan­ese gov­ern­ment bonds still hit­ting 0.25%. 

10–2 Year Spread: (Source: TradingView)

Weimar Republic II

Ger­man August Pro­duc­er Prices Index (PPI) surged 45.8% (vs. 37.1% expect­ed) from a year ago. This was dri­ven main­ly by soar­ing ener­gy prices, rais­ing chances of high­er CPI infla­tion in the next reading.

Con­cern­ing ener­gy, PPI rose almost 15% com­pared to August 2021; how­ev­er, ener­gy prices were twice as high as in the same peri­od last year, an increase of 139%. This would be why ener­gy prices are not con­sid­ered in the CPI print, as cen­tral banks would have to increase inter­est rates aggressively.

Ger­many CPI/PPI (Source: Bloomberg)

Ger­mans have bad mem­o­ries of hyper­in­fla­tion as it affect­ed the Ger­man Papier­mark, the cur­ren­cy of the Weimar Repub­lic, in the ear­ly 1920s. To pay for the repa­ra­tions of WW1, Ger­many sus­pend­ed the gold stan­dard (con­vert­ibil­i­ty of its cur­ren­cy to gold). The Ger­mans used to pay war repa­ra­tions by mass print­ing bank notes to buy for­eign cur­ren­cy to pay for the repa­ra­tions, which led to greater and greater inflation.

“A loaf of bread in Berlin that cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923”- His­to­ry Daily

The gold price in Weimar Marks in 1914 equaled 1, as golds sup­ply increased only around 2% a year, a rel­a­tive­ly sta­ble asset. How­ev­er, with­in the next decade, the per­cent­age change in gold price fluc­tu­at­ed because the denom­i­na­tor (Weimar Marks) increased dras­ti­cal­ly in the mon­ey supply.

A sim­i­lar sit­u­a­tion occurred in the 2020s, as Bit­coin has sim­i­lar char­ac­ter­is­tics to gold. Bit­coin is volatile in nature but also exas­per­at­ed due to the increase in M2 mon­ey sup­ply (con­sist­ing of M1 plus sav­ings deposits).

Gold price in Weimar marks: (Source: Wikipedia)
M2: (Source: FRED)

Correlations

Manipulation of currency

The Bank of Japan left its pol­i­cy rate unchanged at neg­a­tive 0.1% and com­mit­ted to keep­ing the ten-year trea­sury to 0.25%, send­ing the yen to a 24-year low against the dollar.

How­ev­er, on Sept 22, Japan’s top cur­ren­cy diplo­mat Kan­da con­firmed they inter­vened in the FX mar­ket. The Japan­ese gov­ern­ment stepped into the mar­ket to buy yen for dol­lars and con­duct­ed the first FX inter­ven­tion since June 1998. The yen soared against the DXY, drop­ping from 145 to 142.

 “If you manip­u­late the key aspect of mon­ey, you manip­u­late all of our time. And when you have manip­u­la­tion in mon­ey, you have, you MUST have mis­in­for­ma­tion every­where in soci­ety… Bit­coin is the oppo­site sys­tem. Hope, truth, bet­ter future. Spend time there.” – Jeff Booth. 

USD/Yen: (Source: TradingView)

Equities & Volatility Gauge

The Stan­dard and Poor’s 500, or sim­ply the S&P 500, is a stock mar­ket index track­ing the stock per­for­mance of 500 large com­pa­nies list­ed on exchanges in the Unit­ed States. S&P 500 3,693 -4.51% (5D)

The Nas­daq Stock Mar­ket is an Amer­i­can stock exchange based in New York City. It is ranked sec­ond on the list of stock exchanges by mar­ket cap­i­tal­iza­tion of shares trad­ed, behind the New York Stock Exchange. NASDAQ 11,311 -4.43% (5D)

The Cboe Volatil­i­ty Index, or VIX, is a real-time mar­ket index rep­re­sent­ing the mar­ket’s expec­ta­tions for volatil­i­ty over the com­ing 30 days. Investors use the VIX to mea­sure the lev­el of risk, fear, or stress in the mar­ket when mak­ing invest­ment deci­sions. VIX 30 8.37% (5D)

Equities continue to plunge

Equi­ties tried to put on a brave face but con­tin­ued to get bat­tered by ris­ing inter­est rates. So far, in 2022, equi­ty mar­kets have been down­grad­ed mas­sive­ly in val­u­a­tions. With the end of the quar­ter and quar­ter­ly earn­ings sea­son approach­ing, expect down­grades in earn­ings to con­tin­ue this onslaught.

As sup­ply chains con­tin­ue to break down, the cost of cap­i­tal increas­es, and a surg­ing DXY are all lia­bil­i­ties for pub­lic com­pa­nies. Expect to see the unem­ploy­ment rate start to spike from Q4 onwards.

SPX index: (Source: Bloomberg)

Commodities

The demand for gold is deter­mined by the amount of gold in the cen­tral bank reserves, the val­ue of the U.S. dol­lar, and the desire to hold gold as a hedge against infla­tion and cur­ren­cy deval­u­a­tion, all help dri­ve the price of the pre­cious met­al. Gold Price $1,644 -2.00% (5D)

Sim­i­lar to most com­modi­ties, the sil­ver price is deter­mined by spec­u­la­tion and sup­ply and demand. It is also affect­ed by mar­ket con­di­tions (large traders or investors and short sell­ing), indus­tri­al, com­mer­cial, and con­sumer demand, hedge against finan­cial stress, and gold prices. Sil­ver Price $19 -0.77% (5D)

The price of oil, or the oil price, gen­er­al­ly refers to the spot price of a bar­rel (159 litres) of bench­mark crude oil. Crude Oil Price $79 -7.56% (5D)

Don’t get left holding the real estate bag

The aver­age fixed 30-year mort­gage rate has accel­er­at­ed by +104.5% on a year-over-year basis. This appears to be the fastest change rate since the data was col­lect­ed in 1972.

The cur­rent 30-year fixed mort­gage on Sept. 21 was 6.47% high­est since 2008; it was just 2.86% in Sep­tem­ber 2020.

Sep­tem­ber 2020: a medi­an home price of $337k with a 30-year mort­gage rate of 2.86% would see a total paid over 30 years of $502k.

How­ev­er, com­pared to Sep­tem­ber 2022: a medi­an home price of $440k with a 30-year mort­gage rate of 6.47% would see a total paid over 30 years of $998k.

30-year fixed rate mort­gage: (Source: FRED)

Prob­lems con­tin­ue to pile up for real estate investors. The sin­gle-fam­i­ly cap rate vs. six-month US trea­sury yield iden­ti­fies why real estate is a lia­bil­i­ty with ris­ing inter­est rates. The 6‑Month US Trea­sury now yields almost the same, if not more, in cer­tain states as buy­ing & rent­ing out a house in Amer­i­ca (aka Cap Rate).

Real estate has less incen­tive for investors to be in these mar­kets due to prices going down. The next appar­ent sign is reduced investor demand and mar­gin calls to sell prop­er­ties and get the asset off the books. Each time the fed­er­al reserve increas­es inter­est rates, the cap­i­tal cost increas­es on exist­ing port­fo­lios. A trend to fol­low is to see wall street and big banks look­ing to exit as quick­ly as pos­si­ble, as they have already earned their fees.

Sin­gle-fam­i­ly cap rate: (Source: re: ven­ture consulting)

Anoth­er indi­ca­tor that sig­ni­fies a dark­en­ing out­look for US home­builders is the NAHB hous­ing mar­ket index which came out on Sept. 19. The index fell for a ninth con­sec­u­tive month and by more than expect­ed in Sep­tem­ber. The index is threat­en­ing to sink to lev­els last seen dur­ing the hous­ing cri­sis between 2006 and 2013, with activ­i­ty in sales in the new homes mar­ket almost grind­ing to a halt.

NAHB: (Source: TradingView)

Rates & Currency

The 10-year Trea­sury note is a debt oblig­a­tion issued by the Unit­ed States gov­ern­ment with a matu­ri­ty of 10 years upon ini­tial issuance. A 10-year Trea­sury note pays inter­est at a fixed rate once every six months and pays the face val­ue to the hold­er at matu­ri­ty. 10Y Trea­sury Yield 3.68% 6.78% (5D)

The U.S. dol­lar index is a mea­sure of the val­ue of the U.S. dol­lar rel­a­tive to a bas­ket of for­eign cur­ren­cies. DXY 112.97 3.09% (5D)

60/40 portfolio is bleeding out

The 60/40 port­fo­lio has served investors well for the past 40 years, with low infla­tion, volatil­i­ty, and falling inter­est rates. The bal­anced port­fo­lio would see 60% in equi­ties and 40% in bonds.

Why was this strat­e­gy the ulti­mate insurance

  1. Strong risk: in an era of low-inter­est rates, the buy-and-hold strat­e­gy was per­fect for equi­ties. At the same time, bonds pro­vid­ed port­fo­lio insur­ance dur­ing mar­ket stress, espe­cial­ly dur­ing the 2000 tech boom and GFC.
  2. Sev­er­al dis­in­fla­tion­ary forces, such as glob­al­iza­tion, the growth of Chi­na, and aging demo­graph­ics and con­tained inflation.

Why it isn’t anymore 

  1. Vul­ner­a­ble to infla­tion:  investors received rea­son­able nom­i­nal returns in the 1970s, but when you con­sid­er high infla­tion, port­fo­lios lost a sig­nif­i­cant val­ue. In an infla­tion­ary envi­ron­ment, bonds suf­fer more than equi­ties; they will not pro­tect the fun­da­men­tal impor­tance of portfolios.
  2. Accord­ing to the CAPE ratio, bonds and equi­ties were near all-time val­u­a­tions. The ratio is cal­cu­lat­ed by divid­ing a company’s stock price by the aver­age of the company’s earn­ings for the last ten years, adjust­ed for infla­tion. The cur­rent ratio is val­ued at around 29, com­ing down from lev­els of 35. The index is at sim­i­lar lev­els to black Tues­day (1929 great depres­sion) and sig­nif­i­cant­ly more ele­vat­ed than the GFC.
CAPE Ratio: (Source: Cor­po­rate finance institute)

A 60/40 port­fo­lio of US stocks/bonds is down 16.2% in 2022, which is on pace for its worst cal­en­dar year since 1937.

60/40 port­fo­lio returns: (Source: Char­lie Biello)

Bitcoin Overview

The price of Bit­coin (BTC) in USD. Bit­coin Price $19,042 -2.58% (5D)

The mea­sure of Bit­coin’s total mar­ket cap against the larg­er cryp­tocur­ren­cy mar­ket cap. Bit­coin Dom­i­nance 40.61% -1.82% (5D)

Bit­coin Price: (Source: Glassnode)
  • Bit­coin has been rang­ing between the $18k and $20k range for the week com­menc­ing Sept. 19
  • Address­es and gas fees are at mul­ti-year lows.
  • MicroS­trat­e­gy pur­chased an addi­tion­al 301 Bit­coins on Sept. 9; MicroS­trat­e­gy now holds 130,000 Bitcoin.
  • Min­ers’ rev­enue con­tin­ues to get squeezed.
  • BTC has been wrestling with the real­ized price since it went below it in mid-June
Real­ized Price: (Source: Glassnode)

Addresses

Col­lec­tion of core address met­rics for the net­work.

The num­ber of unique address­es that were active in the net­work either as a sender or receiv­er. Only address­es that were active in suc­cess­ful trans­ac­tions are count­ed. Active Address­es 862,692 -9.54% (5D)

The num­ber of unique address­es that appeared for the first time in a trans­ac­tion of the native coin in the net­work. New Address­es 2,799,904 -4.16% (5D)

The num­ber of unique address­es hold­ing 1 BTC or less. Address­es with ≥ 1 BTC 904,423 0.24% (5D)

The num­ber of unique address­es hold­ing at least 1k BTC. Address­es with Bal­ance ≤ 1k BTC 2,119 -0.7% (5D)

Ghost town

Active address­es are the num­ber of unique address­es active in the net­work, either as a sender or receiv­er. Only address­es that were active in suc­cess­ful trans­ac­tions are count­ed. Address­es are a great way to under­stand what activ­i­ty is occur­ring on the net­work. Active address­es have been flat/muted for almost two years now, show­ing lit­tle activ­i­ty on the net­work as spec­u­la­tors have left the ecosystem.

In addi­tion, gas fees are mea­ger and mut­ed at lev­els seen almost since 2018. Fees will go up based on trans­ac­tion­al activ­i­ty, which also sup­ports the case that it is a ghost town on the Bit­coin network.

Active address­es and fees: (Source: Glassnode)

Entities

Enti­ty-adjust­ed met­rics use pro­pri­etary clus­ter­ing algo­rithms to pro­vide a more pre­cise esti­mate of the actu­al num­ber of users in the net­work and mea­sure their activ­i­ty.

The num­ber of unique enti­ties that were active either as a sender or receiv­er. Enti­ties are defined as a clus­ter of address­es that are con­trolled by the same net­work enti­ty and are esti­mat­ed through advanced heuris­tics and Glassnode’s pro­pri­etary clus­ter­ing algo­rithms. Active Enti­ties 273,390 -3.43% (5D)

The num­ber of BTC in the Pur­pose Bit­coin ETF. Pur­pose ETF Hold­ings 23,613 0.04% (5D)

The num­ber of unique enti­ties hold­ing at least 1k BTC. Num­ber of Whales 1,698 -0.29% (5D)

The total amount of BTC held on OTC desk address­es. OTC Desk Hold­ings 2,153 BTC -46.59% (5D)

Whales continue to sell

The num­ber of enti­ties with a bal­ance of 1,000 or more Bit­coin is con­sid­ered a whale. Dur­ing the peak of the ear­ly 2021 bull run, there were almost 2,500 whales as Bit­coin approached $60,000. How­ev­er, as whales are con­sid­ered the smart mon­ey of the Bit­coin ecosys­tem, they sold when the price was high; expect to see this cohort’s accu­mu­la­tion if Bit­coin trends low­er in price.

The accu­mu­la­tion trend score by the cohort con­firms the the­sis above; the met­ric monitor’s dis­tri­b­u­tion and accu­mu­la­tion by each entity’s wal­let. The 1k-10k enti­ty has start­ed to increase its hold­ings since Sept. 19, sig­ni­fied by the dark blue, which is encour­ag­ing to see as they see Bit­coin as val­ue for mon­ey at these price ranges.

Num­ber of enti­ties with bal­ance >1k BTC: (Source: Glassnode)
Accu­mu­la­tion trend score by cohort: (Source: Glassnode)

Miners

Overview of essen­tial min­er met­rics relat­ed to hash­ing pow­er, rev­enue, and block pro­duc­tion.

The aver­age esti­mat­ed num­ber of hash­es per sec­ond pro­duced by the min­ers in the net­work. Hash Rate 230 TH/s 1.77% (5D)

The total sup­ply held in min­er address­es. Min­er Bal­ance 1,834,729 BTC -0.01% (5D)

The total amount of coins trans­ferred from min­ers to exchange wal­lets. Only direct trans­fers are count­ed. Min­er Net Posi­tion Change -17,692 BTC 21,838 BTC (5D)

Miners need to capitulate for the bottom to be confirmed

Look­ing back at the 2017–18 cycle, the final capit­u­la­tion wasn’t until the min­ers capit­u­lat­ed. The Bit­coin hash rate fell over 30% from the peak as min­ers shut down due to being unprof­itable. With ris­ing ener­gy bills and rates, some­thing sim­i­lar most like­ly occurs dur­ing the win­ter as the strain will inten­si­fy on unprof­itable miners.

In addi­tion, min­er rev­enue per Ter­a­Hash (hash rate/ min­er rev­enue) hasn’t bro­ken down below its all-time lows, which has the poten­tial to hap­pen due to ris­ing hash rate and BTC falling prices.

The min­ing indus­try is a game of sur­vival of the fittest; any decent minor uses strand­ed ener­gy and has a fixed PPA. As bor­row­ing rates increase with ener­gy prices, unprof­itable min­ers will start to capit­u­late and fall off the network.

Hash Rate and Dif­fi­cul­ty: (Source: Glassnode)
Min­er rev­enue per ter­a­hash: (Source: Glassnode)

On-Chain Activity

Col­lec­tion of on–chain met­rics relat­ed to cen­tral­ized exchange activ­i­ty.

The total amount of coins held on exchange address­es. Exchange Bal­ance 2,391,523 BTC 19,541 BTC (5D)

The 30 day change of the sup­ply held in exchange wal­lets. Exchange Net Posi­tion Change 281,432 BTC 262,089 BTC (30D)

The total amount of coins trans­ferred from exchange address­es. Exchange Out­flows Vol­ume 185,654 BTC -23 BTC (5D)

The total amount of coins trans­ferred to exchange address­es. Exchange Inflows Vol­ume 173,456 BTC -32 BTC (5D)

Bitcoin on-chain activity looks bleak

On-chain activ­i­ty can deter­mine how many coins are being spent to and from exchanges. The first met­ric con­tex­tu­al­izes this,  total trans­fer vol­ume to exchanges. On Sept 19, 250k BTC was sent back onto exchanges which would be the high­est amount since March 2020.

This is fur­ther sup­port­ed by the met­ric exchange net posi­tion change, which shows inflows are the dom­i­nant regime. This has occurred only four times this year, both around the Russ­ian inva­sion and the Luna col­lapse. A lot of bear­ish sen­ti­ment is being trick­led through onto exchanges.

Total trans­fer vol­ume to exchanges: (Source: Glassnode)
Exchange net posi­tion change: (Source: Glassnode)

Supply

The total amount of cir­cu­lat­ing sup­ply held by dif­fer­ent cohorts.

The total amount of cir­cu­lat­ing sup­ply held by long term hold­ers. Long Term Hold­er Sup­ply 13.65M BTC 0.29% (5D)

The total amount of cir­cu­lat­ing sup­ply held by short term hold­ers. Short Term Hold­er Sup­ply 3.07M BTC -1.64% (5D)

The per­cent of cir­cu­lat­ing sup­ply that has not moved in at least 1 year. Sup­ply Last Active 1+ Year Ago 66% 0.08% (5D)

The total sup­ply held by illiq­uid enti­ties. The liq­uid­i­ty of an enti­ty is defined as the ratio of cumu­la­tive out­flows and cumu­la­tive inflows over the enti­ty’s lifes­pan. An enti­ty is con­sid­ered to be illiq­uid / liq­uid / high­ly liq­uid if its liq­uid­i­ty L is ≲ 0.25 / 0.25 ≲ L ≲ 0.75 / 0.75 ≲ L, respec­tive­ly. Illiq­uid Sup­ply 14.8M BTC 0.01% (5D)

Follow the data

The total sup­ply held by illiq­uid, liq­uid, and high­ly liq­uid enti­ties. The liq­uid­i­ty of an enti­ty is defined as the ratio of cumu­la­tive out­flows and inflows over the entity’s lifes­pan. An enti­ty is con­sid­ered to be illiq­uid / liq­uid / high­ly liq­uid if its liq­uid­i­ty L is ≲ 0.25 / 0.25 ≲ L ≲ 0.75 / 0.75 ≲ L, respectively.

Bit­coin is clos­ing in on 15 mil­lionth bit­coin becom­ing illiq­uid; these are coins kept offline in hot or cold stor­age wal­lets. The cir­cu­lat­ing sup­ply is around 19 mil­lion, with a stag­ger­ing amount of the illiq­uid sup­ply cur­rent­ly sit­ting at 79%.

This met­ric also breaks down the liq­uid and high­ly liq­uid sup­ply. Since the begin­ning of the year, liq­uid and high­ly liq­uid BTC has decreased by around 400k BTC and become illiq­uid, which is bull­ish over the long term as few­er investors are spec­u­lat­ing over the asset and hold­ing it as a store of value.

Liq­uid and illiq­uid sup­ply: (Source: Glassnode)

Cohorts

Breaks down rel­a­tive behav­ior by var­i­ous enti­ties’ wal­let.

SOPR — The Spent Out­put Prof­it Ratio (SOPR) is com­put­ed by divid­ing the real­ized val­ue (in USD) divid­ed by the val­ue at cre­ation (USD) of a spent out­put. Or sim­ply: price sold / price paid. Long-term Hold­er SOPR 0.57 -6.56% (5D)

Short Term Hold­er SOPR (STH-SOPR) is SOPR that takes into account only spent out­puts younger than 155 days and serves as an indi­ca­tor to assess the behav­iour of short term investors. Short-term Hold­er SOPR 0.98 0.00% (5D)

The Accu­mu­la­tion Trend Score is an indi­ca­tor that reflects the rel­a­tive size of enti­ties that are active­ly accu­mu­lat­ing coins on-chain in terms of their BTC hold­ings. The scale of the Accu­mu­la­tion Trend Score rep­re­sents both the size of the enti­ties bal­ance (their par­tic­i­pa­tion score), and the amount of new coins they have acquired/sold over the last month (their bal­ance change score). An Accu­mu­la­tion Trend Score of clos­er to 1 indi­cates that on aggre­gate, larg­er enti­ties (or a big part of the net­work) are accu­mu­lat­ing, and a val­ue clos­er to 0 indi­cates they are dis­trib­ut­ing or not accu­mu­lat­ing. This pro­vides insight into the bal­ance size of mar­ket par­tic­i­pants, and their accu­mu­la­tion behav­ior over the last month. Accu­mu­la­tion Trend Score 0.43 152.94% (5D)

Where are we in terms of cost-basis?

Real­ized price was the aggre­gate price when each coin was last spent on-chain. Fur­ther ana­lyz­ing short and long-term hold­er cohorts, we can cal­cu­late the real­ized price to reflect the aggre­gate cost basis of each group.

This met­ric cal­cu­lates the ratio between LTH and STH real­ized price:

  • Uptrend when STHs real­ize a loss that is a greater rate than LTHs (e.g., accu­mu­la­tion in a bear market)
  • Down­trend when LTHs spend coins and trans­fer them to STHs (e.g., bull mar­ket distribution)

Dur­ing bear mar­kets, as the price con­tin­ues to fall, STH real­ized price will fall below LTH real­ized price. When capit­u­la­tion occurs, high­light­ed by the pur­ple zone, these events usu­al­ly hap­pen dur­ing late-stage bear markets.

The price has been in a down­ward spi­ral for almost a year, since Novem­ber 2021, and we are yet to cross over; the expec­ta­tion of this crossover could occur before the end of Sep­tem­ber. In pre­vi­ous bear mar­ket cycles, it usu­al­ly takes on aver­age 220 days to recov­er after the crossover.

Cost basis cohorts: (Source: Glassnode)

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