The Breakdown - Bitcoin Isn't Acting Like Stocks, Stocks Are Acting Like Bitcoin

Starting point is 00:00:00 Let's have the right framework as we look at stocks' relationship to Bitcoin. And the key point is that Bitcoin didn't start acting like stocks. Stock started acting like Bitcoin. Storing value and giving early buyers asymmetric upside on the way to asset maturation is what Bitcoin was designed to do. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is sponsored by nexo.io and Casper and produced and distributed by CoinDesk.

Starting point is 00:00:35 What's going on, guys? It is Thursday, March 4th, and today I am going to try to flip a mental model. Here's my proposition. Bitcoin isn't acting like stocks right now. Stocks are acting like Bitcoin. So to start this conversation, we need to hop on over to FinTwit, where there is a lot of discussion right now around rising treasury yields. When the year started, the 10-year treasury yield was at 0.93% versus the closer to 1.47% it is now. That yield spiked even over 1.6% last week. So what is driving the rise of these treasury bonds, this U.S. government debt? In short, it's expectations of a stronger economy. Vaccines keep getting rolled out with new ones coming on the market, which suggests that all American adults who want to can be vaccinated by basically the beginning of the summer.

Starting point is 00:01:31 Simultaneously, you're seeing restrictions on businesses being rolled back. And the market doesn't believe, in effect, that the Fed is going to be able to keep rates as low as they've been or continue the sort of asset purchase programs to provide liquidity that they've been doing. Now, these rising treasuries have been causing havoc in the public markets. And part of the issue is valuations. The S&P 500 is currently trading at 22x expected earnings, which is close to the highest it's been in 20 years. In December 2009, six months after a previous recession, it was trading at 14x. What this means is that even small changes in the treasury yields, which is another way of saying small changes in how appealing bonds are as compared to stocks, can cause major spasms, particularly for tech companies which are trading at the highest earnings multiples.

Starting point is 00:02:20 There is also, I should note, some real wild. happening in the repo markets. Repos stands for repurchase agreement, and repos are a collateralized short-term loans, which help financial institutions keep money flowing and are used by the Fed to conduct monetary policy. Basically, the repo rate is a measure of financial institutions with cash willingness to lend on a short-term basis. We saw an insane spike in September 2019, when the overnight repo rate rose as high as 10%, and there were still liquidity crunches. It seems like there's something big going on right now in the repo markets that we might might need to discuss, but for the sake of this conversation, I want to keep it more broad.

Starting point is 00:02:56 Basically, to sum up, treasuries are freaking equities out and even bringing Bitcoin into the conversation. A CoinDesk headline article today reads, Bitcoin hovers below 50k as traders await feds take on bond yields. Quote, according to Ing analysts, comments that Powell is monitoring events in the treasury market might be enough to calm things down, encouraging a return to a softer dollar. That could bode well for Bitcoin and stocks. Both assets have mostly moved in the opposite direction to the dollar index over the past 12 months. However, the rally in yields may accelerate, leading to a stronger dollar and weaker Bitcoin if Powell downplays concerns over rising bond yields taking cues from his European Central Bank counterparts. Quote, no such concern from

Starting point is 00:03:36 Powell would suggest the Fed is happy for Treasury yields to find the right level, as our bond strategy colleagues say, potentially triggering another spike in yields and more dollar short-covering, in analysts noted. So what do people think Powell is going to say in today's comments? Many think that Powell will try to convince markets that the bank will be ultra-patient in any pullback of support for the economy. Some, like Bloomberg, don't think he'll explicitly say they're going to cap long-term interest rates. Instead, most think that he will reaffirm the Fed's determination to meet their updated inflation and employment goals. Employment specifically has been the key here. Basically, the Fed has been more or less saying that they are willing to do whatever it takes until

Starting point is 00:04:17 full employment is achieved. So even if it seems like markets are steaming, that's fine as long as they can get to full employment. They already previewed this position this week with comments from Fed Governor Lail Braynard, who said that the Fed has, quote, quite a lot of ground to cover to meet its objectives. Now, the question becomes what tools the Fed actually has. The first is words, what Bloomberg calls forward guidance light. The Fed is currently buying $120 billion of assets per month, $80 billion in treasuries, and $40 billion in mortgage-backed debt.

Starting point is 00:04:48 They could potentially be explicit about when they intend to that back, rather than leaving it to market guesses. They could also be even more definitive and precise about what it would take for them to raise rates. What if words don't work, however, what would come next? Well, there could be some more extreme courses of action. Bloomberg discusses two. The first is a resumption of Operation Twist, in which the Fed would eliminate their holdings of T-bills, which are shorter maturation of usually a year or less, and put money into longer-dated securities. The benefit would be that it would alleviate downward pressure on T-bill rates which are currently threatening to go negative. The other and even more

Starting point is 00:05:26 discussed is yield curve control. This would be a commitment to capping yields at a certain rate. Now, this is something that Australia has done, and again, Governor Brainerd has spoken approvingly about in the past, but it is a serious Rubicon to be breached. Rao Paul tweeted about it yesterday, saying yield curve control. I hope you all realize that QE, quantitative easing, is a fixed dollar amount at any price, but yield curve control is a potentially unlimited amount of dollars at a fixed price. This mechanism moves 65% of the entire JGB market into the Bank of Japan. This would be a seismic shift and equal Bitcoin rocket emoji, which I think perfectly gets us to this Bitcoin question and its relationship to stocks and treasury yields. Looking for the best way to unlock your

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Starting point is 00:07:02 security, or performance. Learn more at casper.network. A pretty fundamental question for this cycle has been, is Bitcoin a macro asset? Given the profile of who holds it and the growing interest of these types of institutions, the question may be better phrased to what extent and in what ways does Bitcoin act like a macro asset. Is Bitcoin completely immune from macro movements on the one hand? Having nothing to do with things like the price of the dollar or treasury yields? On the other hand, is it fully a macro asset like stocks, wherein not just the long term but also the short term fluctuations can be

Starting point is 00:07:43 attributable to things going on in the larger macro economy? Is there a world in the middle in which Bitcoin is simultaneously driven on a medium and long term scale by macro fluctuations, but still relatively immune to short-term day-in-day-out macro factors like these Treasury yield considerations. In some ways, it feels like some version of this middle scenario almost certainly has to be the case. For all the institutional money that has flooded in, there is a massive retail base that is not watching Treasury yields, nor does it care. What's more, many of the large allocators are not making short-term decisions on the basis of things like bond market movements either. Their mandate is entirely to Bitcoin, not some sort of balanced portfolio. But to the

Starting point is 00:08:23 extent that we think there is any overlap at all and that has been growing, I think it brings up a broader question, which is something that a lot of people in the Twitter sphere have discussed over the course of the last year. Is Bitcoin becoming more like stocks? I think there's a different way to look at it, and I tweeted a version of this yesterday. What if it's not that Bitcoin is acting like other risk assets like stocks, but that risk assets like stocks are acting like stores of value like Bitcoin in a negative real rate world. So here's what I mean. There is a historic conception of risk management in portfolio construction where stocks were risk assets and bonds were safe assets. Bonds provided a guarantee but limited rate of return while stocks could go up in serious

Starting point is 00:09:06 ways or down in serious ways. This was embodied in the 60-40 portfolio idea. That started to get wonky over the last 13 years or so since the great financial crisis. In a low interest rate environment, the value of those bonds gets lower and lower. The yield that comes from them decreases. Proportionally then, more money piles into risk assets looking for yield. This is the phenomenon I've discussed numerous times of people being pushed farther out on the risk curve. Most recently, I discussed the consequences in terms of the expansion of the types of companies who are playing in the private equity and venture capital space, which has created more competition for deals and subsequently higher valuations, as well as a plethora of mezzanine capital that previously

Starting point is 00:09:48 wasn't available that has allowed companies to stay private longer than ever. But this has had some weird effects in public markets as well. When the Davey Day Trader set realized that stocks only go up, there could have been a little asterisk next to that sentiment that said, in the context of zero or negative real interest rates. Negative interest rates are when the nominal interest rate is lower than the rate of inflation. And in that context, the incentive to have some big chunk of a portfolio held in bonds that are guaranteed to either make no money or actually lose value, is negligible. Here's how Alex Kruger put it. Why real rates matter. Rising inflation plus nominal interest rates capped at low levels equal negative real interest rates. If real rates are positive,

Starting point is 00:10:29 one can hedge against inflation via rates instruments. You don't need gold or Bitcoin to hedge. So if we are in a negative real rate environment or close to it, the money that people would have put in bonds has to go somewhere, so why not park it in equities or other types of assets? especially in the context of a political landscape where the stock market is held up as the beacon of whether the economy is doing well. For a generation, there has been no real conception of any sort of stock market reset, just a march ever higher. What's more, the retail folks who theoretically should have been more afraid of taking higher risks have, at least over the last year, been the ones more comfortable with or attuned to the belief that stocks now operate in a context where they will literally not be allowed

Starting point is 00:11:13 to go down. That's why the Wall Street bets and Davey Day Trader Global guys beat the fund managers to the rally last year. In fact, frankly, they caused it. When every fund manager was talking about how bad it was going to be for how long, these guys were meming about J-Pow and MoneyPrinter go Burr. And when stock prices started to rise faster than anyone would have expected, the fund managers got caught flat-footed and had to race to catch up. But all of this gets us back to our main frame set shift. There has been much discussion over the last year about how Bitcoin seemed to be. be getting more correlated to stocks. It's just another risk asset in the Wall Street portfolio, right? It makes sense on some intuitive level to use stocks as the benchmark and compare

Starting point is 00:11:52 Bitcoin to them, rather than to use Bitcoin as the benchmark and compare stocks to it. If only for Lindy and the fact that stocks have been around for longer. I would submit, however, that the opposite framework is more enlightening. Bitcoin is tailor-made for the now 13-year macro cycle we've been in. It is a programmatically supply-limited asset with a perfectly known rate of inflation. It is a store of value in the longest term sense because of the simple reality that more can never be discovered nor fabricated. In the short term, it has the dynamics of a risk asset solely because it has not come even close to achieving its true market value, as dictated by the total addressable market of people and institutions that want to hold such an asset.

Starting point is 00:12:31 It is tricked us into viewing it as a volatile risk asset, in other words, but that's not really what it is. So then, it is not that over the last year Bitcoin has somehow suddenly started acting more like stocks, it is that stocks have been acting more like Bitcoin. Stocks have been acting, in other words, like a store of value. And moreover, a store of value that has higher relative upside than previous stores of value, because as a new store of value, the entire market hasn't had the chance to fully pile in incorrectly value things yet. The analogy extends even further with how you see different types of people interact with the crypto markets versus the stock markets. There are the base-level SPY ETF types who know that stocks only go up and so they just buy and hold.

Starting point is 00:13:11 There are the base-level dollar-cost averages in Bitcoin who know that in the long-term Bitcoin only goes up, so they just buy and hold and accumulate more. But then there are the D-Gens and renegades who see the games available at the frontier and who are willing to throw down and play. This is why the Wall Street Bet's Game Stoppers have common kin in many of the more levered trader parts of the crypto markets. The thing all these folks have in common is the knowledge that In this macro context, these assets only go up. Is this a good thing? There are some pretty good reasons why having the stock market be a store of value

Starting point is 00:13:44 represents a major economic dislocation. I expect we're going to hear a lot more people talking about this concept and the risks associated with it for all of us this year. But for now, let's have the right framework as we look at stocks' relationship to Bitcoin. And the key point to reiterate is that Bitcoin didn't start acting like stocks. stocks started acting like Bitcoin. Storing value and giving early buyers asymmetric upside on the way to asset maturation is what Bitcoin was designed to do. I do think it's still worth asking this question about whether Bitcoin is responding to the Treasury yields right now. Cantering Clark thinks yes,

Starting point is 00:14:20 he says, with all the yields talk in crypto Twitter lately, it can get a bit confusing for anyone who is new to markets. All markets right now are sensitive to what has been a pretty rapid change with the 10-year, and they're not buying Powell's words alone. Make no mistake. yield curve control equals Bitcoin higher. Meltem to Mirz is skeptical and says, after much soul-searching, I've decided the Bitcoin macro narrative is dumb. The Bitcoin market doesn't respond to rates. Lull, imagine being that obtuse. In a number-go-up environment, Bitcoin is just another number-go-up to most allocators. They just dress it up with pretty words. I don't actually think Meltem is saying something that different than above. The whole point

Starting point is 00:14:56 is that we're in a number-go-up environment, causing weird dislocations. I think, though, that Alex Kruger again gets it just a little bit more precisely. Prices tell you real rates have become a secondary factor for Bitcoin. Were that not the case, Bitcoin would be getting thrashed like gold is. Rising Reals still represent a headwind by reducing institutional demand and negatively impacting risk sentiment. Fortunately, real rates are not the only variable. Many want to buy Bitcoin regardless of what rates are doing. Rates in government's response to COVID opened the adoption floodgates. You can slow the flow, but you can't close the dam. Anyways, guys, a little dense on the macro front today, but hopefully interesting and hopefully

Starting point is 00:15:34 that main frame shift is something that resonates. So I appreciate you listening. Let me know what you think on Twitter, on YouTube. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - Bitcoin Isn't Acting Like Stocks, Stocks Are Acting Like Bitcoin

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