The Breakdown - Understanding This Week’s Market Whiplash, Featuring Scott Melker

Episode Date: February 28, 2020

After weeks of not reacting to Coronavirus, the markets took a profound turn for the worse this week, leading ultimately to the fastest correction - i.e. loss of 10% - in recorded history.  In this episode of The Breakdown, @NLW is joined by crypto trader, DJ, and broad market thinker Scott Melker to discuss: What the crypto markets demonstrated this week What recent price action suggests about the bitcoin as a safe haven narrative Why it’s insane that just two weeks ago, despite tens (or hundreds) of millions of people being quarantined in the supply chain capital of the world, stock markets were printing all time highs How we went from those ATHs to the fastest correction (10% drop) in recorded history What the correction suggests for the fundamentals of our economy  Why central bankers have fewer options than ever to fight economic turmoil

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Friday, February 28th, and man, what a week it has been. Today I'm joined by Scott Melker, who many of you will better know as the wolf of all streets. on Twitter. Scott is a trader. He's a DJ and musician. And he is a super, super interesting thinker. Part of the reason that I wanted to bring Scott specifically on the show today is that we've seen a week where there's a lot to dissect in terms of crypto, but there's also a lot of contextualization needed in terms of the larger macro economy, right? In terms of the larger markets and what's happening there.

Scott is the rare trader who speaks as eloquently about fundamentals and about the macro economy as he does about charts and short-term trends. And I think that you can't really talk about this week, whether it's crypto-specific or just the economy in general, without shifting your view from the short-term to the long-term. As you'll see, Scott makes this point really clearly. He talks at one point in this interview about just how jarring it is that something like 10 days ago the stock market was printing all-time highs, yet now we've had a 10% correction. These are strange, strange phenomenon that are not just normal patterns in the economy.

And a lot of it has to do, as we discuss with, a fundamental shift in what stock market numbers even mean, and whether they are, as they once were, about the perceived value of the company, or something completely different and fundamentally different, more like a political scoreboard. We talk about the legacy of QE and 10 years of quantitative easing and what it has done to these markets. We do also contextualize it in crypto, right? We look at the week in the Bitcoin safe haven narrative. This is something that I talked about earlier this week on the podcast, and I think is really, really important to understand just where Bitcoin and the rest of crypto assets fit in this larger conversation in this larger question.

One of my favorite interviews I've done, so let's dive in. Now, just to be clear, this show, and especially this episode, are not investment advice. Anything presented here, any conversation is strictly for entertainment only. All right, Scott, thank you so much for joining today. I really appreciate the time. Oh, thank you so much for having me. I'm excited. It's an exciting and weird time, right? You know, I was just talking. talking with you a little bit before we started recording about how 2020 has kicked off with a bang. And for those who don't know you, you've got a lot of different things going on now.

You've got a newsletter. You are highly engaged in the space. I mean, give me the, I guess, the 10 second intro for people who don't know you. Sure. Well, I've been trading in some, or investing in some various capacity for over 20 years now. Actually, practically 30, if you count the stocks I bought as a child. But it was something that I really got much more serious about in the last decade and even five years. And then the transition into crypto was sort of an obvious one for anyone in the trading space who really liked making money, you know, 2016, now, 2017. So, you know, I came in very much as a trader and not in it for the tech type, although, you know, that has transition to some degree. Over time, I've traded everything. I have a generally decent feel for

markets because I've just been watching them for a really long time. I went to school at the University of Pennsylvania at a time when Wharton was sort of, you know, the finance center of everything. So, you know, I had a lot of exposure there. It's just something I've always been at least superficially interested in, basically, my whole life. I think it's actually funny the comments on in it for the tech, right? I've been joking a lot this week that the more that the price of Bitcoin and the rest of crypto dips, the more we're all in it for the tech. That's right. Which is sort of been the story of this week. A losing trade becomes a community member, right? Well, listen, I, you know, I spent a lot of time in just kind of traditional tech startups before moving into the crypto side of the world.

There's a similar thing there where everything that you fail at is just a learning experience, which I do actually happen to think is true. But you see it most often when people are kind of on the back foot a little bit. Yeah, I don't think that's true at all with a trade. I do think that's absolutely true with a life experience or a failure at work. But, you know, with trading, it's usually emotion and is not a teacher. moment. It's just something that people tend to repeat over and over again. So unless they actually learn about it and change their behavior, but, you know, I think that traders quickly become investors, to become passionate community members for the coins they're holding by a very

natural evolution or de-evolution, I suppose. I don't think that most of them learn from that, unfortunately. If you were paying attention, this is definitely a week where we could be learning a lot. And that's why I was so excited to actually have you join. I want to maybe get into kind of the larger market movements. I know you're interested in them as well and I've been paying really close attention, but let's talk about just what's happened, what we've learned in crypto this week. I mean, how would you summarize this last week in the crypto market specifically? I don't think anything in Bitcoin's price movement as far as a retracement at this point is particularly surprising or unhealthy at current level. Regardless of the macro picture, I don't see anything

strange in the movement of Bitcoin or cryptocurrencies relative to it. It's obviously all coins. We had a big move, and it's retracing that big move, currently still above a 50% retracement, very healthy. And, you know, that started at a predictable level of resistance being the previous swing high, you know, where you would expect any idea of a bear market's over if we break and hold 10,500 area, right? But that said, throw technicals and all of that out of the window, as you kind of touched

we're in a very interesting macro environment. And I think that maximalists and the digital gold narrative people and the store of value, which, you know, I have mixed thoughts on all of those, those people would have really liked to see Bitcoin behave in an opposite manner during this global downturn in markets and during this coronavirus scare. You know, you can't judge anything on a week. Bitcoin could go up. It could become digital gold.

It could do all these things. But if you want to look at this in a microcontradict, cause them in the short term, well, there really wasn't that much buying volume. Bitcoin has dropped with everything else. So it's hard to make the argument that people rush to Bitcoin in times of uncertainty. For me, it would be a grand departure from history for an asset like Bitcoin to perform well in a risk-off environment because people have never in history bought something riskier when they're safer, quote unquote, safer investments are dropping. So it would be a really surprising thing for me to have seen Bitcoin just rip in the face

of all of this uncertainty. Narratives are a lot of what I follow. And I feel like this week has been a really important recalibration in some ways of the Bitcoin as safe haven narrative. So I actually did the podcast yesterday about this as well. And in some ways, it feels like over the last call it nine months, the idea of Bitcoin as this uncorrelated asset, right, that just kind of does its thing. Sometimes irrespective of what's going on got lumped in with the idea of Bitcoin as a safe haven

narrative. And they're obviously a little bit different. Like both can function in similar ways in times of trouble, but they're very actually different in terms of what type of behavior you would expect or not expect in this situation. And I feel like they've been uncoupling this week a little bit. Now, of course, the counterpoint to that or the extension. of that is that if Bitcoin is also going down at the same time as everything else is going down, then even the uncorrelated asset narrative becomes a little bit questionable from this piece of

evidence. But I do think that we got really excited. And I think that I might have been driven a little bit by there were a couple of eye-popping moments, you know, the middle of last year and towards the end of last year where one day randomly the stock market tanked and Bitcoin went up and it was enough for a CNBC clip. So I think it's been interesting to see that kind of peel back a little bit this week. Yeah, I agree with that. To touch on sort of what you said about safe haven versus non-coordinated asset, interestingly, I do believe very strongly that investors should have, whether it's only 1% or 5% of their net worth in Bitcoin, because I do, even in light of this week's events, I don't think Bitcoin is necessarily dumping because of

what's happening in global markets. I think, like I said, I think it was ready for correction. so that was predictable regardless. It was in the chart, so to speak. But the safe haven, it would have risen, right? So I don't think that it necessarily is correlated because it's dropping, because I would have expected a drop perhaps. So I think it kind of hurts the safe haven argument, but it doesn't really affect the non-correlated or uncorrelated argument.

I mean, there's two kinds of risk that as a risk manager, and I'm not talking about as a trader. I'm talking about, you know, if you're at a fund or for your entire portfolio and the way you approach markets, there's systematic risk and there's idiosyncratic risk. Systematic risk is the idea of most things being correlated, and let's be real. Almost every single traditional asset is in some way correlated. You know, gold go up, sure, but very few things are immune, as we can see here, to a Black Swan event or a major market drop. So if you're looking to diversify your portfolio, you're looking for things,

even in small amounts that offer you idiosyncratic risk, which means somewhat, you know, not correlated to the market and detached from what's happening. And so I do think that Bitcoin is that. But when I say that everybody should own 1% of it, they should buy it, put it away forever, and hope that they never need it. Not because it's the future of money or because it's any of those things, because, you know, perhaps if part of my French, if shit really goes down, you might need it, and it might behave in its own manner if in that one in a million chance our currency becomes hyperinflated or something like that, the people of Venezuela, right? So there are cases, obviously, where it's extremely valuable. And I think it's also in that case important to differentiate

between value and price because even if the price of Bitcoin is dropping, for some people in certain situations, it still has tremendous value. Venezuela being a great example. They don't really care what the price is on an exchange if they can actually use Bitcoin to pay for goods. And that's real value. So I do think that there are cases where Bitcoin can become very valuable. And also, like, why wouldn't you want one percent of your money, which is money, if you lose it, you won't even notice? Why wouldn't you want an asset that could be worth a few hundred thousand dollars one day,

buy one Bitcoin and see what happens if you have money? You know, so I don't think that the idiosyncratic risk portion, has been discredited at all. I think that a safe haven digital gold argument is dubious at best. This is kind of the Chimath argument, right, about 1%. I mean, this is what he said in his why I bought Bitcoin essay in like 2013 in Bloomberg, and he stuck by that up into an appearance on CNBC earlier this week where he said the same thing, right? Really echoed this sentiment. When we talk about non-correlation, we're not talking about on a kind of week-to-week level. We're talking about something that is potentially non-correlated on a much longer time scale

in the context of, as you put it, kind of these Black Swan events. Right. That's why I said really put it away and don't think about it, which, by the way, is how you should approach any investment and not trade anyways. If you could buy Bitcoin now and see what happens in five to 10 years and not worry about it, then that's the approach you should take. if you're a casual investor who just wants a bit of idiosyncratic risk and a bit of exposure. All right. So let's talk actually about the larger markets as well.

Because, again, one of the things that I think people find really compelling about your analysis and your insights is that you're moving back and forth between the micro and technical analysis, but also you clearly care about and spend a lot of time thinking about the bigger picture. What's your read on the markets? I ask you read on the crypto markets, but what's your take on what we've seen in the larger stock market, just global markets in general this week as a whole? I think it's bad. I think it's a bit irresponsible to sugarcoat it.

That said, it's hard to find a bottom, but there will be one. And if you have a long time frame, the market will go back up and it will rip and it exceed expectations. So, you know, bullish, bad, good are all, you know, about context and time frame. I would say in the short term, there's no reason to believe. that it's necessarily going to bounce today. There are technical indicators, the 50MA on SPX and the Dow, the levels that it's at. But, you know, right now it's a very uncertain environment.

I think you just need to use common sense in situations like this. And there's no indication right now that the situation is under control. And the market is completely binary as far as emotion, right? People are fearful or if they're greedy? When they're fearful, they're selling. And I think that that's what's happening right now. And I don't think we have clarity. So with any clarity on where this virus is going or where the environment is headed,

we'll maybe start to form a bottom. That could be here. That could be 20% lower. Nothing would surprise me. So I think it's a time to exercise caution. I am generally a dip buyer in markets, especially with my long time frame, but I have not started buying here yet, which says quite a lot because, you know, Brexit, things like that, I pretty much bought right away. I am personally short some market indexes and a few

choice stocks that I believe would be overexposed and some that I was shorting before. I think the bigger issue here that people maybe aren't talking about or that I haven't heard about, it's not really the virus itself. I mean, I think that the virus is one issue. The supply chain from China is the bigger issue. But I think the biggest issue and the real elephant in the room is that I already felt, and many did, that the market itself was inflated and was extremely overvalued. And that that's the case for many of these companies that have risen 50% in the last year gone skyrocketing. So to me, just mean reversion or returning to the actual value of things is a big drop. And that doesn't even account for what happens if they actually lose value.

Right. So this drop, I don't think it's surprising really anyone, but I think the aggressiveness and velocity of the drop is somewhat astounding. I mean, if you're not paying attention, this is a historic drop. The SMP, I believe, was hitting an all-time high 10 days ago. And as of today, it's officially in correction at a 10% drop from that all-time high in 10 sessions. It's not like the crypto market. This thing's only trading, you know, I mean, obviously there's after-hours trading, but this is not in a 24-7 market. So that's just during business hours, it managed to do that. And that's something that we haven't seen since literally World War II. And these are the

worst days we've had since 2008 when everything went down the drain. So I'm not saying it's 2008 by any stretch. I'm just saying proceed with caution. I think it's just common sense that things were overvalued and that maybe the world was not as exceptional of an economy as maybe certain people led you to believe. And here we go. This is the fascinating schizophrenia about the stock market right now and just really like the asset prices in general is that the question actually ceases to become even overvalued or undervalued, but what the numbers that we're looking at actually mean. So there's a great podcast earlier this week, Hidden Forces that had Ben Hunt and Grant Williams on. So Ben Hunt who writes Epsilon theory and Grant Williams, who's done a ton of things,

he has a ton of media, but he also helped start real vision. And they had this really interesting argument where Grant basically is talking about his experience during SARS. He was in Hong Kong as that happened and what that was like as compared to the just total lack of reaction of markets to the first phase of coronavirus, right? Where this was at the time this was recorded before this week, right? So this correction hadn't happened yet. And he was talking about, you know, you've got X hundreds of millions of people quarantined over here and the stock market is reaching all-time highs over here. And his point was that that just feels. so wrong. It is. Ben Hunt's point was that it wasn't just that it was wrong. It's that the stock market

no longer is a mechanism for seeking the fair price of an asset that's going to give you a return in some way. It is now a political scorecard, right? It is just for, it's for earnings the score. And I thought that that framing was so, so profound to hear explicated so crisply. Yeah, I mean, to that point, let's think about the past, I don't know, year. Market gets good. news goes up. Gets bad news, goes up. Gets worse news, goes up, right? You can point to a lot of things, but there's been nothing that has affected the market in a negative manner until this week. And like you said, coronavirus is not new this week. I mean, that's something that the market should have been reacting to a month ago, and it actually ripped the hardest with the coronavirus

news. I mean, they're quarantined tens of millions of people, you know, multiple New York cities over there and everyone over here is having a party, you know, pop in champagne because their beautiful 401ks or 409Ks, whatever our president thinks they're called, are, you know, never dropping. It's just absurd. We already knew that factories were closing American companies and Chinese and that all of this downside was going to be coming and the market just continued to go up. So the day, like you said, that the market fails to react appropriately to news means that

you're in full, fomo and emotion, and we all, certainly anyone who's been in cryptocurrency knows how that ends. It's very similar to when the market starts to lose that fundamental way of judging value, then you're in that phase where people are buying things only to sell them for more, which we all did in 2017. And like I said, you know, you know where these parabolic advances end. It's really interesting. I think holding aside, you know, predictions, prognostications, and all that sort of thing, it does feel like there are a growing number of observers who look at these markets and say, you know what, maybe central banks can prop up this whole thing one more time or, you know, or multiple more times, right? But at some point, there has to be an event or a

threshold where it just can't go anymore, you know, and I mean, in a lot of ways, I feel like bearish market media is entirely about guessing which event that's going to be, you know, is it going to be retirees who have to sell? Is it going to be some black swan? like Corona, but it does feel like this is an example of kind of nudging us further and further along that path. Yeah, I agree. And I mean, it's actually amazing, though. I haven't checked today, but I believe Chinese markets have actually been up.

So their Kiwi is working. But we've been in the quote unquote greatest economy and market of all time. That doesn't really add up when our Fed has been pumping money into the market, right? You have to wonder now, especially in light of Fed is going to have to react. soon. If they're going to just continue to try to ease or reduce rates, and at what point do we just run out of dry powder or a way to react, and the bottom falls out? So I think, you know, at this point, they have to proceed with real caution and maybe not react immediately just because the president or the media or the public makes them feel like that's the right move. I think that,

as I said, everything is just incredibly inflated and has been propped and can't keep that up forever. I do think that the central banks are going to all get together here and start to work together to try to mitigate the loss. But I think that really, at this point, QE and rate cuts are more likely to sort of take the edge off and ease the pain. Maybe it'll be a, you know, instead of a bungee jump, it'll be an escalator. But, you know, I think that the trend is down. Weird and fascinating times. Scott, I really, really appreciate you taking some time. and sharing your thoughts. I could definitely talk to you for a lot longer about this. But for folks who are listening who are like, damn, I got to get me some more of that brain,

where can people find you? I know that you have a new podcast coming out, right? Is that right? I do. I'm working with a company called Blockworks. They handle a lot of the podcasts in the crypto space. We're super excited. I've actually already recorded about five, so I can't wait to get these things into the wild. The core concept being, you know, people in the crypto space, but also music, art, sports, basically anyone with a really interesting story to tell who has even a slight or superficial interest in finance and the space. So it's been pretty eye-opening to hear the stories of the people here.

So we were trying to do something different. Otherwise, you can always find me on Twitter at Scott Melker, S-O-T-T-M-E-L-K-E-R. And there will be links to that podcast and also to the newsletter that I put out a few times a week. I really try to put out as much content as my ADD-D-Rid-Rid. brain can. So it tends to be a lot if you follow me. I hope it's not too overwhelming for people. Awesome. Love it. All right, man. Well, thank you so much for your time and we'll definitely catch more soon. Thank you. We'll do it again soon. The thing that I just keep thinking about, re-listening to that

conversation is we are in a really, really interesting moment where what Travis Kling has called the largest monetary policy experiment in human history is coming up again. some serious tests, right? Coronavirus and the supply chain shock it represents are a black swan event that is putting to the test how much central bank monetary policy can continue to prop up asset prices and artificially inflate even asset prices. And it may not be that this time shudders the train that shuts down the party, but it does feel like every time this happens and central banks and governments are called into plumb for ever more exotic forms of market support, we get closer and closer and closer to that time that it just doesn't work.

So I don't know what that means for these markets. It's very conceivable that the party could go on for some longer amount of time, but I think that we do have to understand just what a phenomenally unique time it is and look at the markets through that lens. So I hope you've had a great week and are looking forward now to a wonderful, restful, or otherwise interesting, exciting weekend. I will be back as usual on Monday with another episode of The Breakdown. Catch you then. Peace.