The Breakdown - What Was That -- A Market Crash for Ants?

Episode Date: August 7, 2024

Wait, is that it? After all that fuss and bluster Monday didn't turn out nearly as bad as many had predicted. What's more, for once, no one blamed Bitcoin (even though it heralded the violent down move to come). NLW finishes off coverage of the recent market movements. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Tuesday, August 6th, and today we are doing the second day of follow-ups around this big market crash. We'll be talking about Bitcoin, Defi holding up, ETF flows, and a trading day recap. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation. come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. So, after a combination of factors set off a global meltdown in risk assets on Monday, it's time now to survey the damage. U.S. markets opened with trepidation after watching record declines in Asian stocks

overnight. We saw a huge gap down at the opening bell with the NASDAQ plunging by 6.3% and the S&P 500 down 3.6%. Both indexes bounced hard and traded in a range for the remainder of the session. There were muted gains after 10 a.m., but both indexes ended the day down significantly. Crypto markets followed a similar trajectory but on a faster timeline. The bulk of the drawdown had already been digested by morning on the East Coast, so all that was left was the recovery. Both Bitcoin and Ethereum saw a decent recovery throughout the day, with each finding a bottom at around 9 a.m. Bitcoin gained 12% from that point while Ethereum had a 13% revival.

Neither managed to fully recover to price levels from Sunday afternoon and remained around 10% down. While neither of those markets were proclaiming strength, were a long way from the peak doom that was anticipated for Monday. Remember, most Asian markets saw their worst trading day in several decades. For U.S. stocks and crypto, Monday ranked among the worst days since 2022, but came nowhere near the history books. Media outlets are instead framing this drawdown along a longer time frame. Bloomberg is reporting this as the worst start to a month since 2008. However, they point out that the current multi-week drawdown doesn't even rank in the top

10 over the past two decades. Again, none of this is great for stocks, but a mid-level drawdown is categorically different to the historic meltdown people were preparing for on Monday morning. Interestingly, the takeaways from the session were fairly similar across stocks and crypto. Investor Nancy Tengler said, The market is a tug of war between fear and greed. In my 40-plus years as a professional investor, it has always paid to buy when others are fearful. Volatility is the friend of long-term investors. Daniel Chung, the co-founder of Synchrecy Capital, said,

Expect crypto to recover relatively quickly given most of the selling at this point is forced in complete panic. Ironically, the floodgates to a much greater bull market has been opened. There are really two big questions then that arise out of the market turmoil, whether it's over already or just getting started, and what the Fed should do about it, if anything. The volatility index, better known as the VIX, is still at highly elevated levels. It came down significantly from the Monday morning spike, but still much higher than anything we've seen since 2020. The metric is viewed as a fear gauge for the stock market and some systematic

funds use volatility targeting to guide their positioning. Morgan Stanley estimates that these funds sold around $75 billion in stocks on Monday and will sell a further $90 billion over this week if volatility remains elevated. For a market signal, today's Asian session went far better than expected. Japanese stock index futures were halted for a 7% gain in pre-market. Once the market opened, there was a strong rebound with the Niki index quickly filling in most of the gap down. The market closed up 10% for the day. There don't seem to be many expecting a multi-day crash to continue. Yesterday's move does seem in retrospect to have been mostly about a leveraged to unwind of the yen carry trade. For that to continue, we would need to see another spike higher

in the yen, which, while not out of the question, for now the yen is trading lower. To the extent there is a bearish thesis, it's not about another sharp sell-off, but rather a slow grind down driven by weak economic data. Paul Nolte of Murphy and Sylvest wealth management said, the euphoria of the first quarter is quickly becoming a distant memory as weaker economic data is raising voices for a Fed cut in rates soon, and maybe before their next meeting. We're in the early stages of the dog days of summer and things are heating up on Wall Street. opinions on whether the Fed should intervene are largely driven by whether you view yesterday's crash as being about fundamental economic drivers or a technical market breakdown.

Wharton Professor Jeremy Siegel delivered a Hall of Fame freak out on CNBC before the markets had evened open. He called for the Fed to immediately deliver a 75 basis point emergency cut and a further 75 basis point cut at the September meeting. His view was that weakening unemployment and inflation getting close to target meant that rates still being above 5% makes, quote, absolutely no sense whatsoever. Bloomberg opinion columnist Marcus Ashworth, however, called an emergency cut counterproductive, writing, this equity downdraft is fundamentally a market positioning on wine, not a response to an economic shock. Swathes of investors have gotten over their skis on over-leverage trades,

from borrowing cheaply and low interest rate Japanese yen to chasing the bubble in technology stocks, especially anything AI-related. It's their icorice moment. There's nothing broken in the U.S. economy, so there's no justification for the monetary authorities to step in and mitigate losses for over-extended equity holders. The fabled Fed put is a break-glass lever only to be used in the event of a proper emergency, and we're not there yet. Hello, friends. Before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by Cryptonatives, and the reason it's so important this year is that despite regulators' best attempts to push industry

founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political parties platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders, and perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com.

There will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. Historically, the Fed has stepped in during some moments of extreme dysfunction in financial markets, but interest rate policy is not usually the tool they use. In 1987, following the Black Monday crash, the Fed acted as a lender of last resort by providing liquidity. This operation pushed the Fed funds rate down by half a percentage point, but that wasn't the primary objective.

In 1998, surrounding the collapse of long-term capital management in the unfolding Asian financial crisis, the Fed did cut rates. By the following year, however, this was viewed as a policy error, and three rate hikes reversed the move. Reflecting in his memoir, then Fed Chair Alan Greenspan said the central bank had reasoned that, quote, the unlikely but potentially destabilizing event was a greater threat than inflation. There's some precedent for the Fed to step in during events like this, but not before systemic issues start showing up. The idea of the Fed leaping into action to bail out a popular hedge fund trade just doesn't make any sense. Joseph Brown of Heresy Financial wrote, the Fed doesn't do emergency rate cuts to stop the stock market from crashing.

They do emergency rate cuts to stop the Treasury market from breaking. Macro-analyst Noel Atchison tweeted, calls for the Fed to do an emergency U.S. rate cut like right now are getting increasingly desperate. But there's little logic to them other than please make prices go up again. Veteran trader Ed Yardini said, this is very reminiscent so far of 1987. We had a crash in the stock market that basically all occurred in one day,

and the implication was that we were in or about to fall into recession. And that didn't happen at all. it had really more to do with the internals of the market. The other point that some are making is that rate cuts could actually make the situation worse. Peter Barrison, the chief global strategist of BCA research tweeted, by the way, if it is the unwinding of the yen-carry trade driving this, emergency fed cuts could make things worse by further narrowing the interest rate differential between the U.S. and Japan.

The narrowing of the interest rate differential would likely provide another boost to the yen and trigger another round of de-leveraging. Some are even suggesting the Fed should think about going in the other direction, with Guy Adami of risk reversal stating, there's no emergency. The stock market can go down too. Rate cuts aren't some magic solve. A rate cut actually makes the yen carry trade worse. If the Fed had a set, they would start thinking about hiking rates. Ultimately, once cooler heads prevail, we'll likely get back to the Fed focusing on economic data and how much they need to cut to dampen an incoming recession. Mark Dow summed it up by tweeting,

the bottom line now is that we're always going to be one data print away from a growth scare for the foreseeable future. For crypto market participants, the panic seems to be over, but the fear is still palpable. founder Arthur Hayes is watching out for contagion risk, commenting, that was the first wave. Now we wait for bodies of Tradfye over leveraged Muppets to surface. Then wave two begins. If there is going to be a bailout, the market needs to deliver more pain by Friday. Enjoy the respite for the war shall continue. Wolf of All Street's host, Scott Melker is expecting more volatility to show up, tweeting, if the market is designed to inflict Max Payne on everyone, then a huge bounce this week to get people bullish, before continuing

down would be absolutely savage. Crypto-Mecana thinks this could be a fairly stunted recovery, writing, this isn't a V-bottom scenario. I believe value will remain cheap for some time and enter an accumulation market phase. TradFi will scoop Bitcoin and ETH with ETHs, which are already proving to be strong. As for the rest of the market, we will be sideways for one to two months. Overall, what a tremendous opportunity and I couldn't be more thankful. For some, one takeaway was that DeFi systems continued operating without a hitch. That was made even more stark than normal on Monday morning, with on-chain trading contrasted against major outages across multiple stock trading platforms. David Hoffman at Bankless tweeted,

Anything break in Defi? Anything at all? No one in the replies could identify a single infrastructure problem or significant bad debt that showed up. During the last cycle, this was completely unheard of during a rapid drawdown. To the extent there's a silver lining for Bitcoin holders coming out of this drawdown, it's probably that Bitcoin held up much better than most tokens. Bitcoin dominance reached 60% of total crypto market cap at its peak, a level not seen since March 2021. This was a massive increase from the 51% dominance from last Friday. Dominance has been fairly static for most of the past year, but we're starting to see a lot more volatility over recent months as all-coin bets sour. Cassus C. C.S.O. Jameson Lop commented,

if you're sad from looking at charts, just switch to the Bitcoin dominance chart. Analysts at Investment Bank Bernstein, meanwhile, highlighted that, quote, it's not Bitcoin's fault this time. Although Bitcoin led the sell-off, plunging hard on Sunday night, basically no one has blamed crypto for what is clearly broader market dysfunction. That's kind of a nice change of pace from the past few years, where the industry was blamed for triggering a banking crisis and a bare market in stocks. For Bernstein analysts, the point was that while Bitcoin is down, it's down for reasons completely unrelated to its own fundamentals. They added, Bitcoin's initial reaction as a risk-off asset is not surprising. This has often been the pattern

for Bitcoin markets, seen before in March 2020 flash crash too, particularly as it's the only market trading over the weekend. We remain calm. Those analysts see a fairly clear path ahead for Bitcoin moving forward. We don't see any incremental negatives for crypto here. If rate cuts and monetary liquidity is the usual template response to U.S. recession fears, we expect hard assets such as Bitcoin to reprice up. Their report also noted recent dynamics around the Trump trade with analysts pointing out, it's not surprising that as polymarket odds between Trump and Harris narrowed, Bitcoin and Crypto have traded weak. We expect Bitcoin and crypto markets to be range-bound until the U.S. elections, trading off catalysts such as the presidential debate and the final

election outcome. Now, this is the first cycle with Bitcoin available through ETFs, and the additional data points they provide to gauge market sentiment coming out of a major event. Last week, it seemed as though the ETFs had sniffed out impending Doom, putting up an extremely weak performance. According to CoinShare's data, Global Crypto ETF saw $528 million in outflows, which was their first negative week since mid-June. U.S.-based EFETFs had a rough week, recording 169.4 million in outflows. The corresponding Bitcoin products did a little better, but still struggled with 80.7 million in outflows for the week. Bitcoin ETF flows were relatively benign until Friday, which saw 237.4 million redeemed. That was the single worst

outflow day since early June. Monday's flows were a little more mixed. Ethereum products saw net inflows of 48.8 million as ETF traders snatched the buying opportunity. Bitcoin ETFs, however, continued to struggle, racking up a further 168.4 million in net outflows, which was far worse than any day from the past few weeks, barring Friday. Crypto-native platforms, on the other hand, seem to have had a much better day than their trad-fied counterparts. River CEO Alexander Leishman tweeted, seeing record numbers of newly minted hole coiners on River. Now, as I'm recording, Bitcoin and Eath have continued to recover. ETH is back up above $2,500, and Bitcoin is approaching $57,000. Stocks are also recovering. The S&P 500 traded 1.7% higher. The Dow Jones,

is up 1.2%, and the NASDAQ is also up 1.7%. Invidia and meta have both regained around 5%, and so overall, it does seem like the carnage has been limited. However, we will continue to keep an eye on what's going on, or whether ultimately it was just another day in time, and something strictly for the rearview mirror. That's going to do it for today's breakdown. Appreciate you listening as always. Until next time, be safe and take care of each other. Peace.