The Breakdown - Why Is September So Bad for Bitcoin?

Starting point is 00:00:04 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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Monday, September 20th, and if you are anything like me, your brain absolutely rebels at the idea of seemingly arbitrary things like market seasonality, or more specifically, a single month. every year being bad for Bitcoin. Historically, though, September's are bad for Bitcoin. Let's look at the data. In 2011, we were down 37.32%. In 2012, the other way, 22.05% up. In 2013, down about 1.76%.

Starting point is 00:00:53 In 2013, down about 1.76%. In 2015, up 2.35%. 2016, down 7.44%. 2018, down 5.5%. 2019 down 13.38%, 2020 down 7.51%, and 2021 down 5.26% so far. Now, of course, the farther back you get, the more questionable the data, but as you can see, especially since 2013, it's been fairly consistent. Since 2014 and not including 2021, September has averaged 7.8% down. That's the third worst month, with January being the second worst month at negative 8.3% and March at negative 14.2%. Although given this year's big January, which was 14.51% up, and March, which was 29.84% up, that average might make September look even worse historically. So what is going on? Here are a few of the very general explanations people give on why September

Starting point is 00:01:57 is bad. One that I've read quite a bit is back to school and jobs. So the logic here, I guess, is people are just focused elsewhere, so markets are weak, or there are distractions and other demands. I don't really know. People say back to school and jobs a lot without ever actually explaining what they mean by back to school and jobs being bad for markets, so make of that what you will. Another one that you hear quite a bit is selling to pay October 15th estimated taxes. People love to trot out these tax payment arguments for why markets are bad with crypto. There's always talk about this at like every tax period, and it just doesn't make a ton of sense to me. What's more, again, there are multiple estimated tax payment periods each year, so it feels strange

Starting point is 00:02:38 that it would be just this one that mattered. But again, people keep bringing it up. People use it around the big tax time as well. People go to Chinese tax time. They will find any way to make tax payments the reason for a market down swing. The more interesting general reason for market seasonality in September, which will also relate to this current September, is September is widely considered to be the worst month for the stock market. Between 1945 and 2006, the S&P 500 only had two down months on average a year. That was February, which averaged down 0.7% and September, which averaged 0.71% down. August was basically flat, but every other month was up. It's not just the S&P 500 either. Since 1950, the Dow Jones Industrial Average has averaged a decline of 0.8%. And since

Starting point is 00:03:27 Nasdaq was established in 1971, it has fallen an average of 0.5% in September's as well. What's more, apparently this is a worldwide phenomenon and not just limited to the U.S. How does traditional finance explain it? Well, they give a couple major explanations. The first has to do with investors and their summer behavior. The idea is that investors go on vacation over the summer, and since volume is thin in general, they wait until they return to exit positions they had been planning on selling. The inverse can also be true, since The stoppages with any trading activity, they might also be taking profits early in September, but either way, it creates selling pressure in the markets.

Starting point is 00:04:05 The other explanation that's often pointed to is mutual fund fiscal years. With many mutual funds ending their fiscal year in September, their fund managers, on average, sell their losing positions for tax loss harvesting, which creates another downward pressure. So the fact that this is a wider phenomenon than just something that is in crypto is somewhat more interesting to me. Jerry Jordan wrote, stocks tend to be weak and in global weakness correlations go to one. So the obvious question is what's

Starting point is 00:04:32 going on in the current stock market. A Bloomberg headline today reads, stock route deepens on China, Fed, Treasury's gain. The TLDR is that U.S. stocks fell more than 1% and European equities fell the most in almost a year. There are a couple big things weighing on the minds of U.S. investors. There is the Evergrand situation, which I did a whole podcast about last week, but TLDR, massive, formerly the second biggest Chinese real estate company, has $300 billion in debts, can't afford to service those debts, certain debt payment deadlines are coming up, and what's more, there are about 1.5 million people who have put down payments and deposits on properties that haven't been built yet, who are getting extremely angry, as it seems increasingly unlikely

Starting point is 00:05:13 that they're going to actually get their properties built. There have been protests around the country, the stock price is down more than 85%, and the real question is whether there is systemic weakness here, or whether it's limited to China, or whether it's limited to Evergrand, to Chinese real estate in general, to China in general, or it will actually spill over. China Bear Kyle Bass pointed out that the weakness was not at least seemingly limited to Evergrand when it comes to Chinese real estate. He tweets, another Chinese property developer collapsed this afternoon in Hong Kong, dropping a massive 87% before it was halted. Shanghai-based developer Cynic, racing Evergrand to the bottom. Get ready for a banking crisis in Hong Kong and China.

Starting point is 00:05:53 Quick aside here for a second, what's my take on all of this? I did that primer show last week. I obviously presented a bunch of different perspectives on it, and frankly, I just can't really tell. It seems to me to be fairly serious, but at the same time, things like Lehman, Archegos, they came as massive exogenous shocks that no one was talking about until they happened. It's kind of the definition of a black swan. This has a massive amount of attention on it, and what's more, it's hard for me to ignore just how juicy the narrative of China's Lehman is so easy and such catnip for media. It feels a little to me like Western media is catching up on something they feel like they

Starting point is 00:06:29 should have been paying attention to for a while and grabbing hold of the easiest analogy that will drive attention. All of that said, it can be true that the media in the West is sensationalizing it because they're catching up, because of analogy, while it still is a very serious situation. So something I'm obviously going to continue to pay attention to. This podcast is sponsored by Nydig, and they put out a research newsletter that's one of the best ways to track market insights and track the turning points of Bitcoin adoption. Sign up at nightig.com slash NLW. That's NYDIIG forward slash NLW.

Starting point is 00:07:13 A couple more things on the minds of U.S. investors, Fed tapering. The Fed meets on Wednesday where they're anticipated to lay the groundwork for a tapering of stimulus and just in general other macro uncertainty. In October, the U.S. government runs out of money unless it raises or suspends the debt ceiling. There are questions of the Biden economic plan. And what's more, there are questions of whether Jerome Powell will be re-nominated for another term as Fed Chair. 90% of investors surveyed by Bloomberg expect Biden to keep Powell on, which is a number that has risen significantly since June. Lail Braynard, a Democrat, is seen as the likely choice by 9%. Those economists also think that the market rallies if Powell is renominated and declines if

Starting point is 00:07:51 Braynard is the pick. Two-thirds see a near-term rally in the case of Powell versus more than half see a decline for Braynard. Overall, though, I think there's just a bit of a shifting narrative. David Bonson, who's the chief investment officer at a wealth management firm, said, while the ever grand situation is front and center, the reality is stock market valuations are overstretched and the market has enjoyed too long of a break from volatility. Sebastian Galey, who's a senior macro strategist at Nordea Investment Funds essay, said, the edges of the bullish narrative cover are being pulled, and the darker underlying reality is coming to the fore.

Starting point is 00:08:23 It has taken the market more time to price in these shocks than I had expected, but the market is far more realistic as the buy-on-dip mentality fades with the fear of inflation. Perhaps most notable of all, a Morgan Stanley note also sees a growing risk of a 20% drop in the S&P 500. In a new note, they lay out fire and ice scenarios. The fire scenario is the Fed pulling away stimulus so the economy doesn't run too hot, that, quote, leads to a modest and healthy 10% correction. The ice scenario sees the economy sharply decelerating and earnings getting squeezed, and that's the 20% dip scenario. The note reads, will it be fire or ice? We don't know, but the ice scenario would be worse for markets and we are leaning in that direction.

Starting point is 00:09:01 We think the mid-cycle transition will end with the rolling correction finally hitting the S&P 500. So I've discussed how the macro environment and how stocks correlate with crypto before, but not for a while. There is still a pretty fierce debate, but the TLDR on my take is that the longer that crypto exists, the more correlated it's going to be. Yes, there are tons of countervailing forces, long-term hodlers who won't sell ever. crypto-rich investors who just don't give a crap about fiat markets. But there are also increasingly institutional actors, more traditional investors, who make up a bigger and bigger portion of the space. For them, naturally, there is correlation. And even for the traders who don't really care

Starting point is 00:09:42 long-term about what those folks do, the price signals those institutional investors can help send, can get translated into fairly big moves thanks to the levered nature of the crypto industry. Back to our little space, Bitcoin is down about 8% today, ETH is down 9%. Everything else is about that or more. What are the crypto markets saying? Well, the main thing analysts are pointing to is the same stuff we're discussing above. Evergrand, fears about tapering, etc. But are there any relevant fud narratives worth exploring? Indeed, there are. Over the weekend, the New York Times published why Washington worries about stable coins. The Federal Reserve, Treasury, and other regulators are worried that a technology that pledges stability will actually

Starting point is 00:10:21 be a source of turmoil. The vast majority of the piece is an extended primer. as a stable coin? Are they all equally risky? Et cetera, et cetera. But the interesting new bit comes in the section, what are the government's next steps? They go through about six different options that regulators have. The first is designating them as systemically

Starting point is 00:10:41 risky. Quote, because stable coins are intertwined with other markets, the Financial Stability Oversight Council, FSOC, could designate them as a systemically risky payment system, making them subject to stricter oversight. While the market may not be big enough to count as a systemic risk now, the Dodd-Frank Act gives regulators the ability to apply that designation to a payment's activity

Starting point is 00:10:59 if it appears to be poised to become a threat to the system in the future. If that happened, the Fed or other regulators would then need to come up with a plan to deal with the risk. End quote. A second option the paper lays out says that they could treat them like securities. Certainly this is something that Gary Gensler has intimated when he was asked last week when he was testifying before the Senate. Another option is to regulate stable coins as if there were money market funds. Another option is to treat stable coins as if they were banks. This obviously would create more oversight, they could be backed up by deposit insurance, and so on and so forth. A fifth option is to try to compete with central bank digital currency. Jerome Powell has said

Starting point is 00:11:38 before that this is something that they've thought about. Quote, you wouldn't need stable coins, you wouldn't need cryptocurrencies if you had a digital US currency. I think that's one of the stronger arguments in its favor. Of course, there are many questions here, but that's something that the paper of record is putting out. And finally, the sixth point they bring up is cooperate internationally. Quote, if there's one point everyone in the conversation agrees on, it's that different jurisdictions will need to collaborate to make stablecoin regulations work. Otherwise, coins will be able to move overseas if they face unattractive oversight in a given country. So what's most likely? Well, the bluster was echoed by Bloomberg, who wrote, Treasury to Flag Stablecoin Perils as

Starting point is 00:12:16 U.S. Reddy's clampdown. Quote, crypto faces a reckoning in Washington as U.S. regulators prepared to clamp down on the rapidly growing industry, and the Treasury's recommendations could act as a roadmap for the next steps. Officials are also said to be discussing launching a formal review by the Financial Stability Oversight Council into whether Stablecoins pose an economic threat, a process that could trigger even more severe oversight. Bloomberg reported last week that after weeks of deliberations, the Treasury and other agencies are nearing a decision on whether to launch an examination of whether Stable Coins threatened financial stability. Last flag comes from Frank Chaparro last Friday night. He wrote, I had a thread on crypto regulation but accidentally clicked out of the tab.

Starting point is 00:12:54 TLDR, SEC is pissed. They're way behind an understanding overseeing this space because Clayton didn't take crypto seriously. I think SEC will create pathway for citizenship-like route for crypto projects and firms offering securities. Crackdown coming unless lobbying ramps up. Coinbase's thread most certainly antagonize them, though. Gensler, as far as I know, is someone who doesn't mind making someone's life miserable. Everyone in their mother is getting subpoenaed. Wouldn't be surprised if we see a lot of these lending offerings shut or walked back on. And indeed, as I was recording this, it crossed the Bloomberg wires that Coinbase is not going to offer its lending offering as planned. I'll get back to more on that tomorrow, but this is obviously something we're going to have

Starting point is 00:13:32 to watch, and I don't know to what extent this is contributing to the overall malaise, but it's certainly worth noting. The good news, however, is that if we're going to talk seasonality, then we also have to look at what comes after September 2. The September downs have often paved the waves for ripping ups right after, especially in having years. In September 2013, Bitcoin dipped a little over 1%, and then ran from $100 to $1,100 in the next two months. Same thing happened in September 2017. Of course, many of these macro dynamics might suggest that we're in store for something different, but only time will tell. For now, guys, I hope you are kicking off a great week, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why Is September So Bad for Bitcoin?

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