The Wolf Of All Streets - Top Macro Economist On What To Expect From The Dollar And Bitcoin | Macro Alf

Episode Date: December 5, 2022

It's Macro Monday and today I have a special guest: Alfonso 'Macro Alf' Peccatiello. We are talking about US Dollar, Bitcoin, the job market, interest rates, inflation, and the recession. Macro Alf: https://twitter.com/MacroAlf ►► JOIN THE FREE WOLF DEN NEWSLETTER https://www.getrevue.co/profile/TheWolfDen  GET UP TO A $8,000 BONUS IN USDT AND TRADE ALL SPOT PAIRS ON BITGET FOR ZERO FEES! ►► https://thewolfofallstreets.info/bitget   Follow Scott Melker: Twitter: https://twitter.com/scottmelker  Facebook: https://www.facebook.com/wolfofallstreets   Web: https://www.thewolfofallstreets.io  Spotify: https://spoti.fi/30N5FDe  Apple podcast: https://apple.co/3FASB2c  The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. This video was created for entertainment. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this video constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

The job report came in hot, hot, hot, hot on Friday, baffling a lot of economists and certainly making Jerome Powell frown. A lot of people think that we need to see some more pain in the job market before we can actually see the Fed lay off the gas with their rate hikes. But today's guest, Macro Alf, wrote an amazing newsletter saying that maybe the job market, when you look under the hood, isn't as hot as we think. I'm going to be talking to Macro Alf, one of the rising stars on Twitter and in the economic community today about jobs, recession, debt, his forecast for Bitcoin and the dollar. And I'm also going to take a very quick look at the Bitcoin and dollar charts myself. You guys don't want to miss this one. It's Macro Monday.

Let's go. the Bitcoin and dollar charts myself. You guys don't want to miss this one. It's Macro Monday. Let's go. and a very disappointing weekend for the seven people in the United States that deeply care about the World Cup, me being one of them. We got smashed by the Netherlands. Wasn't pretty, wasn't great. We've been relegated back to the B-Leagues. Nah, it's fine, it's fine. I thought the United States actually showed well.

It was fun to tie England because anything that makes my English friends feel bad about themselves is good. It's good because, you know, we won the revolution and that's really all that's ever going to matter in that context. Saturday morning, I had the difficult choice between a round of golf and an old golf course that's surrounding a quarry that's amazing and watching the game. I watched the first 20 minutes of the game and then I went and played golf. And I'm really glad that I made that decision. Alf, man, welcome. So nice to have you here today. Hi, Scott. Thanks for inviting me. Sorry for being late, but I'm Italian after all. If you're Italian, I would say 10 minutes late is 30 minutes early.

So you're Italian, I would say 10 minutes late is 30 minutes early. So you're pretty good. I actually see the logo there for the macro compass in the background, which is something that I read and I think probably impression, of course, by just looking at the numbers, 265, whatever it was, versus 200, obviously. Job market's strong. Fed needs to continue to tighten. Not enough pain, sort of all the narratives that we have. But you wrote an amazing blog post. I'm going to actually just bring up your newsletter here. You guys should all subscribe to this, the Macro Compass.

But basically making the argument that when you look under the hood, the job market's not as strong as you think, right? You said the last U.S. payroll report was tagged as very strong. But if you look deeper, you realize the current state of the U.S. labor market is far from hot. Can you dig a bit into that? Yeah, that's correct, Scott. So there are a couple of problems with the non-farm payroll data in the first place. First of all, the number of people who responded to the survey that the Bureau of Labor Statistics sent out was 49%. That's the lowest response rate in 20 years,

which means we got some numbers that are basically at least for 40% the result of some Excel spreadsheet calculation being inputted and trying to forecast what really was the job growth. One example, in the non-farm payroll numbers, the Bureau of Labor Statistics tries to estimate how many new businesses are born or died, basically, went bankrupt over the last month. So effectively, what they do is they see in the past how many businesses were created in November or destroyed in November. And if the response rate is very low, they make an estimate and then they plug it in and they see how much employment was created

by this virtual or estimated amount of new businesses being created. Well, the net birth death of new businesses is now double what it was before the pandemic. So all of a sudden, Scott, where our new businesses are popping up like mushrooms exactly when the Federal Reserve has tightened policy, borrowing rates are as high as they were in 10, 20 years.

It's not credible. And you can also see that the double check to that is the household survey, which is a much more, let's say, much less statistical driven survey, a much more concrete survey, where basically people are phoned home and they ask, hey, do you have a job? How many jobs do you have? How many jobs are you trying to work to make ends meet? The household report actually showed no job growth between March and November, zero net full-time jobs being added. Now, also there, there are some statistical inconsistencies, but the truth is basically that the labor market reality today is not as strong as the labor, as the non-farm payroll

would like to depict it, not as weak as the household data would like to depict it, somewhere in the middle. But most importantly, the labor market is slowing down pretty aggressively. It's not maybe statically still relatively tight, but going forward, it's showing sign of weaknesses, which are pretty evident. Do you think that the Fed digs in as thoroughly as you do? I'm assuming they do, or that they just are able to see that NFP number, the mainstream media spreads that NFP number, and then Jerome Powell says, see, look, we can keep tightening, right? Because I think we know that the Fed wants to inflict pain, obviously, and to sort of create the bottom and break something. And it feels like presenting those numbers gives them the excuse to continue

doing that, even if it's not the reality of the situation. And we know that the Fed generally reacts too late and too aggressively. You're totally right, Scott. Actually, a fun episode first is that fun anecdote. Somebody working at the Bureau of Labor Statistics in the US for Washington, D.C, reached out over LinkedIn to me to ask me if I could help them look into the statistical inconsistencies. So at least one other point to say that they're aware

that there are statistical inconsistencies, to say the least. When it comes to the Federal Reserve, you're totally right. They obviously want things to slow down. They've been so wrong in calling this inflation transitory for so long that now they need to re-back.

They need to try and regain some credibility with markets. What they will end up doing, Scott, is doing the same mistake on the other way around. Now, first, they told us that inflation would never pick up, and it did all the way to 8%. And now they're telling us that they need to tighten and be as tight for as long as possible. What they will do is they will be too tight for too long.

And they will obviously, yeah, basically enhance an already ongoing economic slowdown, which in my opinion will turn into a recession. And we'll basically sleepwalk into one with federal funds rate at 4%, 4.5%, which obviously will need to be lowered later on. But it will be late. It will be late. but it will be late. It will be late. The economy will be suffering, job losses, earnings recession, and all of that will be upon us exactly like it was in 2001 or in 2008.

Then the Federal Reserve will come to the rescue later on, realizing that they were too tight for too long, but it's going to be late. Well, it's incredible when we use the term come to the rescue when it's a problem of their own making. Right. I mean, the tightening is a result of their own policy and not largely a result of what's actually happening in the world. As you said, it's because of what they did in the first place. And you mentioned now that you think a likely recession is coming and that we might limp into it. I don't remember the exact term you said. I have a tweet here from you. If we get a proper recession, the Fed cuts rates by 300 to 400 bits, to say the least,

and it does it real quick. The bond market is not pricing anything remotely looking like a proper recession. Can you talk a bit more about that? Yeah. I mean, this thing that people say that a Fed pivot is priced in and that they will pivot and it's already fully appreciated by asset classes. Absolutely not. Have a look at 2001. And I always make this parallel, Scott, because I think it's very relevant. So think with me. In

1999, there was the dot-com bubble, which extended for the first half of 2000. And back then, anything with a dot-com after their name was trading at 200 times earnings, if they had any earnings in the first place. It was a mania, right? In 2021, also place it was a mania right in 2021 also there was a mania excessive risk taking um amc and all that stuff and all the the you know the altcoins were thrown to the moon in some cases with unreasonable circumstances around now it was excess speculation animal spirits were running high What happened in 2000 was that the Federal Reserve raised interest rates very aggressively to 6.5% Fed funds rate. And what also happened is that the dot-com bubble deflated. Does that remind you what's happening in 2022?

The Federal Reserve recognizing they're making a mistake, they're coming and they're hiking very fast. And of course, all these valuation-intensive stocks and to a certain extent, digital space as well gets hit in that circumstance, cyclically speaking. Now, what happened in 2001 was the reflection of the monetary policy of 2000. And what will happen in 2023 in markets and the economy will be a reflection of the tight monetary and fiscal policy of 2022. So what you're looking at is 2023 in which the economy will just roll over very hard, we'll have job losses, we'll have an earnings recession and people are telling me off it's already priced in and I'm like what? So the equity markets are pricing earnings per share to grow by five percent next year. In a recession earnings drop, they do not grow.

The bond market is pricing the Fed to keep rates at 5% for the first half of next year and then to cut rates by 50-100 basis points. 50-100 basis points? In a recession in 2001, the Fed cuts rates by 475 basis points in 15 months. That's a pivot. That's the Fed basically surrendering to a recession. And I think the same is going to happen between the second half of 23 and the beginning of 24, where the Federal Reserve will be forced to cut interest rates towards the 1-2% area, which is not priced in by markets. Now, the postulate to that is that many people say, yeah, that's bullish risk assets. If the Fed funds rate are 1% instead of 4%, then surely all stocks and crypto and

everything else will go to the moon. Well, the reality is that there is an intermediate period where people don't care if Fed funds rate are 1% or 4% because they're losing their job, because earnings are dropping, because it's a recession. And unfortunately, I think that's the base case for 2023. And do you think it'll extend long beyond 2023? Or do you think that they will once again, overcompensate, come in, as you said, with this aggressive hike, and then everything goes back to quote unquote, normal? I mean, what I find interesting

is you describe, obviously, that period in 2001. And if you look back historically, every time we have these hawkish cycles and Fed tightening, it's a lower high in the amount that they raised to, right? So that was over 6%. Now we're talking about 5%. Whenever this cycle happens again, it'll be 4% because they can't risk continuing to go up. It's a completely broken cycle, completely broken cycle and strategy. So it's early to say when basically the positive effect of lowering Fed funds rate will be reflected in risk assets and in the economy.

But my base case is that the stock market and in general, the broader risk asset market will bottom roughly in Q3 next year. Because to bottom, you need the following conditions in place. You need earnings to deteriorate fast and analysts to throw in the towel and say, look, guys, we're going to downgrade earnings. It's really bad out there. So you need literally recession to take hold and people to be reactive to it, right, in the sense of how they lower their expectation for growth. It needs to be already baked in the price, and it's not baked in the price yet. Q3 23? Probably yes. I think enough pain is evident for people to price that in. And the second is the Federal Reserve must have started their easing cycle very aggressively. And I think they will start it later

because these guys are completely myopic now looking at inflation where it is today. And they will keep rates too tight for too long. But around June, July next year, they'll need to start relooking at their policy, which means in Q3, late Q3, you might see the conditions for an initial bottom, persistent bottom in risk assets to be there. Does that mean that we go to the moon immediately thereafter? Well, the example of 2002 wouldn't be particularly helpful because the bear market started in 2000 and it bottomed consistently only in mid-2002. So that's like basically two years almost of a bear market. I expect a similar thing where we started the bear market in 2022, and we're going to basically

consistently bottom at the end of 2023. What happens after really, it's too early to say, but for now, I think a lot of pain still has to go through in markets. What I find somewhat laughable is that you can obviously take bets. We see how the market price is in each additional rate hike each month, right? And we'll see 75% chance of a 50 basis point hike. And then literally Powell opens his mouth for five seconds and that changes to 25 or 50 or 90 overnight, right? Which means that people clearly have no idea what is happening. But the expectation certainly in in November, seemingly, was that we would likely get another 50 bps hike in December, maybe 25, 25 in January, February.

And then that would be sort of, I don't think we would reverse, but it would just grind to a halt and we would see no action from the Fed. Now, all of a sudden, people are pricing a 75 in again for December, just based on those labor numbers on Friday. Yeah. It's really, we are in the hands of the data right now, but most importantly, we're in the hands of Jerome Powell. I mean, he can be as stubborn as he wants, Scott. I mean, say that now inflation starts consistently dropping and say the labor market shows weakness. He could still say, well, I'm not convinced, guys. I need to see more before I'm convinced. He could say that. Actually, the chance is that he will say that because, as I said before, it's an incentive scheme thing.

He's been so wrong for so long that he doesn't want to risk it anymore. And so what he will do probably is he will end up overtightening. He will end up being late to the party when removing some of the tightness. So, again, we're in his hands and we need to listen carefully to what he says. I think next year, though, when he decides to cut rates or to accommodate a little bit, it is less important for markets and how the economy really is doing. If the economy is holding up okay into 2023, then things are very different. I don't think, though, that's the case. I think the massive tightening we have seen this year will result in a much weaker economy in 2023. It works always like that.

It's a macroeconomic cycle. You first tighten monetary and fiscal policy, or you loosen them, as we did in 2020, and then a year later, you're going to see the positive or the negative resulting effects in the economy and markets. 2022 was a very tight year for fiscal and monetary policy. 2023 likely is going to be a pretty bad year for growth and for markets. It's always been the case. And this time is different.

It's a very expensive ascendance to say in finance. So I won't bet on that. Most dangerous four words in investing, right? So John Teppleton, of course. But the one thing that has been different this time is the performance of the 60-40 portfolio during this cycle. I hate to also say this time is different, but this is really the first time in history that there was nowhere to hide, right? I mean, you had an inflationary dollar. So if you were in cash, you're losing

8.5% a year of buying power in theory, depending on what you believe the numbers to be. Bonds are destroyed and stocks are destroyed at the same time. So where do you hide as an investor? Nowhere. And I think the idea from policymakers was, look, we have an inflation problem. We need to tighten monetary policy. And in the past, actually, over the last 40 years, you never seriously had an inflation problem. Like you had some inflationary impulses with inflation around maybe 3%, 3.5%, 4%. You never had inflation at 8% so quickly. So effectively, investors weren't prepared for a scenario

in which central banks cannot rescue the markets. Actually, what I said in March, I remember last year, Jerome Powell will be drinking a nice glass of wine and cheering if the stock market goes down. And I don't remember a setup that, you know, investors that basically went into the markets in the last 10, 20 years could actually foresee a central banker being happy about risk assets going down.

I mean, I don't remember that. In the past, every time you had a drawdown in equities, you remember late 2018. This was the most comparable period when inflation was slowly going above 2% and Powell said, we actually need to hike rates to a much higher level. At some point, the market broke down.

Of course, it always does in an over-leveraged economy. If you raise interest rates, guess what? You're going to have drawdowns in risk assets. But as soon as the market dropped 20%, it took him a month, Scott, literally a month. And in January, he showed up to the wires and he said, no, no, no, no, no, no, no, no, guys. You can buy all the stocks you want. I was wrong. We're going to ease everything.

But this time he couldn't do it because inflation was 80%. What the hell do you want to ease with inflation at 8%? And it was the first time in 40 years. And that's also why the 60-40 portfolio didn't work. Right. I love that you say that people weren't prepared for this level of inflation. But I'll tell you what people were, Bitcoiners, right? I think that there was an overwhelming sentiment, obviously, in the Bitcoin and crypto community

because that's the very ethos of it. But that, wow, if we print 40% of the money in existence in 18 months, we're probably going to see some inflation and have issues there. So it's interesting that people are so blind. I think that it's that general fear and greed cycle where you just don't want to believe that the music is going to end and that the party is going to end. But every sign was there that the Fed had obviously eased too much, there was too much easy money, too much free money,

and that interest rates were too low. I wonder if next time people will be mentally prepared for this or even for the flip side, which is the bull cycle that comes next. Yeah, I mean, look, Scott, the thing is, never as well in the last 40 years, the government and the central bank have done such a joint effort to produce so much stimulus all at once. In the past, we had either the government or the central bank trying to stimulate markets

at one point. So in 2008, we got the central bank cutting rates to zero, doing the first instances of quantitative easing after the great financial crisis in the US. But the government wasn't sending money at home to people. The government wasn't stimulating. On the opposite, we are talking about surpluses in the US. We're talking about tightening the belt. Tightening the belt means they're going to tax the private sector more. They're going to take resources away from the private sector. They're going to make the private sector have less money available. This time in 2020, think about it.

In 2020, the United States government said, okay, ladies and gentlemen, we're going to blow a hole in our balance sheet because we can, we issue the currency, and we're going to actually send money to Scott and you guys, right? So here is the money. Have fun. Do whatever you want with it. No liability attached to it.

It's not like you need to repay me. When you get a loan or a mortgage, you also get a lot of money thrown at your account, but you also have a liability attached to it it's not like you need to repay me you know when you get a loan or a mortgage you also get a lot of money thrown at your account but you also have a liability attached to it right you need to pay a mortgage back and with government stimulus you don't and then the central bank said you know what um what did they say what did they say five trillion dollars uh they need to fund them via bonds ah okay don't worry we'll actually buy most of them the banks will buy the rest the private sector doesn't need to care about via bonds, okay, don't worry. We'll actually buy most of them. The banks will buy the rest. The private sector doesn't need to care about that. So the combination was just incredible. It has never happened in history. Maybe in wartime, I think 1930s was a similar

example. The scale wasn't the same. This time, the scale was even larger, adjusted for inflation than the warlike stimulus combined from governments and the central banks that we threw. And on top of that, not only the US, Europe, Japan, everybody did the same. Scott, it's incredible. And now what we're facing is the opposite. We're having everybody around the world saying no more accommodation anymore, higher interest rates, no fiscal stimulus anymore, all at once. And this concerted fashion is actually very important. And I think we're

going to see just the opposite part of the cycle compared to what we've seen in 2021. So what does that mean, in your opinion, for the dollar? I've seen some of your writing about it, of course, and we've got Bloomberg obviously pointing out the obvious there. US dollar raises more than half of this year's gains on Fed bets. I was just showing a chart before you showed up. I mean, we were at 115 on the DXY and now, you know, dancing right around 104. So do you think that that was sort of a temporary retrace before the inevitable continuation of dollar strength in context of what you're saying? What do you think happens with the dollar and other currencies? And just to add to that really quick, we talk about Powell wanting to see things break. I think you could argue that in England, in Japan, things have broken, right?

Maybe not in the labor market or the stock market, but I mean, the Bank of England effectively can't decide whether they're stimulating or tightening because they're going to just do both at the same time. Right. And Japan and Japan's policy of buying every long duration bond, no matter what, has effectively destroyed that market and the yen. So what does this mean for the dollar moving forward and for other currencies? So it's a very valid question, Scott. And if I again take as a reference early 2008 or early 2001, which in my opinion are very similar periods to where we stand today, the Federal Reserve in 2001 cut interest rates by 450 basis points. And the dollar didn't depreciate against other currencies, which is ridiculous if you think about the amount of Fed cuts.

The problem with the dollar is that it's also a reflection of risk sentiment. And if we're going through a recession, it means people are deleveraging. It means people are losing their jobs, Scott. It means companies are under pressure. And so we live in an overleveraged world. Each of us has a mortgage, private loans, corporates have a lot of corporate debt. So when the economy is slowing down, how are you going to service this debt? If the cash flows are slowing down, if your earnings are slowing down, how are you going to service this debt? If the cash flows are slowing down, if your earnings are slowing down, how are you going to do that? So when you're in trouble servicing your debt, what you try to do is you deleverage, right? You pay back your debt, which means you want to get hands on your dollars to pay back your

debt. So that kind of risk cycle, basically, during a recession favors the dollars on the margin, despite, in certain cases, the Federal Reserve cutting rates very aggressively. On the other hand, though, it could really be that the Federal Reserve cutting rates aggressively dense the dollar. But the main message I want to come across with is if the Federal Reserve is cutting rates because the economy is doing very bad, that necessarily isn't bullish for risk assets or bearish for the dollar because the economy is doing very bad. It's the most important explanatory factor next year rather than what the federal reserve is doing later on what the federal reserve is doing will be very important but we need to be

a bit patient understand that macro and market cycles work through phases and i think we are most likely to see the recessionary phase next year where it's a little bit hard to make the case very early on that you can be short the dollar, long Bitcoin, long equities. You need to be a bit more patient throughout this cycle, I think. And then later on, you'll have great opportunities. Yeah, it's fun to watch people get super excited by any downside move on the dollar or any upside move in those risk assets and assume that that's a signal that the market's changing, as if we haven't seen every chart in history, you know, follow the jagged up and down. It'd be very easy if everything just took a straight line up and to the right. Can I make an example? In 2001,

so actually during the bear market between 2000 and 2002, it was a two-year-long bear market. The Nasdaq rallied seven times 20% or more. So you can have these bear market rallies, or you can have these downtrends in the dollar. It makes complete sense. Things don't move in a straight line. You just said that, right? It makes sense.

People take profits on their short or on their longs, but the medium-term macro cycle isn't changing, I think, until we get economic growth changing, until we get inflation slowing down, until we get inflation slowing down. Either we get a soft landing, and honestly, the odds aren't very high after the tightening we got in 2022, or we'll need undoubtedly to go through some pain still in 2023. Yeah, I mean, we've seen rallies to where the entire market is only down 2%, 3% before much more downside in the history of extended recessions and even

depression. So there's a reason that we call them bull traps and dead cat bounces. So you touched on it already there saying, obviously, if the base case is that the dollar will continue to show strength and rise into a recession, my assumption is that risk assets, and you include Bitcoin in that bucket, will continue to at least suffer or be flat. But I would love to hear your base case on that. Yeah, I'm not positioning myself to be constantly sitting long risk assets and going to sleep next year at all. Actually, I plan to start the year on a conservative note. And if we would have a further rally on the S&P around the 4,100 area, 4,150, I would consider being outright short, to be honest. This would qualify as one of these bull traps that I would like to be short for in preparation for further downside. Look, when it comes to the crypto space, I think it's a pretty interesting asset class to consider.

I think there has been a lot of excess animal spirits. There has been in the stock market as well, to be honest, in the bond market. Everywhere there has been excess animal spirits. You mentioned GameStop and AMC and all those. That was all a trend of the same making. People like to bash, particularly on crypto, but there has been so much excessive call option speculation on stocks and even in the bond market, there has been speculation. And I think that has driven

people a bit off the rails because they lost a bit sight of what really the asset class is. And they started following these animal spirits. And I think actually now they can focus more on the macro. And it's good if they learn how to look at the cycle, the macro cycle better, because it matters for crypto assets. And you are now seeing that unfold in real time. And so next year, I think there needs to be a bit more patience, especially as the FTX debacle, it's obviously not good. It has reverberation effects. People say it's already fully priced then well hard to say to be honest but putting the overall macro cycle i think caution is needed there will be a point where

i'm personally targeting roughly the 10 000 area if i see bitcoin in 10 12 000 area then i in general i expect like the smb in the 3030 200 area i expect those areas to be very good long-term accumulation places, but we're far off from there. I mean, we're talking about another 40% drawdown or something. So that's my base case, the way I will face the asset class

in the first half of next year. And then I will wait for how events unfold. And as you know, the macro cycle keeps updating, new data comes in, new information comes in, and we'll keep doing the work and see what happens. Well, it's interesting because Bitcoin has largely been an uncorrelated asset historically, right? Which can be a bit misleading, obviously, because as it's actually grown large enough

to be relevant, then it's become obviously more correlated. When you ask Wall Street and institutions to participate in your market, eventually it's going to start trading like those other markets. Scott, such an important point. Look, I do advisory for hedge funds, family offices, institutional investors, their clients. You don't want to know, actually, you want to know how many of these guys are asking me for a view on crypto. It can be Ethereum, it can be Bitcoin, especially the most liquid and largest market cap crypto. It's incredible. That means there is participation, there is interest in an asset class to go long, to go short, to use it as part of your portfolio. And if these guys are looking at that, those are

macro people, guys. Of course, they're going to link it to the business cycle. Of course, it's going to naturally, these flows are good for the space because there is more involvement from different actors and it becomes more of a bigger, relevant asset class. But inevitably, it becomes a macro asset class. There is no other way around. So is there a case in your mind where it once again decorrelates? Listen, I mean, we've had a lack of correlation since June to some degree, right? Bitcoin sort of floated sideways between, call it 17.5 and 22, while the aforementioned Forex markets exploded left and right and stocks bounced all over the place. But then we had the even worse decorrelation of the black swan of FTX

over the past few weeks. But I don't think anyone views that as indicative of what's likely to happen moving forward. So your case, obviously, then it is in the basket of risk assets. Or do you believe that it could de-correlate, become an inflation hedge, it could become a store of value or a digital gold? No, I see Bitcoin or the crypto space in general as a very risk sentiment, real interest rates correlated asset. So you can think of it as a very, think of it like the best comparison can be a growth stock, a very aggressive growth stock. So that does well when risk sentiment is very good, the economy is actually doing pretty decent.

And when financial conditions are very, very loose, the economy is actually doing pretty decent. And when financial conditions are very, very loose, when interest rates are low, when the cost of money is very low, when there's a lot of free money around, then generally Bitcoin tends to do very well, because holding dollars in that case, it's stupid. You lose money on a real interest rate adjusted basis, you're losing money. And that's the point when people are like, okay, where can I invest? I mean, is there something that is growing very fast that is potentially a very good upside payoff? That's the moment when crypto assets do very well. That's the kind of feature as an asset class, cyclically speaking, that I tend to judge it as. There is then a case to be made about the long-term potential features of the crypto space. And, you know, the use cases can be plenty.

It can be thought as a potential monetary basket asset to try and replace the current monetary system. There are many long-term macro features, but again, those are very difficult to monetize. To change a monetary system, it takes... Last time we did it was in the 70s. So we're 50 years into this one. And obviously, it can take a lot of time

for these features to play out. Cyclically speaking, I tend to see it as a risk sentiment-driven, real interest rate-driven asset class. I don't disagree. But interesting to look back to March of 2020, when obviously the COVID crash hit. I talk about this all the time, but Bitcoin bottomed below $4,000. Frankly, that was a result, I think, of BitMEX. So talk about this all the time, but Bitcoin bottom below 4,000. Frankly, that was a result, I think, of BitMEX. So I would really call the bottom 6,000 if we're being genuine, because it was only below 6,000 for about 12 hours. It bounced all the way back. But either way, we saw Bitcoin when that sort of loose monetary policy was kicked in and the free money,

the stock market doubled and Bitcoin went up, if you count 3,800, 17 times. If we're starting at 6,000, 11 or 12 times. So assuming we get the exact base case you're talking about, we get this sort of extended recession, maybe end of 2023, early 2024, we start to see rates coming down aggressively. Do you think then that at least as a higher beta asset or, you know, that it can rise more than everything else, even if they're still correlated on the down and upside in general? Yes, absolutely. Yes. The answer is yes. The definition of a higher beta risk sentiment, lower real rates driven asset basically is that is that it will rally very fast, viciously on the way up. But also when the things deleverage, it will suffer a bit more. And that's exactly what we have seen. And the macro participation in the asset class, once it's there, Scott, it doesn't go away. These hedge funds are not going to be like, oh, I did Bitcoin long and short in 2020, 2021. I'm not going to do long and short Bitcoin in 2023.

They are. They are going to do that. So that will make sure that Bitcoin and the crypto space in general, cyclically speaking, tends to behave like a high beta risk asset. Long term, it's a different story. So I don't want people to mix up the two things. If you are in the crypto for your long term use case, whatever it is, technology, blockchain, a form of money, whatever you think that your assessment of your long-term use case in crypto is, that's a different reason to be in than to be in crypto for a cyclical macro asset. For that, you need to understand macro cycles and understand the role that crypto plays within the

macro cycle. And that's also what I try to do on the Macro Compass, not only for Bitcoin, to be honest, but for every asset class, Scott. Every asset class has its place in the portfolio for a reason in the macro cycle. And at the end of the day, understanding the macro cycle tends to give you advantages in portfolio composition, which includes crypto as well, sometimes a bit more, sometimes a bit less, sometimes no crypto. It's really a macro asset class. With that in mind and what we discussed with the performance of a 60-40 portfolio, do you think that Bitcoin then can become, even at a very small percentage, a consistent part of effectively everyone's portfolio or a new version of that portfolio construction? I think this is

the first time that people are seriously, seriously doubting conservative views or historical views on how you should allocate? So let me think. If I think of that as in the macro cycle, plus its potential long-term features that we discussed, I think in principle, you can have a small allocation. Even as an institutional investor, you could think of an allocation to Bitcoin. Now, of course, the debacle of the third largest exchange in crypto space might make some institutional people be a bit more hesitant. I've been in the space. I mean, I've run a very large institutional book, and I know exactly how these guys actually think.

They don't want to be associated to anything that could be tainted or areas that could be opaque. Their job is to make sure that nothing bad happens at the end of the day, right, Scott, and to preserve some of the credibility they have as institutional investors. So that might actually hit. Of course, you can just buy assets and store them in a cold wallet. That's fine. That also limits the ability you have to trade these assets immediately or very, very, very quick, right? So this exchange story might, on the margin, I think, discourage some institutional investors. But when you look at the cyclical and structural feature of the asset class, I don't see any reason why it couldn't have a place in an institutional portfolio.

I think you just made the most important differentiation between the asset class and the industry, right? We saw a collapse in the industry, which was outright fraud, but that has nothing to do with Bitcoin as a long-term asset that you would hold. And so I would be inclined, at least putting on my over-optimistic hat, to think that some institutions, certainly not endowments and pensions and the ones with risk managers that take five years to make a decision, but smaller ones might be inclined to see this as a breakdown because of the industry and an opportunity to invest into the asset class.

And I think anecdotally, we are seeing a bit of that with the evidence. But I mean, I do agree with you. This is a rough time. I've kind of made the joke that, you know, a few years ago, if you were the guy that walked into the meeting and said, you know, we should consider Bitcoin an institution, you probably would have gotten outright fired. And then two years ago, though, if they asked you about it and you didn't at least have an opinion, you could get fired. And now I think we've cycled back to the other one, which is you're probably pretty afraid to walk into, as the CFO or a risk manager at a pension fund to come in and start talking about allocating to crypto.

Yes, that's correct. And institutional adoption or adoption, adoption is not a word for institutions. Institutional consideration of crypto as an asset class to belong in a portfolio is a slow process. Asset managers, wealth manager, sovereign wealth funds, bank treasuries, in some cases, regulation plays a paramount important role. It's literally what regulators design as a box for you to fit in. That's where you need to try and optimize your constraints around. And if the regulator says no Bitcoin, then it's no Bitcoin.

It's very simple. There's no other way around. So that's the other thing. Watching what regulators do is very important. Watching how the macro cycle evolves is very important. And I think that actually experiencing this unfortunate, very large drawdown in the crypto space can be a very important long-term lesson, educational lesson for investors in the crypto space. It's not an isolated box. It's not an isolated ecosystem. It interacts with everything

else in the financial system, including regulation, including macro cycles, which is a good thing, if you ask me, because a crypto investor now can still be very focused on the long-term use case on crypto. That's totally fine. But on top of it now, as understood, I hope, Scott, also thanks to your work, that it interacts with macro cycles, that the crypto investor needs to be very interested and involved in understanding macro cycles, in understanding regulation, et cetera, et cetera. It's a good thing, if you ask me. Do you have an opinion specifically on Ethereum versus Bitcoin at this point, or is it one big basket in your mind? No, not particularly. As a macro investor, what I do is I first think in principles. And so the digital asset space in general tends to be

one asset class for me, which I look at broadly and I look at the interaction it has with other asset classes. I don't have a particular view on Bitcoin versus Ethereum. by the way i understood scott that um especially on twitter uh which is quite an interesting platform you are not allowed to say that you have no idea or you don't have an opinion but i still say that i don't have an opinion how dare you yeah you have to i think uh if you're going to be on twitter you have to have a uh opinion and be an uh certified expert in literally everything yeah yeah sure but if you're a crypto expert you also have to have a opinion and be a certified expert in literally everything. Yeah, sure. If you're a crypto expert, you also have to understand vaccines,

political cycles, voting. You got to really have it all. You have to definitely be an expert in the mechanics of war. What a fun place. So sometimes I don't have an opinion and I don't have expertise, like in this case. No, I don't have an opinion on Ethereum against Bitcoin. And if I disappointed you guys, I'm sorry.

No, that's a breath of fresh air for someone to say. I don't want to answer your question, man. I just don't. Yeah, no, totally. So before I let you go, are there any final things we may have missed that you're watching closely and could sort of be in the coal mine for what's coming? Or is the base case pretty clear? Scott, I think the base case I have is pretty clear. have missed that you're watching closely and could sort of be in the coal mine for what's coming or is the base case pretty clear uh scott i think the base case i have is pretty clear there is one thing i'm watching very closely which is the housing market where i think some people are

still in la la land and they expect it to be uncorrelated to the cycle to hold up for some reason it's not gonna hold up prices are going down 20% on average next year, which sounds a lot, but it's actually only going to bring us back to the beginning of the pandemic at the end of the day. So it's just going to take away the excess speculation in the housing markets as well. But why am I mentioning that? It's a huge asset class, Scott. I mean, it's the biggest asset class in the world. And in China, it already went basically belly up. And now it's the turn of developed markets because mortgage rates have gone through the roof

and nobody can afford buying houses at these prices anymore. So the only cure is for house prices to drop until people can finally afford entering the housing market anymore. And it's an important sector to watch because it's big and it involves banks and it involves the private sector. So watch that very carefully. sector to watch because it's big and it involves banks and it involves the private sector so watch that very carefully and then the last thing is again i see a lot of crypto investors being kind of discouraged and i want to come across with a um positive note which is guys it's a macro cycle it's okay everybody gets. It's okay. Everybody gets hurt. Everybody makes mistakes and has

negative P&L kind of years or months. It's tough, but it's how markets work. I would see this as a positive opportunity to get involved into macro, understanding the cycle, studying, stepping up your game, which is really important because you're going to get more prepared every time a new cycle comes in. And next time you might even benefit from it. Well, I can say that one of the best ways to do that is to subscribe to Alf's newsletter, which is called the Macro Compass on Substack, correct? Yes, correct. On Substack, you guys can find it there. And you can find him, Macro Alf, on Twitter. I'm assuming everything else stems. Where else can people check you out or listen to your thoughts and what you're teaching? the the substack it's free uh it's the macro compass dot substack dot com but if you google

the macro compass you'll find it as well thanks scott for the endorsement i'm very happy there's so many people reading it now i think 120 000 it's incredible i'm very happy about it and it also to be honest i'm pretty anxious when I click send. It's like, oh my God, a lot of people are going to read it. I hope I write stuff that makes sense. But it's been a very nice journey. And the rest is my snippets are on Twitter at MacroAlpha as well. I've written 630 newsletters now.

And I still like freak out almost every time that I hit send. I'm about to hit send. And then I go back and read one more thing to make sure I didn't like gratuitously misspell something in the title. And it's still and I still butcher things all the time and go back and shake my head. So yeah, it's it never gets better. That's all I can tell you. Unfortunately. Well, I want to thank you. Thank you very much, guys. I'm gonna stick around for a few more seconds. I'm gonna let Alf go. Absolutely a pleasure. Go follow him everywhere and sign up for the newsletter. Awesome, guys.

Yeah, he's an exceptional guest, I think. Extremely pragmatic and realistic view of what is likely to come. I did want to dig into one more thing on the Bitcoin chart. Interestingly, based on the timing this morning, I was watching this. And I didn't put it in the newsletter, but I did immediately put it on Twitter because it didn't look like it was likely to confirm. There's an idea I was watching this, and I didn't put it in the newsletter, but I did immediately put it on Twitter because it didn't look like it was likely to confirm. There's an idea I was watching. Chris Inks here, Texas West Capital, he'll be proud because a lot of what I've absorbed about RSI

and divergences was a result of his teachings. But for our RSI right here, it overbought just at the end of November, came back up to overbought, making a potentially lower high right here. So what we have is in 38 minutes will be what I would view as confirmed from 70 to 50 almost in one single four-hour candle and only with price moving $250. So that's actually somewhat encouraging to me. But guys, as you know, we were coming up to 17,500. If you actually look at a candle chart, it got to about 17,400. That is the key level. Let's pull it back. You can see right here on the weekly chart, right? 17,592 is the lows of June. That is the key resistance right now in my mind, if you are watching this chart, because that's FTX. We had the breakdown. We basically moved

down to a lower range. And you can see it got right up to17,429 before sort of getting rejected here. There's a weekly charge. It's kind of irrelevant. And then when you pair that with the four-hour going to overbought, the reason I didn't share it in the newsletter is because right here, you see this little part right here? It flattened out. That was not a clear elbow down. So we did not have confirmed bearish divergence.

I didn't want to scare people. Maybe I should have. And we did the same thing with price. We sort of had an equal price as opposed to a clear move down. But right now, if we have it something like this, confirming we are looking at confirmed bearish divergence, probably a little more downside. But as I said, if we can go halfway to oversold almost with just a $250 move, perhaps we just go down into the 16,000s, form a bulldoze and head back up for another shot. But no surprise that we'd be rejected right under that 17,500 level the first time that we attack it. That

makes perfect sense. That's what I'm watching right now. As Texas West Capital said, yes, sir. Rapid RSI drop with limited price drop. I would say that's extremely encouraging because usually for a move in RSI that big coming off of divergence, we'd have a multiple percentage move at the very least. And that's not what we're seeing here. So that is good news, guys. That is all that I have for you today. Now I'm checking my calendar like a noob because I didn't look to see what we have tomorrow. Oh, yeah. Tomorrow, Cantor and Clark, guys. You guys probably know Ryan on Twitter. I've got Cantor and Clark coming as the guest for our trading Tuesday. I'm also interviewing Arthur Hayes tomorrow, which will be recorded.

And I interviewed Plan B at the end of last week. We've got some massive podcasts, massive podcasts coming up right now that you guys definitely do not want to miss. I got to run, guys. I will see you tomorrow. Thank you for showing up. Checking out MacroAlf. You also may notice that I'm going to be blogging a lot more. I posted a blog today on DAO theory, idea being that the blog will be very simple blog posts and explanations

of complicated topics, a couple paragraphs on something to give you sort of the spark to go study more, but not diving into tremendous detail. So check it out, thewolfofallstreets.io. Join the newsletter and show up tomorrow. It's going to be awesome. See you guys then. Peace. Let's go.