Why does 40% of the global bond market have negative yields, and what’s the implication for cryptocurrencies?
With Bitcoin holding the recent highs, regaining 62% dominance of the entire cryptocurrency market, is there anything left in the tank, or has Bitcoin run out of gas?
If Bitcoin can hold the early July emotion bar low, absorbing the sell orders after the recent price move above $13,000, the 5%, the most consistent group of speculators and investors, focus on the drivers of significant trends, and one of the variables they check is the Intermarket relationship between stocks and bonds. In other words, they follow the money.
One heuristic used by the 5% to help them gauge the sentiment of the crowd is this: When the only is up, the only way is down, and when the only is down, the only way is up.
If you look back to December 2018, when Bitcoin was trading at under $4,000, the majority of articles were bearish.
Here’s a headline from Bloomberg on the 21st of December.
“Wall Street’s Biggest Bitcoin Forecaster gives up forecasting Bitcoin.”
Members of the 5% club raised an eyebrow.
Nouriel Roubini, the New York University economist, said, “Blockchain is the most over-hyped — and least useful — technology in human history. No asset class in our history has ever experienced such a rapid boom and total utter bust and implosion.” Calling cryptocurrencies “the mother of all bubbles,” Roubini expects Bitcoin to go to, quote, “Close to zero.”
Roubini, because of his past predictions, is known in the investment community by another name: Dr. Doom.
Roubini has not given up on his bearish views, despite the recent Bitcoin rally, and he wants the world to know his opinion — and it’s bearish. In a tweet, Roubini called out the organisers of a cryptocurrency event he spoke at as cowards for not allowing the video footage of his talk to be released to the public.
Permabears, like Roubini, will always be present, no matter which market you analyse, but, as a market nears what history will record as a long term low, the 5% look for Permabulls abandoning ship, and headlines of long term Bitcoin exponents giving up is direct market feedback, increasing the likelihood a long term low is about to happen.
When a market is nearing a low, after prices have fallen, when it looks like the end, when the last bulls have turned bearish, and the weight of sentiment is at its most negative, when it seems like only a complete maniac would buy, that, ironically, a large percentage of the time, is when the 5% get ready and start building a position.
When the King is dead, long live the King.
This is why speculating is simple but not easy. It’s not you. It’s biological. You are just not wired to act against the crowd. This phenomenon has been discussed in previous articles, Puppet on a String, and Shapeshifter, because recognising the behaviour patterns of the masses, is a large part of the 5%’s playbook.
Trends don’t begin with a frenzy. Frenzies end trends, and, in precisely the same way, when the majority of media news is bullish, when the covers of mainstream magazines proclaim the dawn of a new era, when the only way is up… the only way is down.
If you compare the media attention and hype from December 2017 to the hype surrounding Bitcoin and the rest of the cryptocurrency market in late June 2019, you should notice the difference.
In the autumn of 2017, the public was scrambling to get in. As FOMO kicked into gear, spreading like a virus, exchanges, having to cope with massive inflows of new customers, did not have the infrastructure in place to deal with the influx of new demand.
Governments, recognising the potential threat of cryptocurrency adoption, reacted negatively, while at the same time rushing to close the gates. Alt-coins trading for pennies increased in price from under five cents to over a dollar, and exchanges not able to handle the number of transactions, closed the doors, temporarily giving notice to customers that trading in certain alt-coins was suspended.
Many traders attempting to take profits could not sell, shut out and helpless as prices collapsed. This wasn’t small little known illiquid coins, this was happening to top-rated alt-coins worth billions. Traders found out the hard way what operating in a new market is like, as suspended coins reopened on the exchanges, prices had dropped with some coins opening thirty to forty percent down from their pre-suspension prices.
June 2019 feels very different.
In the Velvet Revolution series, we discussed the relative performance of the top-rated alt-coins, normalising their recovery in terms of Bitcoin’s 62% retracement of its all-time high.
The relative performance of the top-rated alt-coins, especially when viewed in parallel with social proof using Google and Twitter data, highlights an important difference between December 2017 and June 2019. Where’s average Joe?
The data suggests Joe isn’t just late to the party, he’s not even home from work.
As President Trump triumphantly proclaims the US economy is “very strong,” as the US stock market approaches new all-time highs, with America swinging from the chandeliers, what could go wrong?
Just before you bar dive into the crowd, trusting you’ll be caught, ask yourself this; If the US economy is very strong, why is the bond market signaling an interest rate cut?
The most important interest rate in the world is the US Fed Funds rate. It’s important because it’s used by banks as the base to set all other short term interest rates.
Using the Fed Funds rate, it’s possible to calculate the likelihood of future interest rate cuts against the likelihood of no action, or the rate staying the same.
Fed Funds futures indicate the probability of a rate cut of 0.25% at the July meeting is around 85%, and, because there is no FOMC meeting in August, using the calculator provided by the CME, the Chicago Mercantile Exchange, the likelihood of a rate drop of 0.25% in September is now around 69%.
If the US economy is so strong, why are interest rate futures predicting that interest rates are going down?
And, if the US economy is about to hit strong headwinds, where will the money flow?
In July 2019, 50% of European bonds have negative interest rates. Why, if the “so strong” rhetoric about the economy is true, is money still flowing into negatively yielding bonds, despite the fact that investors purchasing them are guaranteed to make a loss?
That’s direct market feedback, informing the 5% global financial markets are the opposite of “very good.”
If investors are willing to make a loss by investing in negative-yielding bonds, it suggests they are not insane, but rather they would prefer a known small loss, by entrusting capital to the world’s leading governments, rather than hold money in global equity markets.
If money flows out of stocks, negative returns from bonds could also make non-yielding investments like gold more attractive. And, like gold, could some of the global money flow find its way into Bitcoin?
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