What’s Happening With Macro? 📈

For investing across all asset classes, there are two adages that always remain true:

1. Don’t fight the Fed™

2. Returns are derived from the delta between consensus and actuals

These two principles are especially true for crypto (and even more so for operators in emerging markets like us) since the industry is relatively early in terms of sophisticated participants. In other words:

1. Any action by the Fed or macro outcomes will have amplified results in crypto

2. Consensus can be incredibly incorrect. The best returns in history are from when you are correct and the market is wrong.

There’s a couple interesting data points I’ve been paying attention to that may have significant impacts to crypto:

Rates (US Fed)

The markets have turned incredibly hawkish on prospects of the Fed cutting rates since the last FOMC. The Fed signaled 3 rate cuts back in December 2023 but the markets are now pricing in a 75% probability of 0-2 cuts:

However, I think the macro setup is looking positive for this consensus to shift to 2-3 cuts again with these tailwinds:

1. Rising jobless claims

2. Moderating shelter inflation

3. Oil prices coming down

On the May 15th CPI data, we saw the first colder print after 3 consecutive months of hot prints on inflation data. In April 2024, CPI inflation rose 0.3% vs the 0.4% headline monthly increases in February and March.

This measly 0.1% beat on CPI inflation translated to a ~6% shift in rate cut probability for the next FOMC.

As a tail risk asset class, crypto is incredibly sensitive to rate cut policies. This small inflation beat resulted in the biggest one day gain for $BTC since March.

We have strong momentum for market sentiment to price in lower long duration yields and as a result higher prices for risk assets. If this shift happens, we could see crypto grind upwards again.

Another interesting data point is the Citi US Macro Surprise Index. If we plot 2024 YTD against historicals, there is a clear pattern of seasonality that has tracked fairly closely. If this pattern holds, we could be in for rounds of positive surprises of official economic results vs forecasts, particularly given the bearish current market sentiment.

The next FOMC is scheduled in 26 days - we will be keeping a close eye on this. The market base case is “status quo” and market chop. But I expect the market to rally very aggressively if we get direct comments on dovish rate policy based on this setup.

Quantitative Tightening

A big shift in monetary policy that went under the headlines from the last FOMC was the Fed’s stance on the quantitative tightening. The Fed expects to reduce their QT program down to $25 billion per month from the current level of $60 billion per month, starting in June 2024.

In other words, there is now an additional $35B per month in freed up liquidity to bid on risk assets. A reduction in quantitative tightening is effectively quantitative easing.

If you combine the Fed’s looser QT policy with the better than expected CPI print mentioned above, there should be more wiggle room for policy makers for liquidity operations or rates with the inflation setup.

What does this mean for crypto? I would direct you towards point #1 from this post: Don’t fight the Fed™

Crypto Leverage

The positive news for the recent pullback is the flush out in leverage from the crypto system. Markets ran extremely hot in March, as noted by funding rates (ie, proxy for open interest demand for leverage trading) at >100% APRs across most majors for a while.

As we can see, the recent pullback has reset leverage where current market levels are positioned as neutral / slight bearish. On Binance’s $BTC perps (deepest venue), there is ~25% more short leverage than long leverage:

If we get positive surprises, I think the market can run with short blowouts and reintroduction of levered positions.

Looking at the Binance $BTC liquidation heatmap, $BTC touching $67K would result in a concentrated pool of shorts being forced to close their shorts.

The R/R here to be cautiously long seems reasonable to me based on the data here.

Positioning

I think we are still in the mid innings of this bull cycle. Based on the data, consensus seems to point that the market is slightly bearish. Recall our point #2 at the top of this page: Returns are derived from the delta between consensus and actuals

On the liquid side, I would be positioned cautiously bullish (eg long on majors).

On the venture side, I recommend to token founders to plan for TGE as soon as possible. There should still be meat left on this bull run and having a token out gives the most opportunity to capitalize.