When will markets move higher? 🚀
Macro Summer, liquidity & crypto gains are coming
May 18, 2024
GM! This is Milk Road PRO, lighting up your email inbox each Saturday with a report that helps you invest successfully in crypto. 💰
Maybe you’ve heard that inflation is sticky?
Or that rates are going higher?
Or that markets are headed lower?
After all, the crypto market cap has already retraced 25% over the last 50+ days. 😭
So is it all over for crypto? Hell naw – the Milk Man is going to tell you what’s really going on in the markets right now.
TL;DR: We’ve entered ‘macro summer’ – and no, it’s not the time when the weather gets warm…
It's that phase in the business cycle – the recurring pattern of fluctuations in economic activity – where growth assets, like crypto, tend to perform exceptionally well.
Not familiar with the macro seasons? No worries, keep reading.
But for context, here’s how Bitcoin performed in the 3 previous macro summers – yellow in the chart below – until the end of macro fall – red.
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2012/2013: +146x
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2016/2017: +30x
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2020/2021: +8x
Today's PRO report will help you understand what the business cycle and macro seasons are and how they impact our beloved crypto assets.
We’re also going to look into the timing of these seasons to help guide us through our investment timeframes.
While the business cycle has been around for a long time, macro seasons are a newer concept, brought to light recently by Global Macro Investor.
GMI is a research membership for high net worth individuals and most of the charts and information from this report come from them.
Before we get into it, it’s important to note that what makes this macro summer even better is that most people are completely unaware of it, which is what makes right now the big opportunity.
It’s like being the first to wake up on a sunny morning after a long winter and heading to the beach, but when you arrive, no one is there.
It’s a bit uneasy at first but you realize you get to pick whatever activity you want and there’s no crowd.
It’s a blast, and soon after, everyone else shows up and it turns into a killer summer beach party where vibes are high. ✌️
That’s the moment we are in. Assets are cheap and the crowd – meaning liquidity – is sparse.
But this is about to change as more investors are on their way – this report will attempt to explain why we believe this to be true.
At Milk Road PRO, we’ve extensively covered how crypto cycles are influenced by global liquidity cycles. If you need a refresher, check out our previous report.
Today, we'll delve deeper into how liquidity drives markets and explore indicators that can help us anticipate what’s next.
THE ISM AND GLOBAL LIQUIDITY 💰
One of the best indicators to guide where we are in the business cycle is the ISM Manufacturing Index.
This is a monthly indicator of US economic activity based on a survey of purchasing managers at more than 300 manufacturing firms.
The ISM is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories in the US and each factor is seasonally adjusted.
Essentially, it gathers data from the economy to provide a view on where we are in the economic cycle – expansion or contraction.
The ISM is very much correlated with global liquidity too.
Generally, when the Fed is stimulating the economy – or stops quantitative tightening and thus no longer throttles the economy – the ISM rises (aka economic activity) and of course so do markets. 📈
Below you can see the cyclicality of the ISM over the last 20 years.
The ISM is cyclical like this not because the economy ebbs and flows perfectly every 4 years, but because central banks control the money flows cyclically, refinancing their debt and printing money on a 4 year basis – again, read the liquidity PRO report for a refresher on this…
To show comparison, look how perfectly the global liquidity cycles below match the ISM cycles above.
Returning to the concept of macro seasons, let’s look at the ISM chart overlaid with these periods.
You can observe that summer (yellow) and fall (red) are the seasons when the ISM typically peaks and begins to decline.
Conversely, during macro winter, the ISM tends to decrease and reach its lowest points in macro spring.
Of course, global liquidity does the exact same…
And by the way, it's not just crypto that follows these macro seasons, check out the NASDAQ – i.e. tech stocks – on the macro seasons chart…
And that's because global liquidity controls these assets!
So how do we know this is going to happen again this time around? Maybe things will be different…
Didn’t COVID change everything? Aren’t we in an era of Quantitative Tightening (QT)? Aren’t rates staying higher for longer? What about inflation!?
SO, WHAT HAPPENS NEXT? 🔮
The great thing about using economic indicators like the ISM and global liquidity to understand markets is that we can use a variety of other data points to predict where these indicators are going next.
If you track the leading data points, you can track ISM, which means you can track liquidity, which means you can track markets.
By the way, the leading data points below are very complex formulas that teams like GMI analyze and put together privately.
To begin, the chart below includes a 3-month leading indicator (in red), which has closely mirrored the ISM trends since the 1980s.
Although it doesn't perfectly match the ISM on a monthly basis or precisely predict the timing of peaks and troughs, it effectively tracks the general direction of trends and indicates when they are likely to shift.
This 3-month lead suggests that the ISM is poised for a significant uptick – signaling the onset of what we call macro summer.
There are additional indicators that project the ISM over longer timeframes, such as the 22-month lead shown below.
This suggests we are beginning a significant upward trajectory that is expected to peak between mid to late 2025, marking the end of what we call macro fall.
This aligns perfectly with the 7-month leading indicators for global liquidity too.
Interestingly, the Fed just recently announced that in June they will start tapering Quantitative Tightening – i.e. loosening financial conditions.
And even though they haven’t lowered rates or revved up the money printer, we believe it’s coming later this year.
Though, it is important to note that we don’t need the U.S. to print to see global liquidity rise.
It can come from other countries too, and in fact it already has – China is leading the way with more than $1 trillion added to their balance sheet in the last year.
We believe there is plenty more to come from China, as well as Japan, Europe and soon thereafter the USA will jump on board too.
This increase in global liquidity will be the catalyst that takes crypto into the next leg of this bull market.
The leading indicators above for the ISM and global liquidity fit the macro seasons perfectly, suggesting a big move this year in crypto and topping out somewhere in mid to late 2025.
But when? Wen moon? 😩
CYCLE PATTERNS AND MARKET TIMING 📊
It’s impossible to predict the exact timing of market movements – that’s just simply not how things work.
Instead of looking for the exact moment markets will go up, we want to look for the best moment to allocate capital and then remain patient.
What is the best entry point in terms of risk/reward, regardless of timing?
Of course, the best entry point for crypto was Q4 2022/Q1 2023 as this was when global liquidity bottomed out.
It was a clear signal the bear market was about to be over and also the start of macro spring (green). If you followed the charts you did extremely well. 🥳
We believe the next best time is right now.
The bull market has undoubtedly been confirmed after aggressive price action to the upside over the last 6-12 months and we finally got the “big” pullback we were waiting for – though it wasn’t as big as we had hoped. 😢
Regardless, we believe we are at a clear transition point in the cycle where macro summer moves into full effect and a risk-on environment is coming.
These moments create what Raoul Pal from Global Macro Investor calls “The Banana Zone”.
After a reset in prices during the bear market, undervalued assets climb back to a more “fair” value.
Markets then tend to correct and stagnate for an extended period of time as the market figures things out. This is where we are now.
Finally, we prepare for liftoff – where macro summer and fall take risk assets to new highs. 🚀
This transition period tends to be tough for impatient market participants as they can’t understand why the markets won’t move.
The euphoria from the first leg up in prices dissipates and people think it’s over… until they realize it's just getting started.
In the 2015-17 bull market you can see we had almost a year in the middle where prices moved much slower and were less volatile than the first and last year of the bull run.
In the 2019-21 bull market, the same thing happened in terms of price action to the upside, though it was a lot more volatile due to COVID.
We believe to be at that same point in the current cycle.
The euphoria seen in Q3 2023 and Q1 2024 has faded, and the prevailing sentiment on Crypto Twitter and in the media suggests that the macroeconomic landscape is in trouble, with expectations that inflation and interest rates will remain high.
As a result, Bitcoin retraced by 23% and most altcoins 40-60%.
All of this is happening as most leading indicators are pointing to an incoming big move to the upside for markets and entering – historically speaking – the most aggressive part of the cycle in terms of price volatility.
But the question is, will this happen right away or will it take time to play out?
In our opinion, we may have some time before the fireworks start again. Maybe we sit in a range for a while before moving higher, similar to the charts above.
Prices may very well go lower too, as this is still a pretty weak pullback for crypto, but we wouldn't risk waiting for it. 😬
You don’t want to miss out when crypto makes its move to the upside as they tend to happen quickly and aggressively.
Missing just a few days of parabolic move means that you miss most of the big gains.
It takes a small catalyst to turn markets quickly, whether that be a shocking $ETH ETF approval on May 23rd – which nobody is ready for – or a below expected inflation print or a higher than expected unemployment number.
As we said above, we worry less about the timing here and instead think that now is the best risk/reward we’ve seen since last year.
It’s the final solid opportunity to allocate capital into crypto before the next big phase of this bull market.
We can only hope it lasts for a few more months to give us more time to allocate.
Our base case is that Q3 and Q4 2024 is when we see most of the gains in macro summer.
PACKING YOUR BAGS FOR MACRO SUMMER 🎒
If you were thinking of allocating down the risk curve, then this is the time.
The final leg of the bull market is generally when Bitcoin Dominance goes lower and assets like $ETH and altcoins tend to outperform.
Below you can see the Bitcoin Dominance chart with the top of the Bitcoin price marked with the green lines for each cycle.
About 12 months before Bitcoin price tops is where Bitcoin dominance tops out. While Bitcoin continues to the upside during that time, $ETH and other altcoins outperform significantly. 🚀
This is the stage we think we will hit once markets decide to turn. For this reason, we’re more allocated to altcoins now than we have been since 2021.
The narrative right now on Twitter however is that Bitcoin dominance will continue to rise and altcoins are all worthless.
There’s nothing better than counter trading popular Crypto Twitter narratives. 😅
In the chart above you can see that Bitcoin dominance hasn’t hit the blue trend line yet, so maybe there is still time for altcoins to bleed out vs. Bitcoin.
Again, we’re not holding our breath. We think now is the time to do your research and allocate to solid projects that are undervalued.
When markets turn, $ETH, $SOL and tokens within their ecosystems will do really well – here’s a few narratives to keep your eyes on. 👀
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If $ETH and $SOL appreciate, the liquid staking and restaking narratives should pick up too as the TVL for these protocols will increase massively due to their base assets – $ETH & $SOL – increasing.
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Memecoins will likely continue to have their moment. Every time the market has tried to go higher during this pullback, memecoins have jumped the fastest out of the gate.
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At one end of the spectrum, we have memecoins, and at the other, fundamentally strong protocols like Maker or Jito that generate real revenues.
As crypto becomes more institutionalized and attracts more traditional finance investors, we believe tokens with solid fundamentals are poised to outperform, especially in a bull market – a scenario we haven't fully experienced yet.
Our final piece of advice is this:
In the final stages of a bull market almost everything will appreciate in price. It’s not hard to do well during macro summer/fall.
The key is not to be holding the shitcoins (99% of tokens) when the music stops. Even the fundamentally strong projects will perform badly after the bull market ends.
Don’t get too euphoric and don’t invest more than you can afford to lose.
The more the market will go up, the more you will want to invest even more – don’t get caught up in that hype. Manage your emotions and your portfolio.
Whenever the market turns it is going to be an absolute gift for everyone who is allocating now, but don’t get too greedy.
You’re probably not going to get a 100x at this point in the bull market – even a 10x is a heavy expectation this far in.
Not saying it’s not possible, but don’t expect your entire portfolio to get those returns. If you hold out for that, you’re going to be holding your bag for too long and end up selling much lower.
For more help on when to sell, check out this report here.
Good luck out there. ✌️
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