Navigating this market madness 🧭

How to manage your portfolio in these turbulent times 👍

August 10, 2024

GM! Welcome to Milk Road PRO – the crypto newsletter that’s as steady as an anchor in a stormy market. ⚓

You’ve probably noticed that the crypto markets are finally moving, though not in the direction we all hoped. 😢

The last week was quite brutal for crypto. The total market cap dropped over 28%, wiping out more than $670B in value. Ouch. 🤕

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Source: TradingView

While the market has seen a nice rebound throughout this week, the price action raises some important questions: 

What's really going on? Should you adjust your portfolio? Is it time to play defense? 🤔

We figured you might be asking these questions too, so we want to provide some answers in this report.

Here's what we'll cover today:

• What's causing this market madness, and what are our thoughts on it?

• Which token has demonstrated impressive strength?

• Why has $ETH dropped so much? And will it last?

• What will influence the markets in the coming months?

But before we dive into it, let's talk a bit about the market volatility. 📉📈

We all know that crypto's wild swings can be a tough pill to swallow — especially when it's headed south. 💊 

While we all dream of those exciting 5x-10x gains, we have to accept that downside volatility is part of the game too. 💯

Remember, there's a bigger picture to consider!

Volatility is a major concern for traders, but for investors? Not so much. Investors usually always keep a long-term perspective.

Does this chart look that bad to you? 🤷 

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Source: TradingView

We started the year at $1.59T, so we're still up year-to-date. It might feel rough, but it's not as bad as it seems.

So, the main message is this: Don't worry about short-term volatility. Always keep the bigger picture in mind. 🖼️

However, charts don't always tell the whole story. To truly understand what's happening, we need to dig deeper. ⛏️

So, let's get into what’s going on in the markets. 

We already discussed the 5 specific reasons for this market madness in Monday’s free newsletter and again on The Milk Road Show. 🎙️

However, today we’re going to share the PRO team's opinions on each reason, before sharing our analysis on the current markets.

USA GOING INTO RECESSION ↘️

It seems like one indicator is igniting all the fear and panic in the markets: the Sahm rule.

The Sahm rule is an early recession indicator.

When the 3-month average unemployment rate rises half a percentage point above the low of the previous 12 months, it signals that the economy is in, or about to enter, a recession. 😱 

Since 1950, the Sahm rule has only had one false positive (in 1959), and even then, a recession followed six months later.

And guess what?

Friday's labor market data reported that:

• Job growth in the U.S. slowed significantly

• The unemployment rate rose more than expected 

As a result, the Sahm indicator just surpassed the 0.5 threshold.

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Source: @fxevolution

With the Sahm indicator at 0.53, does it mean we are headed for a recession? 🧐

Slow down— let's look at some broader market factors to see if things are really that bad before jumping to conclusions. 🦘

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Source: @JustinWolfers

This chart highlights key indicators used by economists and analysts to assess the likelihood of a recession. 

So, while the Sahm rule was triggered, we don't see significant declines in the broader set of indicators above to suggest the economy is heading into a recession. 

Moreover the Fed has a significant tool at its disposal: it can cut interest rates if needed. ✂️

So now the main concerns are growing that the Federal Reserve is falling behind in providing policy support for a slowing U.S. economy.

It seems the narrative of bad news being good news is over. Now, bad news is really just bad news again. 

Maybe the markets are finally coming to their senses. 🤣

The market turmoil is fueling expectations for more Fed rate cuts this year. 

Here is a table showing the probabilities:

[

Source: CMEGroup

The market assigns a 76.5% probability of two rate cuts in September, from the current 5.25-5.50% to 4.75-5.00% target rate. 

There is also a 41.3% chance of four cuts and a 39.1% chance of five cuts by the end of the year. 

Remember, the more cuts, the cheaper the money**.** This helps the economy grow and boosts the prices of risk-on assets.

But there are few other things which probably added more fuel to the fire: 

• Berkshire Hathaway reduced its stake in Apple by nearly 50% in Q2, putting their cash stockpile above $270B.

• Some major players like Google and Amazon report weaker-than-expected Q2 results.

• Intel cut 15,000 jobs and Nvidia may delay its new AI chip indicating a cooling of the AI rally.

Our conclusion: Overall, nothing has fundamentally changed over the past few days. It seems like some market participants overreacted.

According to JP Morgan, retail investors have been aggressive net sellers, while institutional investors have taken the opportunity to buy the dip. 

The message is clear: retail investors are panic-selling while big players are accumulating. 

Which side do you want to be on?

We feel like this chart is really spot on. 🎯

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Source: @intelligentcryptocurrency

But before you get too excited, we need to discuss other events that have impacted the markets, because it wasn't just the U.S. causing the madness.

JAPAN HIKING INTEREST RATES 🗻

Japan is also to blame, as its central bank recently increased interest rates. 💹

Central banks are changing the interest rates all the time, why is it a big deal? 

Well most central banks are, but not the BoJ (Bank of Japan), until just recently. 😂

Japan’s central bank has kept interest rates near or below zero for nearly a decade**,** aiming to spur inflation in a deflationary economy. 🤔

It now seems they have successfully combated deflation, as prices are steadily increasing. 

So the Bank of Japan increased its key interest rate to “around 0.25%”, up from the previous range of 0% to 0.1%.

This rate hike wouldn't be as troublesome if the close-to-zero policy hadn't lasted for that long, creating significant leverage in the system! 🏦

People could borrow yen at a rock-bottom 0% interest rate and reinvest in USD for a 5% yield. 

Easy money, right? 

But once the conditions of this trade changed, it caused a significant impact on the markets!

This is especially true given that this trade is estimated to involve $4T—more than double the current cryptocurrency market cap. 🤯

Just look at the chart of USD/JPY:

[

Source: TradingView

The JPY has risen 14% against the USD recently, making the yen more expensive when using USD to buy it.

Just a reminder: this is forex, not crypto, yet we're still seeing significant volatility. 🎢

The issue isn't just the higher interest rate—it’s the rapid increase in the value of your outstanding loan. 

AKA you'll now need 14% more USD to repay it.

Imagine you were buying US stocks, but there’s fear and uncertainty about an impending US recession. 

The yen could continue to strengthen against the USD due to differing central bank policies.

While Japan is raising interest rates, causing more buying pressure on the yen and decreasing its supply, the US is expected to do the opposite.

So, how confident would you be in this trade? 😮‍💨

Probably not very confident, and you might start selling the US stocks or other assets you bought with this strategy. 

And that’s where we are now. 

But perhaps it’s not as bad as it looks. Japan is aware of the carry trade and its impact on the markets, especially on US dollars.

To address this, the BOJ launched a program called 'U.S. Dollar Funds-supplying operations' to ensure there are enough U.S. dollars in Japan. 

This move aims to stabilize the market and support international transactions. ⚖️

While it doesn’t reduce the selling pressure (prices can keep going down), it helps to stabilize the financial system, and that’s far more important. 🔑

If Japan is actively cooperating with the US to resolve and slowly unwind this trade without destabilizing the markets, we can hope that we have already seen the worst. 🙏

Update: With summer in full swing and U.S. elections approaching, everyone is hoping for an uptrend. 📈

Investors are clearly unhappy with the current situation and declining markets. However, if the BOJ announces they won't raise rates further to help stabilize the market, it would certainly help. 

And guess what just happened? 

Yes, Japan just said no further hikes for now. 

So for the time being, we don't need to worry about this, which likely was the biggest negative impact on the markets. 📉

However, there were a few other negative news stories that helped spark fear in people.

ESCALATING ISRAEL AND IRAN TENSIONS ⚠️

Tensions in the Middle East are soaring as Iran and its allies prepare to respond to the assassination of Hamas chief Ismail Haniyeh and a key Hezbollah commander in Beirut, which Israel is blamed for. 

These incidents have triggered vows of revenge from Iran and allies, raising fears of a regional war.

Our take: Could a war in the Middle East impact your investments? Absolutely. 

Should we be really worried and reassess our strategy? No.

Why? It’s nearly impossible to predict geopolitical events. 

If you based your investments on the potential of war, you would never have an opportunity to invest. Instead, we feel it’s a short term concern that doesn’t impact our long term thesis. 📔

Speaking of leaders... The odds for who will be the next U.S. President are shifting rapidly.

TRUMP'S DECLINING CHANCES 📉

According to Polymarket, Trump's odds of winning the presidency this November are dropping. 

Since Trump is seen as the markets' top choice, his declining chances are causing concern among investors.

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Source: Polymarket

This could alter our bullish targets for this cycle. 

Trump, being the businessman he is, will likely boost both business and crypto, making him a favorite of Wall Street, big institutions, and the crypto community. 🤭

Kamala Harris, his main rival, might not be as bullish for the markets, especially for crypto. 

However, even if Kamala wins, it might only slightly lower our targets for this cycle.

Here's our take: With Trump, we're super bullish. With Kamala, we're bullish.

And because we all are crypto investors, we must also address the latest news in the crypto markets.

After the German government sales, Mt. Gox distributions, and Grayscale outflows, you might have thought we'd see an end to the selling pressure. 

We hoped for the same, but unfortunately, that's not the case. There's a new big seller in the market.

JUMP SELLING CRYPTO 🦘

Jump Crypto, one of the biggest market makers in crypto, is transferring millions of dollars worth of digital assets to exchanges. 

This potentially increases selling pressure across crypto markets. 😨

People speculate there are two reasons why Jump Crypto is selling even on Sundays with low liquidity: 

1. They might be getting a margin call in traditional markets and need liquidity over the weekend.

2. They could be exiting the crypto business due to regulatory issues related to Terra Luna.

In the past 10 days, Jump Crypto has sold $377M worth of $ETH and plans to sell an additional $104M.

Even though it's a smaller supply overhang, it can intensify the selling pressure when markets are falling rapidly. 😡

It feels like we can't escape these frustrating supply overhangs as new supply keeps entering the market. However, this might lead to a quicker uptrend once the selling pressure eases. 🎢

Alright, so now we understand what caused the market turmoil and why all crypto is down. 

However, there is one token we want to highlight as a clear winner in this meltdown. 🏆

SOLANA SHOWS STRENGTH 💪

There's a general rule in times like these: major tokens usually outperform everything else, meaning they fall slower than other coins. 

Since we don't hold $BTC, our biggest token by market cap is $ETH. 

So we expected $ETH to hold strong during this period while other tokens underperform it. 

But $SOL showed even more strength and is doing new ATHs every day against $ETH.

P.S. We have two PRO reports discussing Solana:

1. Is $SOL About to Explode?: We examined Solana's fundamentals that aren't yet priced in.

2. 3 Ways to Determine a Token's Fair Price: We compared $SOL and $ETH and predict SOL/ETH reaching 0.3.

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Source: TradingView

Based on our previous PRO reports, Solana's performance isn't that surprising. 🥱

However, it's important to highlight it as it remains quite impressive.

When people panic, they tend to sell tokens they have lower confidence in. 

This suggests that most market participants are confident in Solana and were either hesitant to sell or took the opportunity to buy Solana at a "discount." 

That’s probably the kind of token you want to hold.🤫 

And here’s the catch: We believe we know what’s holding back $ETH's price.

ETHEREUM SELLING PRESSURE 💎

There is ongoing selling pressure on $ETH:

• Grayscale average daily outflows of $190M of $ETH 

• Jump Crypto selling $30M of $ETH daily over the last 10 days

Those are averages, but that's over $200M in known sell pressure. 

Even ETF inflows ($150M) haven't been able to exceed that, which is why $ETH's price remains where it is.

However, we don't think this will last much longer:

• Jump will soon be out of $ETH

• Grayscale outflows from $ETHE might take another 2-3 weeks before the majority of the sell pressure is gone

We can learn from Bitcoin. Only about 50% of $GBTC holders wanted to exit their position (see the chart below), and a similar ratio could be true for $ETHE. 

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Source: Fxstreet

We saw 26% $ETHE outflow in just 12 days. If this continues, we could reach around 50% of $ETHE being converted in 2-3 weeks. 

After that, the heavy selling should stop, and we could see more buying.🚀 

And lastly, there is a reason why we think that there will be much more buying then selling in the upcoming months. 

UPCOMING CATALYST - NEW LIQUIDITY 🚰

We talk about liquidity a lot because we believe all economic cycles are driven by liquidity cycles.

We are likely about to start feeling the effects of growing liquidity in the markets.

Actually something big is launching this week: the U.S. Treasury Buyback Program 🏦

This initiative will pour $50B into the markets over the next three months, starting with $8.5B in August, $31.5B in September, and $10B in October.

And this is just the beginning. Other central banks are expected to print much more money in the coming months to boost their economies. 🔜

For example, China's central bank adds assets to its balance sheet and spends heavily in the second half of each year, increasing market liquidity.  

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Source: Real Vision

This is obviously very positive for the markets. So let's take a closer look at the overall global liquidity entering the markets. 👀

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Source: CrossBorderCapital

The recent weeks show a pretty steep growth in global liquidity. 

And we all know how markets react to increased liquidity, don't we?

[

Source: CrossBorderCapital

Well let's just say that Bitcoin likes liquidity. 😝

Alright, that was a lot of information, so let's summarize and draw some conclusions.

OUR CONCLUSIONS 👇

The last few days were quite volatile for the markets due to the reasons mentioned above. 

Here are the key points:

• We examined other recession indicators, which don't signal anything worrisome.

• Japan increased rates causing market panic but then announced no further hikes in the foreseeable future..

• Tensions in the Middle East are concerning but likely won't have a major impact on the markets.

• Trump's declining odds are more significant to us. While the elected president won't stop liquidity flow into the markets, crypto adoption might slow if Kamala is elected.

• The ongoing sell pressure for $ETH, driven by Grayscale outflows and Jump Crypto, won't last much longer.

• Solana has shown strength during these tough times, increasing our confidence in it.

• Most central banks are about to start printing more money, increasing global liquidity, which tends to be a good time for investors.

It seems the markets, particularly retail, overreacted to the recession fears in the USA and concerns about Japan's carry trade destabilizing the markets. 

With these worries now behind us and other news having less impact, we believe the worst is over, and the recent decline is largely unjustified (which we saw evidence of with prices shooting back up).

We are especially bullish on crypto moving forward as we think it is still trading at a discount compared to stocks. 

But perhaps this is the chart that tells it all… 😏

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Source: Real Vision

We're in The Boring Zone but knocking on The Banana Zone. 🍌

Here is our take: Don't panic—just hold on and enjoy the ride. 

This is going to be a good one.🚀

Stay safe.

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