Cinco de Mayo bloodbath
Risk markets unraveling after Fed hikes another 50 basis points.
Dear loyal subscribers,
Despite markets in turmoil and Fed rate hikes dominating the conversation, I can’t help but start at today’s post by calling out the hypocritical IMF. Bitcoin is trading at a crucial level after yesterday’s bloodbath, and the stock market is not feeling any love for the Fed. Let’s dive in.
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The IMF’s criticism of bitcoin is an embarrassing mark on an institution that favors western banking interests over the plight of the world’s citizens.
The global de-risking event gained steam this week.
Bitcoin and Nasdaq correlation is strong, but bitcoin is materially outperforming since February 23rd.
The Fed has permission from the market to hike rates another 1.5% by September.
Are Treasury yields on a one-way train higher?
Central African Republic adopts bitcoin as legal tender, IMF caught with its head firmly in the sand
Last week, Central African Republic announced that it has adopted bitcoin as legal tender, according to the office of the country’s president. Central African Republic is a nation suffering from civil war and crippling poverty, yet the IMF had this to say about the news:
Really? This small African nation, one of the world’s least developed, is suddenly a monetary concern because it adopts bitcoin as legal tender? The reaction reeks of bias.
I do believe that small nations such as Central African Republic and El Salvador will continue to adopt bitcoin as legal tender as a low-risk way to boost their economies, regardless of how effective the move might be. In El Salvador, there has been an immediate boost in attention and interest in the early months of bitcoin’s legal tender status. Evidence of bitcoin’s impact on the economy might come our way within the next few years. We will have to wait and see if it made a difference.
In Central African Republic, I’m not expecting a flood of regional mindshare to the nation in order to pursue bitcoin policies. But this doesn’t mean the country should be admonished for experimenting with the world’s first neutral digital monetary network. And this is where the IMF shows its true colors. The IMF’s mission, from its website:
The IMF has three critical missions: furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity.
The institution obviously believes that warning Central African Republic against adopting bitcoin as legal tender is discouraging a policy that would harm prosperity, but bitcoin cannot harm prosperity for people with no prosperity. The IMF warning about bitcoin adoption feels like horse and carriage operators warning against automobiles. We see right through you, IMF.
Where is your money protected on a day like yesterday?
The risk spectrum is broad, and certain parts of the risk market are as much beneficiaries of leverage and momentum as victims of volatility. But even the “risk-free” asset isn’t safe when markets are going through de-risking—stocks were collapsing this Cinco de Mayo while Treasury prices also fell significantly. Bitcoin ticked with Nasdaq as it has over the past several months. The only place to hide was the dollar.
It’s important to point something out in the middle of this type of market repricing: bitcoin can be touted as the savior to the atrocities in the financial system, but that is not an actionable thesis when bitcoin prices dump right alongside tech stocks as the Fed fights inflation with rate hikes.
Speaking of fighting inflation, the narrative of bitcoin as an inflation hedge is failing spectacularly this year. Inflation is at 8% (at a minimum), yet bitcoin is going lower as inflation numbers continue to burn hot. It seems like the only way to outperform lately is to stay in dollar cash (or real estate). Bitcoin, gold, and even equities have all failed as inflation hedges this year.
Nasdaq, bitcoin, correlation, and return
We know that Nasdaq and bitcoin have been tightly correlated, signaling just how much bitcoin is traded as a global macro asset alongside the other major asset classes:
But correlation does not necessarily translate into the same return.
For example, February 23rd saw bitcoin and Nasdaq make new lows, but since that day the bitcoin price is up 4% while Nasdaq is down 4%. Bitcoin is hovering above its recent low, while Nasdaq makes new lows. This little difference in return over the past couple months speaks to this idea that correlation and return are different constructs. Look at bitcoin’s 4% increase since late February and its series of higher lows: