MicroStrategy Joins Nasdaq 100, Bitcoin Chases Money Markets: TBL Weekly #122

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Dec 14, 2024

Good morning Readers!

Friday evening’s release of ETF rebalances never graces our radar. Except last night, when the well-forecasted move of Michael Saylor’s MicroStrategy joining the Nasdaq 100 (QQQ) triumphantly ascended bitcoin another rung higher on the global financial ladder. We ponder the accelerated large-scale adoption in a post-$100k world.

Given the outperformance of bitcoin over the past month, it is easy to forget that cash still exists. In fact, demand for cash and cash-like assets, measured using Money Market Funds’ assets (MMFs), is over 3X the market capitalization of our precious orange coin. We analyze today’s demand for cash, and what signal we may derive from it—here’s how we’ll do that:

Current returns from holding cash
The dollar and US rates
And bitcoin’s decoupling from equities

So, grab your morning coffee, and let’s dive into TBL Weekly #122.

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Weekly Monitor

Weekly Analysis

Next week, the Fed will be cutting rates for the third time this cycle, taking the trustworthy spread between Treasury 2-year yields and Fed Funds to almost nil. Currently at -37 basis points, a 25 basis point cut takes most of that out. In short, this means that the market and the Fed are finally together in the medium-term outlook on policy rates. The market is saying that the policy rate should average about 4.25% over the next couple of years, while the Fed is about to lower the lower-bound of the policy corridor to 4.25%. This means the Fed is likely heading for more of a “wait and see” approach, as are investors.

On the margin, this should put a ceiling on bond volatility with a more certain and mild approach to changes in monetary policy. Inflation certainly lurks, and we won’t dismiss major signs of its persistence, but a disinflationary presence finds new life at TBL—we cannot ignore technology’s deflationary powers, and the current AI boom is bringing unprecedented investment as well as disrupting entire industries and the corporate relationship with labor.

Positive returns from holding cash

This week, we received an important piece of information for the Fed’s upcoming meeting, which is that CPI remains in its range of moderate:

The print came in as expected, which allowed the market to confirm this month’s rate cut. This boosted bitcoin’s price in the middle of the week, as risk markets like certainty, and they certainly like lower rates.

What does this have to do with cash? Cash in the investment sphere means short-term, risk-free assets like Treasury Bills. If you are a corporation with millions or billions of dollars in cash, you expose yourself to your own bank’s credit risk by leaving all your uninsured deposits in a bank account (we hear Trump may have something to say about the FDIC, but that’s a story for another time). Thus, leaving cash in a bank account is a big ‘No, No’ in the grand scheme of things; this is the main value proposition for T-Bills. Let’s now look at another chart:

As of November, holding a cash-like 3M-Bill returns approximately 4.60% on an annualized basis, while YoY Core CPI lies at 3.30%. In other words, your real rate of return for holding a bill is 1.3%, and looking at the time series, real returns on cash haven’t been around since pre-Great Financial Crisis. We can’t ignore that recessions are associated with the Fed lowering overnight rates, which usually eliminates any positive return on cash, so we’ll be watching for that.

As it stands right now, though, holding bills is not a bad proposition for capital preservation when using CPI as an all-encompassing measure of inflation—which it isn’t, but we digress. In fact, let’s look at MMF-asset growth rates in times when this real return is positive (chart inspired by Bravos Research):

Since 2006, the YoY growth rate of assets in MMFs has been positively associated with positive real returns in cash-like assets, which makes sense, but why do we care? Demand for cash means potential headwinds for risk assets. From 2008-2018, when this real return was negative, we saw steady growth in the S&P 500. Then, in 2018, when the real return turned positive, the S&P started experiencing some pullbacks, only to continue growing in 2019. The relationship is evolving, but again we can’t ignore the relationship between attractive cash and selling risk assets.

Eyes on the dollar

Inspired by Tuur Demeester’s presentation during an Unchained webinar this past week, we looked at the demand for dollars (the ultimate form of cash), and how equities behave during high dollar-demand times. For the most part (except for 2014), when the dollar rallies, we see a decrease in the S&P 500:

Currently, we understand that a strong dollar is a potential threat to stocks. At the same time, the rally in stocks alongside the dollar since the return of Trump might mean the penalty of a stronger dollar on risk markets is at the very least delayed. With cash looking like an attractive option—especially if we get Bessent to issue more bills next year—we may be in for some pullback, and we see the S&P 500 as about 5% extended beyond its blistering trend over the past year.

Another thing to note here is the realized volatility in the US rates market:

US 2Y yields have seen violent moves up and down over the past 3 years when looking at the daily 30-day trailing percentage-point changes. When observing the wide ranges from 2022 to 2024, 2008’s volatility seems like an ant-hill in comparison. Think about it: given the Fed’s current indecision, almost every economic print we’ve gotten this year drives a violent weekly move up or down. This data dependency has been going on for way too long.

Is bitcoin cash or a risk asset?

Bitcoin is often associated with tech stocks (or risk assets more generally) given its high correlation with them—even we, at TBL, associate bitcoin with risk assets for the most part; however, looking at this chart (another one inspired by Tuur), we notice periods where decoupling happens:

If these two were perfectly coupled, this logarithmic chart would not have periods wherein bitcoin grows at an increasing rate in relation to tech stocks, such as in 2017, 2020, and now late 2024. Obviously, many things skew these decoupling patterns, mainly bitcoin’s emerging-asset characteristic; however, this simply goes to show that bitcoin is still different from equities. Here’s another chart to bring this point home, but in a worldwide scenario:

Bitcoin recently shot through its 120 ratio to global equities, an extremely bullish picture that showcases how bitcoin is outpacing equities in general.

So then, where do we place bitcoin as an asset? The fact that we don’t have an answer to this means that we are still so early.

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Economic events next week

Important Economic Charts from Last Week

A very large jump in small business optimism surely has something to do with the election, tax cuts, and deregulation.

In case you missed it: TBL on YouTube

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