A Recession Like No Other: AltFi’s Market Outlook
Economic announcements last week were full of contradictions and have the markets seemingly at crossroads. To try to make sense of where we see the markets currently, we’ll explore the top-down approach we utilize at AltFi Capital.
At AltFi, our macro approach determines our big picture outlook, our fundamental approach determines our asset selection, and our technical approach supports the timing for our entries and exits.
MACRO FACTORS
Last week’s announcement saw the second-quarter GDP falling by 0.9%, following a 1.6% decline in the first quarter. Two quarters of consecutive GDP contraction have been the standard definition of recession for as long as anyone can remember, although the White House was quick to remind us that it’s not an officially-declared recession until the National Bureau of Economic Research declares it so and likely won’t make a judgment on the period in question for months if not longer. At AltFi, we’re officially calling it a recession and believe the likely to come third successive quarter of economic contraction will seal the argument.
We’ve got inflation. We’ve got a recession. We have stagflation. Can there be any doubt we’ve got stagflation after two negative quarters and 9% inflation? That is the absolute definition of stagflation.
But the big contraction and market dilemma was highlighted after Friday’s jobs data, which confirmed the U.S. economy added a robust 528,000 jobs in July, recouping the number of payrolls lost in the wake of the pandemic.
The unemployment rate also dropped to 3.5%, a half-century low, also seen just before the pandemic in early 2020, the Labor Department said Friday. The acceleration in jobs follows a first half of the year during which payrolls grew faster compared to any post-Second World War period, even while the economy began contracting.
Consumers however, don’t seem to have gotten the recession memo. Everyone who travelled this summer paid off-the-charts airfares and hotel prices. Look at the TSA data — 2.3m passengers a day.
The consumer represents 70% of the economy. So, if the consumer is employed, spending and travelling and still has some savings left from the pandemic, it’s hard to see evidence of a current and deepening recession.
So why have markets been rallying?
Since the June lows, the Nasdaq has risen 18.9%, S&P 13.07%, Bitcoin 30.68% and Ethereum 84.04% (as at August 7th 2022).
Markets responded positively to the July 27 FOMC announcement and 75bp rate hike, as Chairman Powell indicated that the current target Fed Funds rate of 2.25% to 2.5% was now considered neutral, and eyes are on developing data on an economic slow-down.
The market is interpreting all of this, as the end of the rate-hike cycle is in sight, and it’s not too far in the future. And the markets are rallying in anticipation.
Where investors may be getting ahead of themselves is assuming that the Fed giving up on forward guidance means their stance will need to change as the data softens. In our view, the Fed is still on a credibility crusade to fight inflation, and it’s not clear that they’re done yet.
A fundamentally different world
One thing that concerns us about the Fed announcements is that they are using models based on historical timeframes that are significantly different to how the economy is operating in a post-Covid world.
We think it is an economy with more frictions, with more onshoring, with more labor shortages as well. And that is likely to lead to more inflationary pressure, not 9%, but maybe 4% or 5%. And the Fed is going to have to come to grips with that; they’re not close to neutral and they’ve still got a lot further to go on rate rises, which markets are not yet pricing in.
Geopolitical tensions rise
As war in Ukraine grinds on with no signs of a near-term resolution, the US has swung to damage control mode in the South China Sea in the wake of Speaker Pelosi’s controversial trip to Taiwan. China’s unprecedented live-fire military exercises have changed the status quo of how far it can breach into the self-governing island’s territory. As Taipei pushed back with war games of its own, the US thus far has attempted to manage the crisis without triggering wider escalation. However, further provocations risk a major incident or accident, which would translate to a downslide markets have shrugged off. As the White House reverts to “cautious acceptance,” the likelihood of further destabilization in the region has the potential to weigh on the macro-outlook, particularly given Taiwan’s important position in the global economy. Markets have yet to price in risk of further escalation.
TECHNICAL ANALYSIS
The team at AltFi is comprised of both crypto native and traditional finance professionals. As long-term investors, we use fundamental analysis to identify and select investments coupled with a technical approach to risk management. Our deep experience with technical analysis helps us interpret market cycles, current trends, and manage risk.
Signs of a market bottom
Following our last article where we explained how we use and apply our favored technical signals, we can see in the charts below Bitcoin and Ethereum’s daily timeframe and the structure of a potential market accumulation phase that follows a declining market phase.
Signs that this accumulation phase will then turn into a subsequent advancing market phase include a series of higher-highs and higher-lows on the price chart as well as price moving back above and holding the 21-day moving average (the solid white line on the charts below). We see both of these signals on the chart of Bitcoin (below left) and see these signals even more strongly on the Ethereum chart (below right).
In addition, our favourite price momentum oscillator, the Directional Movement Index (DMI), has also just started to form bullish signals. See charts below of the daily timeframe for Bitcoin (below left) and Ethereum (below right).
Here again the likely reversal signal of trend change is much stronger on the Ethereum chart than of Bitcoin, which matches up with our respective portfolio allocations here at AltFi.
At AltFi, one of our favourite tools for looking for signs of accumulation are Volume Profile charts as shown below. Volume Profile shows volume at price, as opposed to volume at time as per the typical chart-based volume analysis.
Above we show the volume profile charts for Bitcoin (above left) and Ethereum (above right) for the last 180 days. The BTC chart shows strong institutional buying pressure at around the $20,000 levels, supporting the case for a current accumulation phase. The next major volume node is around the $28,000 to $32,000 level.
What is particularly interesting on the Bitcoin volume profile chart is the very low volume area between the $24,000 and $28,000 level. Low volume areas signify non-equilibrium price levels where neither bulls or bears want to trade and prices tend to move quickly through such areas. This structure implies that if price breaks out above this $24,000, it is quite likely to race quickly up to the $28,000 level, which will represent the next major area of resistance.
Even more telling is the volume profile chart for Ethereum showing massive institutional buying at and around the $1,000 level, suggesting an incredibly strong case for an accumulation phase at the institutional level. At AltFi, we joined this party at the $1,000 level with our opening trades in our newly launched fund. The Ethereum volume profile chart shows the next high-volume node around the $2,000 level, which will be the next significant level of resistance and where we expect some profit taking to take place as well as an exit area for some market participants who originally bought at this level on the way down and look to get back out at their break-even price.
At AltFi, we will utilize some of these volume profile support-and-resistance areas to trade in- and-out of some shorter term positions, but hold our core positions through these levels based upon our fundamental analysis and the longer-term time horizon of our fund.
CONCLUSION
On the one hand we have recession, inflation, rising rates, supply side shortages and quantitative tightening. On the other we have strong jobs growth, labor shortages, record travel numbers, and little sign of declining consumer spending. Mixed signals for sure, although for now markets seem to be telling us the bottom is in and signalling some further bullish momentum.
As ever, we anticipate that projects with real fundamentals will continue to standout. Beyond the blue-chip tokens ($BTC and $ETH), AltFi sees value in comparatively early-stage projects, several of which are operating in the decentralized finance ecosystem. Examples include Maple Finance ($MPL), an undercollateralized DeFi lending project and DFX ($DFX), an Ethereum- based decentralized foreign exchange protocol. DeFi remains a bright spot in crypto, underpinned by active user growth coupled with growing signs of product/market fit. Though many early projects should be considered akin to “liquid venture” in risk profile, proven products and their associated tokens stand to disproportionally benefit from a resurgence of “risk-on” sentiment in the long-run.
On balance, we at AltFi remain cautious. However, we have upped our investment allocations from approximately 40% to 60%, but still remain 40% in cash, with plenty of dry powder to deploy as opportunities present. We will look to add to our blue-chip token positions and gradually deploy in “liquid venture” opportunities as our framework merits.
Contact
Tim Calveley — tim@altfi.capital — +1 (441) 300–0204
Cooper Jefferson — cooper@altfi.capital — +1 (705) 790–2959
About AltFi
AltFi Capital Management Ltd. offers an alternative investment management service with a specialization in digital assets. AltFi offers investors hedge fund, venture capital and strategic investments in the digital asset sector, via a single open ended non-leveraged fund vehicle.
*This article is not an offer to sell shares of any investment fund or a solicitation of offers to buy any such securities, nor should it be misconstrued as investment advice.
