One way to have an edge in crypto is to understand the large-scale financial flow.
Being aware of the dominant trend in the global economy allows you to know when the odds are in your favor, and to decide when to be cautious and when to take more risks.
During the previous bull run, it wasn’t uncommon to see crypto projects doing 2x, 5x, and 10xs and more, even low-quality ones.
Why? They were backed by endless liquidity entering the Crypto market. Everything was going up.
The vast majority of Altcoins have their price action coupled with Bitcoin.
Simply put, there is a hierarchy in the markets:
S&P 500 moves → Bitcoin moves → then the alts respond.
There is a strong correlation even though it’s not 100% accurate all the time in every single case.
So by noticing this pattern in the 2021 bull run I decided to invest time to study macro economical tendencies.
From listening to FOMC speeches to reading Twitter threads, watching youtube videos, and analyzing S&P 500, Inflation, and Interest Rates, I tried to spot patterns and see how accurately some key factors shape the world economy.
Then I filtered the information and compiled a list with the factors that seemed the most relevant.
Here is the list:
1. Massive Layoffs by Tech Companies
Amazon, Meta, Microsoft, and other big tech companies announced massive layoff numbers recently.
Additionally, employment is a lagging indicator, meaning it can take a while for monetary policy changes to affect its rates.
In summary, that’s how I see things playing out:
More people are unemployed → less buying power → less heat in the economy → not much liquidity going toward riskier assets.
2. Inflation is still sitting at 40~ years high
Even with the recent Interest Rates increases by the Federal Reserve, Inflation is still considerably high.
Therefore it would be reasonable to expect the continuation of restrictive measures coming from the FED to restrain inflation which would point to short and medium-term financial contraction.
3. The FED has been raising interest rates at the fastest pace in history
As mentioned above, unemployment is only starting to show up in recent weeks because there is a delay.
Nonetheless, inflation is not close to being tamed yet, it wouldn’t be a surprise if rates kept going up.
Moreover, at the November 2022 FOMC speech, Jerome Powell communicated the intention to keep setting strict monetary policies until inflation goes down to the 2 percent target.
4. House Market Decline
As Eric states in this thread, the housing market is falling fast.
And it is another key indicator of shrinkage in the economy because:
- Federal Reserve tightens policies
- House Market goes down
- Sales of housing-related goods go through a downturn
- The overall economy is impacted negatively due to employment issues
5. ISM reaching cautious ranges
The ISM indicator (Institute of Supply Management) points out the level of demand for products.
It relates to the supply chain activity in the economy and historically it’s been an accurate index to signal low growth/crisis.
According to Raoul’s thread, several leading indicators point to the ISM going lower in the next months. The thread was written in July and it’s still going lower.
This is only one indicator that Raoul sees as being strong, but if you want more in-depth analysis from him I’d highly recommend watching his amazing Economy Master Class on Youtube.
6. S&P has been going up A LOT in the last decade
In this thread @GameofTrades_ goes over historical examples where the S&P 500 went through long years of low return.
With an in-depth analysis of the S&P 500 overall performance over history, he explains why the next bull runs will likely be faster in the next decade.
Whether the theory is going to play out in the next decade it’s yet to be seen, but having a model based on historical data to look at can be helpful to project and adapt trading/investment strategies in the future.
It’s about Cycles
Even though the items on the list might seem pessimistic it helps to look at things in terms of cycles.
Risk assets valuation has always been going through cycles and by expanding our time horizon we can better assess where we stand in those cycles.
History shows the best opportunities come during hard times.
“Be greedy when others are fearful and fearful when others are greedy.”
— Warren Buffet
Stepping back to evaluate the bigger picture can help us make better, unbiased decisions.
It’s possible to prepare for great buying opportunities with simple actions, for instance:
- Protecting capital when the odds are low so there is liquidity available when the right time comes.
- Doing research as diligently as possible in order to have confidence when opportunities arise.
Final thoughts
The list above gives the overall sentiment toward the financial markets.
Stepping back, expanding the time horizon, and analyzing key data help to make more informed decisions.
The Internet contains an overwhelming amount of information, therefore it’s crucial to be guided by high-signal content.
Fortunately, there is an abundance of quality Macro content to study and learn from.
Here are some of the Twitter accounts I suggest following:
Key Takeaways
- Awareness of Macro Economical Cycles can highly increase gains in crypto
- Key macro data signs uncertainty in financial markets. Maybe the bottom is not as close as some may think
- The Federal Reserve keeps tightening monetary policies
- Inflation is still quite high
- Exceptional buying opportunities arise in bear markets
- We can prepare for the next bull run by simply preserving capital and doing research
