Weekly Investor Report: Issue #1

In this report, I’ll unpack what I think is going on in the macro, crypto, and traditional markets. And if I’m seeing any opportunities, I’ll highlight those here. 

So without further ado, here’s your first Weekly Investor Report!

The macro

The US Federal Reserve (Fed) raised interest rates by another 0.25% on Wednesday. And it looks like Fed Chair Jerome Powell is stuck between a rock and a hard landing.

The rock is that the American inflation rate is still high (it was 4.985% the last time CPI was reported in March). So if the Fed doesn’t raise rates more, inflation could still linger above its 2% target for longer. That’s the Fed’s fear, at least.

The hard landing is that the US economy can’t cope with higher interest rates – and we’re seeing that in the banking sector right now. It’s only May and three decent size US regional banks have already gone bust this year.

I wrote about First Republic Bank (FRC) on Tuesday, but here’s the TLDR: higher interest rates meant the value of its assets took a big hit (bond values go down when rates go up). When the bank’s customers got wind of this, they all tried to pull their cash out. And seeing Signature Bank and Silicon Valley Bank implode in March for the same reasons didn’t exactly calm their nerves. 

Bank run. Shares delisted. You get the picture.

FRC was the second-biggest regional bank failure in US history, so it’s kind of a big deal. Here’s what its share price looked like before it finally stopped trading…

Of course, the question now on everyone’s mind is: “Was First Republic the last bank in the US to fail this year”? My guess is: no. Most regional banks have the same business model. And that business model just can’t handle higher interest rates right now. 

Of course, that probably doesn’t apply to the “too big to fail” banks, like JP Morgan, which is buying most of FRC’s assets on the cheap.

So what comes next?

Regardless of what happens, it’s pretty clear that Powell is going to have to choose the rock sooner rather than later. Inflation is still above 2%, sure, but nobody wants more bank runs. Not to mention, bank runs tend to bring inflation down anyway. So he’s probably done the job already. According to the CME FedWatch tool, 90.4% of investors expect the Fed to keep interest rates the same on June 14 (when the next interest rate decision is due).

If you’re wondering why the remaining 9.6% still see Powell hiking rates further, it’s probably because the US jobs market still looks relatively strong – which doesn’t help bring inflation down. US Non Farm Payrolls came in at 253,000 for April – meaning the same number of new jobs were created that month (excluding a few things like farming and government positions). Still, the number looks to be trending down and could get much lower if the Fed keeps raising rates. 

Getting back to inflation… US CPI peaked at 9.1% in June last year. But it’s 5% now and trending down. As for the UK and Europe, they’ve got higher inflation than the US. But if you look at the below chart, their inflation rates are going down. They’re just a bit further behind than the US, and a bit ahead of Japan and China…

So to sum up the macro: inflation is dropping, banks are going bust, and the job market is still “OK” for now. To me, that says it’s time to stop raising interest rates. Hopefully, Powell thinks the same, or we could see a serious global recession. 

Crypto

Crypto goes up when there’s more liquidity in the market. And to bring inflation down last year, the Fed and other central banks had to pull a lot of that liquidity out of the market by raising interest rates. The Fed also let its bonds “roll off its balance sheet” without reinvesting the interest payments. That’s a fancy way of saying it decreased the amount of liquidity in the market. 

But as I said earlier, inflation now looks to be coming down just as fast as it went up. Lower inflation means the Fed can print more money without causing the prices of everyday goods to go up too much. And if Non Farm Payroll numbers get worse, along with a few more bank collapses, then you can bet your bottom bitcoin the Fed will quickly switch the printers back on. In other words, it will increase its balance sheet size and increase the amount of liquidity in the market.

But crypto is a global asset. So it’s not just concerned about the Fed in the US. The next chart shows the total balance sheet size of the world’s four biggest central banks (including the Fed) in white. When you add the European Central Bank (ECB), Bank of Japan (BoJ), and the People’s Republic Bank of China (PBoC) to the mix, things look very different. That total balance sheet figure started growing in October last year – a month before bitcoin (yellow) bottomed.  

When central banks expand their balance sheets, they increase the global money supply. For now, that’s good for bitcoin, crypto, and growth stocks.

Bitcoin key levels to watch

We can talk about the macro until we’re blue in the face. But at the end of the day, it’s price action that matters most. Bitcoin has consolidated between about $27,000 and $31,000 since mid-March. And although it’s been ranging, the trend is still up. So until proven otherwise, dips are for buying. 

As for how low those dips can go? A daily close below $27,000 (orange line) could see bitcoin head toward $25,000 (red line, chart below) – which would be my line in the sand to stay bullish. On the flip side, a daily close above $29,500 (green line) would put bitcoin back above its last two highs of late April and early May. At that point, I’d say it’s likely to retest it’s early April $31,000 high – and probably blast straight past it toward the mid $30,000s.

What about ether?

Ether gained about 3% vs. bitcoin last week. And I think it could keep outperforming bitcoin for the rest of May. My reasoning is in the next chart, which shows the price of ether in bitcoin (how many satoshis it would cost you to buy one whole ether). 

Now, if you’ve followed my analysis over the past few years, you’ll know about “W-bottom” patterns with Bollinger band confirmations. And above we could be seeing one in the making. Notice “low 1” was below the bottom band – meaning it was a more extreme move. Low 2 (which looks to be forming now) is so far above the bottom band – a less extreme move. You can read my full guide on Bollinger Bands here to find out how that works. 

I also posted a technical update on Solana a couple of weeks ago, which I think could do relatively well if bitcoin and ether can hold the line.

Stocks

Despite big drops in bank stocks, the S&P 500 is holding strong. The chart below shows how this week (and last) it bounced perfectly off its 21-week exponential moving average (EMA, yellow line). And as I write this, it’s sitting at its 0.5 Fibonacci retracement level. In other words, the index has recovered about half its losses from its January 2022 high to its October 2022 low. So if it breaks that level, the next Fib target lies just above 4,300 points. 

While the index looks to be slowly grinding higher, I’d be more cautious if it finished this week below last week’s low (red dotted line). That would also put it back below the 21-week EMA. The chart also shows below how the 21-week EMA crossed above the 50-week simple moving average (blue line) back in March. In the past, that’s been a pretty good long-term buy signal (you can read about that here).

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