The challenges of a bear market

The challenges of a bear market


After a difficult week in markets & especially crypto, I shared some thoughts on Twitter which I thought I’d share here to give some perspective & share how I’m thinking about things within a bigger picture macro framework.

The broad fear right now is that spot inflation is forcing CBs to tighten irrespective of whether it causes recession.

Yes, they’re clearly panicked by inflation & facing political pressure to address it. There’s also talk that the Fed want stocks lower to deflate bubbles. That may be true but the fact is, in credit-driven economies, the only way to grow with real wages falling is to keep expanding credit & to do that, you need high asset values which are the collateral underpinning the system against which consumers & businesses get leverage & drive growth expansion

The feedthrough from declining asset values to credit contraction hits leveraged economy growth very quickly & we fall into recession & a deflationary bust.

The Fed know this, but they don’t see any material growth slow down atm & for all the models they use, they really only respond to data as it hits.

Over the next few months, the growth outlook will regain focus & the Fed will be forced into a dovish pivot/pause.

The fall in demand alongside base effects will bring inflation sharply lower during that pause & we’re back into a cutting cycle.

If the Fed really wanted to flush out leverage & allow a reset, they’d have done so in 2008 but it’s an impossibly difficult decision to take to let a 1930s style depression take hold so I think it’s a low probability the Fed allow that all in the name of fighting inflation. The cure is worse than the disease. I also think we’ll trend back to a disinflationary environment…

So this leaves me thinking we’re at peak CB hawkishness. The long bond trade is just beginning to get underway in the long end IMO and will begin to get more pronounced in the front end.

Stocks/risk will remain volatile as markets & Fed diverge on the appropriate rate path but Fed will eventually get what the market is telling them on growth.

So, potentially more downside in equities (although a lot of bad news baked in at this point) Long bonds look attractive here. Crypto trades as a high beta risk asset and the LUNA/UST blow up creating additional problems which will perpetuate some of the FUD around crypto…

Longer-term, I believe we’ll revert to a low growth, low inflation world supported by low rates & ever-expanding CB balance sheets & the subsequent fiat debasement will keep pushing “assets” higher.

Crypto meanwhile is building the platforms & protocols for the digital age & is an asset class in its infancy. High volatility, exponential upside.

For non-traders:  don’t take leverage & only allocate a proportion of your portfolio that can stomach these large drawdowns. So my point. Don’t “trade” these markets & don’t panic. The longer-term drivers remain intact from a broad macro perspective.

In crypto, we just keep building! - David Brickell Director, Institutional Sales 

Kez Duxbury May 17, 2022

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