Stock Market Hits All-Time High As Bitcoin Stumbles Amidst GBTC Outflows
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Good afternoon everyone. With markets closed for the week, let's break down all the relevant action and what it means in the coming weeks.
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Equities raged to all-time highs off the back of continued expectations for the Fed to cut interest rates. This anticipated tailwind for financial conditions has driven market sentiment toward believing that businesses may make it out OK in 2024, despite worries of bankruptcies as a result of the Fed keeping rates elevated.
This drove traders to take the Nasdaq and Dow Jones to new all-time highs for the second time this year, with the S&P 500 hitting a fresh all-time high for the first time in more than two years:
Consumers are in a similarly euphoric boat, at least according to the most popular consumer sentiment gauge in the country, the University of Michigan survey.
According to the latest preliminary release for January, consumer sentiment towards the economy massively beat expectations, coming in at 78.8 versus 70.1 expected, up from 69.7 in December. This level also marks a 3-year high in consumer sentiment, which is the highest since pre-COVID lockdowns. Reasons cited for the renewed confidence in the economy are inflation coming down, and interest rates are expected to fall in the year ahead:
The Fed has been on a mission to fulfill its mandate of stable prices by bringing down price inflation to its long-run target of 2%. A few weeks ago, as we continue to hover above the 3% range, the Fed (perhaps prematurely) forecasted interest rate cuts due to the progress it has made in nearly arriving at the 2% target. The market has swiftly taken the Fed at its word, pricing in 2 rate cuts to bring the effective Fed Funds rate, the Fed's primary policy rate, down to 4.75%:
Whether it was a move out of fear or stupidity, this forecast of rate cuts from the Fed itself has led to a sharp rise in economic optimism which risks prices reaccelerating if people start spending more. The Fed risks a positive feedback loop of heightened economic confidence pushing up asset prices, which raises spending, which raises asset prices, and the loop begins anew—undoing the progress made in tightening financial conditions and risking having to raise rates further.
We will know if the Fed is premature or right on the money soon enough, as consumer excess savings from post-pandemic stimulus are set to reach 0 as early as mid-March. If the forces of an overly optimistic consumer is faced with the reality of no excess cash to spend, the Fed's rate cuts will seem prescient in hindsight. If we are met with a still-resilient consumer that reignites their spending habits due to the Fed's rate cuts, they will seem premature and risk further rate hikes, potentially destabilizing financial markets and risking recession. As we near the end of Q1 in a few months, we will know which it is.
So... what does this all mean for Bitcoin? Well, as all three US stock indices raged this week, Bitcoin is faced with its own suite of factors that have caused it to stumble, chief among them is the GBTC arbitrage trade.
Grayscale's Bitcoin ETF, formerly the Grayscale Bitcoin Trust, is the longest running spot Bitcoin-adjacent vehicle in US markets. Perhaps because of this industry tenure, Grayscale is comfortable charging a 1.5% management fee while the rest of the industry charges 0.2%—an eyewatering 130 bps more in annual fees. For larger investors, that kind of fee differential is very undesirable, and has led to a mass exodus from GBTC into these less expensive vehicles.
Grayscale has needed to sell $5.4 billion worth of its fund's Bitcoin over the past 5 trading days as investors arb into its lower-fee counterparts, which has applied significant downward pressure during an otherwise bullish event. See GBTC's total assets in the top pane, falling from $28.5 billion to $23.1 billion, with the bottom pane showing daily fund outflows:
Here's a view of all 10 spot bitcoin ETFs. Of the new, lower-fee vehicles that are experiencing net inflows, BlackRock leads the dance with $1.17 billion in Bitcoin held on behalf of clients, with Fidelity close behind at $1.02 billion:
Zooming back out for some take-aways, it's important to remember that at times of extreme euphoria like this one, the market is generally approaching or at a top. Further elucidating this is the fact that every previous peak in the Fed's rate hiking cycle coincides with all-time highs in the stock market. When rate cuts come, since rate cuts only come when there is a rapid slowdown in economic activity, the stock market tanks alongside it.
We are currently in the waiting-game phase of the cycle where the Fed has stated that its policy rate has topped out for the cycle, and the economy has yet to unwind. A period of transient euphoria where risk-taking rages, a "last call" of sorts before the reality of thin pockets and tight financial conditions hit the headlines, by which point it's too late to position yourself accordingly:
The only difference between cycles is how long this waiting period lasts, and how large the Fed and US Treasury's monetary and fiscal stimulus are on the other side of it. Regardless of how many billions will be siphoned to banks from thin air once this business cycle reaches its bottom, bitcoin is the only asset that stands to emerge stronger in the long-run. The stock market may have hit an all-time high today, but its growth will never outpace the increases to the money supply that it has grown reliant on. Only bitcoin, with its absolute scarcity, appreciates in the face of the Fed's perpetual monetary debasement:
Talk to you guys soon,
Joe
Theya is an app for simplified Bitcoin self-custody. With its 2-of-3 multisig custody solution, you can enjoy maximum security for your Bitcoin and the peace of mind that comes with it.
Download Theya on the App Store and declare your sovereignty today.