In our previous macro update, we highlighted the bull case going into 2025 – the US debt ceiling situation and the resulting TGA spend down – as well as the key macro risks to keep an eye on, those being: Persistent dollar strength, deterioration in global liquidity conditions, and rising inflation forcing the Fed to pivot towards a less dovish stance.
Although we didn’t directly call for it – we unsurprisingly have witnessed some volatility for risk assets as a result of the above risks that we highlighted.
What Caused The Holiday Bearishness In Risk Assets
- The dollar’s strength is beginning to weigh on global liquidity conditions and squeeze foreign investors out of U.S. Markets.
- The fed pivoted its stance from asymmetrically dovish to neutral with subsequent inflation data trending higher.
Inflation is also back in a trend higher, according to our economic regime model, putting us back in an economic regime where growth and inflation are both trending higher on a 3 month rate of change basis.
Moreover, there is also a good chance that growth slows during 2025 which would move us back into the bottom right quadrant of rising inflation and declining growth.
These factors coupled with the fact that investors are sitting on massive gains this year, caused a bit more defensiveness over the holidays. Unlike 2023 where many investors were overly defensive for much of the year and got caught offside which subsequently led to a performance chase into year-end.
The #1 dynamic that could be a bull catalyst in the first half of 2025 is the TGA spend down, which we are monitoring closely to see how it plays out.
TGA Spend Down Update and Estimates
Based on very rough estimates of government expenditures, we will likely get close to a $300B increase in US net liquidity over the coming month – or about $75b per week until Congress suspends the debt limit or all $650b in the TGA is drained, whichever happens first.
A couple of factors to take note of that are not accounted for in this estimate are the reverse repo facility which could trend higher due to insufficient supply of short-term Treasuries, as well as the Treasury General Account spend down being partially offset by tax receipts.
Dollar Down, Liquidity Up
The good news this week from a liquidity standpoint is that the dollar is down and liquidity is rebounding a bit as China begins to stimulate as much as they can get away with without killing the Yuan.
Two factors that have helped add downward pressure on the dollar this week have been the Bank of Japan BoJ raising rates again along with the PBoC opting to hold its policy rate steady, implying efforts to stabilize the Yuan as much as possible, which took markets by surprise.
It’s hard to say if the dollars rebound will be a sustained trend or just a short-term retracement, but between Japan raising rates, China holding their rates steady, and the likely easing US liquidity, there may be enough pressure to finally slow the dollars seemingly unstoppable momentum, at least in the near term.
Market Technicals
Taking a quick peak at Bitcoins chart on the daily timeframe, Bitcoin has been close yet unable to close a daily candle back above its all-time high, as it rejected the 106k level almost 7 days in a row.
The price action is pretty simple, if it doesn’t have the strength to close above this key level by sunday night, we’ll most likely see a test of the middle of the range and if that doesnt hold as support, it’s likely back to test the bottom of the range. Most likely whatever direction bitcoin chooses will dictate the rest of the market.
Our Outlook
Crypto is entering an environment from a political and regulatory standpoint, that feels very much the opposite of 2023 where instead of constant negative news and FUD, there are many positive catalysts for the crypto industry. This means that if the macro environment is permitting, the crypto market is poised from various standpoints to perform very well.
We still have a bullish bias, however, due to the number of macro wildcards, such as a potentially more hawkish US Treasury secretary, a strong dollar, and still shaky global liquidity conditions, we are currently cautiously optimistic.
We expect that the first 3 to 6 months of 2024 will most likely be positive for risk-assets, however, the second half is much more shaky from the standpoints of liquidity and inflation.
In times of high uncertainty with a wide distribution of probable outcomes, it is extremely important to exercise diligence in following your risk management process in order to come out the other side unscathed. No matter what you do it is impossible to get the markets 100% right, so the key to surviving is to understand when to take more risk and when to play it a bit more safe.
We took a lot of risk when we were extremely bullish in Q3 2023 and made a lot of money as a result. Now is the time to play a bit more conservatively, stick to our process, and be more focused on keeping the money we’ve made rather than getting greedy and overextending ourselves.