Opinion: Forecast Market Bottom Appear Time According to the Macro

Sep 27, 2022

Author: Wublockchain Joey Wu

The crypto market, like the stock market, reflects people’s expectations of the future economy. The crypto market had already started a downtrend when people are still under the illusion that the Fed rate rises will not hit the market. And right now, investors are still divided on whether the U.S. economy is about to enter a recession, which means that the market’s expectations have not yet been agreed upon, so the downtrend is not yet over. Once the U.S. economy starts to officially enter a recession or a geopolitical conflict breaks out in full force, the bottom of the crypto market will appear.

There are two types of recessions, one is inflationary and the other is deflationary, and the one the U.S. is about to face clearly belongs to the first type. Inflationary recession is characterized by high inflation and low unemployment in the early part of the recession and rising unemployment in the later part of the recession, but the inflation rate remains high. The U.S. inflation rate is currently high, and with winter approaching, Russian restrictions on oil and gas output will cause energy prices to spike at the end of the year, further pushing up the inflation rate. In addition, the continued rise in inflation will lead to a strike movement by workers. The recent U.S. railroad workers’ strike is just the beginning of a wave of strikes that will follow. This will cause a death spiral of rising wages — rising inflation — rising wages, which will eventually lead to rising unemployment and make the economy enter a complete inflationary recession.

Therefore, the Federal Reserve can only continue to raise interest rates next year. According to previous projections by Meister, interest rates will rise to at least 4% early next year, and may even exceed 7% for the year. The recovery from an inflationary recession is a very long one, and by all accounts, the market is not likely to see a rate cut cycle until at least 2024. However, this does not mean that the crypto and equity markets will have to wait until 2024 for the bottom to come. Capital markets reflect investors’ expectations for the future rather than the current situation. Therefore, as long as the market agrees on future expectations, i.e. most investors agree that the economy will enter a recession, there will be no selling power in the market, regardless of whether a recession is coming at that time.

Currently, there is a widespread view in the market that the U.S. will cut interest rates in order to save the economy, which is essentially a disapproval of the economy entering a recession. Historically, inflationary recessions have not been saved by stimulus policies such as interest rate cuts, and the only way to save a recession is by plunder. Plunder not only includes hot wars, but also predatory economic wars, that is, by raising interest rates to absorb global funds to cause the collapse of other countries’ financial systems, and then buy back other countries’ high-quality assets at low prices. Before World War II, most countries adopted hot wars to transfer conflicts to foreign countries, while after World War II, most of them adopted financial wars. In the case of the United States, a series of policies to stimulate the economy after the Great Depression were palliative, but it was the second world War that really got the United States through the crisis. After World War II, the world longed for peace, so there was no hot war between great powers. Since then, the United States has survived every stock market crisis by financial war. So it is now, with a global recession inevitable, as the great powers compete to see who can bear it longer, buying the best assets at low prices after the other collapses first. The difference is that in the post-World War II crises, the first to collapse was not able to start a hot war, while this time, whether the collapse is the U.S. and European camps or China and Russia camps, they have the strength and possibility to choose to escalate the level of conflict.

As investors, we don’t have to worry about whether the international situation will come to that point. Even during World War II, U.S. stocks rose steadily. But what we need to see is whether there is consensus in the market about this possibility.

It’s hard to predict exactly when expectations will shift from inconsistent to consistent, but we can keep an eye on a few important timing points: the U.S. midterm elections and China’s two sessions in March.

The importance of the U.S. midterm elections cannot be overstated, and the reason why the vast majority of optimistic investors (such as Arthur Hayes) believe that the U.S. is about to cut interest rates is because they feel that policymakers can set aside voter pressure after the elections and save the stock market despite high inflation. The time for confirmation is the Interest Rate Decision after the midterm elections (Dec. 14 and January).

China’s political factors are often ignored by international markets, but they should also be taken into account when discussing whether a geopolitical conflict will escalate. Not only that, but despite China’s repeated crackdown on crypto markets, we still can’t deny the fact that China is the second largest source of funding. Therefore, the liquidity of Chinese investors can also play a significant role in crypto market.

Now, widespread expectations that Beijing will ease its zero-covid strategy(ZCS) after the 20th Congress starts in October and after that the economy will start to improve, which is too optimistic. The real end of the staffing arrangements will not come until the two sessions in March 2023. Therefore, investors are only likely to agree on when China’s economy will start to rebound and how it will respond to geopolitical conflicts until after March next year.

In summary, I think the bottom in the crypto market will occur between mid-December of this year and March of next year. The market reflects expectations for the future, and it is not recession and geopolitical conflict that we fear, but rather uncertainty about whether either will come. As long as investors’ expectations shift from inconsistent to consistent, capital will not panic, no matter how troubled the world is.

These are personal views and do not constitute investment advice.

Wu Blockchain

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