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The ominous-sounding technical price pattern could again trap bears on the wrong side of the market as the Bank of Japan plays down chance of a near-term interest rate hike.

Bitcoin's Impending 'Death Cross' May Trap Bears as Bank of Japan Eases Rate Concerns

Marc Ostwald, Chief Economist at ADM Investor Services International, joins CoinDesk with his analysis on navigating the crypto market amid current macroeconomic conditions. It's Thursday, August 8th and this is Markets Daily hosted by me Jen Sani. On this show, we navigate the currents shaping the crypto markets, providing insights against the broader financial landscape. So whether you're actively trading or simply fascinated by the volatility of the crypto markets. This show is your compass to understanding what's happened where we are and where we're going. Good morning, everyone. Today's guest is here to talk to us about what's going on on a macroeconomic level, chief economist at AD M Investor Services International, Mark Oswald. Welcome to the show. Well, Mark, I've been waiting to speak to an economist all week. We of course saw uh a big market downturn on Monday. Some we're saying a reaction to the jobs report here in the US uh coupled with some developments in Japan. Talk to me about what you're seeing and what we should be watching. Um Well, I I think what one has to understand is this problem's been brewing for months. Um You, you've seen it in the complacency in a lot of trades. You've had the skew that everyone's got in their portfolios towards the A I and the tech sector I can understand all of that, but there comes a point when valuations just go, you know, out the window. I mean, if I think it was Warren Buffett the other week who was basically talking about divesting some of his apples state because he just can't see the business case for a company being on 40 a 40 pe ratio. It, it's not that it's not going to do well, it's just the valuation is too much. And then on top of all of that, we have this problem with Japan and Japan basically getting off. Um, you know, the zero interest rates that it's had basically for the, the last 25 years and it was always going to be a tortured process. Um They decided, you know, having signaled quite clearly quite some time ago, but without enough conviction to warn investors about the potential disruption, um but they were going to raise rates. Um, it took everybody by surprise on Monday. Um I think the surprise was really simply because people didn't really believe that they were gonna do it. And that's really what caused, you know, it has caused a lot of the disruption, the combination of very skewed positioning and a good deal of complacency and a lot of leverage in the market. Um Well, when it happened, um, you know, in conjunction with the fact that, um they, they made it very clear when they raised rates last week that basically their primary concern at the moment is the yen and therefore the market basically playing long, you know, short yen. Um, and long any other asset that you the UK to think of above all tech, um, was always, you know, going to be vulnerable and that's really what upset the Apple Cart. I think the fact that it's happened in August, uh, which is traditionally quite a thin liquidity month, um, probably exacerbated a lot of the move. But, um, you know, w what they had been waiting for then was sort of post hoc after they, they raised rates, they then had the wages data which everyone had vastly underestimated. They have jumped enormously and that offered the big backward justification for what they did. Nevertheless, having raised rates, everyone, particularly in Japan is actually blaming the Bank of Japan for making the move even though actually, it's as much the Ministry of Finance as it, it is the Bank of Japan. Why didn't people believe that uh there was going to be monetary policy tightening in Japan? Um because they've been so sensitive about it when they first raised rates, which wasn't really much of a rate hike back in April going from minus 0.1 to zero range to zero to plus 0.1. They didn't actually that they said, well, depending on what happens with wages, depending on our judgment of how inflation turns out and whether we're actually in what they would call a virtuous inflation cycle. W basically, meaning where inflation stays around their target of 2% which they share with a lot of other central banks. Um And they were just, they just didn't have the conviction. Um And at that point, that's when the carry trade really got into full swing because people went, they don't sound like they're convinced. And then some of the domestic economic data um has not been particularly convincing. Um you know, uh household consumption has contracted four quarters in a row in Japan. And everyone's saying, well, why would they want to raise rates? Um So to, to a certain extent they're victims of their own initial success because what one has to understand is this is a process which started 18 months, two years ago and the first part of it, which everyone was really fearful about that, it would actually create a lot of flows back into Japan. A lot of unwinding of carry trades um was managed so well with so little disruption that people thought, well, they seem to have this all under control and obviously they didn't. Um And a lot of it boils down to what uh a lot of central banks have focused on, particularly in the last 10 to 12 years is about communication. Hm You mentioned something at the beginning of the interview, I don't want to skirt over that. Uh tech stocks and A I could be overvalued, crypto really tracks tech stocks, these days we talk a lot about A I, it's becoming a little bit more closely intertwined with Bitcoin mining companies. Uh uh When you look at the tech and A I sector, it sounds like you're saying it's overvalued and we're due for a correction. Yes, I mean, II, I think what one has to understand about A I is there is a big bright future but we've got into a very similar situation to the one we did in 99 2000 with the, the bursting of the tech bubble that people assume that it's gonna turn yield results very quickly. And what we've got now is a situation where if you had all the corporate earnings coming out and anyone said we've got an A I project, everyone went. Oh, right. Let's, let's revalue that stock by 10%. Um It's expensive, first of all. Um, and we've got to this point now where just saying you've got a big A I project and then in the next quarter results we're gonna spend even more, which initially is greeted. Well, because it seems it sounds like you're, you're really being serious about it, then gets to the point where investors say yes, but you know what costs are you saving? What efficiencies have you made? How is this going to improve your profits? What's your return on investment? And suddenly everyone wakes up to the fact that at the moment all it's doing is increasing costs and the returns aren't that great. So we have to have a bit of a reset and that's where the valuations become extraordinarily challenging. I don't think, you know, the enthusiasm for A I is gonna go away, but I do think people need to have more realistic timelines uh when, you know, companies basically can give their quarterly reports and say, yeah, well, our A I project has, you know, meant that we've made these cost efficiencies where our profit margins have in approved by XYZ. Um, and we're just not there yet, largely because where A I is, if one, com compares it to human development is it's learning to crawl, it hasn't even started to, you know, walk, let alone run. And I think basically a lot of the valuations with A I were at the running stage ba based on what you're saying there about A I and in relation to tech, are there any assumptions or predictions that we can make about the crypto markets? Um, well, the, the, the crypto markets at an interesting juncture because II I think it should benefit, you know, if we are going into a rate cutting cycle in the US and more broadly, you know, some of, uh, the other countries have already started, started cutting rates. Yeah, that should be generally quite beneficial. Um, it's not got such hot competition, which, to be honest, it's cryptos, weathered the storm of higher interest rates that we've had over the last two years actually pretty well. Um, you know, obviously it came down with stocks in 2022 but pretty much everything. Had a bad year though. Yeah, bonds had a bad year. Stocks had a bad year. Crypto had a bad year. Um, you know, that was just basically people getting used to this idea that, yeah, you can have interest rates up at 5%. They're not particularly high if one actually, you know, someone as old as me, you know, I remember when U US Long bond yields below 7% were considered to be almost. Um So, you know, I i it it's, it's there, it's a, I think the most important thing for crypto now is it's become institutionalized. It is that institutional involvement, which gives it a lot more gravitas, not necessarily removing the volatility, but it gives it a lot more gravitas and pe the idea that people take it seriously. And it also has the advantage that the with gold is uh not overvalued but uh performing so well. It's another alternative in a world which is still beset by fiat money. Um And where the fiat money is basically still looking for better returns. Well, I want to talk a little bit more about that. You know, there are people who are in two camps when it comes to Bitcoin, there are folks who are in the camp that Bitcoin is a risk asset. Uh And there are people who are in the camp? That Bitcoin is a store of value, much like gold. People call it digital gold. Uh What's, what's your perspective if you have one on Bitcoin, do you think it follows the risk asset camp or do you think we're going to start seeing uh more folks start to view it as digital gold? Uh I don't think it's got to the stage where it could be viewed as digital gold. I, I think it's, I it is very much still a risk asset, but we're in an environment in an environment where we are going into lower interest rates. Um um and also an environment where probably the equity markets all need to revalue down to more realistic levels before they can rally again. Um You know, it, it presents an interesting alternative. Um As long as one has the patience and does the due diligence on it. Now that market downturn on Monday had economists debating whether we are heading towards a recession, whether we're not, I saw some good arguments on both sides. Where do you stand? Um I, you know, if there is gonna be a recession, I doubt it's the, not the, I doubt it happens before next year. Um For the US economy for the time being the s you know, I, I think the biggest risk for the US economy actually comes from the fiscal side from the election. Um If Mi if Mr Trump or, and indeed the Republican Party outlines on what it plans to do to the Inflation reduction Act, which is basically revoke it. Um that will slow the US economy quite dramatically because that has along with the Chips Act um has um been supporting the economy, been supporting business investment via the tax credits for the past 18 months. Um And without it, um a as much as people are also worried about the size of the budget deficit in the United States. But without it basically that support, um you know, you've had the reduced support for the consumer post COVID. Um And now that side, I don't think actually would do the US economy, uh many favors and there would have to be basically uh a slowdown. Um And probably a lot of businesses will be quite concerned about, you know, what happens next. Mhm. Along with calls for, for that recession, I've heard many economists saying that we're due for a Black Swan event maybe to kick off that recession. Curious if you think we would see a Black Swan event seemingly very close to the last one that we saw with COVID. Um Well COVID was a different type of Black Swan event. One would have to say, you know, it's, uh you know, it's in the category of natural disasters, basically. Um, we've got enough there out there. So it's al always in everyone's consciousness, you know, financial markets basically don't like to price in political risk. Because there's a political risk there every five minutes. Um, so, um, they, they basically don't price it in until the shooting starts and you, until it becomes really ugly. Uh, because otherwise they end up with a very familiar cycle of people say, oh, but you need to watch out for this. So they get rid of some of their risk assets. They pile up the defensive assets and then they, what they find out is that it doesn't actually materialize and they end up having to buy back into the risk assets at 1015 20% higher than they actually sold them at and think, and they end up thinking, you know, what I should have sat that out. Uh So we, you know, we, we've got the, the geopolitical tensions. We've all, we've got the whole na national um political tensions, whether it's in the US, whether it's in France, whether it's in the UK. Um You know, we've got the, the global trade tensions with China. We've got the, the co the, the NATO versus um the, the Shanghai corporation access as well. So there's plenty of things out there which could definitely create a Black Swan event. Um Typically, I, you know, I, I think, I think what people need to remember with the interest rate cutting cycle. And I've made this quite a number of times. We actually haven't had an interest rate cutting cycle, particularly in the US in the last 25 years ie since, um, the LTCM Russian crisis, which was 9798 which hasn't been triggered by some sort of financial systemic threat. None of it has been a, no, there's been a normal one where the economy's slowing. We need to give a little bit more stimulus and it's all very gradual. It's always been. Oh, my goodness. We've got a cr finan, we've got a financial systemic crisis. We need to address that immediately cut rates dramatically um and do more um quantitative easing. Um And that's all people are used to in the last 25 years, particularly since uh well, the last 15 years since the global financial crisis. So that, that's what the peculiar part of this is when we're talk talking about second guessing a recession, you know, any recession, even in Europe, you know, Europe's growth is not impressive at all. Uh Germany is going through a period of deindustrialization. Um But we're not talking about a crash bang wall recession, you know, the economy's not gonna contract like it did in the first six months of COVID. Um It, it's a gradual stagnation, I think rather than a recession. And for that, there are actually, you know, for that generally, actually, interest rates don't do a lot because prob a lot of the problems are structural and therefore need to be dealt with by the legislature by e fiscal spending and changing legislation rather than th this, this precious little central banks can do if an economy has a lot of structural headwinds and a lot of the developed world economies do have structural headwinds. We mentioned uh many macroeconomic factors on the show this morning, we talked a little bit about China, Japan Germany, the elections coming up here in the United States just to round us up here before we wrap up. What should folks who are investing in crypto, whether that's on the ETF front or by actually holding the crypto or trading the crypto, what should they be watching right now as we head to the end of the year? Um I think basically don't watch who's gonna win the the presidential election, watch what Congress is gonna, how Congress is gonna be made up, that's gonna be far more important in terms of market reaction because it will be, you know, if there is a clear, if, if one of the parties wins both houses, then they have AAA and assuming the same, we have the president from the same party, they basically can do a lot in terms of legislation which could have quite long lasting impacts if on the other hand, Congress is divided, um basically, you're gonna, you're not gonna get as many dramatic things. Um And the other thing, I think people need to remember which I, I think sometimes gets lost in the wash uh particularly with regards to the US. There is this idea that the Republicans are more hostile to China than the Democrats. I would actually say the Democrats are much more hostile to China, but they see China as a threat. Um in the words of Donald Trump from just a few weeks ago, the Republicans basically don't mind what China does. But if they want to sell things to the United States, then come and make them in the United States employ American workers and we will welcome the Chinese goods. Um So that's something to always bear in mind because I think some people go, oh well, Donald Trump, you know, will be bad for Mexico will be bad for China. Um And it's not necessarily the case mark. Thank you so much for joining the show and providing that insight. And thank you for listening to the show and coming on this journey with me to better understand the crypto markets. If you enjoyed this episode, be sure to subscribe to the Coin Desk Podcast Network that's available on all podcast platforms. Give us a five star review, leave a comment about what you love or what you hate and we will be sure to read them and respond only when appropriate. If you prefer to watch video, subscribe to our youtube channel and hit that like button. Your support means the world to us. Have a fantastic day and we'll see you on Monday.

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