The recent rally across various asset classes has been fueled by macro factors, but analysts differ in their opinions on the sustainability of the bullish trend. Despite expectations of a recession and a resumption of the 2022 bear market, most assets have experienced gains, including the NASDAQ reaching a 52-week high. The possibility of further rally and its underlying reasons are explored by independent macro and crypto analyst Lyn Alden in a recently published newsletter.
Alden compares today’s inflationary environment to two different periods: the 1940s and the 1970s. The key difference lies in rapid bank lending and large monetized fiscal deficits, which Alden suggests are driving inflation. While the current situation resembles the 1940s more than the 1970s, the Federal Reserve is implementing policies similar to those of the 1970s, potentially leading to counterproductive outcomes. The creation of new federal debt, often referred to as government money printing, has been a significant contributor to inflation. Raising interest rates to combat inflation can work when it stems from an expansion of credit tied to banking loans. However, in the current scenario, higher rates exacerbate fiscal deficits by increasing the interest owed on debts. With the federal debt now exceeding 100% of GDP compared to just 30% in the 1970s, the situation worsens at a faster pace.
Despite the Federal Reserve’s efforts to control inflation by raising rates, the core cause of the inflationary environment remains unaddressed. The higher debt-to-GDP ratio complicates matters further. However, markets, including tech equities and crypto, have remained resilient, even though the correlation between the two has weakened. This indicates that the tool used by the Fed may not be suitable for the current situation, but it hasn’t hindered market performance, at least for now.
The first half of 2023 has been bullish for equities, with tech stocks leading the rally. However, this upward momentum has primarily been driven by a handful of mega-cap stocks, resulting in an imbalanced distribution within indices like NASDAQ. The rally in tech stocks receives support from an easing of liquidity in the bond market, which began in late 2022. Real interest rates present a different story compared to the 1970s, further suggesting potential struggles in traditional markets and the possibility of blockchain serving as a safe haven.
Crypto assets, particularly Bitcoin, have shown resilience and even decoupled from traditional equities, indicating their potential as risk assets. Bitcoin’s correlation with the S&P 500 has reached near-zero levels, highlighting its independence. With upcoming events such as the halving and the prospect of a spot Bitcoin exchange-traded fund (ETF), cryptocurrencies seem poised for a breakout regardless of market conditions.
It is essential to note that this article does not provide investment advice or recommendations. Investors should conduct thorough research and analysis before making any investment decisions.