The Withdrawing Addict Gets Their Fix
Plus a major announcement for Cubic Analytics!
Investors,
Markets have been tumultuous in 2023, continuing with the theme from last year. The good news is that the S&P 500, the Nasdaq-100, and Treasuries have a positive YTD return. Even gold is up +8% this year! The Dow Jones has turned negative for the year, plagued by a concentrated exposure to financials; however, asset prices have been resilient amidst an array of risk events and macro headwinds, including:
Two +0.25% rate hikes by the Federal Reserve.
Two +0.5% rate hikes by the European Central Bank.
The second & third largest banking failures/shutdowns in U.S. history.
The acquisition/bailout of Credit Suisse by UBS & the Swiss government.
More systemic risks and concerns about the U.S. financial & banking industries.
Still high/resilient inflation data in the U.S., though certainly in disinflation.
As I continue to adapt and find new ways to create value for Cubic Analytics subscribers and guide investors through the turbulence, I’m happy to announce a new benefit that I will be offering to premium members:
Weekly group sessions for market discussion and Q&A!
As I look across the landscape right now, I want to ensure that premium members are at least one step ahead of the market and have a firm grasp on overall market conditions. By providing these “office hours”, I want to make myself available to give you my unfiltered opinions, answer your questions, and even go over exclusive charts & analysis. This will give all premium members the ability to ask for clarification on recent publications and analysis, or to bring new ideas to the table and have an open discussion about them.
Think of this as a weekly investor meeting or analyst call for premium members to ask me about anything market/macro-related. If you’re already an existing premium member, you’ll automatically start to receive email invitations for these weekly meetings so that you can attend, which will begin during the first week of April 2023.
If you’re currently a free subscriber, consider upgrading your subscription today and I’d love to have you join these meetings! I’m confident that they’ll create a tremendous amount of value in addition to the existing benefits of a premium membership.
Premium members now benefit from the following, in addition to free weekly reports:
Weekly investor calls, where I’m fully available to answer questions & discuss markets conditions with paid monthly/annual members.
Weekly deep-dives on market conditions, published every Sunday, focused specifically on the stock market & Bitcoin.
Monthly analysis on a subscriber-voted stock, published on the first Wednesday of every month. We’ve covered Chevron and Meta so far, with the upcoming edition focused on Advanced Micro Devices AMD 0.00%↑
Full access to my “Portfolio Strategy” series, where I shared the 15 individual stocks & ETF’s I’m buying in portfolios that I help to manage. I don’t just share what I’m buying, but I share the complete qualitative and quantitative investment thesis behind each idea.
33% discount to one-on-one meetings, booked directly through Substack.
I’m thinking to conduct these group calls every Tuesday at 6pm, but please do me a favor and vote on the best option for you below:
These investor meetings will begin on the first week of April (not this upcoming week, but the week after) and I’m super excited to kickoff this new benefit for premium members! If necessary, we can alternate the timing of these meetings to ensure that there are different options if investors have existing time conflicts.
To upgrade your subscription and take part in these calls, use the link below to view the premium membership options:
Without further ado, these are the top things you should know about from this week:
Macroeconomics:
In a week dominated by macro events, defined by more banking pressures and another Fed rate hike, I had an opportunity to speak with the team at Blockware Intelligence to provide my thoughts about ongoing dynamics. We did an excellent job of hashing through the key events and breaking down the most important things for investors to know about the banking situation, liquidity conditions, and Fed intervention.
Please check it out below:
Stock Market:
Broadly speaking, markets have continued to remain resilient and exhibit strength amidst fundamental concerns about macro. Investors seem solely focused on the fact that the Fed is injecting an immense amount of liquidity to the system, as exhibited by an ongoing increase in their balance sheet. As of Wednesday, March 22nd, the Fed’s balance sheet increased by another +$94Bn after the prior week’s increase of +$300Bn.
With the Fed acting as a lender of last resort, their recent actions have erased five months of balance sheet runoff that they were conducting in 2022. The Fed’s assets are currently equivalent to the level from October 2022.
Similar to the analysis that I shared in my 2023 outlook, an increase in the Fed’s balance sheet will likely produce strong tailwinds for high beta assets, particularly relative to low volatility assets. So what exactly is a high beta asset? Something that experiences larger moves (both to the upside & downside) than the broader market.
We should think of technology stocks, semiconductors, SaaS, and crypto when thinking of “high beta”.
So how have these assets been performing lately? Extremely well. EXTREMELY well.
Technology (Nasdaq-100) +7.9% over the past 2 weeks.
Semiconductors (VanEck Semi ETF $SMH) +7.2% over the past 2 weeks.
SaaS (iShares Expanded Tech Software ETF $IGV) +6.9% over the past 2 weeks.
Crypto (Total Crypto Market Cap) +28% over the past 2 weeks.
Another way to think about this is comparing growth stocks vs. value stocks, which I will expand on in tomorrow’s premium report!
The Dow Jones, which has the most exposure to financial stocks, is clearly lagging each of these market groups with a +1.03% return over the past two weeks. The S&P 500 itself is up +2.8% over this time period, which is still impressive considering the banking situation that is still unfolding.
Essentially, the market dynamic that I forecasted on Monday after the Fed’s intervention has been correct:
As far as the market is concerned, the Fed’s intervention has stopped the bleeding and backstopped the fear that this can lead to a widespread economic/financial downturn. While I have a difficult time telling the market that it’s wrong, I continue to remain hyper-cautious given the exponential rally we’ve been seeing in the equity market. In other words, I’m not chasing this rally and would prefer to let the market come to me.
Perhaps the market knows something we don’t, leading to higher asset prices with an insatiable appetite for risk assets; however, I also believe that the magnitude of this rally is nonsensical. Investors are fully expecting for the Federal Reserve to cut interest rates by 100 basis points (or -1%) at some point in 2023, but it’s necessary to understand WHY the Fed might start slashing interest rates. The justification, as far as I’m concerned, is the exact same from my forecast in my 2023 market outlook:
A recession or a financial crisis, particularly considering that CPI inflation is +6% YoY.
At the present moment, the market is exclusively focused on “the what” and not focused on “the why”, highlighting the degree with which investors are addicted to monetary stimulus. The market wants another hit because it’s been in a painful withdrawal for 12 months. With liquidity rushing into the system from the Fed’s intervention, the market is getting its fix. I don’t know how long this “high” will last, but the market is clearly buzzing and might even get a larger dose in the near future.
Bitcoin:
With many investors viewing Bitcoin as a fundamental gauge of liquidity, it’s been one of the primary beneficiaries of the ongoing Fed intervention. The digital asset is now up +66% YTD and has experienced minimal pullbacks in the 2023 uptrend:
It’s three largest drawdowns in 2023 have been:
-12%
-22.5%
-9.9%
For Bitcoiners, these consolidations are practically nothing at all and highlights the decisive nature of the uptrend. Still, I think it’s vital to zoom out and understand the following two charts for Bitcoin and the overall crypto market.
1. Bitcoin denominated by M2 money supply: BTC/M2 is an alternative way to measure the performance of Bitcoin. Rather than analyzing BTC relative to the value of U.S. dollars, it’s great to measure BTC relative to the supply of U.S. dollars! M2 helps us to accomplish that, even though it’s not a perfect methodology.
From a structural perspective, BTC/M2 is still trading below the peak from December 2017, when BTC’s nominal value was trading at $19,700. With the BTC/USD exchange rate currently at $27,500, it’s amazing to see such an extreme divergence between the value relative to M2 over time. From my perspective, I think it’s important to remain cautious about the ongoing BTC rally so long as BTC/M2 remains below the 2017 peak. As we can see from the chart above, the breakout above the 2017 peak acted as a launchpad for the price in Q4 2020 and 2021. Because of this significance, I think it’s important for long-term investors to have this chart on their radar.
2. Total crypto market cap $TOTAL: This metric essentially allows us to measure the entire price action of the crypto market by being asset-agnostic. This chart captures the entire value of crypto, including stablecoins and the most nonsensical altcoins. Again, it’s not a perfect metric, but it certainly allows us to contextualize market dynamics within crypto.
So here’s the thing… total crypto market cap is trading at an EXTREMELY important level right now, based on the chart below:
As we can see, this teal range has been a critical place for crypto:
January 2021 resistance
Mid-2021 support
May 2022 support
August 2022 resistance
November 2022 resistance
YTD 2023 resistance
Each of these timestamps were major tops or bottoms for the crypto market over the past 27 months, and it just so happens to be the case that we’re retesting this key range right now. Personally, this tells me that there’s a high probability for it to act as resistance, as it has since the mid-2022 breakdown below the range. However, if total crypto market cap can manage to break above it (big “if”), then probabilities shift towards it acting as support, as it did in 2021!
In my opinion, both of these charts represent the two most important arguments for caution and/or potential resistance. If BTC/M2 and $TOTAL can break above these key levels, the bullish argument will improve dramatically. We’ve seen extreme improvements for BTC & crypto in 2023, and the resilience of the uptrend has been astounding. However, that doesn’t mean that we’re out of the woods and I will continue to highlight potential concerns for investors to have on their radar.
Best,
Caleb Franzen
DISCLAIMER:
This report expresses the views of the author as of the date it was published, and are subjected to change without notice. The investment thesis, security analysis, risk appetite, and time frames expressed above are strictly those of the author and are not intended to be interpreted as financial advice. As such, market views covered in this publication are not to be considered investment advice and should be regarded as information only. Everyone is responsible to conduct their own due diligence, understand the risks associated with any information that is reviewed, and to recognize that the information contained herein does not constitute and should be construed as a solicitation of advisory services. Cubic Analytics believes that the information & sources from which information is being taken are accurate, but cannot guarantee the accuracy of such information.
This report may not be copied, reproduced, republished or posted without the consent of Cubic Analytics and/or Caleb Franzen, without proper citation & reference.
As always, consult a registered financial advisor and/or certified financial planner before making any investment decisions.