Several months ago, I posted the original idea (see related) when I thought that markets were preparing for major asset rotation. Instead, it seems that we only got a preview of the real thing. Meaning, that Bitcoin had a major selloff right around the time of the first post, but it wasn't severe enough to drastically shift the major asset classes.
Right now, I feel a similar type of paradigm shift is coming, so I wanted to review some key points that I've gathered since monitoring this correlation study. The major takeaways are listed in the top part of the chart and the updates to what the correlations with Gold could mean for each asset class are shown in the bottom sections, respectively.
In my opinion, not much has changed regarding the future direction of the various asset types, with the exception of USD. I think that as of today, inflation will get its recognition as a potential destroyer of wealth and will lead to mass exodus from risk assets. The reasons for this are too many to include and are beyond the scope of this post. The main point of this is that I believe that due to the bizarre and artificial economic landscape painted by the Fed, that inflation will be viewed as a harbinger for risk assets, before it is considered an "invisible tax" on the USD, which would lead to broader questions concerning its purchasing power.
The reason for mentioning this inflation belief is that we find ourselves in a unique situation whereby there are only two main asset types that are "undervalued": 1) USD, 2) Gold. Ironically, these two things should be polar opposites; yet it is now undeniably true (based on recent correlation studies), that the two move in tandem when correlated, and have been such more often than not over the past several years.
Lastly, I would strongly recommend keeping tabs on USD/Gold corr going forward, since it can really help to find true direction when financial markets unravel.
HARRI: From what you have said (SPX/GOLD negative, USD/GOLD positive) we are entering a period of commodity strength and equity weakness?
UnknownUnicorn5511258
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@coal4christmas, yes, for sure. the 1970s parallel is shaping up to be the most similar period from a structural/technical perspective in addition to the often-referenced similarity in economic climate.
the real problem that I see this time around, though, is that the true inflation figures are actually much, much higher than are being reported. this could be very serious if prices (particularly on the supply side) hit an inflection point whereby the government/fed cannot fight them with their monetary/fiscal tools.
well, maybe they could theoretically, but then markets would lose all their freedom.
circling back to your question, I think that this particular economic situation lends itself to a sustained bull market in commodities and at least an initial major selloff in equities (that assume future cash flows in terms of today's inflation, not tomorrow's hyperinflation).
sparrow_hawk_737
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crypto can be taken as mostly a function of global liquidity-- perhaps china credit impulse is the most crude but accurate indicator for crypto's performance
UnknownUnicorn5511258
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@sparrow_hawk_737, not a bad thought, and could be the case. Only argument with this is how tiny the market cap is (Bitcoin, at least), compared with any other major asset. Is there any metric you can think of to show this relationship?
my best guess for what crypto represents most closely, in today's market at least, is the riskiest form of equity investment. that is what the today's 90-day correlation says to me, at least.
i don't think you will see another mutually exclusive selloff between BTC and Equity again this year for that reason.
sparrow_hawk_737
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@Perma_Pig, see this chart, by robert balan, on china credit impulse and crypto: imgur.com/a/YLhV2pn
BrianM20
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BTC / gold double full crash soon, would you expand on the timing and why you say double full crash?
UnknownUnicorn5511258
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@BrianM20, im glad you asked. it seems btc does everything in twos when it comes to technical orientation. for example, there seems to be two barr tops at the high and second high. (dual barr topping pattern). Also, every little pullback on the way down has another version of itself within the broader correction if you look closely enough.
so, its for this reason why I thought it would take two separate major selloffs for this to finally capitulate.
unrelated note - the move up was so ridiculous that the move down should be labeled accordingly, imo.
UnknownUnicorn5511258
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@Perma_Pig, also timing is mostly due to my wave analysis and the fact that gold is reversing.