Viewpoint: Speculating the time of the "market bottom" from the macro cycle

The crypto market, like the stock market, reflects people's expectations for the future economy. When people were still fantasizing that the US dollar interest rate hike would not have an impact on the market, the crypto market had already started a downward trend. Now, the market is still divided on whether the US economy is about to enter a recession. Disagreement means that the market's expectations have not yet reached a consensus, so the downward trend has not ended. Once the US economy officially enters a recession or geopolitical conflicts break out, the bottom of the crypto market will appear.

There are two types of economic recessions: inflationary and deflationary. The one the United States is about to face is obviously the first type. The characteristics of an inflationary recession are the coexistence of high inflation and low unemployment in the early stage, and the unemployment rate rises in the later stage but the inflation rate remains high. The current inflation rate in the United States remains high. With the coming of a cold winter, Russia's restrictions on oil and gas output will cause energy prices to soar at the end of the year, further pushing up the inflation rate. In addition, the continued rise in the inflation rate will trigger a strike movement by workers. The recent strike by American railway workers is just the beginning, and there will be waves of strikes in the future. This will cause a death spiral of rising wages - increasing inflation - continued wage increases, which will eventually lead to rising unemployment and completely put the economy into an inflationary recession.

Therefore, the Fed can only continue to raise interest rates next year. According to Mester's previous forecast, interest rates will rise to at least 4% at the beginning of next year, and may even exceed 7% for the whole year. The recovery from an inflationary recession is very long. Judging from various sources, the market will have to wait until at least 2024 to usher in a rate cut cycle. Of course, this does not mean that the crypto market and the stock market will have to wait until 2024 to hit bottom. The capital market reflects investors' expectations for the future rather than the current situation. Therefore, as long as the market agrees on future expectations, that is, most investors agree that the economy will enter a recession, then there will be no selling power in the market regardless of whether the recession comes at that time.

At present, there are still some voices in the market that believe that the United States will cut interest rates in order to save the economy, which is essentially not recognizing that the economy has entered a recession. Inflationary economic recessions in history cannot be saved by stimulus policies such as interest rate cuts. The only way to save the recession is external plunder. The methods of external plunder include not only hot wars, but also financial wars, that is, absorbing global funds by raising interest rates to cause the collapse of other countries' financial systems, and then buying back other countries' high-quality assets at low prices. Before World War II, most countries adopted the method of hot wars to transfer contradictions to other countries, and after World War II, most of them adopted the method of financial wars. Take the United States as an example. After the Great Depression, a series of policies to stimulate the economy were only symptomatic and not fundamental. What really got the United States out of the crisis was the outbreak of World War II. After the end of World War II, the world longed for peace, so hot wars did not easily occur between major powers. After each stock market crash, the United States survived the crisis through financial wars. The current situation is also the same. The global economic recession is inevitable. The game between major powers is to see who can tolerate the recession more and buy the other party's high-quality assets at a low price after the other party collapses first. The difference is that in several crises after World War II, the party that collapsed first did not have the ability to launch a hot war, but this time, whether it is the US and European camp or the Chinese and Russian camp that collapses, 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 reach that point, even though the U.S. stock market was rising steadily during World War II. But what we need to observe is whether the market has reached a consensus on this possibility.

It is difficult to estimate the specific time when differences will turn into consensus, but we can pay attention to several important time points: the US midterm elections and China’s two sessions next year.

The importance of the US midterm elections is self-evident. The reason why most optimistic investors (such as Arthur Hayes) believe that the US is about to cut interest rates is because they think that after the election, policymakers can put aside the pressure from voters and save the stock market regardless of high inflation. The time point to confirm this view is the interest rate decision after the midterm elections (December 14 this year and January next year).

The Chinese factor is often ignored by the international market, but since we are discussing whether geopolitical conflicts will escalate, the Chinese factor must naturally be taken into consideration. Not only that, although China has repeatedly suppressed the crypto market, we still cannot deny the fact that China is the second largest source of funds. Therefore, the liquidity of Chinese investors can also play a decisive role in the crypto market.

At present, the market expects that China will relax its control over the epidemic after the October meeting, and the economy will begin to turn around. This expectation may be too optimistic. The overall layout, especially the personnel layout, will not be completed until the National People's Congress in March 2023. Therefore, investors' expectations on when China's economy will begin to pick up and how to deal with geopolitical conflicts will not be able to reach a consensus until after March next year.

In summary, I believe the bottom of the crypto market will appear between mid-December this year and March next year. The market reflects expectations for the future. What we fear is not economic recession and geopolitical conflict, but the uncertainty of whether the two will come. As long as investors' expectations turn from divergence to consensus, capital will not panic no matter how turbulent the world is.

This is just a personal opinion and does not constitute investment advice.