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November 2018 Market Update – Trade War + Bitcoin

Stay calm.  All is well in the markets.

Remember this time last year Trump unleashed a massive tax cut.

The tax cuts are what sparked the sugar rush of spending to this day.

But things aren’t as powerful anymore on a year-over-year (yr/yr) perspective.

Add in the blowback from tariffs and a whiff of uncertainty enters the picture… and you get the deep, dark red in your portfolio.

As I said last week:

At this point the market will bounce up or down depending on the latest trade war news item.  The market is hostage to the trade war. Trump is playing hard ball. He started the fight and must see it through.

The market clearly wants a deal to get made. News of Trump willing to meet with Chinese President Xi sent stocks up. Then signs of an impasse brought it right back down.

Now the story is fear the Fed will make a policy mistake. One it’s done over and over: raise rates into an economic slowdown.
For example, I was wrong about inflation: CPI was pretty mild.  Although the producer’s inflation rose (PPI).

Nervousness is not something the market handles well. And we’re in the middle of absolute uncertainty today.

I am changing my near-term read of things.

I no longer expect China to blink this month.

I expected some movement post-midterms. I believed China would wait in order to calibrate their response to how Trump emerged.

I rightly predicted that he would emerge unfettered. Nevertheless, China is standing firm.

I can’t tell how much is just playing to the audience and how much is real positioning.

If it’s positioning, then they are making serious policy errors because it means they continue to misread Trump’s willingness to go to the full distance. Which means the trade war gets dragged out into February.

Bitcoin’s fading promise

Cash is not a bad move.  Or gold.  Same thing.

But not Bitcoin (BTC).

BTC fell to a 12 month low – now at just under $4,400. All the other cryptos got crushed too. But what does this all mean?

First, let me repeat my overall take of crypto currency.

I believe that crypto is here to stay for at least 2 reasons.

One is that it enables rapid, low-cost transactions. It is the thing that banks fear the most: a way to bypass them.

But they also recognize a winner when they see one and they are trying to harness the underlying blockchain technology to obsolete their workers.

Second, BTC enables China, Russia, Iran and others to pursue non-dollar transactions.

In fact, the entire starting point for Satoshi’s creation is de-dollarization. Put differently, BTC will always have a home for those who don’t want U.S. dollars.

The real question isn’t Bitcoin – yes-or-no?  The real question has always been – what is Bitcoin really worth?

Last week the market said that BTC was worth 15% less than it was worth the previous week.

Some people will claim that it is tied to a branch in the crypto currency. No. That would not affect all cryptos.

More basically, this has been a trend based selloff.

Bitcoin continued to make new lows since January – when Bitcoin futures became available. And it was able to effectively be “shorted.”

A technical read says that is an indication of further lows ahead. Sure it could bounce back in the near-term. But it looks like the future isn’t as strong as many thought.

And this is BTC specific. The market was relatively unaffected.  Crypto currencies just….collapsed.

It could be connected: maybe a major BTC owner had a margin call somewhere else and decided to close BTC positions to cover.  I leave that to better informed people to figure out.

This leaves two major problems with Bitcoin overall.

BIG PROBLEM #1: Bitcoin has failed it’s first big test. It is clearly not a hedge against market crashes or volatility.  And frankly that is the only reason to own it.

BIG PROBLEM #2: Most owners are underwater. Anyone who bought in the last 15 months and held is now losing money. And over half of buyers bought in the last 12 months.

It’s clearly been a fad over the last 15 or so months (maybe longer?)  Not to everyone. But to many.

It’s evident in the trading volume, which has steadily drooped 50% in just the last 6 months.

Buyer interest is tapped out. As the fad part continues to wane, BTC will be left with more down days ahead.

Avoid Bitcoin for now…



Andrew Zatlin

Editor of Moneyball Economics

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