Market value of equity holdings is not part of 'liquidity' which is a funding measure. Decades ago real economies drove financial markets: now the reverse. Financial markets in turn driven by need to refinance debt
Ah I see your point. Agreed here. Liquidity is credit intermediated by collateral. So it's true that rising asset prices as collateral beget more liquidity. We take this part into account. The collateral multiplier depends inversely on the MOVE index of bond volatility. I thought you meant that equity cap was part of how we measure liquidity. Happy Christmas too
If I understand correctly it is not strategic for the US to raise liquidity before the big Treasury auctions starting next year because it will raise bond yields?
Probably true. But can you model gold? Same problem? The way I look at it gold price is determined by volume of credit money to notional gold stock. More paper means higher gold price. Bond and stock are denominated in paper money and because of their returns, they are luding value against gold at a slower rate. Bitcoin has both the scarcity value and a novelty/ uptake effect which may follow an S-shaped curve. I like then and own them, and hope to buy more on a dip.
If global liquidity drives the price of both gold and Bitcoin, why do you treat the gold price and liquidity as two independent influences on the price of Bitcoin? Can they be merged into a single influence?
Yes that's correct within a system of equations, but because there are feedback effects operating between gold and bitcoin, when looking just at bitcoin, we need to know what has already happened to gold.
Question regarding GLI lag times - in general it's about 12 weeks. But can it be further broken down by the liquidity component driving the GLI.
Like would there be a difference if GLI improves from lower bond volatility (bigger multiplier effect) vs CBs doing QE or some policy pushing money out of RRP, or the spending of TGA account.
Do these liquidity sources have different time effects to trickle down into markets or it doesn't really matter?
Its a good question, but hard to quantity. Money that is created within and stays within the financial sector is more likely to drive financial asset prices. But to isolate the individual effects statistically would be challenging. I would just stick to the aggregate
Thanks for the research. Very insightful. Do you know why DAX has a negative sensititivty to Global Liquidity, while all other stock indices have a positive sensitivity?
I would not read too much into that single result because it may well be picking up other effects.DAX is sensitive to Euro/US$ so in the period we looked at here that factor may dominate
Question: looking at the GLI (+13 Weeks) & BTC chart, does that mean it is very likely that we will see a short term sell off in BTC of as much as -30% very, very soon? Maybe after year end? How reliable is the chart?
Its only statistics, but intuitively it makes sense. Would I use it as a sell signal when BTC$ has a strong trend? Unlikely. But I would lighten up and look for a better entry point in a few weeks. BTC does not move in a straight line. Yet I am bullish long term
I didn’t realise that just on the day I asked this question, the market will sell off sharply. So BTC could sell off 30% now to catch up with liquidity? Possibly.
In my BTC analysis, i concour that in the long term GLI is the main driver of BTC Base Price, or BTC Realized Cap, as almost all other assets. And besides that, in 4-4 years BTC doubles its price because of the halving, so:
1) We have a BTC price increase of 8%/year because of Global Liquidity (same as Gold), and
2) A BTC price increase of 18,9%, due to doubling price every 4 years (halvings)
3) Being a total of aprox. 27%/year increase in BTC base or realzied price, in the long term (Power of Law).
However, i think in the short term BTC price fluctuates primarely by increase in risk alocation, risk apetite and speculation, because BTC deviates alot from its Realized Cap/Price.
We can see this with the indicator MVRV Z-Score, which tells the diference betwen BTC Current CAP/BTC Realized CAP.
This increase in risk apetite/alocation, or "new money", rotates from other assets, like Gold and Equities, to BTC. So in the short term, i think is more a mater of liquidity realocation, than a short term liquidity increase.
Final point, if GLI was the main driver in short term, this means that from GLI increase between march 2020 to 2021 (30%), BTC should had increased much more than the usual, or more than the MVRV Z-Score, breaking its top trend. But that didnt hapen.
In the cycle of 2017, MVRV Z-Score climbed to 7 with a GLI increased over 20%. But in 2021, again MVRV Z-Score climbed to 7, with now a GLI increase of 30%, being much more than the last cycle.
How can we explain the decline in crypto+gold market cap between 2013-2016 despite liquidity trending upwards? Has it got to do with the slope of the curve, i.e. rate of liquidity growth? In other words crypto+gold can correct in an environment of increasing liquidity if the rate of growth becomes lower than the previous period?
It seems to be less to do with liquidity in this case than the 'sentiment' and 'gold' factors. Gold tends to move more with the trend in liquidity. BTC is more sensitive to ST cycle, but also includes these sentiment factors.
I will not touch gold; it is just not worth the risk; in the short history of Bitcoin, it has been eating into the share of gold, property, etc, as a monetary hedge; if we keep extrapolating, it seems that Bitcoin will overtake gold. Moreover, the Bitcoin Sharpe ratio and the return are better.
Hi Michael - what do you use as risk appetite proxy?
I have your book Capital Wars but have not started on it yet
Like the cover
I read ten books in parallel and haven’t been able to move yours up yet as need to finish one of the other ten
I view common stock as a form of credit. Does the common stock total capitalization come into your formula as liquidity?
I feel we are a credit cycle financial world now not currency per se
My credit offers actually seem expanding in last few months
In any case a Merry Christmas to everyone
Market value of equity holdings is not part of 'liquidity' which is a funding measure. Decades ago real economies drove financial markets: now the reverse. Financial markets in turn driven by need to refinance debt
Ok
Apparently people use their stocks as collateral to borrow at least media says billionaires do that
Also are margin accounts or margin borrowing which were a huge factor in the 1929 crash according to Irving Fishers book
Ah I see your point. Agreed here. Liquidity is credit intermediated by collateral. So it's true that rising asset prices as collateral beget more liquidity. We take this part into account. The collateral multiplier depends inversely on the MOVE index of bond volatility. I thought you meant that equity cap was part of how we measure liquidity. Happy Christmas too
Hello Michael what is R10 in the chart again?
10year US Treasury yield
If I understand correctly it is not strategic for the US to raise liquidity before the big Treasury auctions starting next year because it will raise bond yields?
Am curious if there is a generational aspect
I like to watch financial analyst interviews for entertainment
I noticed older analysts recommend bitcoin but said they don’t own any because they like things they can model or are just “old fashioned”
And have heard it’s the younger generations doing nihilistic betting on cryptocurrencies
I haven’t seen any statistics on this though
As wealth moves from the dying boomers to gen X etc this might matter?
Just my ruminations
Probably true. But can you model gold? Same problem? The way I look at it gold price is determined by volume of credit money to notional gold stock. More paper means higher gold price. Bond and stock are denominated in paper money and because of their returns, they are luding value against gold at a slower rate. Bitcoin has both the scarcity value and a novelty/ uptake effect which may follow an S-shaped curve. I like then and own them, and hope to buy more on a dip.
If global liquidity drives the price of both gold and Bitcoin, why do you treat the gold price and liquidity as two independent influences on the price of Bitcoin? Can they be merged into a single influence?
Yes that's correct within a system of equations, but because there are feedback effects operating between gold and bitcoin, when looking just at bitcoin, we need to know what has already happened to gold.
I have learned incredible things with you Michael. Tip top
Hi Michael,
Question regarding GLI lag times - in general it's about 12 weeks. But can it be further broken down by the liquidity component driving the GLI.
Like would there be a difference if GLI improves from lower bond volatility (bigger multiplier effect) vs CBs doing QE or some policy pushing money out of RRP, or the spending of TGA account.
Do these liquidity sources have different time effects to trickle down into markets or it doesn't really matter?
Its a good question, but hard to quantity. Money that is created within and stays within the financial sector is more likely to drive financial asset prices. But to isolate the individual effects statistically would be challenging. I would just stick to the aggregate
Hi Michael,
Thanks for the research. Very insightful. Do you know why DAX has a negative sensititivty to Global Liquidity, while all other stock indices have a positive sensitivity?
I would not read too much into that single result because it may well be picking up other effects.DAX is sensitive to Euro/US$ so in the period we looked at here that factor may dominate
Hi Michael
Excellent article as always!
Question: looking at the GLI (+13 Weeks) & BTC chart, does that mean it is very likely that we will see a short term sell off in BTC of as much as -30% very, very soon? Maybe after year end? How reliable is the chart?
Thanks!
Its only statistics, but intuitively it makes sense. Would I use it as a sell signal when BTC$ has a strong trend? Unlikely. But I would lighten up and look for a better entry point in a few weeks. BTC does not move in a straight line. Yet I am bullish long term
I didn’t realise that just on the day I asked this question, the market will sell off sharply. So BTC could sell off 30% now to catch up with liquidity? Possibly.
Hello, Michael
In my BTC analysis, i concour that in the long term GLI is the main driver of BTC Base Price, or BTC Realized Cap, as almost all other assets. And besides that, in 4-4 years BTC doubles its price because of the halving, so:
1) We have a BTC price increase of 8%/year because of Global Liquidity (same as Gold), and
2) A BTC price increase of 18,9%, due to doubling price every 4 years (halvings)
3) Being a total of aprox. 27%/year increase in BTC base or realzied price, in the long term (Power of Law).
However, i think in the short term BTC price fluctuates primarely by increase in risk alocation, risk apetite and speculation, because BTC deviates alot from its Realized Cap/Price.
We can see this with the indicator MVRV Z-Score, which tells the diference betwen BTC Current CAP/BTC Realized CAP.
This increase in risk apetite/alocation, or "new money", rotates from other assets, like Gold and Equities, to BTC. So in the short term, i think is more a mater of liquidity realocation, than a short term liquidity increase.
Final point, if GLI was the main driver in short term, this means that from GLI increase between march 2020 to 2021 (30%), BTC should had increased much more than the usual, or more than the MVRV Z-Score, breaking its top trend. But that didnt hapen.
In the cycle of 2017, MVRV Z-Score climbed to 7 with a GLI increased over 20%. But in 2021, again MVRV Z-Score climbed to 7, with now a GLI increase of 30%, being much more than the last cycle.
What do you think Michael? Thank you
That was a great article!
How can we explain the decline in crypto+gold market cap between 2013-2016 despite liquidity trending upwards? Has it got to do with the slope of the curve, i.e. rate of liquidity growth? In other words crypto+gold can correct in an environment of increasing liquidity if the rate of growth becomes lower than the previous period?
It seems to be less to do with liquidity in this case than the 'sentiment' and 'gold' factors. Gold tends to move more with the trend in liquidity. BTC is more sensitive to ST cycle, but also includes these sentiment factors.
I will not touch gold; it is just not worth the risk; in the short history of Bitcoin, it has been eating into the share of gold, property, etc, as a monetary hedge; if we keep extrapolating, it seems that Bitcoin will overtake gold. Moreover, the Bitcoin Sharpe ratio and the return are better.
If gold makes sense as a generic investment (it should vs paper money) then BTC can eats its lunch and gain mkt share vs gold as a monetary hedge