The Rise of Risk Assets

1) In December 2022, we put forward our thesis that ‘2023 will be very bullish for risk assets’ (stocks + crypto).

2) The spread between the Fed Funds rate and the US CPI is now 2.3%, the highest since 2009. There is no need for the Fed to hike anymore as the structure shortage in the US employment market can hardly be reversed by simply hiking interest rates.

3) Our trusted CPI model indicated that US inflation would decline from 7.7% in December 2022 to 2-3% by the end of 2023. This made us hugely bullish as so many pundits called for persistently high inflation numbers. Mathematically, this was impossible.

4) The latest CPI reading is now at 3.0% and our model indicates that inflation will fall further. This will support risk assets (stocks and bonds) and should also cause lower bond yields, which will free the shackles of high cost of capital for corporates.

5) The most important trade will be money leaving money market funds and being moved into bond funds. The last we saw $20bn leaving money market funds. Before COVID, US money market funds held $3.6trn, since Nov 2022 when the Fed hiked rates to 4.0%, money market funds held $4.6trn and currently stand at $5.4trn.

6) Hence there is now $1.8trn access liquidity in money market funds, harvesting an astonishing 5.25% risk-free return. Sounds exciting? Well Bitcoin is up +83% YtD, Nasdaq +36%, SP500 +18%, etc. So the 5.25% return was a trap for many investors that believed all this talk about an immediate recession in 2023.

7) The stock market continues to run on the AI theme. When Nvidia hit $400, many wanted to short it but instead of a reversal, the stock is now at $454. This is a sign that the ‘AI theme’ is not done yet and thinking about fading the winners is the wrong approach. We expect Bitcoin to hit $45k by year-end and the SP500 to make new all-time highs.

8) In early June, we wrote that a record number of SP500 shorts and the coming short-covering would lift SP500 prices (stocks) higher. 50% of the shorts have now been covered and this caused the SP500 to rally +10%. There is potentially more shorts to be covered soon.

Join now for more insights around crypto!