00:00 Speaker A

Recent note from City pointing to crypto weakness as a potential warning sign for equities, but saying liquidity could soon turn and revive risk assets into year end. For more Dirk Willer, head of macro strategy and asset allocation at City. Dirk, it is good to see you as always. let’s start with that recent note from you all, Dirk, where you were talking about Bitcoin’s recent weakness and sort of this this warning sign for stocks.

00:20 Speaker A

since you’ve said, you know, wrote that Bitcoin’s even weaker, but but start there, Dirk. what is this this warning sign you’re referring to?

00:33 Dirk Willer

Yeah, um yeah, thanks for having me on. It it’s interesting actually that uh when we we were when the month when the equity market was still doing really uh quite well, we noticed the divergence with Bitcoin, um and it’s it’s actually somewhat rare. So Nasdaq and Bitcoin both um trade uh with a positive correlation.

00:54 Dirk Willer

And you had episodes in the past where Bitcoin diverge to the downside and that was uh at times a negative harbinger. So we back tested that, um, and we found actually, it it’s fairly reliable.

01:07 Dirk Willer

So if um, if Bitcoin trades below its 55-day moving average, the information ratio of the Nasdaq is just 0.5. If it’s above, it’s 1.5. And of course, both are positive numbers because we’re essentially in a bull market for a long time, but there’s meaningfully better performance for the Nasdaq when Bitcoin uh is essentially part of the bullish sentiment rather than when it’s diverging.

01:28 Speaker A

So in your note, Dirk, correct me if I have this wrong, what, you know, trying to find explanations for what’s going on with Bitcoin, were you pinning that on tightening liquidity?

01:42 Dirk Willer

That is one of the explanations. So there are a couple of things going on in in Bitcoin that that are interesting. First, there was a flash crash in early October. and that, you know, for Bitcoin itself, it was a 14% move down over two days, maybe not not that drastic, but some of the old coins really got uh got sold much, much harder. And uh after this flash crash, we saw that the flows into the uh Bitcoin ETFs uh and so forth really changed.

02:08 Dirk Willer

So the flows um really never recovered and so retail was apparently somewhat shell-shocked by that day and uh and we saw outflows. Um the other thing that happened is that I think a lot of the institutional investors trade Bitcoin with a bit of a trend following mindset. And so we broke some of the moving averages that they tend to look at and that is also reducing a source of demand.

02:32 Dirk Willer

But the third point is what you were mentioning, and that is that the liquidity which we measure by bank reserves on the Fed balance sheet dropped by a bit more than 500 billion. And that happened because the Treasury uh increased the Treasury General account at the Fed uh by selling a lot of T bills.

02:49 Dirk Willer

And there were two reasons for that. One is um why this TGA account was so high. One is that um uh that during the government shutdown, uh the treasury didn’t spend as much. So so that account rose mechanically on the back of that.

02:59 Dirk Willer

Um but secondly, they did sell more T bills than is typical. Um and and so we are thinking going forward, the liquidity squeeze, so that explanation for the Bitcoin weakness should actually get much better because we expect TGA to at the very least flatten out um and uh probably decline meaning bank reserves and the liquidity should improve between now and the end. Partly because of the reopening and partly because the Treasury has sold so many T-bills already.