Market Lab Report - Banking woes; Crypto miners

by Dr. Chris Kacher

The big QE pump to backstop depositors due to the banking crisis in March is likely short lived as liquidity starts to dry up again. Net USD liquidity correlates with asset prices. Net USD liquidity is the Fed's Balance Sheet minus the Treasury General Account (TGA) minus Reverse Repo. The TGA is the operational account of the US treasury. When TGA declines, liquidity is being added. When there's a change in net USD liquidity, it takes about 2 weeks to propagate out into the economy & impact asset prices. That change in net USD liquidity influences stock and crypto prices.



On the other hand, the banking sector is struggling as the bounce is rolling back over. First Republic Bank (FRC) is another recent casualty followed by PacWest (PACW). Three of the five largest bank failures in history all happened in the last four months. Other financial institutions are still holding billions in debt that shows steep losses. Unless more JP Morgans step up to buy faltering banks such as FRC, the Fed will likely have to print to save the depositors and/or the banks. Foreign banks such as Credit Suisse are also faltering. Expect more QE sooner than later at home and abroad after the tightening cycle ends later this year. Pensions, IRAs, and commercial real estate are also all at risk. Each is another domino that could tip since they all have high bond exposure.


The majority of Fed members support at least one more 25 bps rate hike. Various members have said inflation is not yet under control so much work needs to be done in terms of keeping rates elevated. The 2% target remains in force though former treasury secretary Larry Summers said 5% inflation is the new standard in the US. Elevated sectors such as food and rent together with declining GDP growth create a stagflationary environment.

Major averages in the US stock market continue to show lackluster direction as the number of rip tides pushing the market up, down, and sideways continues.

Crypto and mining stocks

Bitcoin, Ethereum, and the crypto miners tend to correlate in price. Naturally, such will also have a high degree of correlation with Bitcoin and Ethereum vehicles that trade on the U.S. exchanges. Crypto miner CleanSpark (CLSK) bought 45,000 new mining rigs for $145 million, which will almost double its current computing power, or hashrate, once installed, by the end of the year. It has since outperformed other crypto mining stocks.

Notice how pocket pivots in CLSK and BTC have worked fairly well since liquidity increased as global M2 has risen this year pushing stocks and crypto higher, but then both started to roll back over in late Feb once liquidity diminished. But the banking failures forced the Fed to print starting March 13 so we got a QE pump which pushed markets higher once again. But this is so far only temporary as the Fed and other western central banks such as the ECB and BoE continue to hike rates. Countering this is QE out of China and Japan.  


Pocket pivots in Ethereum have also shown more success than failure. They can be used as an entry point for the Grayscale ETN ETHE though due to the discount at which ETHE trades relative to ETH, ETHE carries more risk. As with all pocket pivots, the key is to limit losses when a pocket pivot fails. This can be done by either buying on constructive weakness after a pocket pivot which then limits your downside, or buying one that is not extended such as when price undercuts then rises just above a support area. The risk is that you may miss the buy since crypto tends to move fast. One strategy is to wait for a pullback to a moving average to buy. Some use the 9ema, 10dma, 21ema, 50dma, 55ema, 200dma, or other timeframes. Whichever lengths you choose, make sure you create sound trading rules that align with your risk tolerance levels and investment personality.