Capital Flows on the Fed, Trump policy and a possible Bitcoin melt-up

Transcript

GM good morning welcome to the milroad show The Daily crypto show where we break down crypto faster than the feds breaks your mortgage dreams I'm your host Jay Hamilton and today we are joined by Capital flows back again Capital flows is just one of the leading experts on understanding macro understanding the FED understanding Trump and that's all what we're going to talk about today is how do these all these Catalyst in these market dynamics how are they playing together and what does that look like now yesterday you guys all know probably by now that fed kept the interest rate stable crypto markets have responded relatively positively which is great to see but at the same time we got Trump has been publicly calling for the FED to lower rates meanwhile the fed and Powell have really shifted their stance to more of a

hawkish stance and we want to understand like what does this all mean for crypto what does it mean for markets and what does it mean for your bags before we jump in with capital flows if you guys do me a favor subscribe like the podcast like the YouTube wherever you guys are it really helps us bring more great guests on the show and we make the show for you so that we can all win in this market and create generational wealth one second before we jump into here from our sponsors who make this show possible meet odos the defi aggregator that makes your token swap smarter faster and a whole lot easier tired of trading like it's 2019 odos finds the best prices for your swaps across 900 liquidity sources and 14 blockchains so you always get more

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time I was on we had you know really interesting situation in terms of where we're at with the FED with global liquidity with everything and it's been really cool because we've had a lot of development since then in terms of the FED stance Trump's inauguration the communication from the Trump inauguration or from Trump Administration into how they're going to have a stance toward crypto so there's been all these developments and you know all of them are actually you know pretty tangibly impacting crypto markets interest rates equities so I think there's been a lot of you know interesting development since we've last talked and and it's amazing you know you were you were on a

month ago uh I think one thing that everything shifts so fast fast and so quickly in the markets and it's why it is even if you are a Buy and Hold type of investor and you're not trading and you're not regularly making shifts in your portfolio uh I'm sure that your uh your stress levels are changing rapidly because the markets do change so quickly and so so much can change in a month um okay before we chat about the uh we sort of have we have we have the macro regime and then we have Trump and the fed and I want to talk about the fed and the FED meeting yesterday and what came out of that what your takeaways were but before we do that I thought I would bring up

you you shared a great chart uh and for those listening we'll try to explain it recently of the S&P 500 since the beginning of November and you basically broke down like okay here's the story so far in this bow run can you can you walk us through this so we all have the context of where we've come from and where we're at because I think that really helps understand where we're going yeah absolutely so you know if we understand the macro regime that we're in so with growth inflation liquidity and then we understand how the Trump Administration is impacting that and then also how the Powell or how the FED with Powell is impacting that if you understand those three things then

you're going to be able to understand how and why assets are moving in the way that they are and then that in turn allows you to take views that are informed on equities and Bitcoin and things like that the chart that is in the display right here is the breakdown that I provided for what the progression has been for the drivers in the S&P and these overlap a lot with Bitcoin if you just look at the correlation so the we've actually been in a Range a little bit you know the the election Hedges Unwound on the very left hand side and actually during that time after those election Hedges Unwound I published some reports and we also talked about this on the podcast that you know I turned a bit neutral because

you had a lot of these positioning onwi you had a lot of these changes and you know since then we've actually had a lot of volatility and we've been basically neutral in equity so that view is played out but understanding the moves that have taken place in the interim inform what is likely to take place over the next 90 days so we had mag seven outperformance which just means you had all of these major names be the primary thing that pushed equities to all-time highs as we as that took place place you had this shock to positioning because Powell came out as very hawkish in December that was the you know selloff in blue and then since then you had a little bit of risk price into markets

where you had some you know good news basically put downward pressure because valuations are high and some other things and then you had CPI basically come in in line and just below expectations which caused equities to rally and the big thing that has taken place you know if you you understand that mag 7 has been one of the main reasons you've seen positive performance in the S&P then it makes sense why the news out of China about deep seek and the AI there caused a gap down and selling pressure in the S&P on Monday right and that happened as we are moving into fomc so you have this a little bit of a position inwind and then we moved

into this setup with power where he comes out and you know what I would say for the fomc meeting that happened this past week is that Powell intentionally didn't say anything that would indicate he's coming out with a more aggressive stance in in on the hawkish side right he you know said inflation is not making progress toward you know their their goals like he did last time he didn't say that because we need to see a couple more inflation prints come in below expectations you know decelerate but Powell could have brought on the table you know some type of idea about rate hikes or something along those lines but we haven't seen that

right so overall the FED didn't cut there's no meeting in February and you know right now in the models that I'm running and what we're doing you know very unlikely to get a cut in March very unlikely so you have this three-month period of time where the FED is basically not moving they're pausing and that means if you hold the FED constant everything that takes place in the Trump Administration and in the macro regime those two things are going to determine asset prices over the next you know 90 days let's talk about what what do you think comes from those three things over the next 90 days because what I'm there's there is definitely everybody's still very bullish on the the year and

the outlook for and we'll get to talking about global liquidity later in the show this belief we are going to have this you know QE or maybe it's not called QE but something from the US at some point but that seems to be a little bit further out so I I think what everybody's really trying to figure out is like what's the short term look like what does the next few months look like are we going to see a rise because often q1 especially in Bull years is is one of the best it is the best quarter for Bitcoin but now I'm not so sure we still haven't seen a 30% pullback in this bull run we got a little bit we got pullback I think it was like 18% uh in um in December in early Jan uh but so I'm just trying to I'm trying to frame this all

and help us help us frame how you think the next 90 days will play out and if you want to talk about fed first or Trump uh we can go through each yeah absolutely so when we think about what has happened over the past two years we've had back-to-back years 2023 and 2024 where equities and Bitcoin have had you know major return years right major High return years the S&P specifically you know over 20% returns both years right on a year-to day basis when you have that take place and you have valuations at these levels and things like that that means that there's a higher hurdle to be able to you know have returns and to adjust positioning and things like

that in other words that just means you need to be a lot more specific and tactical in how you're taking views so that's why we've had some volatility since those Trump Hedges Unwound and why things have been range bound and that's why you know I wouldn't be surprised to see you know moves up move down I wouldn't be surprised to see us end the year flat in Bitcoin or you know equities overall maybe we end up you know positive a little bit or something like that but a lot of the narratives around the bullish case primarily surround Trump right and his new policies and things like that and I think on net the Trump Administration policies are going to be

positive for growth but when I think about the Trump policies especially how they impact crypto I think about the shift that's taking place where I wrote an article about this that we've discussed where in my view the Trump Administration has shifted things for crypto so that there's actually some different risks that crypto faces under the Trump regime regime as opposed to the previous Biden Administration under the Biden Administration we had a lot more you know regulatory scrutiny we had a lot more you know kind of stance toward crypto that wasn't super positive and now we're just flipping to the extreme opposite but you'll notice the people

involved in the Trump Administration they are people that are directly involved in the crypto industry or they are talking their book and they have a bag right so if you just think about the main person for the Trump Administration that is there heading up the crypto Side of Everything Is David Sachs right and he has funds and you know investors invested in crypto funds you know crypto VC firms you know he has long exposure to crypto so what early investor in salana totally totally yeah like those guys those guys talked about the top you know and were basically Shilling salana on the all-in podcast uh I don't know if you want to cut this out but you know

they're sh all inan on the all in podcast at like the top and I'm just like you got to be kidding me right now but you know they're talking their book you know talk in their book and you know what like I I forget who said this but they were like hey once you get a position get long and get loud you know that's that's what like that's what all these guys do right you know don't you know these guys don't have your best intentions at heart which just means you know understand the information that they're putting out there and why they're doing it right and so you're shifting where your you're having these very Pro business individuals or people that are actively involved in businesses I mean just look at the amount of people at the Trump inauguration that are just involved in CEOs at businesses right and

major corporations it's like every single person you could think of right all of those people want to be able to have an advantage in this Administration and be able to have an advantage in government policy right and so we're shifting a bit where you're going to have a lot more concentration in these different type of business individuals and what they're going to say is primarily going to talk their book and help them be in an advantageous position as opposed to you know the these people might have some you know reasons because they just want to help the country and things like that but at the end of the day they are talking their own book right and so that

shift is going to be really important because that is going to determine you know the signals and risks for crypto from a regulatory perspective and from a price action perspective because you know these guys like anyone else will maybe try to push the price up and that they'll use it as exit liquidity right and that's more of a risk than maybe the regulatory side under you know you know Gary doing his little thing right so that's that's kind of how I think about the shifts and risk very interesting and and it and that's obviously what led you to you post article recently where you said the Trump Administration is a massive risk for crypto that's the risk that you see uh I I want to go back to you saying

that we you wouldn't be surprised if we ended the year where we are now that's you're the first person to come on the show and to say that oh really yeah definitely everybody is got their bullhorns on and everyone's like this is the year like we're doing it it's all going to happen it's lining up so I want to understand what why do you think that we could end the year flat I I think it's because I I don't have a necessarily like really bearish View at the moment right I I had some you know views moving into you know January that you know I was running some shorts and trying to take some bets to the downside and you know kind of see how that took place but when you know you think about all of the major times for let's just

talk about Bitcoin all the major times you had really exceptional performance in Bitcoin every single time you had all three major factors of macro aligned which means growth was positive inflation was actually you know Rising a little bit and you had macro liquidity expanding right typically when you have you know growth expanding you know T typically when you have growth expanding or inflation going up or something like that and you have macro liquidity expanding those are very unique circumstances right like 2021 where the Fed held rates you know below zero and growth and inflation were taken off like that's the reason why Bitcoin had

outperformance now we're in this period where sure growth is positive but the FED is not doing the same thing they did in 2021 right they're not opening the QE pipes they're not you know cutting rates and holding them and pinning them to the ground aggressively that just means that there is less factors creating this czy tale scenario or this crazy outside scenario where we move to 500k in Bitcoin this year or something like that right so that just takes you know my stance and makes it more neutral because I know that macro liquidity you know probably neutral at best maybe a little negative depending on what we see and then on the growth side that's probably

neutral at best just you know just marginally positive we're probably going to stay above you know 2% we might go down a little bit we'll see and then on the inflation side that seems pretty neutral as well which means we're probably not going to have a really aggressive you know cut in rates this year so you know all of those factors coming together is you know why I don't have a super strong view on either direction and until that changes I don't really have an edge in predicting an extreme bullish or bearish scenario and so I think you know at at this time for the time being I'll be you know just be able to take the other side of extremes

when you know Bitcoin or equities or interest rates price an extreme then I'll just take the other side of that whether that's the upside or downside so let's talk about what would need to change and in order for you to to shift your view and first I I want to chat about um actually I want to cheat about global liquidity but before we do that because in my view QE is still coming uh but maybe you have a different take so I want to ask you about that but before we talk about that you did say recently we just because we've talking about Bitcoin that if you saw a close above 108k for Bitcoin that would flip your stance tell us more about that yeah so into we we are in this you know range

really for Bitcoin and it you know it does connect with the the idea of global liquidity but you know we have that high that we made from the inauguration right right and you know we're in this you know range where we're you know between let's say 92,000 and 108,000 right what we need to see is capital moving out the risk curve and a weekly close above the 108 level in Bitcoin would you know be this signal that we're closing above that inauguration level right which which means there's more durability behind the flows you know when you have these you know inauguration events those are really you know overall just kind of

a sell the news liquidity kind of turnover event because you know everyone knows nothing nothing durable is going to take place you know maybe we rallied into it and we sold off you know after it that's not surprising right the question is how is Bitcoin moving and what is its correlation with other assets and what's its correlation with macro liquidity so you know in my models I'll run a correlation of Bitcoin against every other asset and then also against every major factor in macro and you know I'll look okay let's say we close above that 108 level in Bitcoin I'll look and say has that occurred with these other factors in macro providing confirmation if that provides

confirmation then I have I can actually get more aggressive right and I want to take all of these different signals from across every market and not just Silo into one because when I when I take all of those signals and bring them together I'm able to actually have an edge that maybe some people that are just looking at Bitcoin don't have so I I pull all of those things together and in connection with you know macro liquidity and Global liquidity overall I think you know we are at a stance where it's a little bit neutral to maybe just negative just a little bit and you know you have you know the interest rate side basically neutral probably for this year because we're

already pricing you know almost you know two rate Cuts so if we get two rate Cuts this year that's already priced in and you know you you know have inflation probably going to roll over a little bit but not as aggressively as everyone thinks and you know we probably are not going to hit a 2% goal this year or something like that but on the QE side you know the recent meeting with Powell is they're still doing the balance sheet runoff they're still adjusting things they're not you know actively doing QE and there's not a really positive impulse from the treasury that says they're going to if you know you want to get technical they're going to do more bills than

bonds or something like that there's not there's not a crazy kind of setup for that so you know overall Bank Reserves in the system and liquidity is has been pretty neutral overall and so until until you see a shock on either the inflation side or the grow side you're not going to have fed act with QE right like they did that in the svb crisis right where like something blew up and then they responded they increased you know reserves they you know took on some more things on their balance sheet and things like that until we see that you know they're probably not going to inject liquidity intentionally which just means we're kind of in this again the range-bound kind of neutral setup and a

lot of the bullish catalysts are primarily connected to um you know anything that you know maybe I mean even if even if the the United States did some type of thing where they that you know they bought Bitcoin or something along those lines that doesn't seem like it's goingon to happen this year you know I could be wrong on that but I even if they do you know let's say they buy six billion right or five billion that's that's not gonna make a material difference on the overall float of Bitcoin right yeah maybe move the market for a day but is that gonna is that I mean what you actually see is you know ETF flows and micro strategy being the primary you know factors taking a lot more of the float right so watching them is probably going to provide more

of a signal than the Trump Administration uh so what about the what about the debt in the US they just passed their 36 trillion debt ceiling is that not enough of a crisis for them to have to go into QE yeah so um I actually just published an article today about how the debt situation in the United States and the geopolitical situation in the United States connects with you know China and the reserve currency of the United States you know in my view um and when you model the US debt and things like that yes it sounds like a big number but we're not at a place where we're going to feel the constraints of that high level of debt so in my view you know uh

sure the numberers really big and sure we're gonna have to deal with that someday and all of those things on an investable time Horizon we're not in a debt crisis right so I think you know you you have a debt problem but what is that debt problem from it's not just from overspending it's from the fact that you have the dollar as the reserve currency of the world which means the United States can get cheap liquidity very easily and if you want to get a little technical you know the fact that you the the US is running a current account deficit right and they're importing a lot of goods and services and they're also doing that with a you know budget deficit in the US government of that is kind of connected to a lot of the

actions China has had and also the US Reserve currency status so you know unless you close the capital account for the United States or shift the dollars Reserve currency status you're probably not going to get away from this debt setup and you know the treasury keeps issuing you know bills and bonds and the market continues to adjust and take them on we're not seeing a situ yet where the market can't digest that and we have to go to a situation like the boj in Japan where they're buying basically all the government debt at all times right so we're not in that situation yet where the market is not adjusting to that and probably not going

to get there on an investable time Horizon over the next you know three to five years uh let's let's chat about the Melt up scenario that you see building first of all explain what a melt up scenario is like it's a that that language is is new to most of our listeners fair enough fair enough yeah so the melt-up scenario that I see which just means you know having a parabolic rise and a complete push up in assets on the equity side and Bitcoin and everything else you know the biggest comparable for a quote unquote melt up is the Nick in Japan when it had a the Nick itself the

index had a 90% return year I mean imagine the S&P is gonna be imagine if imagine if I tell you hey the S&P is gonna be up 90% this year you're gonna tell me like no it's not gonna be up 90% that be crazy you're like I'll take the other side of that all day right yeah that's what happened in Japan right and why it's because you had this you know massive liquidity cycle that pushed up the valuations of assets to a you know level that was unsustainable given the monetary base right it's not just that valuations were high you know valuations High doesn't mean a ton it's about what's pushing those valuations high in terms of liquidity and can that

liquidity be sustained right and so you know you have this concentration in the United States from passive flows that are indiscriminate buyers every single day right like your you know your Vanguard and your you know every single major you know Black Rock and everything else are the major players coming into the market and buying every single day and they're not selling they're taking more and more of the float every single day and the share of passive is increasing exponentially and so when that takes place on top of all of these major mag seven names becoming the main weightings in the

index it's very easy for a melt up to take place because no one's selling and everyone continues to put money into their 401ks until the unemployment rate Rises so you know that's one of the reasons why we've seen a rise in valuations in the S&P over the past four or five years is because passive as a share of the entire you know index is increasing and that's very different from the past where people put money in mutual funds and that would kind of get distributed over active management and people would do stock picking and they would get all these different places now we have this idea ingrained in our culture that and basically across the

entire world that just buy an index fund and you'll be fine that's that's a positive thing I actually I mean I in a sense believe in that I own index funds and all that stuff but that has a consequence on the micr structure of the market and so you don't have a seller until the unemployment rate Rises and so you know this is you know something that is you know talked about by a lot of different people there have been people that publish papers you know all of us that are in the industry and trade actively all of us are very aware of these risks and how ETFs and all these new products they they create this crowded theater kind of situation where it's pretty easy for everyone to get in but as soon as there's a fire everyone rushes for the exits and no one can get

out right like that's what's creating for the market which means you can have a parabolic rise on the upside but then when you kind of come to the downside you have a big problem and the tangible implication and expression of that has been with just the option flow that we've seen in markets it just continues to get shorter and shorter term right which is not necessarily a bad thing but when you have more and more of the options volume in the S&P and in every single asset getting shorter and shorter term everyone is taking that exposure and they're using the option Market to adjust their exposure because they know it's difficult to I mean you know order books are just so thin these days in terms of getting liquidity and things

like that and it's all in option flow and so you know that's what's creating most intraday moves now right that's why you're seeing especially in the S&P you have these crazy moves to either end of the range that just reverse right like at the end of the day right and so you know understanding that those are all little pieces of the puzzle that build to this picture where um you know even if the macro situation doesn't change if money keeps getting funneled into passive vehicles that could you know wouldn't be surprised to see you know S&P at like a 7,000 or something like that um in in short order if that that reflexive feedback loop begins to take place and the unemployment rate doesn't rise right so so you're so what you're

saying is that that parabolic rise could still happen and then there could be a a big drop absolutely I mean I think uh you know it's when I structure ideas and trades around these types of ideas it's recognizing that either of those things can take place and Market timing is everything right like that like I we could have we could have the next 20% draw down in the S&P be in five years right like what am I going to do for the next five years right like I can't be short for five years right and that that that 20% drop could be from you know 100% higher right so you know what I what I do in that scenario is just understand those those

risks and you know just something simple you know not investment advice or anything like that but just understanding like you know calls are probably underpriced right and there's nothing wrong with you know buying you know out of the- money calls or you know those types of calls that maybe be longer dated or you know rolling them or something like that because you know those longer dated ones uh you know there's all of that activity for you know options is primarily on the short end or on you know uh closer expirations right un mainly zero DTE now but under under three months right so buying you know longer dated out of- the money calls actually an interesting strategy here for a melt-up scenario and you know

if if that doesn't pay out then you you know are able to adjust to things right so you always want to manage that left and right tail what's going to happen on the downside extreme upside extreme and then as we move through the interim how do I you know trade actively or balance those risks fantastic absolutely wonderful Capital flows just it's the way you break it down is it's it's technical but yet simple which is what we love here on the milroad show uh before we we let you go uh when you when you step back and look at this the rest of this year what are the major catalysts or the major

things that you will be watching and I know we've discussed them throughout the show but I think it's a good idea to sort of summarize and bring them together for everybody yeah I would say one of the primary things I'm watching really closely is what are credit spreads doing in connection with Trump or Powell if I understand that I am going to have a pretty good view on how the macro situation is connecting to policy right because credit spreads are really low right now right which just means means financial conditions are not restrictive right or not incredibly restrictive so if that changes then that is going to be an incredibly important signal for a regime

shift and then the second thing I'm watching is we are seeing a an increasing geopolitical risk between the US and China that I feel like people are talking about less right now um you know I just saw a video the other day on Twitter and a couple other places where you know China is not you know technically allowed to have you know semiconductor chips and things like that from Nvidia and things along those lines and you know there's a video the other day of you know Chinese founder basically saying yeah I got all these Nidia chips like what are you guys doing they're doing it yeah they're doing it they're they're getting them man that is a you know huge problem because that you know Chinese excuse me China is you know

one of the ma major players in the enti world and when they move or when they take an action that is going to impact the US especially if it is related to semiconductor chips AI Tech and especially you know Ai and crypto are getting overlapped right now you know the very beginnings of that is like the the virtuals protocol right where you have all of these new AI Bots connected to cryptocoins and now they're sending crypto back and forth between AI Bots that's just beginning right all of these things are getting intertwined and if you have an action by China that has more of an impact on the United States and then Trump responds to that with

some type of tariff sanction or or something he have to do something very precise or have you know thread the needle because there's all these different ways to get around them especially when you have the resources like China does so that understanding that that is going to impact Nvidia semiconductors Tech crypto like that relationship impacts everything and that's one of the things I've been modering on you know writing articles about it on the substack and everything else and I would say those two things are the major things I'm watching this year fantastic we will since you brought up your substack we'll link to it in the show notes for anybody who wants to check out Capital flows uh incredible research and uh very well written uh for anybody who's active in the markets

thanks again for joining us today Capital flows thank you enjoy the conversation always always appreciate your time thanks for listening in everybody have a wicked awesome day as always if you liked today's episode please hit subscribe and make sure you follow us so you don't miss out on the next one there's also a link in the description to our free 5 minute daily newsletter where we simplify crypto for you while making you laugh and if you're willing to step up your crypto investing game we're going to also leave a link for milk Road Pro you get access to our portfolio where you can see exactly what we are buying this is your number one resource to help you invest successfully in crypto one final note this show is

for educational purposes only and nothing we say is financial advice investing in crypto or any asset is risky and you should never invest more than you can afford to lose thanks so much for listening in my friends have a wicked awesome day