In market legend traders take naked directional positions and make their fortunes by predicting the future. According to theory, this is an impossible task.
The trading industry won’t have you believe this because their pay checks often depend on the imaginary gift of calling market direction. The history of Wall Street is strewn with amazing traders that were genius and massively profitable when the trend was with them but crashed and burned when the trend got to a bend in the end.
So what do you do when you are a financial institution that the Federal Reserve offers infinite money to for almost free? You’d better find yourself a way of trading with that money that isn’t going to blow up, that you can get quickly back, and that pays a fat coupon beyond what the Fed is going to charge you.
You need a “carry trade” (borrowing at a low interest rate and investing in an asset that provides a higher rate of return). You need lots of “carry trades.” With trillions on offer almost any trade will do.
What is a no-brainer is to buy stocks. The liquidity is there, there is yield and everyone else with access to the ocean of money is going to be buying stocks and pushing them higher. This is the story of the mega-bull market post 2008-2009.
Trillions of levered QE dollars have pushed the stock market to epic highs. This process is being unwound and because of that the markets have become extremely volatile.
On Thursday, May 4, when the Dow got a stick save from breaking lots of technical levels, minutes later up goes Bitcoin.
It been noted before that Bitcoin seems to be correlated to stocks and here it is again, this time intraday and very clearly so.
Where is the linkage? For one, cheap money can be turned into “cash and carry.” There you would take a Fed handout, buy Bitcoin and sell the future. As I write, the yield on this trade is 10%-plus. So for your riskless trade of “borrow a billion dollars,” buy Bitcoin now and sell the futures contract ‘for delivery,’ you have a 9% carry trade, a sweet $90 dollar profit per annum.
This is why I believe the Dow is a leading indicator of Bitcoin intraday, because liquidity in or out from the Fed and they appear to be doing both to try and smooth out reverse QE, and the Dow will instantly react. Bitcoin, a much more primitive and niche market, takes time for the cash injection to hit.
So traders, get it while you can, because one thing is for sure, leading indicators like this don’t last for long.