Over the past few weeks I have discussed how the coronavirus crash is different from prior market crises. However, there is one thing that this market…
Over the past few weeks I have discussed how the coronavirus crash is different from prior market crises. However, there is one thing that this market decline shares in common with every other panic in financial history--a mass movement to cash.
For example, CNBC recently reported that money market mutual fund assets reached their highest levels since March 2010, led by a retail investor exodus out of risk assets.
There have been record outflows among high-grade bond funds and Eric Balchunas recently tweeted a chart of monthly mutual fund flows demonstrating the exact same thing:
It looks like in March 2020, the flight to safety was in full effect.
But what does this mean going forward? Are high investor allocations to cash bullish or bearish?
To answer this question, I will be relying on the American Association of Individual Investors (AAII) Asset Allocation survey. Their survey data provides a snapshot of how AAII's members are allocated across stocks, bonds, and cash each month since 1987.
Following the extreme volatility last month, I was anxious to get my hands on the March 2020 AAII survey data. Thankfully, it didn't disappoint. Below is a chart of the percentage of assets that survey respondents have held in cash over time:
As you can see, March 2020 saw a huge move to cash among investors relative to recent years. However, the aggregate cash holdings are nowhere near the levels seen during the GFC or the end of the DotCom bubble.
Does this suggest that we may have more to go? Who knows.
What is more telling is that March 2020 was the 2nd largest one-month change in aggregate cash holdings in AAII survey history. The largest one-month change occurred during the quant quake of August 2007:
After seeing this you might be wondering whether this data is meaningful. Do higher (or lower) cash allocations correlate with higher (or lower) future returns?
Well, it depends on the time scale. Aggregate investor cash holdings seem to have little correlation with returns over the next 1 year:
As you can see, while very high levels of cash are generally followed by positive returns, this analysis has sample size issues and many overlapping return periods (i.e. remember each dot is one month).
Despite these limitations, if we look at investor cash holdings and returns over the next 10 years, a more positive relationship emerges (note: all returns are annualized):
This chart suggests that higher allocations to cash correspond with higher future returns, all else equal.
Why is this true?
It's true because if we look at how survey respondents were allocated to stocks, bonds, and cash since 1987, we can see that the highest allocations to cash occurred near stock market bottoms (i.e. 2003, 2009):
This makes logical sense as any investor who did not change their allocations in any way would be holding more cash and bonds following a decline in equities.
As an example, imagine you have a $100 portfolio with $60 in stocks, $30 in bonds, and $10 in cash. If stocks decline by 50% and nothing else has changed, you now have $30 in stocks, $30 in bonds, and $10 in cash.
Your portfolio went from having 60% allocated to stocks ($60/$100) to having 43% allocated to stocks ($30/$70) without any buying or selling on your part. This is why cash allocations (by definition) increase during periods where equities are depressed.
And it is precisely when equities are depressed and allocations to stocks are low that future returns are the greatest (assuming the market recovers).
With that being said, where are we today? Currently AAII investors have 55% of their portfolios allocated to stocks (i.e. the dotted line in the plot below):
As you can see, stock allocations hit these levels usually only during times of crisis, at least over the past few decades.
To demonstrate this, below is a plot of the growth of $1 in the S&P 500 (with dividends) and all those periods where AAII investor allocations to stocks were less than 55%:
Based on this alone, I would agree with the data that lower stock allocations (and higher cash allocations) are generally a bullish signal for equities over the long-term.
Then again, if we take out all overlapping time periods, N = 3. It's not much to go on, but it seems to be a decently reliable indicator. So while things may not look good right now, they are likely to look good much later.
Too Many Signals
At this point you are probably overwhelmed with the number of different signals "suggesting" whether markets are bullish or bearish.
On one hand, a high VIX, the mathematics of returns during a crisis, and the aggregate investor allocation to cash, suggest that you should be bullish.
On the other hand, Fed rate cuts and the average length of a bear market being 14 months, suggest that you should be bearish.
We can play this game all day and we will still be no closer to knowing how the future will unfold. This is what makes historical data analysis intriguing, but not necessarily profitable.
If it were that easy, then everyone would be investors and would have no problem with 20%, 30%, or 50% declines in equities.
But it isn't that easy. Investing is a game of hope, pain, fear, greed, and so much more.
That's why when my friend texted me in panic last month asking for reassurance that, "Investing works...right?" I had to respond with, "Yes, but things may get a lot worse."
I don't believe in many absolutes, but I do believe in the long term growth of global capital markets. It's the only signal I will ever need.
Thank you for reading!
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This is post 176. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-databondscoronavirussp 500equitiesstocksfed
Meet the Bitcoinetas, a fleet of transformative vehicles on a mission to spread the bitcoin message everywhere they go. From Argentina to South Africa,…
You may have seen that picture of Michael Saylor in a bitcoin-branded van, with a cheerful guy right next to the car door. This one:
Ariel Aguilar and La Bitcoineta European Edition at BTC Prague.
That car is the Bitcoineta European Edition, and the cheerful guy is Ariel Aguilar. Ariel is part of the European Bitcoineta team, and has previously driven another similar car in Argentina. In fact, there are currently five cars around the world that carry the name Bitcoineta (in some cases preceded with the Spanish definite article “La”).
Argentina: the original La Bitcoineta
The story of Bitcoinetas begins with the birth of 'La Bitcoineta' in Argentina, back in 2017. Inspired by the vibrancy of the South American Bitcoin community, the original Bitcoineta was conceived after an annual Latin American Conference (Labitconf), where the visionaries behind it recognized a unique opportunity to promote Bitcoin education in remote areas. Armed with a bright orange Bitcoin-themed exterior and a mission to bridge the gap in financial literacy, La Bitcoineta embarked on a journey to bring awareness of Bitcoin's potential benefits to villages and towns that often remained untouched by mainstream financial education initiatives. Operated by a team of dedicated volunteers, it was more than just a car; it was a symbol of hope and empowerment for those living on the fringes of financial inclusion.
The concept drawing for La Bitcoineta from December 2017.
Ariel was part of that initial Argentinian Bitcoineta team, and spent weeks on the road when the car became a reality. The original dream to bring bitcoin education even to remote areas within Argentina and other South American countries came true, and the La Bitcoineta team took part in dozens of local bitcoin meetups in the subsequent years.
The original La Bitcoineta from Argentina.
One major hiccup came in late 2018, when the car was crashed into while parked in Puerto Madryn. The car was pretty much destroyed, but since the team was possessed by a honey badger spirit, nothing could stop them from keeping true to their mission. It is a testament to the determination and resilience of the Argentinian team that the car was quickly restored and returned on its orange-pilling quest soon after.
Argentinian Bitcoineta after a major accident (no-one got hurt); the car was restored shortly after.
Over the more than 5 years that the Argentinian Bitcoineta has been running, it has traveled more than 80,000 kilometers - and as we’ll see further, it inspired multiple similar initiatives around the world.
In early 2021, the president of El Salvador passed the Bitcoin Law, making bitcoin legal tender in the country. The Labitconf team decided to celebrate this major step forward in bitcoin adoption by hosting the annual conference in San Salvador, the capital city of El Salvador. And correspondingly, the Argentinian Bitcoineta team made plans for a bold 7000-kilometer road trip to visit the Bitcoin country with the iconic Bitcoin car.
However, it proved to be impossible to cross so many borders separating Argentina and Salvador, since many governments were still imposing travel restrictions due to a Covid pandemic. So two weeks before the November event, the Labitconf team decided to fund a second Bitcoineta directly in El Salvador, as part of the Bitcoin Beach circular economy. Thus the second Bitcoineta was born.
Salvadoran’s Bitcoineta operates in the El Zonte region, where the Bitcoin Beach circular economy is located.
The eye-catching Volkswagen minibus has been donated to the Bitcoin Beach team, which uses the car for the needs of its circular economy based in El Zonte.
Late 2021 saw one other major development in terms of grassroots bitcoin adoption. On the other side of the planet, in South Africa, Hermann Vivier initiated the Bitcoin Ekasi project. “Ekasi” is a colloquial term for a township, and a township in the South African context is an underdeveloped urban area with a predominantly black population, a remnant of the segregationist apartheid regime. Bitcoin Ekasi emerged as an attempt to introduce bitcoin into the economy of the JCC Camp township located in Mossel Bay, and has gained a lot of success on that front.
Bitcoin Ekasi was in large part inspired by the success of the Bitcoin Beach circular economy back in El Salvador, and the respect was mutual. The Bitcoin Beach team thus decided to pass on the favor they received from the Argentinian Bitcoineta team, and provided funds to Bitcoin Ekasi for them to build a Bitcoineta of their own.
Bitcoin Ekasi’s Bitcoineta as seen at the Adopting Bitcoin Cape Town conference.Bitcoin Ekasi’s Bitcoineta as seen at the Adopting Bitcoin Cape Town conference. Hermann Vivier is seen in the background. South African Bitcoineta serves the needs of Bitcoin Ekasi, a local bitcoin circular economy in the JCC Camp township.
Bitcoin Ekasi emerged as a sister organization of Surfer Kids, a non-profit organization with a mission to empower marginalized youths through surfing. The Ekasi Bitcoineta thus partially serves as a means to get the kids to visit various surfer competitions in South Africa. A major highlight in this regard was when the kids got to meet Jordy Smith, one of the most successful South African surfers worldwide.
Coincidentally, South African surfers present an intriguing demographic for understanding Bitcoin due to their unique circumstances and needs. To make it as a professional surfer, the athletes need to attend competitions abroad; but since South Africa has tight currency controls in place, it is often a headache to send money abroad for travel and competition expenses. The borderless nature of Bitcoin offers a solution to these constraints, providing surfers with an alternative means of moving funds across borders without any obstacles.
Photo taken at the South African Junior Surfing Championships 2023. Back row, left to right:
Mbasa, Chuma, Jordy Smith, Sandiso. Front, left to right: Owethu, Sibulele.
To find out more about Bitcoineta South Africa and the non-profit endeavors it serves, watch Lekker Feeling, a documentary by Aubrey Strobel:
The European Bitcoineta started its journey in early 2023, with Ariel Aguilar being one of the main catalysts behind the idea. Unlike its predecessors in El Salvador and South Africa, the European Bitcoineta was not funded by a previous team but instead secured support from individual donors, reflecting a grassroots approach to spreading financial literacy.
European Bitcoineta sports a hard-to-overlook bitcoin logo along with the message “Bitcoin is Work. Bitcoin is Time. Bitcoin is Hope.”
The European Bitcoineta is a Mercedes box van adorned with a prominent Bitcoin logo and inspiring messages, and serves as a mobile hub for education and discussion at numerous European Bitcoin conferences and local meetups. Inside its spacious interior, both notable bitcoiners and bitcoin plebs share their insights on the walls, fostering a sense of camaraderie and collaboration.
Inside the European Bitcoineta, one can find the wall of fame, where visitors can read messages from prominent bitcoiners such as Michael Saylor, Uncle Rockstar, Javier Bastardo, Hodlonaut, and many others.On the “pleb wall”, any bitcoiner can share their message (as long as space permits).
Introduced in December 2023 at the Africa Bitcoin Conference in Ghana, the fifth Bitcoineta was donated to the Ghanaian Bitcoin Cowries educational initiative as part of the Trezor Academy program.
Bitcoineta West Africa was launched in December 2023 at the Africa Bitcoin Conference. Among its elements, it bears the motto of the Trezor Academy initiative: Bitcoin. Education. Freedom.
Bitcoineta West Africa was funded by the proceeds from the bitcoin-only limited edition Trezor device, which was sold out within one day of its launch at the Bitcoin Amsterdam conference.
With plans for an extensive tour spanning Ghana, Togo, Benin, Nigeria, and potentially other countries within the ECOWAS political and economic union, Bitcoineta West Africa embodies the spirit of collaboration and solidarity in driving Bitcoin adoption and financial inclusion throughout the Global South.
Bitcoineta West Africa surrounded by a group of enthusiastic bitcoiners at the Black Star Square, Accra, Ghana.
All the Bitcoineta cars around the world share one overarching mission: to empower their local communities through bitcoin education, and thus improve the lives of common people that might have a strong need for bitcoin without being currently aware of such need. As they continue to traverse borders and break down barriers, Bitcoinetas serve as a reminder of the power of grassroots initiatives and the importance of financial education in shaping a more inclusive future. The tradition of Bitcoinetas will continue to flourish, and in the years to come we will hopefully encounter a brazenly decorated bitcoin car everywhere we go.
If the inspiring stories of Bitcoinetas have ignited a passion within you to make a difference in your community, we encourage you to take action! Reach out to one of the existing Bitcoineta teams for guidance, support, and inspiration on how to start your own initiative. Whether you're interested in spreading Bitcoin education, promoting financial literacy, or fostering empowerment in underserved areas, the Bitcoineta community is here to help you every step of the way. Together, we will orange pill the world!
This is a guest post by Josef Tetek. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution…
Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution of the market into a “casino” following the pandemic, where retail traders have increased their speculative appetites.
“Such is unsurprising, given that retail investors often fall victim to the psychological behavior of the “fear of missing out.” The chart below shows the “dumb money index” versus the S&P 500. Once again, retail investors are very long equities relative to the institutional players ascribed to being the “smart money.””
“The difference between “smart” and “dumb money” investors shows that, more often than not, the “dumb money” invests near market tops and sells near market bottoms.”
That enthusiasm has increased sharply since last November as stocks surged in hopes that the Federal Reserve would cut interest rates. As noted by Sentiment Trader:
“Over the past 18 weeks, the straight-up rally has moved us to an interesting juncture in the Sentiment Cycle. For the past few weeks, the S&P 500 has demonstrated a high positive correlation to the ‘Enthusiasm’ part of the cycle and a highly negative correlation to the ‘Panic’ phase.”
That frenzy to chase the markets, driven by the psychological bias of the “fear of missing out,” has permeated the entirety of the market. As noted in “This Is Nuts:”
“Since then, the entire market has surged higher following last week’s earnings report from Nvidia (NVDA). The reason I say “this is nuts” is the assumption that all companies were going to grow earnings and revenue at Nvidia’s rate. There is little doubt about Nvidia’s earnings and revenue growth rates. However, to maintain that growth pace indefinitely, particularly at 32x price-to-sales, means others like AMD and Intel must lose market share.”
Of course, it is not just a speculative frenzy in the markets for stocks, specifically anything related to “artificial intelligence,” but that exuberance has spilled over into gold and cryptocurrencies.
Birds Of A Feather
There are a couple of ways to measure exuberance in the assets. While sentiment measures examine the broad market, technical indicators can reflect exuberance on individual asset levels. However, before we get to our charts, we need a brief explanation of statistics, specifically, standard deviation.
“Like a rubber band that has been stretched too far – it must be relaxed in order to be stretched again. This is exactly the same for stock prices that are anchored to their moving averages. Trends that get overextended in one direction, or another, always return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average.”
The idea of “stretching the rubber band” can be measured in several ways, but I will limit our discussion this week to Standard Deviation and measuring deviation with “Bollinger Bands.”
“Standard Deviation” is defined as:
“A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of the variance.”
In plain English,this meansthat the further away from the average that an event occurs, the more unlikely it becomes. As shown below, out of 1000 occurrences, only three will fall outside the area of 3 standard deviations. 95.4% of the time, events will occur within two standard deviations.
A second measure of “exuberance” is “relative strength.”
“In technical analysis, the relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can read from 0 to 100.
Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.” – Investopedia
With those two measures, let’s look at Nvidia (NVDA), the poster child of speculative momentum trading in the markets. Nvidia trades more than 3 standard deviations above its moving average, and its RSI is 81. The last time this occurred was in July of 2023 when Nvidia consolidated and corrected prices through November.
Interestingly, gold also trades well into 3 standard deviation territory with an RSI reading of 75. Given that gold is supposed to be a “safe haven” or “risk off” asset, it is instead getting swept up in the current market exuberance.
The same is seen with digital currencies. Given the recent approval of spot, Bitcoin exchange-traded funds (ETFs), the panic bid to buy Bitcoin has pushed the price well into 3 standard deviation territory with an RSI of 73.
In other words, the stock market frenzy to “buy anything that is going up” has spread from just a handful of stocks related to artificial intelligence to gold and digital currencies.
It’s All Relative
We can see the correlation between stock market exuberance and gold and digital currency, which has risen since 2015 but accelerated following the post-pandemic, stimulus-fueled market frenzy. Since the market, gold and cryptocurrencies, or Bitcoin for our purposes, have disparate prices, we have rebased the performance to 100 in 2015.
Gold was supposed to be an inflation hedge. Yet, in 2022, gold prices fell as the market declined and inflation surged to 9%. However, as inflation has fallen and the stock market surged, so has gold. Notably, since 2015, gold and the market have moved in a more correlated pattern, which has reduced the hedging effect of gold in portfolios. In other words, during the subsequent market decline, gold will likely track stocks lower, failing to provide its “wealth preservation” status for investors.
The same goes for cryptocurrencies. Bitcoin is substantially more volatile than gold and tends to ebb and flow with the overall market. As sentiment surges in the S&P 500, Bitcoin and other cryptocurrencies follow suit as speculative appetites increase. Unfortunately, for individuals once again piling into Bitcoin to chase rising prices, if, or when, the market corrects, the decline in cryptocurrencies will likely substantially outpace the decline in market-based equities. This is particularly the case as Wall Street can now short the spot-Bitcoin ETFs, creating additional selling pressure on Bitcoin.
Just for added measure, here is Bitcoin versus gold.
Not A Recommendation
There are many narratives surrounding the markets, digital currency, and gold. However, in today’s market, more than in previous years, all assets are getting swept up into the investor-feeding frenzy.
Sure, this time could be different. I am only making an observation and not an investment recommendation.
However, from a portfolio management perspective, it will likely pay to remain attentive to the correlated risk between asset classes. If some event causes a reversal in bullish exuberance, cash and bonds may be the only place to hide.
BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals.
Credit: Impact Journals
BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals.
Impact Journals will be participating as an exhibitor at the American Association for Cancer Research (AACR) Annual Meeting 2024 from April 5-10 at the San Diego Convention Center in San Diego, California. This year, the AACR meeting theme is “Inspiring Science • Fueling Progress • Revolutionizing Care.”
Visit booth #4159 at the AACR Annual Meeting 2024 to connect with members of the Agingteam.
About Aging-US:
Agingpublishes research papers in all fields of aging research including but not limited, aging from yeast to mammals, cellular senescence, age-related diseases such as cancer and Alzheimer’s diseases and their prevention and treatment, anti-aging strategies and drug development and especially the role of signal transduction pathways such as mTOR in aging and potential approaches to modulate these signaling pathways to extend lifespan. The journal aims to promote treatment of age-related diseases by slowing down aging, validation of anti-aging drugs by treating age-related diseases, prevention of cancer by inhibiting aging. Cancer and COVID-19 are age-related diseases.
Agingis indexed and archived byPubMed/Medline (abbreviated as “Aging (Albany NY)”), PubMed Central, Web of Science: Science Citation Index Expanded (abbreviated as “Aging‐US” and listed in the Cell Biology and Geriatrics & Gerontology categories), Scopus (abbreviated as “Aging” and listed in the Cell Biology and Aging categories), Biological Abstracts, BIOSIS Previews, EMBASE, META (Chan Zuckerberg Initiative) (2018-2022), and Dimensions (Digital Science).
Please visit our website at www.Aging-US.com and connect with us:
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