🚨All Markets are Crashing!📉

Global stock markets and crypto are dumping, what is causing this?

Aug 05, 2024

Hey Thinkers 💡

Why Are The Markets Crashing?

It’s a bloody Monday, folks. Crypto and stocks are dumping. Why is this happening? Well, it is a combination of factors. Let’s break it down:

Overbought Stock Market

The stock market was overbought. Whether it was the Nasdaq, S&P 500, or Dow Jones, they all flagged overbought on the daily RSI (Relative Strength Index) with all of them being over 70. This is textbook: "Traditionally the RSI is considered overbought when above 70 and oversold when below 30." So a price correction was due for the stock market as it was overextended.

Recession Fears and Federal Reserve Inaction

Recession fears and lack of movement by the Fed are also playing a role. The economy was finally starting to feel the pain from rates being high for too long, with employment numbers dropping. Many were highlighting that the Sahm Rule had started flashing signals of a recession.

This indicator is named after its creator, Claudia Sahm, a former Federal Reserve and White House economist. The rule indicates a recession has started when the three-month moving average of the US unemployment rate is 0.5 percentage points or more above its lowest during the previous 12 months.

Throw in a potential Middle East war and US political uncertainty, and this means there was a growing level of fear creeping into the markets. Investors were ready to hit the panic button at the first sign of trouble.

Japanese Yen ‘Carry Trade’

This is the spark that started the crash. Many traders were borrowing Japanese Yen (JPY) at low interest rates, converting them to US Dollars, and using this to buy US stocks. Then the Bank of Japan (BOJ) recently decided to raise interest rates, which caused the JPY to strengthen significantly against the USD. This put the traders in big trouble. Not only must they pay higher interest for the JPY they borrowed, but they are now facing huge forex losses as well.

The USD assets they are holding may not be enough to repay the JPY they have borrowed. This is causing a huge unwind of these trade positions. Traders facing big losses and margin calls are selling their US stocks to raise USD, converting back to JPY, and paying back their loans. This can lead to more selling pressure on US stocks and even more declines in the short term.

Crypto Feeling Pain

Because Bitcoin and the crypto market are highly correlated to the stock market, they are also feeling the sell pressure. Bitcoin crashed below $54,000 and altcoins are bleeding out.

What Happens Next?

So where does this leave us? Well, we have to let the dust settle. The good sign is that stocks and crypto are nearing the oversold zone on the RSI, so we may see a relief rally in the coming weeks. This continued downturn could cause the Fed to do emergency cuts this month and Janet Yellen at the Treasury to inject more liquidity.

I think we all know global QE (Quantitative Easing) will be coming back sooner than later. We live in a debt-based system, so money printing will continue, which will drive up global liquidity and, in turn, asset prices.

We already see the US M2 and China’s M2 money supplies are on the rise again.

After this shortterm pain expect Stocks and Crypto to rise over the next 8-12 months. I will be buying the dips soon once I see a bottom forming (Not Financial Advice).

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