“Head, Shoulders, Knees and Toes” is a beloved rhyme worldwide with versions in Chinese, Dutch, Finnish, French, German, Greek, Hungarian, Indonesian, Maori, Norwegian, Polish, Punjabi, Russian, Spanish, Swedish, Tagalog (in the Philippines). If Barney, Blue’s Clues or Wiggles are familiar, you’re likely all TOO familiar. Though the identity of the song’s composer remains a mystery, the first reference dates to a printing of The Children’s Friend, September 1912. In the 1920s and 30s, the song became a popular song to inspire exercise in America’s elementary school pupils. Press from North Carolina to Colorado hailed the song’s benefits. The adult variety once was “Glasses, wallet, keys and phone.” The post-pandemic tweaked version is “Mask, wallet, keys and phone,” a cover(ing) tune if we’ve ever heard one.
“Head and shoulders” also populates the core curriculum for those fast-tracking towards a career as a technical analyst. Chartists rely on such patterns to determine their near-term bullish or bearish calls. Purveyors of all that’s fundamental tend to not rely on this method to provide forward guidance. There are, however, exceptions, when data series’ trends are indecipherable and the next move unclear. At these junctures, leaning on technicals can help shine a needed light.
Bitcoin’s signal had ample clarity over the weekend, as did the broader crypto and DeFi universe. On Saturday, the ‘flagship’ cryptocurrency flash-crashed more than 20%. After receiving the x-ray results, we find that it’s more than a sizeable proportion of these investors having no stomach, though that factor will always amplify volatility. It’s likelier that a confluence of factors had begun to make these go-go investors queasy. One bad oyster later, they puked.
The set up for the confluence pits Bitcoin against the global stock of negative yielding debt. In March 2021, we commented about what happens when you slide the risk asset spectrum to the left. The “matter” of negative yielding debt was an outgrowth of global central bank negative interest rate policy. This radical movement spawned the “anti-matter” of Bitcoin at the farthest reaches of the outer rim of riskiness.
We all know that central banks are governed by one common denominator – inflation, which has had a limited impact on monetary policymaking in recent years given its (systematically repressed) quiescence and proximity to the 2% target. Of course, 2021 has been anything but stable on the price pressure front. Supply chain disruptions and rising labor costs have become more problematic as the year has unfolded placing negative yielding debt square in the crosshairs.
It’s been quite the bumpy ride over the last 12 months, with December 2020’s $17.8 trillion tally (green circle marker) sliding as low as $10.7 trillion by Halloween before rebounding to the current $13.7 trillion level. Those moves also draw a distinct head and shoulders pattern. A year ago, optimism around vaccines and the ‘benefits’ of fiscal stimulus helped drive the green line under $13 trillion by the end of February. Relative steadiness followed until the summer’s rising Delta variant led to a bulge (shoulder) in the negative pile – to $16.3 trillion (green triangle marker). This was followed by October’s low, setting up a neckline in that vicinity.
Bitcoin drew its left shoulder (blue triangle marker) in March and head (blue circle marker) in October. Blame Federal Reserve Chair Jay Powell for cracking open and serving up last week’s bad oyster that culminated in Saturday’s bout of Bitcoin food poisoning. The November 30th hawkish pivot, filled with promises of an expedited taper to kick off the New Year with a bang, caused rates traders to drain inflation expectations from the inflation breakeven curve.
From all appearances, the Fed’s “UNCLE!” threshold landed with the shorter inflation expectation tenors exceeding (5-year) or testing (7-year) the 3% mark. Give Powell’s jawboning an assist with drawing the head and shoulders for negative yielding debt and reinforcing the head for Bitcoin.
Is there an inflation link from the supply chain to Bitcoin? Buried in the Institute for Supply Management’s (ISM) manufacturing survey, production material lead times (red line) proxy inflation regimes over long stretches of business cycle history from the mid-1950s to present. The 2021 expansion in lead times coincided with a methodical shift in Fed policy that was well telegraphed. That said, last week’s Powell Swivel was the second public attestation of the need to accelerate the exit the from the ‘rising flows’ chapter of Quantitative Easing.
It begs the question, is Bitcoin a leader of supply chain pressures? The technicals of head and shoulders tests the concept. We wish we could report that the conclusion was definitive; such certainty requires more evidence to the fact. If history is any guide, the post-U.S./China trade war lengthening of lead times in 2019 did coincide with a run up in Bitcoin through June 2019 before both blue and red lines eased toward the end of that year. For the moment, the demand-supply imbalance in the global supply chain isn’t as acute as it was earlier in 2021 suggesting a rolling over in pressures could be in the making. If it’s the case that crypto is a reliable guide for upstream inflation, the establishment of the right shoulder could signal a topping process. Plug that into your model and smoke it.