Market Cycles, Business Cycles & Liquidity Cycles - Part Three
This blog references an opinion and is for entertainment and informational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
Hello, and welcome to Part Three of our deep dive into cycles of every kind: business cycles, liquidity cycles & market cycles.
In Part One, we introduced the Rainbow Spaghetti Monster and his correlation with the broader market cycles, focusing in at first on the Business Cycle and its core components and proxies that I track to better determine where in the cycle we might be.
In Part Two, we looked in depth at the Liquidity Cycle, the much discussed concept of 'global liquidity' and the various proxies used to track said liquidity, as well as the Crypto Cycle itself.
For the final instalment in this series, we will be looking at the current market cycle in the context of the Business, Liquidity and Crypto Cycles, as well as discussing what we might expect from a future cycle.
This one will be a little more concise - which I'm sure you'll be relieved to hear - but nonetheless it should help you digest the concepts we've covered in the prior two posts and apply them to our current cycle.
Let's begin by looking at where we might be relative to the Business Cycle:
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THE CURRENT CYCLE
THE BUSINESS CYCLE
Below, I have provided a chart of the primary Business Cycle components covered in Part One of this series, mapped against BTC/USD and zoomed in to highlight the past 3-4 years (one full 'cycle'):
What I want to draw your attention to here is the general choppiness of most of the business cycle components:
We had a clear period in which the business cycle was in contraction, from late 2021 towards early 2023. During this period, financial conditions were tightening, banks were tightening lending standards, high yield bonds were being sold, the Copper/Gold ratio was plummeting and US PMIs were falling. Sometime around late 2022, a few of these components began to bottom out, followed by other components in early 2023, and since then we have been in this recovery phase, where in general most components have been grinding higher but chopping a lot, whilst others (like Copper/Gold and Manufacturing New Orders / Non-Manufacturing New Orders, have been sat at cycle lows. However, financial conditions are at their loosest since early 2021 and banks are continuing to loosen lending standards. We should expect to see this manifest in an upturn in the business cycle, which remains to be seen. Nonetheless, this is very much looking mid-cycle, with an expectation for acceleration into Q1 2025. If we see Copper/Gold, MNO/NMNO and US PMIs trending higher together above the 2024 highs going into the New Year, we can be more certain that we are venturing into the latter stages of the business cycle. Recall that BTC/USD has peaked roughly around the same time that US PMIs have marked a top in the business cycle for the past three cycles.
Now, because apparently we have such productive and generous readers, @aussiemcbull has created a free composite indicator for TradingView, normalizing all of these Business Cycle components.
Below, we can see this composite indicator mapped against BTC/USD across the past ~14 years, thereby mapping the entirety of the business cycle itself against the price-action of Bitcoin:
What a surprise: we continue to grow more and more cyclical and more and more correlated to that business cycle.
This also gives us a really clear snapshot as to where in the cycle we might be - and this corroborates the above view that we are very much mid-cycle here. The business cycle has yet to accelerate in the manner it has in the previous four cycles, and instead we are in this mid-cycle recovery phase. We should anticipate continuation higher aligning with outperformance in BTC/USD before both cycles peak.
If we zoom in to the past four years, we can see this correlation more clearly:
Bitcoin bottomed out a little earlier than the Business Cycle, as it tends to, but recovered alongside it into early 2024, where the Business Cycle stagnated and has been consolidating, corresponding with this period of chop we've see since March in BTC/USD. My expectation is that Bitcoin will sniff out reacceleration in the Business Cycle, leading to continuation higher into early 2025, where we can reassess where we might be cyclically.
Now that we have established where we might be in the Business Cycle at present, let's take a look at the Liquidity Cycle:
THE LIQUIDITY CYCLE
Strangely enough, we are seeing some similarities here with the Business Cycle:
We contracted clearly into late 2022, with most liquidity proxies marking a bottom in Q4 2022, leading to a recovery through 2023 but general consolidation and even some contraction since then, whereas BTC/USD has diverged from this markedly, particularly in Q4 2023 into Q1 2024. During this period, liquidity proxies were grinding higher briefly before contracting from January 2024, whilst Bitcoin continued to show strength. This was, in my view, due to both speculation preceding the ETF launch and subsequent flows in Q1. We then peaked in March 2024 and Bitcoin has been consolidating since then, whilst liquidity proxies trended lower into the summer. Some proxies marked out a bottom in summer and pushed higher into late Q3, but liquidity more broadly has been contracting in early Q4. This general lack of directionality and consolidation has been matched by BTC/USD and this is in no way reflective of a peak in the liquidity cycle. Much like the Business Cycle, we seem to be in that mid-cycle consolidation, where Global M2 / Global GDP has put in cycle lows but is not trending higher to new cycle highs, Fed Net Liquidity has been flat to contracting for over a year and USDCNH (Inverted) marked out cycle lows but has yet to accelerate. The Dollar strength has more recently been capping a lot of these proxies, but generally post-US Election we tend to find another leg higher in the liquidity cycle follows. Thus, we should expect to see all of these proxies begin to march higher into Q1 2025, supporting the Business Cycle recovery and of course supporting asset price growth. In a credit-based system, we should anticipate new cycle highs for many of these proxies, as per my Financial Deepening post, before a peak is found in the Liquidity Cycle.
And finally, let's look at the handful of indicators or tools I use to determine where we might be in the Crypto Cycle:
THE CRYPTO CYCLE
Maybe this time is different, but I'm not betting on it:
We can see from the above chart, MVRV Z-Score has broken out and is curling higher once again after a period of mid-cycle consolidation much like late 2019 into mid-2020, but remains nowhere near levels that have historically marked out cycle peaks. It is likely we have several months ahead in which Market Value diverges from Realized Value towards 6, where we are sure to see more signs of market-wide euphoria. Further to this, Bitcoin Dominance + Stablecoin Dominance (Inverted) is at cycle lows, more akin to that mid-cycle consolidation seen around the 2020 halving. Very much not what a Crypto Cycle peaks has historically looked like. When we see acceleration higher (which would be falling Bitcoin and Stablecoin Dominance) alongside BTC/USD in price discovery and MVRV Z Score ripping higher, we are very likely to be in the latter stages of the Crypto Cycle. Now is simply not that time. Finally, Stablecoin Market Cap is simply consolidating; begin trending lower from here over the coming weeks and this time may indeed be different, but my view is that we see another period of growth in this measure going into 2025 before the Crypto Cycle reaches its crescendo...
Now, a few thoughts about future cycles:
Firstly, I'd like to preface this conclusion with acknowledgment of the fact that these cycles are growing more and more correlated over time, in my view, because of the phenomenon of Financial Deepening - and if you have not read my post on that phenomenon, please do.
Whilst this phenomenon persists, these cycles *should* continue to be correlated in much the same way as they have been for the past two decades. Unless the global coordination by policy makers to suppress volatility and inflate away debts with monetary debasement ceases, we will keep seeing such cyclicality.
In light of such expectations, and against the consensus view that 'this cycle is the last cycle', I expect future cycles to look much like previous cycles until we see a systemic shift in global monetary policy and a move towards fiscal responsibility vs. fiscal profligacy. Though we can certainly anticipate diminishing returns or lower volatility over subsequent cycles within growingly more TradFi-friendly assets like Bitcoin and Ethereum, whilst we have persistence of global monetary debasement, crypto will provide the escape valve.
I would not be remotely surprised to see another cycle beginning with a Business Cycle and Liquidity Cycle trough sometime in late 2026 / early 2027 that corresponds with a Crypto Cycle that peaks sometime in 2029 - as long as policy makers around the world continue to kick the can down the road.
Hopefully, you are now armed with more tools to determine where we might be in the broader market cycle - and with some luck we see this all play out as anticipated into 2025.
