# Why's the market selling off?

_+ an update on global liquidity_

December 20, 2024 • Michael Nadeau

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# Why's the market selling off?

## + an update on global liquidity

Michael Nadeau
 December 20, 2024

 Hello readers,

 After peaking at $108.3k on Tuesday, Bitcoin sold off on Wednesday after the FOMC meeting — in which the Fed cut rates 25 basis points. The rate cut was expected. So, why is Bitcoin down 12% (as of writing)?

 This week we’re breaking down the market’s reaction to the Fed meeting on Wednesday plus sharing some additional data concerning global liquidity.

 Topics covered:

- [Market Volatility](#market-volatility)

- [Global Liquidity Update](#global-liquidity-update)

- [What to Look for Moving Forward](#looking-forward)

***Disclaimer:**** Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice. *

 Let’s go.

# Market Volatility

 As we noted in our [macro update last week](https://thedefireport.io/research/tailwinds-for-crypto-into-2025?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-s-the-market-selling-off), inflation has been on the rise. CPI came in at 2.7% last week, a 0.3% increase over the prior month. We’ll have PCE data tomorrow.

 In response, while cutting rates (dovish), the Fed also adopted a more *hawkish* stance. Below are the takeaways from Powell’s presser as we see it:

-  Inflation: Powell acknowledged that inflation is creeping up. He also indicated that the Fed is anticipating further increases. This seems to be the primary focus now (shifting from the labor market weakness)

-  Labor Market: Powell noted that the labor market is “still clearly cooling,” and that it’s currently “cooler than it was pre-pandemic”

-  Growth: The Fed believes the economy is strong (2.8% GDP Q3, projecting 3.2% in Q4)

 Powell acknowledged that it was a “close call” to cut. So, even though he did what the market expected (cut rates, which was already priced in), it was the concern over inflation (impacting the # of anticipated cuts next year) that spooked the market.

 Which led to a significant sell-off on Wednesday:

-  At the time of writing, Bitcoin is down 12%. ETH is down 16%. SOL is down 25%.

-  The Nasdaq was down 3.6% on Wednesday — the worst performance on a FOMC day since 2001

-  The S&P 500 had its worst post-FOMC meeting day since 2009

-  The VIX spiked 74%, the most in a single day since February 2018

-  The dollar rose to 108 +, its high for the year

-  The 10-Year Treasury jumped 10.9 bps to 4.56%

##### Our View

 We think the market was slightly over its skis heading into year-end (ourselves included). This created a lopsided market structure, with any bad news leading to an equally lopsided move in the other direction.

 But that’s how markets work. We ebb and flow between fear and greed, with a propensity for excessive drama in both directions. Turns out that humans are emotionally volatile. Who knew?

 At the end of the day, we think the market is overreacting to essentially one change on the dot plot.* 2 cuts next year instead of 3. *The big picture hasn’t changed from our perspective.

 Here’s why:

-  We don’t think inflation is coming back. [Last week’s note explains our thinking.](https://thedefireport.io/research/tailwinds-for-crypto-into-2025?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-s-the-market-selling-off)

-  We think the labor market is weakening (Powell agrees).

-  The treasury needs to refinance 1/3 of the [outstanding debt](https://fiscaldata.treasury.gov/datasets/monthly-statement-public-debt/detail-of-treasury-securities-outstanding?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-s-the-market-selling-off) over the next year. We think they want to do that at lower levels, which we expect to see in ‘25.

-  ISM (business cycle) data is telling us the economy is slowing.

-  Trump is coming in and we think he wants to run the economy hot while keeping interest rates low — so as to inflate away/reset some of the debt.

 In summary, we still think the Fed will be cutting more than 2 times next year. The pullback has cleansed the market a bit (removed excessive leverage).

 We’re expecting some consolidation in the short term before ultimately making another move higher.

 Remember. 20-30% corrections for Bitcoin are normal in a bull market. We’ve already had 3 in this cycle. ETH has corrected 30% + three times this cycle. It’s down 16% as I write this. SOL has corrected 45% + three times already this cycle. It’s down 25% from its cycle high as I write this.

 A 25% correction for BTC takes us to $80k.

# Global Liquidity Update

 In our note on 12/6, we mentioned that global liquidity was flashing some bearish signals.

 Let’s revisit this with a few charts courtesy of CrossBorder Capital:

Data: CrossBorder Capital, Federal Reserve, PBOC, ECB, BOJ, Bank of England

 As we can see above, global liquidity bottomed in October of ‘22. We’ve been in an up-trend ever since, with Bitcoin following:

Data: CrossBorder Capital, Federal Reserve, PBOC, ECB, BOJ, Bank of England

 Now. We’re in a bit of an air pocket as Central Bank liquidity has slowed since September’s 50 bps cut. China cut rates around the same time but has signaled caution more recently.

 We’ve since seen collateral (bond) values drop as interest rates and the dollar rise together.

 This feels similar to the air pocket we saw in Q2 of last year — when Bitcoin sold off after the post-ETF run in Q1. At the time, yields were rising along with the dollar (as we see today).

 Liquidity rose in Q3, led by rising collateral (bond) values. Of course, Bitcoin went on to re-price itself after the election in November.

 Per CrossBorder Capital, global liquidity values are currently at $173.7 trillion, above the year’s low of $169.3 trillion recorded in April.

# Looking Forward

 The Fed has now cut 1% since it started the rate-cutting cycle in September. Meanwhile, the 10-year has *risen *nearly 100 bps and the dollar is *up* to 108.4 (from 100.3).

 So, the Fed’s *easing* cycle has actually *tightened* monetary conditions.

 Basically, the bond market is watching the Fed cut at the short end of the curve while sending rates higher on the long end (which the Fed does not control).

 Why?

 Concerns over inflation, fiscal spending, Trump policies, etc. Longer duration bonds need to be paid for these uncertainties. And so rates are going higher.

 So how could this trend reverse?

-  The Treasury needs to refinance over $10 trillion of debt over the next year.

-  We do not think they can do this at elevated rates because it would significantly increase interest expense, exacerbating fiscal pressures.

-  This could lead to a debt spiral, where higher interest costs lead to even larger fiscal deficits, requiring more borrowing, and pushing yields even higher.

 So, the question moving forward is whether the Treasury can refinance its debt without the Fed buying the debt while pinning interest rates (QE).

 Remember. If private demand falters, yields will rise further to attract buyers — tightening financial conditions and potentially destabilizing the broader economy.

 We think the Fed will do anything to avoid this. And so we expect to see QE in 2025. If this were to play out, we would expect to see lower rates. Increasing global liquidity. And bullish conditions for risk assets such as crypto.

 Thanks for reading.

 Take a Report.

 And Stay Curious.

***Disclaimer****: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.*