Pro Perspectives 9/24/19

September 24, 2019

The impeachment threat has been made by the Democrats for the better part of the past two years.

They now have a new 'smoking gun' issue they have rallied around:  a phone call with Ukraine.  But as the impeachment anticipation began to build today, Trump killed the buzz by announcing that he'll release the transcripts of the alleged "treasonous" call.   

For our guide, the Clinton investigations took about a year, and by the time Congress officially voted to move forward with an impeachment inquiry, stocks bottomed and resumed what was already a big multi-year bull market.  

Despite the noise of impeachment swirling today, the big loser of the day wasn't stocks.  It was Bitcoin, down as much as 19% from the highs of the day.  Let's take a look at the chart …    

Now, we've talked about the rise, fall and rise of Bitcoin over the past few years.  It has had everything to do with Chinese capital flows. 

On that note, let's revisit an excerpt from my June Pro Perspectives note … 

Remember, this first run-up had everything money moving out of China, and less to do with Silicon Valley genius/ global monetary system disruption. 

In late 2016, with rapid expansion of credit in China, growing non-performing loans, a soft economy and the prospects of a Trump administration that could put pressure on China trade, capital was moving aggressively out of China.  That's when the government stepped UP capital controls — better policing movement of capital out of China, from transfers to foreign investment (individuals can move just $50,000 out of the country a year). 

Of course, resourceful Chinese still found ways to move money.  Among them, buying Bitcoin. And that's when Bitcoin started to really move (from sub-$1,000). China cryptocurrency exchanges were said to account for 90% of global bitcoin trading. Capital flows were confused with Silicon Valley genius. 

But in September of last year China crackdown on Bitcoin – with a total ban.  A few months later, Bitcoin futures launched, which gave hedge funds a liquid way to short the madness. Bitcoin topped the day the futures contract launched.  And a few months later it was worth 1/6th of its value at the top.

Is this time different?  Is this real traction for Bitcoin, or is this just Chinese capital flows looking for a parking place, again?  Likely, the latter.  It's probably no coincidence that as the prospects of a 'no deal' with China have elevated in recent months, Bitcoin has again been on the move  … 

… they [China] fight tariffs with a devaluation of the yuan.  With those prospects, if you have money in China, you have been getting it out!  While cryptocurrency exchanges have been banned in China, owning and buying Bitcoin in China is not banned.  The Bitcoin futures market and off-exchange (peer-to-peer) trading are liquidity sources for Chinese citizens to respond to potential devaluation in the yuan.  

With the above in mind, this round of Bitcoin bubble may not deflate until/unless Trump makes concessions to do a deal (which seems unlikely until, at least, we get past the July Fed meeting).

With the above in mind, is the move in Bitcoin today signaling a U.S./China deal in the offing?