Just as one might worry that the current risk rallies are getting frothy, Bitcoin scored a KO-punch by rallying from $57k to a high of ~$64k in the span of 24 hours. February is sizing up to be the best monthly performance for BTC going back to December 2020 with a >40% monthly gain, while spot ETF volumes exploded to $7.69bln on the day, far eclisping the $4.66bln launch day record as FOMO-fever is finally starting to catch on.

In fact, retail activity out of the US was so strong that the Coinbase website crashed temporarily, with customer balances showing a 0 value and leading to a sudden 5%+ collapse from ~$64k to ~$59k in a matter of minutes. Coinbase CEO Brian Armstrong took to X to confirm the crash and reassure that investor balances are safe, and they were not prepared for a sudden >10x jump in traffic, which led to wide trading outages.

The parabolic move in Bitcoin has prompted some macro observers to opine on the currently loose financial conditions, and asking the wisdom behind the Fed’s current easing bias. Now, on this point of easy money, it’s interesting to note that we are seeing similar ATHs being reached across many other asset classes, so the ‘wealth effect’ isn’t just limited to crypto at the moment.

With the market awash in risk-on sentiment, Citi posed an interesting question asking where the “money” is coming from. Traditional M2 measures of liquidity have remained capped at 2023 levels, while global quantitative tightening (QT) has continued unabated, with Central Bank balance sheet expected to shrink from a peak of $760bln to ~$560bln by the end of the year. So the current rise in asset prices has not been fueled by easy CB money, unlike the ZIRP / QE era of the past decade.

Furthermore, somewhat surprisingly, the amount of cash being held in money market accounts managed to cross above $6 trillion to record highs, and monthly AUM has been rising consistently despite the risk rally. So if we are truly in an ‘everything-rally’, from equities to credit to crypto and even cash, what’s the new capital coming from?

Now, stock markets are not a zero sum game (unlike options), and wealth effects can be created from expansions in GDP output or tech productivity (AI), it is still rare to see stock prices rise at this pace on barely zero pull-backs. The 20%+ rally in the SPX since the October lows (>40% annualized!) has been met with some of the lowest realized volatility (RV) on record, contrasting that with the much more significant bump in Bitcoin (RV) on the rally from $40k to $63k.

Finally, as Citi concluded in their piece, the only places where one can see liquidity withdrawals would be the decline in reverse repo balances (thereby causing the Fed to discuss QT taper), as well as from the ever-expanding fiscal deficit from the free-spending US government. Nevertheless, the drop in RRP ($1.5T) and the rise in fiscal deficit ($1.8T) is still far behind the jump in equity market cap ($5.5T), before we even account for the dramatic performance in credit markets as well as increase in crypto markets (+$0.7T). For now, we don’t have a satisfactory answer outside of “organic improvements” in EPS / economic outlook / multiple expansion, but let’s enjoy the ride while we can as it is a truly historic rally that shall go into record books.

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