GM! Welcome to Milk Road PRO – the crypto newsletter that’s as steady as an anchor in a stormy market. ⚓

You’ve probably noticed that the crypto markets are finally moving, though not in the direction we all hoped. 😢

The last week was quite brutal for crypto. The total market cap dropped over 28%, wiping out more than $670B in value. Ouch. 🤕

While the market has seen a nice rebound throughout this week, the price action raises some important questions: 

What's really going on? Should you adjust your portfolio? Is it time to play defense? 🤔

We figured you might be asking these questions too, so we want to provide some answers in this report.

Here's what we'll cover today:

But before we dive into it, let's talk a bit about the market volatility. 📉📈

We all know that crypto's wild swings can be a tough pill to swallow — especially when it's headed south. 💊 

While we all dream of those exciting 5x-10x gains, we have to accept that downside volatility is part of the game too. 💯

Remember, there's a bigger picture to consider!

Volatility is a major concern for traders, but for investors? Not so much. Investors usually always keep a long-term perspective.

Does this chart look that bad to you? 🤷 

We started the year at $1.59T, so we're still up year-to-date. It might feel rough, but it's not as bad as it seems.

So, the main message is this: Don't worry about short-term volatility. Always keep the bigger picture in mind. 🖼️

However, charts don't always tell the whole story. To truly understand what's happening, we need to dig deeper. ⛏️

So, let's get into what’s going on in the markets. 

We already discussed the 5 specific reasons for this market madness in Monday’s free newsletter and again on The Milk Road Show. 🎙️

However, today we’re going to share the PRO team's opinions on each reason, before sharing our analysis on the current markets.

USA GOING INTO RECESSION ↘️

It seems like one indicator is igniting all the fear and panic in the markets: the Sahm rule.

The Sahm rule is an early recession indicator.

When the 3-month average unemployment rate rises half a percentage point above the low of the previous 12 months, it signals that the economy is in, or about to enter, a recession. 😱 

Since 1950, the Sahm rule has only had one false positive (in 1959), and even then, a recession followed six months later.

And guess what?

Friday's labor market data reported that:

As a result, the Sahm indicator just surpassed the 0.5 threshold.

With the Sahm indicator at 0.53, does it mean we are headed for a recession? 🧐

Slow down— let's look at some broader market factors to see if things are really that bad before jumping to conclusions. 🦘

This chart highlights key indicators used by economists and analysts to assess the likelihood of a recession. 

So, while the Sahm rule was triggered, we don't see significant declines in the broader set of indicators above to suggest the economy is heading into a recession. 

Moreover the Fed has a significant tool at its disposal: it can cut interest rates if needed. ✂️

So now the main concerns are growing that the Federal Reserve is falling behind in providing policy support for a slowing U.S. economy.

It seems the narrative of bad news being good news is over. Now, bad news is really just bad news again. 

Maybe the markets are finally coming to their senses. 🤣

The market turmoil is fueling expectations for more Fed rate cuts this year. 

Here is a table showing the probabilities:

The market assigns a 76.5% probability of two rate cuts in September, from the current 5.25-5.50% to 4.75-5.00% target rate. 

There is also a 41.3% chance of four cuts and a 39.1% chance of five cuts by the end of the year. 

Remember, the more cuts, the cheaper the money. This helps the economy grow and boosts the prices of risk-on assets.

But there are few other things which probably added more fuel to the fire: 

Our conclusion: Overall, nothing has fundamentally changed over the past few days. It seems like some market participants overreacted.

According to JP Morgan, retail investors have been aggressive net sellers, while institutional investors have taken the opportunity to buy the dip. 

The message is clear: retail investors are panic-selling while big players are accumulating. 

Which side do you want to be on?

We feel like this chart is really spot on. 🎯

But before you get too excited, we need to discuss other events that have impacted the markets, because it wasn't just the U.S. causing the madness.

JAPAN HIKING INTEREST RATES 🗻

Japan is also to blame, as its central bank recently increased interest rates. 💹

Central banks are changing the interest rates all the time, why is it a big deal? 

Well most central banks are, but not the BoJ (Bank of Japan), until just recently. 😂

Japan’s central bank has kept interest rates near or below zero for nearly a decade, aiming to spur inflation in a deflationary economy. 🤔

It now seems they have successfully combated deflation, as prices are steadily increasing. 

So the Bank of Japan increased its key interest rate to “around 0.25%”, up from the previous range of 0% to 0.1%.

This rate hike wouldn't be as troublesome if the close-to-zero policy hadn't lasted for that long, creating significant leverage in the system! 🏦

People could borrow yen at a rock-bottom 0% interest rate and reinvest in USD for a 5% yield. 

Easy money, right? 

But once the conditions of this trade changed, it caused a significant impact on the markets!

This is especially true given that this trade is estimated to involve $4T—more than double the current cryptocurrency market cap. 🤯

Just look at the chart of USD/JPY:

The JPY has risen 14% against the USD recently, making the yen more expensive when using USD to buy it.

Just a reminder: this is forex, not crypto, yet we're still seeing significant volatility. 🎢

The issue isn't just the higher interest rate—it’s the rapid increase in the value of your outstanding loan. 

AKA you'll now need 14% more USD to repay it.

Imagine you were buying US stocks, but there’s fear and uncertainty about an impending US recession. 

The yen could continue to strengthen against the USD due to differing central bank policies.

While Japan is raising interest rates, causing more buying pressure on the yen and decreasing its supply, the US is expected to do the opposite.

So, how confident would you be in this trade? 😮‍💨

Probably not very confident, and you might start selling the US stocks or other assets you bought with this strategy. 

And that’s where we are now. 

But perhaps it’s not as bad as it looks. Japan is aware of the carry trade and its impact on the markets, especially on US dollars.

To address this, the BOJ launched a program called 'U.S. Dollar Funds-supplying operations' to ensure there are enough U.S. dollars in Japan. 

This move aims to stabilize the market and support international transactions. ⚖️

While it doesn’t reduce the selling pressure (prices can keep going down), it helps to stabilize the financial system, and that’s far more important. 🔑

If Japan is actively cooperating with the US to resolve and slowly unwind this trade without destabilizing the markets, we can hope that we have already seen the worst. 🙏

Update: With summer in full swing and U.S. elections approaching, everyone is hoping for an uptrend. 📈

Investors are clearly unhappy with the current situation and declining markets. However, if the BOJ announces they won't raise rates further to help stabilize the market, it would certainly help. 

And guess what just happened? 

Yes, Japan just said no further hikes for now. 

So for the time being, we don't need to worry about this, which likely was the biggest negative impact on the markets. 📉

However, there were a few other negative news stories that helped spark fear in people.

Uh, Oh… 😧 The rest of this report is exclusive to Milk Road PRO members!

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