🔮Running Back The Dot Com Bubble?
How Long Will The Bull Run Last?
On Sunday afternoon
tweeted an ominous chart implying we are in a macro setup similar to the dotcom bust, when the S&P 500 took a 50% dump from peak to trough. At this time, the Fed was cutting short term interest rates yet long term rates remained elevated and even increased.
Citrini is not your average fintwit bro - he is one of the best. With returns of more than double the S&P index, largely from nailing the AI and Ozempic trades, so his Sunday morning doom-post got a good deal of attention.
So are stonks in for a rough ride in ‘25? Let’s look at what Polymarket’s macro indicators say about what’s coming next:
Inflation Heating Up?
The Fed is still officially married to its 2% inflation target, although many analysts seem to think the Fed has soft-abandoned the goal since Powell started cutting rates with inflation still above 2%.
Looking at the last few months of data along with the Polymarket forecast for December inflation (which drops on January 15), it does seem like we are in a slight uptrend:
September CPI: 2.4%
October CPI: 2.6%
November CPI: 2.7%
December CPI 2.9% or greater (🔮 80% odds)
As Jim Bianco pointed out in our podcast last month, there could be some seasonal effects pushing up these numbers towards the end of 2024 due to holiday shopping and travel.
When you zoom out, the current upswing in inflation is a blip compared to the massive post-Covid spike. But four months in a row and with the upper band (2.9% or above) being the most likely outcome on Polymarket, January’s inflation number could be rough for stonks if it comes in hot.
Treasury Market
One of the main red flags in the Citrini chart is the divergence between short- and long-term interest rates. Instead of falling as the Fed cut short term rates, the 10-year bond yield has gone up, clocking in at just under 4.6% today
Rising long rates during a cutting cycle are seen as an indication that the bond market expects high inflation or is concerned about Federal debt. If long term rates continue rising, it will be a drag on the stock market rally, as corporate borrowing costs, and mortgage rates will remain high.
So how high could the 10-year go? On Polymarket, the market for whether the 10-year Treasury yield tops 5% by June 30 is at 19%.
The last time the 10-year was above 5% was in 2007 just before the start of the financial crisis, so the market seems to view a large short-term spike in rates as unlikely.
More Fed Cuts?
The Fed has cut short term interest rates three times so far in the current cycle: half a point in September, and quarter points in November and December.
In their next meeting in January, the Fed is expected to hold interest rates steady (🔮 91% chance no change) but the cutting cycle is expected to be shallower than previously thought, with two cuts rather than four seen by the market.
Either scenario is consistent with Citrini’s chart, as the dotcom-era Fed’s cutting cycle continued while stocks tanked.
Stock Crash?
On Polymarket, the market for whether the NYSE “circuit breaker” trips this year is sitting at 17%. The circuit breaker is a temporary pause in stock trading that is triggered by a 7% intraday drop in the stock market.
Is this a higher than normal level of risk? Let’s look at several events that would have qualified for the circuit breaker rule in recent years:
October 27, 1997: following the Asian financial crisis (triggered twice on same day)
September 11, 2001: Market closed for a few days following the 9/11 attacks even though circuit breaker was not formally tripped
December 1, 2008: During the Great Financial Crisis
May 6, 2010: During the algorithmic trading "Flash Crash,” which led to new circuit breaker rules being put in place
March 9-18 2020: Four separate circuit breaker events during the COVID-19 pandemic
Put together, we have five events over a 27-year period, for a base rate of 18.5% in a given year, or about exactly what the market is pricing.
That is, 2025 seems to be an average or slightly below-average risk for a major stock market crash.
What About Crypto?
The above chart shows the Polymarket odds for BTC and ETH to hit various price targets in 2025. It’s looking like there is a higher chance for extreme upside scenarios for BTC this year due to the the presence of several catalysts like:
US Bitcoin reserve in 2025? (🔮40% odds)
Will a new country buy Bitcoin in 2025? (🔮 71% odds)
There is also a 73% chance for a Solana ETF to be approved in 2025, which will be a major catalyst for SOL.
The Trump Factor
Put together, it does look like several of the ingredients of the post-dotcom era macro economy are in place: upticking inflation and a cutting Fed against the backdrop of rising long-term interest rates. So why does the market seem to be not that concerned about major downside in stocks and crypto?
The answer may lie in the incoming Trump administration. Trump, who is known to circulate autographed images of stock rallies, is seen likely to slash rates and fire up the money printer at the first signs of any weakness in risk assets.
This scenario - as detailed by Luke Groman in a recent podcast - would support stocks and crypto, but at the price of a weakening dollar.
🔮 Write for The Oracle
The Oracle is looking to commission original pieces of hard-hitting investigative journalism using the tool of prediction markets. If you are a Substacker or indie journalist interested in using prediction markets in your work we want to hear from you!
Send your pitches and clips to oracle@polymarket.com.
Any story that has a connection to our markets is fair game, but areas we are most interested in for 2025 include:
UAPs: WTF is going on in New Jersey and elsewhere? Wen disclosure?
Trump Admin: Dives into the nominees / confirmations / policies
H5N1 Pandemic?
What are AI agents doing on Polymarket? Understand the strategies of AI trading accounts
US Tiktok ban?
Operation Chokepoint 2.0: Using markets to investigate the Biden admin crypto crackdown.
Corporate Investigations: What can we learn about leading companies from prediction markets?
Crypto Legislation: What pieces of crypto legislation are likely to get through and what does it mean for the market?
Disclaimer
Nothing in The Oracle is financial, investment, legal or any other type of professional advice. Anything provided in any newsletter is for informational purposes only and is not meant to be an endorsement of any type of activity or any particular market or product. Terms of Service on polymarket.com prohibit US persons and persons from certain other jurisdictions from using Polymarket to trade, although data and information is viewable globally.
