Crypto's correlation with stocks is going to tighten, but volatility is going to pick up as the Fed ends its easy-money policy, Real Vision's Raoul Pal says

The stock market has buckled in the face of higher interest rates, despite the booming interest in the metaverse and gold rush in the non-fungible token market.

The Federal Reserve's end of cheap cash and ultra-loose monetary policy will lead to a move in stocks and cryptocurrencies closer to lock-step, according to Real Vision chief executive Raoul Pal. This will likely lead to more volatility.

Everything is a risk curve, and every single part of the investable universe is part of that risk curve. Sometimes it is correlated and sometimes it is not. We have seen that when you go to a macro shift. Pal told the ARK Invest Big ideas Summit that it varies depending on where we are on the risk curve.

The S&P 500 is down 9% so far in January, while the tech-laden Nasdaq 100 is down 13%. Cryptocurrencies have followed suit.

In January, it has lost about a fifth of its value, to trade around $35,000, a far cry from its November record of $69,000.

Proponents of the technology often cite its role as a portfolio diversifier. As interest rates rise and investors have more assets that will offer a decent yield, this relationship will break down.

He said that it tends to be decoupled in the mid-cycle phase when growth is okay and the central bank policy is loose.

He said that market volatility is a reflection of a shift in the narrative, and that it is the shift in the cycle that will alter the correlation.

The narrative was about inflation. Inflation destroyed spending and investing. He said that it has been seen in meme stocks, across the market, and in cryptocurrencies.

With consumer inflation running at its hottest since 1982 and growth booming along at a four-decade high in the fourth quarter, the Fed has had to shift gears and go from trying to pump up the economy to trying to stop it overheating.

Markets are preparing for at least five rate hikes this year, after the Fed's most recent policy meeting. But Pal is not as strict.

He said that central banks will be more dovish than people think, so we should have a longer cycle with more tailwinds.

The economy does not have traction and it may be a few years before the full impact of the coronaviruses-driven recession is obvious. Growth can bounce back quickly after a recession, but can then stop, which can be unnerving for investors.

He said that it was typical of every recession he had ever followed.