Tag: fed watch

Forget The Federal Reserve, The Market Is Pivoting Anyway

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“Fed Watch” is a macro podcast, true to bitcoin’s rebel nature. In each episode, we question mainstream and Bitcoin narratives by examining current events in macro from across the globe, with an emphasis on central banks and currencies.

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In this episode, CK and I cover our reactions to the FTX debacle, the latest consumer price index (CPI) numbers from the U.S. and the new central bank digital currency (CBDC) pilot by the Federal Reserve and banks. We touch on the G20 meeting in Bali, but run out of time at the end and don’t cover it in depth.

CPI Numbers From The U.S.

We had to skip last week’s show due to scheduling conflicts, so we missed covering the CPI numbers. This week, I read out some of the important details of the data.

October’s headline CPI change was +0.4%, almost half of the Cleveland Fed’s CPI Nowcast projection of 0.76%, and far below the industry forecast of 0.6%. It really shocked the market and stocks rallied hard.

Bitcoin’s expected reaction would have matched that of stocks if it were not for the FTX collapse happening at the time — even though FTX didn’t hold any bitcoin anyway, as it turns out. This move in the bitcoin price was therefore a sympathetic move with the industry. The correlation between altcoins and bitcoins won out over bitcoin’s correlation with stocks. However, that is evidence that bitcoin is oversold from a fundamentals perspective.

Shelter was the largest component in the monthly CPI and accounted for almost half of the increase. On the show, I spend some time explaining how the shelter component is designed to lag by 12-24 months. Without the addition from the lagging housing sector, CPI would have been 0.2% for the month. Annualized, that is 2.4%.

It is important to focus on the month-over-month change because that is the fundamental unit used to create the year-over-year (YOY) headline number. The YOY change does not do a good job of recognizing directional changes like peak CPI. You can think of it like a 12-month period moving cumulative change, similar to a moving average. The influence on the 12-period moving cumulative change of a sudden qualitative shift will be minimal in the first few periods. It is only after the new trend is well established that the broader 12-period average plainly communicates the data.

In this case, the YOY change in CPI is still 7.7%, even though the last four months have been 0%, 0.1%, 0.4%, and 0.4%. If you annualize the last four months, you get 2.7%, not 7.7%. Do not forget as well, that half of the recent rises are due to the lagging shelter component. It is not a stretch to say that the current rate of change in prices is under 2% on an annualized basis.

Charts

We went through 10 charts on the show, but I won’t cover them all here.

First up is bitcoin. You can see clearly the breakout of the pattern and the ensuing FTX dump. The horizontal zone was previous support turned to likely resistance. I also added a green line to denote the level with the most volume by price resistance as well, namely $19,000.

Bitcoin hourly chart

Next up is the U.S. dollar. Showing is the current rally, top and possible new higher range. I expect the behavior of the dollar to remain similar to the era after the Global Financial Crisis (GFC).

Dollar chart with new proposed range and ghost pattern from 2015 high

So far, the behavior of the dollar has been very similar to 2015 when the dollar rallied to the 1.618% Fibonacci extension and then was range bound — as you can see in the pink line. A copy of the pattern with tops matched up.

I expect the dollar to remain range bound as the financial system recovers slowly from the damage done by the acute dollar shortage. We can see this recovery in many currency charts, like the Hong Kong dollar, the Japanese yen and the euro.

U.S. Treasury yields for 10-year, 5-year and 2-year with the Fed Funds target range

We spent a few minutes discussing the above chart. For the first time in this cycle, the 5- and 10-year Treasury yields have entered the Fed Funds target range. Not only that, but the 10-year has fallen below the reverse repurchase agreement (RRP) rate of 3.8% and the lower limit of the Fed Funds of 3.75%.

This is a major change and a major component of my analysis of the Fed’s monetary policy going forward. If rates stop listening to Jerome Powell, the Fed will be forced to pivot.

Federal Reserves Digital Dollar Pilot

We were surprised to hear of the Federal Reserve’s pilot program with banks going forward to test a new dollar CBDC. We have been quite clear on “Fed Watch” that we do not expect the Fed to approve the use of a CBDC, instead they will legitimize USD stablecoins, bringing them into the Federal Reserve system.

I read from an article on The Street, however, during the show I ran out of time to cover it in detail. I recommend reading it in full.

“The proof of concept (PoC) project will test a version of the regulated liability network design that operates exclusively in U.S. dollars where commercial banks issue simulated digital money or “tokens” — representing the deposits of their own customers — and settle through simulated central bank reserves on a shared multi-entity distributed ledger.”

I don’t blame you if you don’t understand that word salad. CK and I are bitcoin specialists and we can barely follow it. Nothing in this pilot program shows that the Fed is close to a CBDC. We maintain our reasoning that Jerome Powell and the Fed will not go down this road, but they have to move quickly to make their intentions clear and bring USD stablecoins into the fold or else the next chairman might follow along with globalist leanings.

I also quote from Vice Chair Randal Quarles’ 2021 speech about CBDCs where he demonstrates a firm grasp of the CBDC game. We recommend reading it in full, as well.

“I emphasize three points. First, the U.S. dollar payment system is very good, and it is getting better. Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, developing a CBDC could, I believe, pose considerable risks.”

Lastly, we cover the G20, but to be honest, we don’t have time to do it justice. Here is a link to The Guardian’s five takeaways from the G20 meeting.

This is a guest post by Ansel Lindner. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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Ansel Lindner

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November 18, 2022
Jerome Powell Contradicts Fed’s Own Statement, Chaos Ensues

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“Fed Watch” is a macro podcast, true to bitcoin’s rebel nature. In each episode, we question mainstream and Bitcoin narratives by examining current events in macro from across the globe, with an emphasis on central banks and currencies.

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In this episode, CK and I cover Jerome Powell and the FOMC policy decision in depth, analyzing statements from the Federal Reserve, Powell and other financial experts. Then we move onto charts, starting with bitcoin and the dollar, then moving on to Treasury rates. Lastly, we discuss the diesel shortage brewing on the east coast of the U.S.

Federal Reserve FOMC Raises Rates Again

CK and I agree that the level of importance of the Federal Reserve and the FOMC policy decision to the market is a sign of a very unhealthy economy, where central bank decisions are the only game in town.

The Fed raised interest rates by 75 basis points (bps) to a new Fed Funds target range of 3.75% to 4%. This was not a surprise. The market had been predicting the Fed to not pivot away from their course in this meeting, despite the global liquidity concerns appearing in the financial system.

The central bank maintained their policy trajectory, but the statement did contain some softening of their hawkish tone. The sentence that jumps out is the following:

“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

“Cumulative” is the word people are focusing on. What does “cumulative” mean in this context?

The Fed is placing their meeting-to-meeting decisions within a broader scope of their tightening program as a whole since March 2022, as well as considering their globally important role. The reasoning Powell portrays in the press conference that followed is mixed. They want to place their decisions within a whole program, but also want to be data dependent on a meeting-to-meeting basis.

Overall, I think that their intention is to cause uncertainty. Uncertainty is key at the end of a hiking cycle. The Federal Reserve’s intention is to cause an economic slowdown to bring demand down to be in line with supply, but they can’t do that if the market is frontrunning the end of the hiking cycle.

That’s exactly what we’ve seen over the last several months. I’m sure Powell has mixed feelings about the stock market remaining resilient to their hiking, with the S&P 500 above where it was at the time of the June meeting’s hike. That was three meetings with 75 bps hikes, yesterday made it four, and yet the stock market was higher. He wants a “soft landing” — to achieve their policy goals without major damage to the economy — but at the same time their goal is to damage the economy. It’s a contradictory tightrope they are trying to walk.

The intentions of the last few hikes in the tightening program cannot be achieved if the market is frontrunning their slowdown, the pause, and then the eventual reversal. This is where the purposeful uncertainty comes in. If the Fed can send mixed messages and keep the market uncertain, the effects of their last few hikes can be more significant.

Charts

The charts on Fed Day were moving quickly. I delayed taking snapshots until 30 minutes after the Fed’s announcement, but the mixed messaging from Powell caused them to swing wildly. I won’t post them here because they are already out of date, but you can look at them on the slide deck for this episode.

The initial reaction was consistent across the board. Markets took the written statement, including the new language about cumulative effects, as a dovish pivot. Bitcoin spiked along with stocks and the dollar moved down.

However, as soon as Powell started to take questions at the press conference, and with his mixed messaging detailed above, markets reversed. Bitcoin and stocks headed down, the dollar up.

The one chart I will include on this companion post to the podcast is that of the 3-month and 10-year Treasury rates showing the most important inversion in the curve.

3-month and 10-year Treasury securities, in relation to the Fed Funds target range

What you can notice on this chart is the 3-month yield going higher than the 10-year yield. Also, the 10-year yield is awfully close to being inside the Fed Funds target range.

What I’ve been saying for months is that the Fed will continue to raise rates until the market forces them to stop. That force applied by the market will show up as longer term rates simply not obeying the Fed anymore and going lower, like we can see with the 10-year yield here.

The Fed is admittedly “data dependent.” They tell us they are followers, but if you want to know where the Fed is going, all you have to do is look at the yields. If government security yields start heading down into the Fed Funds target range, by the next meeting their choices will be: raise rates again and lose confidence that they are in control of anything, or pause, or even do a “mid-cycle adjustment” and lower them. Powell has done what he calls a mid-cycle adjustment before. Back in 2019, the first rate cut in July was downplayed as just such a move. Of course, it was then followed by massive cuts in the following months.

Diesel Shortage

There are other things happening in the economy than the Federal Reserve. There is concern about diesel shortages in the U.S. Reports are flying about there being only a couple weeks of diesel left in storage, and with the winter coming on, diesel and heating oil demand is set to increase.

To cover this story, I read from a great article by Tsvetana Paraskova. She covers the shortage and reasons behind it in great detail.

In short, U.S. refinery capacity is down due to some plants being switched to making biofuel and our imports from Russia are non-existent due to crazy sanctions.

On the show, we get sidetracked because I am not personally that worried about the diesel shortage. It will cause some pain, but the solution is through that pain. Higher prices will cause one of two things to occur — or both: higher prices will stimulate more production or higher prices will cause political changes to allow higher production.

There is an almost universal fear of higher prices and they are demonized as “inflation” at every turn. Of course, high prices aren’t bad if you are a producer. They aren’t bad in general, either. Prices are supposed to be neutral and give you information about the economy. The only price changes that are a net negative are those due to changes in the money supply. Since our current economic condition is not due to money printing but instead supply crises and bad government policies, the price increases are necessary to fix the problems today.

This is a guest post by Ansel Lindner. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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November 7, 2022
A Geopolitical Picture Of The Bitcoin Price Breakout
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“Fed Watch” is a macro podcast, true to bitcoin’s rebel nature. In each episode, we question mainstream and Bitcoin narratives by examining current events in macro from across the globe, with an emphasis on central banks and currencies.

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Listen To The Episode Here:
In this episode, CK and I cover extremely important updates for the future of the global economy. First, we talk about the bitcoin breakout. Then we continue rolling through several more macro charts including currencies, U.S. Treasury yields, European natural gas prices and finally freight rates. Lastly, we listen to several clips from a China expert on what happened at the 20th Party Congress and what it means for the future of China.

Bitcoin Breakout

During the week of October 24, bitcoin made a nice move upwards, out of the triangle pattern we’ve been watching for weeks. During the show, I clarified that the lack of confirming volume on this breakout shows that it could be a fakeout and it could still roll over and go lower.

Watch the volume closely. If it does not come in and price hovers in this general area for a few days, the likelihood that this is a fakeout increases dramatically.

Bitcoin daily price chart shows the breakout to nearly $21,000

Currencies: Dollar, Yen, Euro, Yuan

DXY versus trade-weighted dollar

We start our currency discussion talking about the dollar index (DXY) versus the broad trade-weighted dollar index. As you can see, the DXY has moved a lot more, meaning that the weakest currencies influencing the change have been the larger ones, where the many other currencies included in the broad dollar index are slightly stronger. However, they are now both reverting.

DXY long-term range and breakout to Fib extension

DXY detail on current breakdown

If the dollar is weakening slightly, that means the other currencies must be strengthening slightly. Let’s take a look at the other major currencies.

The euro is back above parity with the dollar, exhibiting higher highs and higher lows — looking strong.

EUR/USD

Using an inverse chart to the euro chart above, the Japanese yen is 4% off its weakest and looking like it also wants to strengthen in the near term.

USD/JPY

Finally, the Chinese yuan. The rumors are that the Chinese government ordered intervention in the yuan to attempt to strengthen it against the dollar. The chart shows a big red candle in late September, followed by a week of apparent manipulation to peg the exchange rate. Immediately after that, the yuan continued its pattern of devaluation. Then, on the day of recording, there was another large red candle, likely the result of intervention. Whatever the reason, the yuan is stronger against the dollar today than last week.

USD/CNY

U.S. Treasury Yields

The next couple of charts CK and I look at were U.S. Treasury yields. Specifically, we look at the 3-month to 10-year inversion.

This is a very important inversion to the Federal Reserve, as it means a recession is imminent. As you can see below, it was 3 basis points negative at the time of recording, and at the time of writing it was negative 10 basis points. That’s a pretty strong inversion, and is likely getting Jerome Powell’s attention.

U.S. 3-month to 10-year spread

Below is my rainbow yield curve chart. I labeled each in their vertical order. You can see the 3-month/10-year inversion. I also added the fed funds rate and the future fed funds range after the upcoming FOMC meeting (if they raise 75 bps again).

Selected U.S. Treasury yields and range of the fed funds rate

On the show, I try to articulate my position which is that if the yields crash down, the Fed will not have a choice but to pause or pivot.

Insight Into The 20th Party Congress

The second half of this episode is dedicated to three clips from “Lei’s Real Talk,” a YouTube channel that reports on events in China. Lei is a financial professional turned independent journalist. She has a deep experience with China, Chinese culture, Chinese politics and censorship. I thought her insights were extremely valuable.

First, Lei goes over the additions made to the Chinese Communist Party’s (CCP) Constitution, which was voted on immediately after Hu Jintao’s public purging on the last day of the Congress.

The additions included:

Making Xi Jinping synonymous with the CCP; no one in China can question Xi without questioning the party itself.

Adding language about Taiwan, with caveats that can be interpreted any way Xi wants.

Shifting the CCP’s economic focus to the domestic economy and placing exports as a way to boost domestic supply and demand.

The second clip was a history lesson about how the CCP views Xi Jinping within their internal historical accounts (a characteristic of Marxism is rewriting history). Lei says that the top strategist to Xi compared Xi’s rise to power as on par with Mao in 1935 and Deng Xiaoping in 1978. These two events were framed as saving the party from collapse. Now, Xi is seen as “saving the party from collapse.”

At the end of this second clip, Lei gives her opinions of what this means for the near term in China. She concludes there will be more purges, much tighter economic controls and China will basically become “a super-sized version of North Korea.”

In the last clip, Lei answers a question from her audience about whether the CCP truly thinks these reforms will lead the country to becoming the global hegemon or if they are happy with No. 2 status. Her answer is blunt: The CCP doesn’t care about the economy. The economy is by far a secondary concern to the party and power. They believe so much in Marxism that they will push forward and try to impose it domestically and abroad.

This is a guest post by Ansel Lindner. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
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November 1, 2022
The World Is In Disarray, But The Worst May Be Over
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“Fed Watch” is a macro podcast, true to bitcoin’s rebel nature. In each episode, we question mainstream and Bitcoin narratives by examining current events in macro from across the globe, with an emphasis on central banks and currencies.

Watch This Episode On YouTube Or Rumble

Listen To The Episode Here:
In this episode, CK and I cover a large chunk of the ongoing macro news. First, we update the situation in the U.K. gilt market. Then swing over to China to cover developments from the 20th Party Congress, the real estate market and the general investment climate. Lastly, we discuss the European energy crisis and current storage situation.

Charts And Bitcoin Sentiment

Each week, CK and I lead off with a few charts including bitcoin and other currencies to center our macro conversation from that perspective.

In the week of October 17, 2022, the bitcoin chart was showing continuing strong support in the range of $17,500-$18,500 despite all the geopolitical and global economic stresses happening. The stability of bitcoin relative to most other assets must be getting noticed by people managing large capital pools in the world.

Bitcoin daily chart

CK and I also spoke briefly about the U.S. stock market and its similarly stable performance. If you were only to listen and read the mainstream financial press and never look at the charts, you might be fooled into thinking stocks were much lower, or at least falling on a daily basis. However, as it stands now, the S&P 500 is above the June low.

S&P 500 chart

Below is my dueling dollar indices chart, showing the DXY which is heavily weighted toward the euro and yen, and the broad trade-weighted dollar index that includes many more currencies depending on their share of trade with the United States. Importantly, this includes the Chinese yuan and Mexican peso.

As you can see, the trade-weighted dollar performed better during the initial COVID-19 crash, but has lagged the euro-heavy DXY. What this means is dollar strength has become more broad-based in the last couple of weeks.

DXY versus trade-weighted Dollar

The last currency chart we analyze is the Japanese yen, which is crashing versus the dollar, reaching 150 yen to the dollar. In the broadcast, I mention that this is an example of the dollar’s current effects throughout East Asian currencies.

USD/JPY

United Kingdom Gilt Recap And Credit Suisse

Admittedly, CK and I have not watched the crisis in the U.K. as closely as other things, so we take an opportunity to recap the timeline of what’s gone on there so far.

The Bank of England (BoE) announced intervention on September 28, after the long-term gilt market sold off from roughly 2% yields to 4.5% yields in a matter of weeks. On earlier shows, I mentioned the importance of the end of the Q3 for financial stress, which is well known, but for some reason the BoE decided to begin quantitative tightening (QT) one week prior to the end of the quarter.

On October 3, the BoE adjusted their intervention size up to £10 billion per day, and an end date for the program of October 14. Most economic commentators did not think it would be possible to end it so quickly and in such a telegraphed manner. They were proven wrong, as the “no quantitative easing” program ended on the projected date. The latest is that the BoE will resume their QT attempts on November 1.

We also spoke about the interesting coincidence of the emergency swap lines between the Federal Reserve and the Swiss National Bank (SNB) that took place during the peak of the BoE’s troubles. I speculated that this swap line could have served as an obscured bailout of these troubled financial institutions in London, routed through the SNB.

The crisis seems to be under control for the moment, but the damage may have been done. In these financial crisis episodes, confidence is broken and despite the acute panic being over, the market is shifted to a more fragile state of mind going forward. This can lead to the crisis popping back up after a few months.

China’s Economy And The 20th Party Congress

I did not pull any quotes for the show from Xi Jinping’s two-hour opening speech. I provided a link to the full transcript and I encourage people to read it for themselves. It is eye-opening to see the rhetoric, the devotion to Marxist-Leninist communism and the hubris of authoritarian central planners.

What I did cover directly in the episode was a blog post by BlackRock and a tweet thread by Michael Pettis, confirming some of my views on the state of China today and their path in the near term.

BlackRock’s words are important as they represent what large capital pools think about China. From their post, we learn that Chinese export volumes are likely to be down 6% this year and next, although in nominal dollar terms they will be up 3%. The authors also note the horrific demographic situation in China and say it precludes the needed domestic growth to counteract the effect of shrinking exports. In a country with massive debt and demographic issues, this is not a recipe for economic growth.

“Recession is looming now for the U.S., U.K. and Europe. But this time, China won’t be coming to its own, or anyone else’s, rescue.”

Michael Pettis, Senior Fellow at the Carnegie Endowment and professor of finance at Peking University’s Guanghua School of Management, seems to agree with the direction of the Chinese economy in the medium term. His tweet thread exposes the no-win situation faced by the Ministry of Finance in China.

The Ministry of Finance said that state-backed entities are strictly prohibited from purchasing land by raising debt. Pettis agrees with this prohibition, because “local governments [reversing] the decline in land-sale revenues by setting up SPVs to buy land from themselves [as] a way for them to borrow money and pretend the proceeds were actually land-sale revenues.”

Pettis, however, emphasizes the same no-win scenario facing the Ministry of Finance that the BlackRock comments did. Namely, that Beijing has no room to stimulate. They are cracking down, but not offering any help.

“The MoF stopped them from faking revenues without addressing the reasons they had to do so.”

Pettis continues:

“Beijing must know how difficult the circumstances are that local governments face, and yet isn’t doing much to help. I think we are probably seeing the beginning of what over the next few years will be a very contentious relationship between local governments and Beijing.”

This does not bode well for Beijing and Xi, especially as the U.S. rhetoric, sanctions on chip manufacturing and arming of Taiwan is picking up pace. There is a real existential threat to the Chinese Communist Party appearing.

European Energy Non-Crisis?

We had Andreas Steno on the show a few weeks ago, because I wanted to hear his sober analysis of the European energy crisis. He was the one analyst I saw pushing back against the panic narrative.

He is back in the form of a tweet thread this week and on the show I quickly read through the highlights. They are:

Natural gas storage is nearly full in Europe way ahead of schedule.

Energy prices are rapidly coming down to normal.

There is a huge backlog in liquid natural gas ships off Europe’s coasts waiting to unload.

What struck me about this analysis is how much it reminded me of the April 2020 oil futures crash. At the time, oil storage was full and tankers were loitering around the world — also full. There was simply no place to take delivery of the futures contracts, so holders had to sell at any price, causing a flash crash to zero.

Could we see the same thing in Europe this month? Not quite yet, but it is at least a possibility. What a clown world turn of events. From massive record highs to a zero price being a possibility in a matter of months.

This is a guest post by Ansel Lindner. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
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Ansel Lindner

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October 25, 2022