The Federal Reserve on Wednesday approved a fourth consecutive three-quarter point interest rate increase and signaled a potential change in how it will approach monetary policy to bring down inflation.
In a well-telegraphed move that markets had been expecting for weeks, the central bank raised its short-term borrowing rate by 0.75 percentage point to a target range of 3.75%-4%, the highest level since January 2008.
The move continued the most aggressive pace of monetary policy tightening since the early 1980s, the last time inflation ran this high.
Along with anticipating the rate hike, markets also had been looking for language indicating that this could be the last 0.75-point, or 75 basis point, move.
The new statement hinted at that policy change, saying when determining future hikes, the Fed “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.”
Economists are hoping this is the much talked about “step-down” in policy that could see a rate increase of half a point at the December meeting and then a few smaller hikes in 2023.
This week’s statement also expanded on previous language simply declaring that “ongoing increases in the target range will be appropriate.”
The new language read, “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
On balance, Powell dismissed the idea that the Fed may be pausing soon though he said he expects a discussion at the next meeting or two about slowing the pace of tightening.
He also reiterated that it may take resolve and patience to get inflation down.
“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he said.
Still, Powell repeated the idea that there may come a time to slow the pace of rate increases. He has said this at recent news conferences
“So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made,” he said.
The chairman also expressed some pessimism about the future. He noted that he now expects the “terminal rate,” or the point when the Fed stops raising rates, to be higher than it was at the September meeting. With the higher rates also comes the prospect that the Fed will not be able to achieve the “soft landing” that Powell has spoken of in the past.
“Has it narrowed? Yes,” he said in response to a question about whether the path has narrowed to a place where the economy doesn’t enter a pronounced contraction. “Is it still possible? Yes.”
However, he said the need for still-higher rates makes the job more difficult.
“Policy needs to be more restrictive, and that narrows the path to a soft landing,” Powell said.
Along with the tweak in the statement, the Federal Open Market Committee again categorized growth in spending and production as “modest” and noted that “job gains have been robust in recent months” while inflation is “elevated.” The statement also reiterated language that the committee is “highly attentive to inflation risks.”
The rate increase comes as recent inflation readings show prices remain near 40-year highs. A historically tight jobs market in which there are nearly two openings for every unemployed worker is pushing up wages, a trend the Fed is seeking to head off as it tightens money supply.
Concerns are rising that the Fed, in its efforts to bring down the cost of living, also will pull the economy into recession. Powell has said he still sees a path to a “soft landing” in which there is not a severe contraction, but the U.S. economy this year has shown virtually no growth even as the full impact from the rate hikes has yet to kick in.
At the same time, the Fed’s preferred inflation measure showed the cost of living rose 6.2% in September from a year ago – 5.1% even excluding food and energy costs. GDP declined in both the first and second quarters, meeting a common definition of recession, though it rebounded to 2.6% in the third quarter largely because of an unusual rise in exports. At the same time, housing demand has plunged as 30-year mortgage rates have soared past 7% in recent days.
On Wall Street, markets have been rallying in anticipation that the Fed soon might start to ease back as worries grow over the longer-term impact of higher rates.
The Dow Jones Industrial Average has gained more than 13% over the past month, in part because of an earnings season that wasn’t as bad as feared but also due to growing hopes for a recalibration of Fed policy. Treasury yields also have come off their highest levels since the early days of the financial crisis, though they remain elevated. The benchmark 10-year note most recently was around 4.09%.
There is little if any expectation that the rate hikes will halt anytime soon, so the anticipation is just for a slower pace. Futures traders are pricing a near coin-flip chance of a half-point increase in December, against another three-quarter point move.
Current market pricing also indicates the fed funds rate will top out near 5% before the rate hikes cease.
The fed funds rate sets the level that banks charge each other for overnight loans, but spills over into multiple other consumer debt instruments such as adjustable-rate mortgages, auto loans and credit cards.
This is an opinion editorial by Ansel Lindner, an economist, author, investor, Bitcoin specialist and host of “Fed Watch.”
Ghost money has a long history but only recently became part of the bitcoin vernacular via premier eurodollar expert, and bitcoin skeptic, Jeff Snider, Chief Strategist at Atlas Financial. We’ve interviewed him twice for the Bitcoin Magazine podcast “Fed Watch” — you can listen here and here, where we talked about some of these topics.
In this post, I will define the concept of ghost money, discuss the eurodollar and bitcoin as ghost money, examine currency shortages and their role in monetary evolution, and finally, place bitcoin in its place among currencies.
What Is Ghost Money?
Ghost money is an abstracted ideal currency unit, used primarily as a unit of account and medium of exchange, but whose store-of-value function is a derivative of a base money. Other terms for ghost money include: political money, quasi-money, imaginary money, moneta numeraria or money of account.
To many economic historians the most famous era of ghost money is the Bank of Amsterdam starting in the early 17th century. It was a full reserve bank, used double-entry bookkeeping (shared ledgers) for transactions, and redeemed balances at a fixed amount of silver. Ghost money existed on their books, and the money in their vaults.
The financial innovation of an abstracted ideal currency unit evolved because coins are never the same weight or fineness. Coins in circulation tended to get worn quickly, dented or clipped and even if the coins were in mint condition, sovereigns tended to debase the coins on a regular basis (by the year 1450, European coins only had 5% silver content). Ghost money is a currency abstraction based on a fixed measurement of a money (its store-of-value), but does not need to reference actual coins in circulation, just an official measurement.
To put it in terms Bitcoiners are familiar with, this layer of abstraction gave commodity money new security properties and payment features.
Security wise, ghost money avoids the problem of debasement to a degree (we could call this debasement resistance), because the unit-of-account is a fixed weight and fineness set by a bank, not the sovereign. For example, the Bank of Amsterdam set the guilder at 10.16 g fine silver in 1618. Coins in circulation at the time tended to differ widely, coming from all over Europe. There were even direct attacks on banks in the form of flooding the local economy with debased coins, as happened in the 1630s with the importation of coins of less silver content from Spanish Netherlands north to Amsterdam.
Ghost money also allows new features, like the ability to transact over long distances, in large sums, carrying only a letter, greatly reducing transaction costs. It also allowed longer-term bonds at lower interest rates because the unit-of-account is more stable. The pricing of shares (a new innovation at the time), also could be valued in stable currency units.
In general, ghost money leads to thinking of value in a stable abstract unit. This has far reaching effects that are hard to overstate when it comes to large long-term investments, like massive infrastructure projects, that just so happened to get going in the preindustrial era as well. Eventually, the thinking in stable abstract currency units would lead to all the financial and banking innovation we see today.
Ghost money is rightly thought of as a derivative to the money itself, one which replaced the insecure aspects of the physical coins, without getting rid of the underlying form of money. It would more properly be called “ghost currency,” because it is simply a stable derivative, an idealized currency, used for accounting.
Everything has a trade off, and ghost money is no exception. Abstracting the currency away provided debasement resistance from the sovereign, but it also enabled the banks to more easily create credit denominated in that idealized unit (fractional reserve lending), shifting the money printing task from sovereigns to banks. Expanding credit in the private sector according to market desires can lead to economic booms, but the trade off is the following bust.
Currency Shortages
In an article from Jeff Snider, he pairs the use of ghost money with the concept of monetary shortage to explain the rise of modern banking, and the beginning of the evolutionary process toward the current eurodollar financial system and even bitcoin.
“Any money-of-account [ghost money] alternative is the resourceful yet natural human response to these specific conditions.”
He sees ghost money as a natural market-driven practice, with a primary driving force being monetary shortage. Ghost money can add elasticity to the money supply as I stated above through credit expansion. He points to the 15th century’s Great Bullion Famine and the 1930’s Great Depression as two very important epochs in ghost money’s history. These were periods of inelasticity in the supply of currency, which incentivized efforts to search out new supplies via financial innovation (ghost money) or searching for new sources of money itself (silver and gold in the Age of Exploration and the eurodollar credit expansion in the 1950s and 1960s).
More than anything, though, what might have driven money-of-account forward to its preeminent position was something called the Great Bullion Famine. Just as the 20th century seemed to pivot in one direction then the other, from the deflationary money shortages of the Great Depression to decades later the overwhelming monetary changes underneath the Great Inflation, so, too, did Medieval economics suffer one to then pivot into its opposite.
Ghost money’s Golden Age, forgive the pun, coincided with the Bullion Famine. Quasi-money is often one solution to inelasticity; commercial pressures are not easily surrendered to something like a lack of medium of exchange. People want to do business because business, not money, is real wealth.
“The role of money, separated from any store of value desire, is nothing more than to facilitate such business[.]” — Jeff Snider
Snider frames ghost money as a market tool that happens to also provide a route to increasing the elasticity of money in times of currency shortage. In other words, when the supply of money does not expand at a sufficient rate, the ensuing economic difficulties will drive people to find ways to expand that money supply, and ghost money is a ready-made solution via fractional reserve.
Snider’s views put him squarely in the monetarist camp, along with Milton Friedman and others. They see in “the quantity of money the major source of economic activity and its disruptions.” Inelasticity is both the primary culprit of depression and the primary mover of financial innovation.
The Eurodollar As Ghost Money
“Necessity, basically, the mother of invention even when it comes to money […]But if the eurodollar was the private (global) economy’s response to restrictive gold, what then of the eurodollar’s post-August 2007 restrictions upon the very same? Where’s the ghost money of the 21st century to replace the preeminent ghosts of the 20th?” — Jeff Snider
Snider frames the eurodollar system as a natural innovation response to the inelasticity that prevailed in the Great Depression. In the 1950’s when Robert Triffin began speaking about this paradox, the market was busy solving it through ghost money and credit. The eurodollar system is simply a network of double-entry bookkeeping and balance sheets, using the global idealized currency unit at the time, U.S. dollars (backed by $35/oz of gold).
But is the eurodollar in its current form, still ghost money? No — it is credit-based money, but it looks almost identical.
Remember, ghost money is an idealized unit of money (in the past it was silver or gold). Credit is also denominated an idealized unit-of-account, a second order derivative, if you will. Through the dominance of ghost money, thinking in an abstract currency unit became common, and the psychology of the market changed to center around this new financial tool.
The difference between the current eurodollar, which is a pure credit-based system, and credit in a ghost money system is found in the store-of-value function. Ghost money’s store of value is from a base money (silver or gold or bitcoin). The eurodollar today, on the other hand, is divorced from base money completely, and backed by something new. A dollar today is an idealized measurement of debt denominated in dollars. It’s a circular, self-referential definition in the place of base money:
“Money-of-account [ghost money] was one such alternative which also blurred the lines between money and credit; in one sense, using ledgers to settle transactions even between merchants was under the strictest definition credit rather than a monetary substitute. But that was the case only insofar as eventually this paper IOU would have to be disposed of by bullion or specie.
Subprime mortgages and their ancient equivalents became possible where specie was in overabundance, yet perhaps counterintuitively far less likely if not completely impractical using only ghosts untethered to hard money.” — Jeff Snider
In other words, untethering ghost money from its hard money can simulate the overabundance of money. We are wrong though to continue to call this untethered money, ghost money. What is it a ghost of? Once you remove the store-of-value/hard-money tether, it is now a new form of money.
I also must add that if untethered ghosts can simulate overabundance of currency, it can also simulate a currency shortage at the other extreme, which is exactly what we see today.
The eurodollar started out as ghost money until 1971 when the gold peg was severed, either by market evolution or official declaration. It became a new form of money, pure credit-based money.
Is Bitcoin Ghost Money?
Snider stated that “quasi-money is often one solution to inelasticity,” not that all solutions to inelasticity are quasi-money. Yet, that is what he’s doing when he extrapolates that because bitcoin is providing new monetary liquidity in a time of eurodollar shortage, that bitcoin is ghost money.
Currency shortages can be solved by introducing a whole new money, and as the old money suffers from shortage, the new money, with an all-new store-of-value anchor, can become the primary unit-of-account. This is not a ghost money process, it’s a money replacement process, something the Monetarists’ model cannot contend with.
“This forms the basic argument of so-called Bitcoin maximalists who see particularly the Federal Reserve but really all central banks as having set loose to ‘money printing’ excesses. They’re killing their currencies by creating too much, and cryptos are the offered antidote to ‘devaluation.’ No.It is, point of fact, the opposite.
Just like the bullion famine, what crypto enthusiasts of all kinds are reacting to — and basing their buying of digital currencies on — is the central bank response to an otherwise severe and constraining monetary shortage.” — Jeff Snider
Snider is right. I have to give him props on opening a lot of people’s eyes on this. We do have deflationary pressures today, but bitcoin is a hedge against inflation and deflation as a counterparty-free asset. It just so happens the overriding force in the economic environment today is a deflationary pressure of a credit collapse, which simulates currency shortage. While more quantity but increasingly less productive debt is money printing, meaning there is inflation, it also increases the debt burden relative to circulating currency. It creates a debt-to-income problem that manifests as a monetary shortage.
“Digital ghost money for a new age of shortfalls.” — Jeff Snider
Snider sees bitcoin as a new ghost money, where I see new money. Ghost money is no threat to replace the monetary standard, because it is a derivative of that standard, like stablecoins. U.S. dollar stablecoins will not replace U.S. dollars. They are a perfect example of ghost money.
As Snider said above, quasi-money (ghost money) is only one solution to a currency shortage, yet he labels all solutions as ghost money regardless of makeup.
Snider offers evidence in the form of his eurodollar cycles and their timing with bitcoin cycles.
“In 2017’s bitcoin bubble, exactly the same. Its price in dollars went parabolic along with a clear bubble in digital offshoots, now-forgotten ICO’s, the frenzy never lasted long because the premise behind its price surge was entirely faulty. Once the dollar instead caught its Euro$ #4 bid, renewed acute shortage, bitcoin’s price sunk like a rock.” — Jeff Snider
They do match pretty well with bitcoin tops. Below is the best chart I could find of his with dates. However, many of his other charts have different dates for these cycles.
Pretty convincing, but it shouldn’t be a surprise — demand for bitcoin is a part of the larger global market for money. Bitcoiners would definitely agree. When dollar supply is tight during these eurodollar events, bitcoin loses a bid. However, if bitcoin truly were just a ghost money derivative of the eurodollar, it would not set higher highs and higher lows each cycle.
The reason bitcoin can set those new highs each time is because bitcoin is a new money, and is slowly becoming entrenched next to the eurodollar not as a ghost money of it.
Turning back to the Great Bullion Famine, it was followed by the explosion of ghost money, but what followed that expansion is even more interesting. What happened in the 18th century in regards to ghost money and new money? Britain went to a gold standard in 1717 (officially in 1819). It changed money from which the store-of-value function was derived.
The gold guinea (7.6885 grams of fine gold) was not a new ghost money. As I argued above, the eurodollar itself, initially a response to the currency shortage in the first half of the 20th century, evolved eventually into a new store-of-value in a pure credit-based money.
But what if we bring Snider’s position full circle, when he claims that the eurodollar is still ghost money today, a position gold bugs have argued for years. What if we are still on a quasi-gold standard, because central banks hold most of the gold. (Ron Paul famously asked Ben Bernanke why the Federal Reserve held gold if it was demonetized. His response, “it’s tradition, long-term tradition.”)
This interpretation of the current eurodollar system would then make it a ghost of a ghost, ultimately based on the same store of value. It would also make the current incarnation of the eurodollar just the end-phase of another ghost money experiment, ready to be replaced by a new money, the same way the British gold standard replaced the international silver standard.
Either way you take it, that the current eurodollar is a new money because it is a pure credit-based money, or that it is the ghost of a ghost still connected psychologically to a gold standard, both these positions support one conclusion. The ultimate end of the process Snider outlines — starting from a currency shortage, to dealing with inelasticity through ghost money, and finally back to economic health — is a new form of money.
Bitcoin is a new store of value to undergird the financial system as it desperately tries to throw off the currency shortage restraints at the end of an epic global credit cycle. Bitcoin is not a ghost of the old, it is the unconstrained new.
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.
Traders are trying to sniff out a pivot from the Federal Reserve, and that means investors should start thinking about how to change their portfolios if interest rates start to fall. The Fed is expected to hike its benchmark rate by 0.75 percentage point Wednesday, but some central bankers have signaled that they are worried about going too far and causing a recession. That means that market rates could fall, even if the Fed continues to hike for the next few months. This is especially true for longer-dated bonds, which are less sensitive to the meeting-to-meeting changes by the Fed and more reflective of long-term expectations. The 10-year Treasury yield has already eased off its highs from mid-October. This means it may be time to turn the page in the playbook for investors. The most direct way to play this phenomenon would be to buy Treasury ETFs. Bond yields move opposite of price, so the ETFs should go up in value. And because yields are so high, the funds should still feature solid income for investors — even if the Fed starts to cut rates next year. There are several large ETFs on the market focused on Treasurys, including the iShares’ 7-10 Year Treasury Bond ETF (IEF) and 20+ Year Treasury Bond ETF (TLT) . They both have fees of 0.15%. Similarly, Vanguard offers the Intermediate-Term Treasury ETF (VGIT) , which has a fee of just 0.04%. Corporate bonds carry more risk than Treasurys, but should rally if Treasury yields fall. Intermediate-Term Corporate Bond Index Fund ETF (VCIT) also has an expense ratio of 0.04%. There are also some equity funds that were hit particularly hard by higher rates, and they could be due for a relief rally in store when rates fall. However, these could be riskier than the Treasury funds because the Fed is concerned about a recession, which could hurt these stocks even if rates fall. One of those areas is homebuilders. The U.S. housing market has slowed sharply as interest rates have soared, and the SPDR S & P Homebuilders ETF (XHB) has fallen more than 30% year to date. A recession could mean that housing continues to struggle, but consumers and builders may be comfortable taking on new projects if they believe mortgage rates have topped out. Growth stocks are another group that could benefit from a decline in rates. These companies are often valued based on far-off earnings, which become less attractive when discount rates are higher. Passive funds like the iShares Russell 1000 Growth ETF (IWF) could offer a relatively cheap way to get exposure to these types of stocks. That may make funds like the Invesco S & P 500 GARP ETF (SPGP) , focused on growth at a reasonable price, worth a look. The fund has an expense ratio of 0.33%, but it carries a five-star rating from Morningstar.
The below is an excerpt from a recent edition of Bitcoin Magazine Pro, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.
November FOMC Meeting
All eyes across global markets are on the November FOMC meeting. At this point in the global liquidity cycle, seemingly every asset class is part of the same implicit trade. The tough talk from the Fed, the central bank of the dollar indebted world, has held up so far in 2022, as they embark upon the fastest tightening cycle in modern history.
Consensus for the size of the rate hike is 75bps, which would raise the policy rate to 4.00%.
Consensus for the size of the rate hike is 75bps, which would raise the policy rate to 4.00%.
Much of this hiking has already priced itself into the front end of the U.S. Treasury curve, which has led to all sorts of inversions across various maturities.
In terms of the yield curve, across any duration that matters, an inversion has happened — a phenomenon that typically occurs before an economic slowdown, as short term yields rising disincentivizes the investment of capital over long durations due to “attractive” short end yields. Lend your money to the U.S. government for 30 years and lock in 4.13% or for three months at 4.13% and reevaluate then? Duration risk is real and the pace of this tightening cycle on the backs of record inflationary conditions across the globe has left investors uneasy on the long-term prospect of government paper. No kidding.
U.S. Treasury yield curve inversion with short-term yields higher than long-term yields.
Arguably, the Fed is still behind the curve and, per their mandate, shouldn’t have “let” inflationary pressures get this out of control while still stoking the flames with zero-interest rate policy and $120B/month of quantitative easing bond purchases. Due to the blunder and subsequent hit to their credibility, the Fed is attempting to induce pain in the labor market and in asset prices until inflationary concerns abate.
It’s a bold strategy and it’s one that is entirely destined to fail. But they’ll likely end up crashing everything while trying. However, the nominal economy — meaning gross domestic product expectations (not inflation adjusted) and the labor market — is still piping hot. The market looks to be believing that Fed policy is in an entirely new regime going forward.
Shown below is the bitcoin price with its average on-chain holder cost basis (realized price). Bitcoin is in a classic bear market consolidation phase, that many may not have more pain ahead. These periods, where panicked/leveraged investors transfer their holdings to the prudent and well capitalized, are what create the conditions for the next bull run.
There’s something about the latest crypto crash that makes it different from previous downturns.
Artur Widak | Nurphoto | Getty Images
The ongoing crypto winter is “only going to get worse” as the industry recalibrates to a higher interest rate world, according to the co-founder of blockchain platform Tezos.
Asked about the fall in price of many crypto assets this year, Kathleen Breitman said: “A lot of this was inflated on cheap money, and a lot of this was backed by basically, like, VCs trying to pump.”
“There was a lot of easy money going into the system and I think it was artificially stoking a number of different things, mainly valuations of these companies,” she told CNBC’s Karen Tso Wednesday at the Web Summit conference in Lisbon, Portugal.
Breitman cited NFT marketplace OpenSea, where trading volume plunged from $2.9 billion in September 2021 to $349 million in September 2022, according to data from Dune Analytics.
“Clearly there is a phenomenon that has kind of crested and gone away in a lot of these markets, but meanwhile they’re saddled with a $13 billion valuation,” Breitman said.
“So I think there’s a lot of cheap money that went in, valuations went super sky high, you had people scrambling to make those valuations justified in some form, usually through cheap tactics like yield farming, and now that the easy money’s gone away, all that’s left is we’re getting communities, I hope,” she continued.
On whether the pause in Federal Reserve rate hikes that economists expect next year could see crypto markets rally, Breitman said there would still be a shift in crypto and tech valuations being based on anticipatory benefits to actual user growth; and without the ability to keep using “cheap tactics” to get “easy come, easy go” users in the door.
“Crypto hasn’t been evaluated by that metric, and neither has technology in the last 10 years that we’ve had low interest rates,” Breitman told CNBC. “It remains to be seen, but basically I think what you’ll find is the things that are useful are going to thrive.”
“But that’s the small minority of crypto applications, whether people want to admit it or not.”
Tezos, which Breitman also co-founded, is a smart contract platform, like the better-known Ethereum, but that allows token holders to vote on changes to the platform before they are enacted every few months.
Usage of the network has increased on 2021, Breitman said, driven by demand from the art world, where digital artists are minting art on the blockchain and trading it. This use is providing one of the only sources of organic growth in the industry more broadly, she said.
The notion of the end of the era of easy money in crypto is one that analysts have been discussing in recent months amid the downturn.
Some industry figures believe the recent relative price stabilization of assets such as bitcoin, which has been trading between $18,000 and $25,000 for the last four months after experiencing massive volatility, is positive for the industry.
Antoni Trenchev, co-founder of crypto lender Nexo, previously told CNBC bitcoin’s performance was “a strong sign that the digital assets market has matured and is becoming less fragmented.”
Correction: The text of this story been been updated to accurately describe Kathleen Breitman’s job title.
The Federal Reserve is expected to raise interest rates by three-quarters of a percentage point Wednesday and then signal that it could reduce the size of its rate hikes starting as soon as December.
Markets are primed for the fourth 75-basis point hike in a row, and investors are anticipating the Fed will slow down its pace before winding down the rate-hiking cycle in March. A basis point is equal to 0.01 of a percentage point.
“We think they hike just to get to the end point. We do think they hike by 75. We think they do open the door to a step down in rate hikes beginning in December,” said Michael Gapen, chief U.S. economist at Bank of America.
Gapen said he expects Fed Chair Jerome Powell to indicate during his press briefing that the Fed discussed slowing the pace of rate hikes but did not commit to it. He expects the Fed would then raise interest rates by a half percentage point in December.
U.S. Federal Reserve Board Chairman Jerome Powell takes questions from reporters after the Federal Reserve raised its target interest rate by three-quarters of a percentage point to stem a disruptive surge in inflation, during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, June 15, 2022.
Elizabeth Frantz | Reuters
“The November meeting isn’t really about November. It’s about December,” Gapen said. He expects the Fed to raise rates to a level of 4.75% to 5% by spring, and that would be its terminal rate — or end point. The 75 basis point hike Wednesday would take the fed funds rate range to 3.75% to 4%, from a range of zero to 0.25% in March.
“The market is very fixated on the fact there’s going to be 75 in November, 50 [basis points] in December, 25 on Feb. 1 and then probably another 25 in March,” said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI. “So in reality, the market already thinks this is happening, and from my point of view, there’s no way the outcome of his press conference is going to be more dovish than that.”
The stock market has already rallied on expectations of a slowdown in rate hikes by the Fed, after a final 75 basis point hike Wednesday afternoon. But strategists also say the market’s reaction could be violent if the Fed disappoints. The challenge for Powell will be to walk a fine line between signaling less-aggressive hikes are possible and upholding the Fed’s pledge to battle inflation.
Stock picks and investing trends from CNBC Pro:
For that reason, market pros expect the Fed chair to sound hawkish, and that could rattle stocks and send bond yields higher. Yields move opposite price.
“I think he’s going to try to execute the fine art of getting off the 75 [basis points] without creating euphoria and influencing financial conditions too easy,” said Rick Rieder, BlackRock chief investment officer of global fixed income. “I think the way the market is pricing, I think that’s what they’re going to do, but I think he’s really got to thread the needle on not getting people too excited about the direction of travel. Fighting inflation is their primary objective.”
As the Fed has raised interest rates, the economy is beginning to show signs of slowing. The housing market is slumping, as some mortgage rates have nearly doubled. The 30-year fixed rate mortgage was at 7.08% in the week of Oct. 28, up from 3.85% in March, according to Freddie Mac.
“I think [Powell] will say that four 75-basis point hikes is an awful lot and with this long and variable lag, you need to step back and see the impact. You’re seeing it in housing. You’re starting to see it in autos,” said Rieder. “You’re seeing it in some of the retailer slowdowns, and you’re certainly seeing it in the surveys. I think the idea that you’re slowing, it’s important how he describes it.”
The Fed should be dependent on incoming data, and while inflation is coming down, the pace of decline is unclear, Rieder said.
“If inflation continues to be surpisingly high, he shouldn’t shut off his options,” he said.
Gapen expects the economy to dip into a shallow recession in the first quarter. He said the equity market would be concerned if inflation were to stay so high the Fed would have to raise rates even more sharply than expected, threatening the economy even more.
“The markets want to be relieved, particualy the equity maket,” said Rieder. “I think what happens to the equity market and the bond market are different because of the technicals and the leverage. … But I think the market wants to believe that the Fed, they’re going to get to 5% and stay there for awhile. People are tired of getting bludgeoned, and I think they want to believe the bludgeoning is over.”
“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.
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 thatthe 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.
PCK Schwedt oil refinery in Schwedt, Germany on Monday, May 9, 2022.
Krisztian Bocsi | Bloomberg | Getty Images
ABU DHABI, United Arab Emirates — Politicians and governments around the world are bracing for potential civil unrest as many countries grapple with mounting energy costs and rising inflation.
The global economy is facing an onslaught from multiple sides — a war in Europe, and shortages of oil, gas and food, and high inflation, each of which has worsened the next.
Concerns are centered on the coming winter, especially for Europe. Cold weather, combined with an oil and gas shortage stemming from Western sanctions on Russia for its invasion of Ukraine, threatens to upend lives and businesses.
But as much concern as there is ahead of this winter, it’s really the winter of 2023 that people should be worried about, major oil and gas executives have warned.
Energy prices “are approaching unaffordability,” with some people already “spending 50% of their disposable income on energy or higher,” BP CEO Bernard Looney told CNBC’s Hadley Gamble during a panel at the Adipec conference in Abu Dhabi.
We are in good shape for this winter. But as we said, the issue is not this winter. It will be the next one, because we are not going to have Russian gas.
Claudio Descalzi
CEO of Eni
But through a combination of high gas storage levels and government spending packages to subsidize people’s bills, Europe may be able to manage the crisis this year.
“I think it has been addressed for this winter,” Looney said. “It’s the next winter I think many of us worry, in Europe, could be even more challenging.”
The CEO of Italian oil and gas giant Eni expressed the same worry.
For this winter, Europe’s gas storage is around 90% full, according to the International Energy Agency, providing some assurance against a major shortage.
But a large proportion of that is made up of Russian gas imported in previous months, as well as gas from other sources that was easier than usual to buy since major importer China was buying less due to its slower economic activity.
“We are in good shape for this winter,” Eni chief Claudio Descalzi said during the same panel. “But as we said, the issue is not this winter. It will be the next one, because we are not going to have Russian gas – 98% [less] next year, maybe nothing.”
This could lead to serious social unrest — already, small to medium-sized protests have cropped up around Europe.
Anti-government protests in Germany and Austria in September and in the Czech Republic last week — the latter of which has seen household energy bills surge tenfold — may be a small taste of what’s to come, analysts have warned. Some energy executives agreed.
Yes, there is a real risk that governments without a steady hand on policy shaping in Asia can deal with unrest.
Datuk Tengku Muhammad Taufik
CEO of Petronas
“We’ve seen that any shocks to the price at the pump, or something as simple as LPG [liquefied petroleum gas] for cooking, can cause unrest,” the CEO of Malaysian oil and gas company Petronas, Datuk Tengku Muhammad Taufik, said.
He described how a strengthening dollar and rising fuel prices pose a serious risk to many Asian economies – massive populations that are some of the biggest oil and gas importers in the world. And this is happening while subsidies are already in place to help ease prices for citizens.
Inflation in the euro zone remains extremely high. Protestors in Italy used empty shopping trolleys to demonstrate the cost-of-living crisis.
Many Asian economies were already reeling from the pandemic, which caused “vast swaths of [small and medium enterprises] in Asia to just collapse,” Taufik said. “So, yes, there is a real risk that governments without a steady hand on policy shaping in Asia can deal with unrest.”
Much of the anger of protesters is also directed at the energy companies, which have been making record profits as bills get higher and higher.
Responding to this, many of the CEOs who spoke to CNBC said it’s an issue of market supply and demand, and that it’s up to governments to implement policies more conducive to energy investment. That investment, they stressed, has taken a hit in recent years as countries push for the transition to renewables.
The world has to face “the practicalities and realities of today and tomorrow,” BP’s Looney said, stressing the need to “invest in hydrocarbons today, because today’s energy system is a hydrocarbon system.”
Many policymakers and institutions still decry the use of fossil fuels, warning the far bigger crisis is that of climate change. In June, United Nations Secretary General Antonio Guterres called for abandoning fossil fuel finance, and called any new funding for exploration “delusional.”
The oil executives argued that this approach simply isn’t realistic, nor is it an option if countries want economic and political stability.
Read more about energy from CNBC Pro
At the same time, however, they admitted that the energy transition itself does need greater focus and investment in order to avert a larger crisis next year and beyond, when there is no Russian gas in storage and other options are increasingly expensive.
“In Europe, we pay at least six, seven times to [as much as] 15 times the energy costs with respect to the U.S.,” ENI’s Descalzi said.
“So what we have done in Europe, each country, gave incentive subsidies to try to reduce the cost for industry and for citizens. How long that can continue?” he asked.
“I don’t know, but it’s impossible that it can continue forever. All these countries have a very high debt,” he said. “So they have to find a structural way to solve this issue. And the structural way is what we said until now — we have to increase and be faster on the transition. That is true.”
“But,” he added, “we have to understand, from a technical point of view, what is affordable and what is not.”
A customer waits for his car at the garage of Avis Budget Group at the San Francisco airport.
David Paul Morris | Bloomberg | Getty Images
Check out the companies making headlines in after-hours trading.
Avis Budget Group – Shares of the budget care rental company jumped 2% following its quarterly results. Avis reported adjusted per-share earnings of $21.70, compared to expectations of $14.64 per share, according to Refinitiv.
Stryker – The medical technology company fell 5.5% after it reported a miss on the top line in its latest quarterly results. Stryker posted adjusted earnings per share of $2.12, compared to estimates of $2.23, according to Refinitiv. The company narrowly beat expectations on revenue.
Hologic – Shares of the medical supplier added 7.5% as it beat expectations of analysts’ expectations on top and bottom lines for the latest quarter, according to Street Account. For the fiscal year ending September 2023, the company expects earnings per share between $3.30 and $3.60 compared to FactSet’s expectation of $3.43, while revenue is expected by the company between $3.7 billion and $3.9 billion against the anticipated $3.81 billion.
Goodyear Tire & Rubber Company – Shares of the tire company tumbled more than 8%. Goodyear posted quarterly earnings per share of 40 cents on revenue of $5.31 billion. Analysts expected per-share earnings of 55 cents on revenue of $5.36 billion, according to Street Account.
IDEXX Laboratories – The science company with a focus on animals and water added 2.8% in post-market trading as investors looked to earnings coming Tuesday ahead of the market’s open.
PRAGUE — U.S. Trade Representative Katherine Tai traveled more than 4,000 miles to prevent a transatlantic trade war over electric vehicles, but her EU counterparts signaled on Monday that they would be a tough crowd to win round.
The growing spat hinges on U.S. legislation that encourages consumers via tax credits to “Buy American” when it comes to choosing an electric car.
At a time when the U.S. and Europe want to present a united front against Russia, this protectionist measure has triggered outrage in many EU countries, including France and Germany, two leading European carmaking nations. Beyond the EU, China, Japan and South Korea have also voiced concern.
After speaking with Tai at a meeting of EU ministers in Prague, the bloc’s trade chief Valdis Dombrovskis predicted it would be difficult to resolve the dispute.
“It will not be easy to fix it — but fix it we must,” he said.
Among the 27 EU countries, anxiety about the U.S. measure is growing. Sweden’s new trade minister, Johan Forssell, whose country takes over the presidency of the Council of the EU in January, told POLITICO on Sunday that aspects of the U.S. legislation were “worrying” and “not in accordance with [World Trade Organization] rules.”
Another senior official stressed: “It’s not only one or two member states, which are concerned … It’s also the small ones; they will have no access at all” to the U.S. market.
French President Emmanuel Macron and German Chancellor Olaf Scholz agreed over lunch last week that the EU should retaliate if Washington pushed ahead with the controversial bill. Macron floated the idea of a “Buy European Act” to strike back.
The new tax credits for electric vehicles are part of a huge U.S. tax, climate and health care package, known as the Inflation Reduction Act, which passed the U.S. Congress in August.
The idea is that a U.S. consumer can claim back $7,500 of the value of an electric car from their tax bill. To qualify for that credit, however, the car needs to be assembled in North America and contain a battery with a certain percentage of the metals mined or recycled in the U.S., Canada or Mexico.
Czech Trade Minister Jozef Síkela, whose country currently holds the presidency of the Council of the EU, said that European carmakers wanted to qualify for the scheme, just as the North Americans do.
In its current form, the bill is “unacceptable,” and “is extremely protective against exports from Europe,” said Síkela as he walked into Monday’s meeting. “We simply expect that we will get the same status as Canada and Mexico.”
U.S. Trade Representative Katherine Tai and European Commission Executive Vice President Valdis Dombrovskis | Jim Watson/AFP via Getty Images
“But we need to be realistic,” Síkela told reporters later. “This is our starting point in the negotiations and we’ll see what we’ll manage to negotiate at the end.”
In a bid to soothe tensions, a joint task force was set up last week by the European Commission and the U.S. The task force is supposed to meet at the end of this week, although the exact date isn’t yet fixed, according to thesenior official.
Asked whether Brussels would retaliate should no agreement be struck with Washington, Dombrovskis took a cautious approach: “Setting up this task force is already … a response of us, raising those concerns … At this stage, we are focusing on a negotiated solution before considering what other options there may be.”
The midterm elections in the U.S., where President Joe Biden’s Democrats look likely to lose ground, compound the difficulties.
It doesn’t seem like the tensions will be eased by the next Trade and Technology Council, which takes place between U.S. and European negotiators in early December.
Dismay over the U.S. subsidies has overshadowed the preparatory work for the next TTC meeting, for which the EU and businesses on both sides of the Atlantic want to see rapid concrete results to avoid the perception that the format is simply a talking shop.
Tai herself had no immediate comment in Prague, but later released a statement on her meeting with Síkela that gave no hint of a breakthrough.
“Ambassador Tai and Minister Síkela discussed the ongoing work of the Trade and Technology Council, and the importance of achieving meaningful results for the December TTC Ministerial and beyond. They also discussed the newly-created U.S.-EU Task Force on the Inflation Reduction Act,” the statement said.
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Representations of cryptocurrency Bitcoin are seen in this illustration, August 10, 2022. REUTERS/Dado Ruvic/Illustration
Dado Ruvic | Reuters
Bitcoin’s lack of volatility lately isn’t a bad thing and could actually point to signs of a “bottoming out” in prices, analysts and investors told CNBC.
Digital currencies have fallen sharply since a scorching run in 2021 which saw bitcoin climb as high as $68,990. But for the past few months, bitcoin’s price has bounced stubbornly around $20,000 in a sign that volatility in the market has settled.
Last week, the cryptocurrency’s 20-day rolling volatility fell below that of the Nasdaq and S&P 500 indexes for the first time since 2020, according to data from crypto research firm Kaiko.
Stocks and cryptocurrencies are both down sharply this year as interest rate hikes by the U.S. Federal Reserve and a strengthening dollar weighed on the sector.
Bitcoin’s correlation with stocks has increased over time as more institutional investors have invested in crypto.
But bitcoin’s price has stabilized recently. And for some investors, that easing of volatility is a good sign.
“Bitcoin has essentially been range bound between 18-25K for 4 months now, which indicates consolidation and a potential bottoming out pattern, given we are seeing the Dollar index top out as well,” Vijay Ayyar, head of international at crypto exchange Luno, told CNBC in emailed comments.”
“In previous cases such as in 2015, we’ve seen BTC bottom when DXY has topped, so we could be seeing a very similar pattern play out here.”
Antoni Trenchev, co-founder of crypto lender Nexo, said bitcoin’s price stability was “a strong sign that the digital assets market has matured and is becoming less fragmented.”
Cryptocurrencies have suffered a brutal comedown this year, losing $2 trillion in value since the height of the 2021 rally. Bitcoin, the world’s biggest digital coin, is off around 70% from its November peak.
The current so-called “crypto winter” is largely the result of aggressive tightening from the Fed, which has been hiking interest rates in an effort to tame rocketing inflation. Large crypto investors with highly leveraged bets like Three Arrows Capital were floored by the pressure on prices, further accelerating the market’s drop.
However, some investors think the ice may now be beginning to thaw.
There are signs of an “accumulation phase,” according to Ayyar, when institutional investors are more willing to place bets on bitcoin given the lull in prices.
“Bitcoin being stuck in such a range does make it boring, but this is also when retail loses interest and smart money starts to accumulate,” Ayyar said.
Matteo Dante Perruccio, president of international at digital asset management firm Wave Financial, said he’s seen a “counterintuitive increase in demand of traditional institutional investors in crypto during what is a time where generally you would see interest fall off in the traditional markets.”
Financial institutions have continued taking steps into crypto despite the fall in prices and waning interest from retail investors.
Goldman Sachs suggested we may be close to the end of a “particularly bearish” period in the latest cycle of crypto movements. In a note released Thursday, analysts at the bank said there were parallels with bitcoin’s trading in Nov. 2018, when prices steadied for a while before rising steadily.
Read more about tech and crypto from CNBC Pro
“Low volatility [in Nov. 2018] was following a large bitcoin bear market,” Goldman’s analysts wrote, adding that “crypto QT” (quantitative tightening) occurred as investors poured out of stablecoins like tether, reducing liquidity. The circulating supply of USD Coin — a stablecoin that’s pegged to the U.S. dollar — has fallen $12 billion since June, while tether’s circulating supply has dropped over $14 billion since May.
Selling pressure has slowed, too, as bitcoin miners reduced their sales of the cryptocurrency, suggesting the worst may be over for the mining space. Publicly-traded bitcoin miners sold 12,000 bitcoins in June and only around 3,000 in September, according to Goldman Sachs.
Wave Financial’s Perruccio expects the second quarter of next year to be the time when crypto winter finally comes to an end.
“We’ll have seen a lot more failures in the DeFi [decentralized finance] space, a lot of the smaller players, which is absolutely necessary for the industry to evolve,” he added.
James Butterfill, head of research at crypto asset management firm CoinShares, said it was difficult to draw too many conclusions at this stage. However, he added, “we err on the side of greater potential for upside rather than further price falls.”
“The largest fund outflows recently have been in short-Bitcoin positions (US$15m this month, 10% of AuM), while we have seen small but uninterrupted inflows into long Bitcoin over the last 6 weeks,” Butterfill told CNBC via email.
The main thing that would lead to greater buying of bitcoin would be a signal from the Federal Reserve that it plans to ease its aggressive tightening, Butterfill said.
The Fed is expected to hike rates by 75 basis points at its meeting next week, but officials at the central bank are reportedly considering slowing the pace of future increases.
“Clients are telling us that once the Fed pivots, or is close to it, they will begin adding positions to Bitcoin,” Butterfill said. “The recent liquidations of net shorts is in sync with what we are seeing from a fund flows perspective and implies short sellers are beginning to capitulate.”
The U.S. accused Moscow of “weaponizing food” in suspending its participation in agreement allowing grain shipments to leave Ukraine’s ports.
The U.N. and Turkey, which brokered the deal in the summer, said on Sunday that they were in talks to try to bring Russia back into the accord. Ankara said in a tweet that Turkish Defense Minister Hulusi Akar “has been meeting with his counterparts” over the situation.
U.N. Secretary-General António Guterres is engaged in “intense contacts” aimed at bringing Russia back to the deal, the organization said on Sunday, after the Kremlin on Saturday said it was halting the agreement for an “indefinite period,” citing an attack on a base in occupied Crimea that Russia blamed on Ukraine.
The grain export deal, designed to make sure Ukrainian agricultural products can reach international markets, is considered critical to global food security given Ukraine’s role as a major producer of foodstuffs.
“Any act by Russia to disrupt these critical grain exports is essentially a statement that people and families around the world should pay more for food or go hungry,” U.S. Secretary of State Antony Blinken said in a statement late Saturday. “In suspending this arrangement, Russia is again weaponizing food in the war it started.”
U.S. President Joe Biden called Russia’s move “purely outrageous.”
“It’s going to increase starvation,” Biden told reporters in Delaware on Saturday.
Russia’s ambassador to the U.S. blasted Washington on Sunday for its reaction to Moscow’s decision and reiterated unsubstantiated claims that U.K. operatives were involved in a drone attack on the Russian fleet at the Black Sea port of Sevastopol in Crimea on Saturday.
“Washington’s reaction to the terrorist attack on the port of Sevastopol is truly outrageous,” Ambassador Anatoly Antonov said on Telegram.
The U.S. and the EU called on Russian President Vladimir Putin to reverse the decision on the Black Sea grain deal.
“Russia’s decision to suspend participation in the Black Sea deal puts at risks the main export route of much needed grain and fertilizers to address the global food crisis caused by its war against Ukraine,” Josep Borrell, the EU’s top diplomat, said in a tweet.
The Joint Coordination Center — the body established by the U.N., Turkey, Russia and Ukraine to coordinate foodstuff exports from Ukrainian ports — said it is “discussing next steps” following Moscow’s decision to halt the Black Sea agreement. At least 10 vessels, both outbound and inbound, are waiting to enter the humanitarian corridor established by the JCC, the center said late Saturday.
Ukrainian President Volodymyr Zelenskyy said Moscow has been “deliberately aggravating” the food crisis since September. “This is an absolutely transparent intention of Russia to return the threat of large-scale famine to Africa and Asia,”he said.
“From September to today, 176 vessels have already accumulated in the grain corridor,” Zelenskyy said in his nightly address Saturday. Some ships have been waiting for more than three weeks, he said.
Zelenskyy called for a “strong international response” to the Kremlin’s move, specifying the U.N. and “in particular” the G20. “How can Russia be among the G20 if it is deliberately working for starvation on several continents? This is nonsense,” Zelenskyy said.
Poland called the Kremlin’s move “yet another proof that Moscow is not willing to uphold any international agreements.”
“Poland, together with its EU partners, stands ready to work further to help Ukraine and those in need to transport essential goods,” the Polish foreign ministry said in a tweet on Sunday.
Nahal Toosi contributed reporting from Washington.
This is an opinion editorial by Luke Mikic, a writer, podcast host and macro analyst.
This is the second part in a two-part series about the Dollar Milkshake Theory and the natural progression of this to the “Bitcoin Milkshake.” In this piece, we’ll explore where bitcoin fits into a global sovereign debt crisis.
The Bitcoin Milkshake Theory
Most people believe the monetization of bitcoin will most hurt the United States as it’s the country with the current global reserve currency. I disagree.
The monetization of bitcoin benefits one nation disproportionally more than any other country. Like it, welcome it or ban it, the U.S. is the country that will benefit most from the monetization of bitcoin. Bitcoin will help to extend the life of the USD longer than many can conceptualize and this article explains why.
If we move forward on the assumption that the Dollar Milkshake Thesis continues to decimate weaker currencies around the world, these countries will have a decision to make when their currency goes through hyperinflation. Some of these countries will be forced to dollarize, like the more than 65 countries that are either dollarized or have their local currency pegged to the U.S. dollar.
Some may choose to adopt a quasi-gold standard like Russia recently has. Some may even choose to adopt the Chinese yuan or the euro as their local medium of exchange and unit of account. Some regions could copy what the shadow government of Myanmar have done and adopt the Tether stablecoin as legal tender. But most importantly, some of these countries will adopt bitcoin.
For the countries that may adopt bitcoin, it will be too volatile to make economic calculations and use as a unit of account when it’s still so early in its adoption curve.
Despite what the consensus narrative is surrounding those who say, “Bitcoin’s volatility is decreasing because the institutions have arrived,” I strongly believe this is not a take rooted in reality. In a previous article written in late 2021 analyzing bitcoin’s adoption curve, I outlined why I believe the volatility of bitcoin will continue to increase from here as it travels through $500,000, $1 million and even $5 million per coin. I think bitcoin will still be too volatile to use as a true unit of account until it breaches eight figures in today’s dollars — or once it absorbs 30% of the world’s wealth.
For this reason, I believe the countries who will adopt bitcoin, will also be forced to adopt the U.S. dollar specifically as a unit of account. Countries adopting a bitcoin standard will be a Trojan horse for continued global dollar dominance.
Put aside your opinions on whether stablecoins are shitcoins for just a second. With recent developments, such as Taro bringing stablecoins to the Lightning Network, imagine the possibility of moving stablecoins around the world, instantly and for nearly zero fees.
What I find most interesting is not the rate of growth of stablecoins, but which stablecoins are growing the fastest. After the recent Terra/LUNA debacle, capital fled from what’s perceived to be more “risky” stablecoins like tether, to more “safe” ones like USDC.
BlackRock is the world’s largest asset manager and recently headlined a $440 million fundraising round by investing in Circle. But it wasn’t just a funding round; BlackRock is going to be acting as the primary asset manager for USDC and their treasury reserves, which is now nearly $50 billion.
The aforementioned Tether appears to be following in the footsteps of USDC. Tether has long been criticized for its opaqueness and the fact it’s backed by risky commercial paper. Tether has been viewed as the unregulated offshore U.S. dollar stablecoin. That being said, Tether sold their riskier commercial paper for more pristine U.S. government debt. They also agreed to undergo a full audit to improve transparency.
If Tether is true to their word and continues to back USDT with U.S. government debt, we could see a scenario in the near future where 80% of the total stablecoin market is backed by U.S. government debt. Another stablecoin issuer, MakerDao, also capitulated this week, buying $500 million government bonds for its treasury.
It was crucial that the U.S. dollar was the main denomination for bitcoin during the first 13 years of its life during which 85% of the bitcoin supply had been released. Network effects are hard to change, and the U.S. dollar stands to benefit most from the proliferation of the overall “crypto” market.
This Bretton Woods III framework correctly describes the issue facing the United States: The country needs to find someone to buy their debt. Many dollar doomsayers assume the Fed will have to monetize a lot of the debt. Others say that increased regulations are on the way for the U.S. commercial banking system, which was regulated to hold more Treasurys in the 2013-2014 era, as countries like Russia and China began divesting and slowing their purchases. However, what if a proliferating stablecoin market, backed by government debt, can help soak up that lost demand for U.S. Treasurys? Is this how the U.S. finds a solution to the unwinding petrodollar system?
Interestingly, the U.S. needs to find a solution to its debt problems, and fast. Nations around the world are racing to escape the dollar-centric petrodollar system that the U.S. for decades has been able to weaponize to entrench its hegemony. The BRICS nations have announced their intentions to create a new reserve currency and there are a host of other countries, such as Saudi Arabia, Iran, Turkey and Argentina that are applying to become a part of this BRICS partnership. To make matters worse, the United States has $9 trillion of debt that matures in the next 24 months.
Who is now going to buy all that debt?
The U.S. is once again backed into a corner like it was in the 1970s. How does the country protect its nearly 100-year hegemony as the global reserve currency issuer, and 250-year hegemony as the globe’s dominant empire?
Currency Wars And Economic Wild Cards
This is where the thesis becomes a lot more speculative. Why is the Fed continuing to aggressively raise interest rates, bankrupting its supposed allies like Europe and Japan, while seemingly sending the world into a global depression? “To fight inflation,” is what we’re told.
Let’s explore an alternative, possible reason why the Fed could be raising rates so aggressively. What options does the U.S. have to defend its hegemony?
In a world currently under a hot war, would it seem so far-fetched to speculate that we could be entering an economic cold war? A war of central banks, if you will? Have we forgotten about the “weapons of mass destruction?” Have we forgotten what we did to Libya and Iraq for attempting to route around the petrodollar system and stop using the U.S. dollar in the early 2000s?
Until six months ago, my base case was that the Fed and central banks around the globe would act in unison, pinning interest rates low and use the “financial repression sandwich” to inflate away the globe’s enormous and unsustainable 400% debt-to-GDP ratio. I expected them to follow the economic blueprints laid out by two economic white papers. The first one published by the IMF in 2011 titled, “The Liquidation Of Government Debt” and then the second paper published by BlackRock in 2019 titled, “Dealing With The Next Downturn.”
I also expected all the central banks to work in tandem to move toward implementing central bank digital currencies (CBDCs) and working together to implement the “Great Reset.” However, when the data changes, I change my opinions. Since the creepingly coordinated policies from governments and central banks around the world in early 2020, I think some countries are not so aligned as they once were.
Until late 2021, I held a strong view that it was mathematically impossible for the U.S. to raise rates — like Paul Volcker did in the 1970s — at this stage of the long-term debt cycle without crashing the global debt market.
Debt held by the public is nearly as high as times during WWII
But, what if the Fed wants to crash the global debt markets? What if the U.S. recognizes that a strengthening dollar causes more pain for its global competitors than for themselves? What if the U.S. recognizes that they would be the last domino left standing in a cascade of sovereign defaults? Would collapsing the global debt markets lead to hyperdollarization? Is this the only economic wild card the U.S. has up its sleeve to prolong its reign as the dominant global hegemon?
As a Ray Dalio disciple, I’ve built my entire macroeconomic framework on the idea that “cash is trash.” I believe that mantra still holds true for anyone using any other fiat currency, but has Dalio stumbled upon some new information about the USD that has changed his mind?
Has he concluded that the United States could be about to weaponize the dollar, making it not so trashy? Has he concluded that the U.S. isn’t going to willingly allow China to be the world’s next rising empire like he once proclaimed? Would the U.S. aggressively raising rates lead to a capital flight to the U.S., a country that has a comparatively healthier banking system than its competitors in China, Japan and Europe? Do we have any evidence for this outlandish left-field, hypothetical scenario?
Let’s also not forget, this is not just a race with the United States versus China. The second-most used foreign currency in the world — the euro — probably wouldn’t mind gaining power from a declining U.S. empire. We have to ask the question, why is Jerome Powell refusing to align monetary policies with one of our closest allies in Europe?
In this illuminating 2021 webinar, at the Green Swan central banking conference, Powell blatantly refused to go along with the “green central banking” policies that were discussed. This visibly infuriated Christine Lagarde, head of the European Central Bank, who was also part of the event.
Is this a sign the U.S. is no longer a fan of the Great Reset ideologies coming out of Europe? Why is the Fed also ignoring the United Nations begging them to lower rates?
We can speculate about what Powell’s intentions may be all day, but I prefer to look at data. Since Powell’s initial heated debate with Lagarde and the Fed’s subsequent rate increase on the reverse repo days after, the dollar has decimated the euro.
Reverse repo rates initially increased on May 31, 2022
In April 2022, Powell was dragged into another “debate” with Lagarde, led by the head of the IMF. Powell reaffirmed his stance on climate change and central banking.
The plot thickens when we consider the implications of the LIBOR and SOFR interest rate transition that occurred at the beginning of 2022. Will this interest rate change enable the Fed to hike interest rates and insulate the banking system from the contagion that’ll ensue from a wave of global debt defaults in the wider eurodollar market?
I do think it’s interesting that by some metrics the U.S. banking system is showing comparatively fewer signs of stress than in Europe or the rest of the world, validating the thesis that SOFR is insulating the U.S. to a degree.
A New Reserve Asset
Whether the U.S. is at war with other central banks or not doesn’t change the fact that the country needs a new neutral reserve asset to back the dollar. Creating a global deflationary bust, and weaponizing the dollar is only a short-term play. Scooping up assets on the cheap and weaponizing the dollar will only force dollarization in the short term. The BRICS nations and others that are disillusioned with the SWIFT-centered financial system will continue to de-dollarize and try to create an alternative to the dollar.
The global reserve currency has been informally backed by the U.S. Treasury note for the past 50 years, since Nixon closed the gold window in 1971. In times of risk, people run to the reserve asset as a way to get a hold of dollars. For the past 50 years, when equities sell off, investors fled to the “safety” of bonds which would appreciate in “risk off” environments. This dynamic built the foundation of the infamous 60/40 portfolio — until this trade ultimately broke in March 2020 when the Treasury market became illiquid.
As we transition into the Bretton Woods III era, the Triffin dilemma is finally becoming untenable. The U.S. needs to find something to back the dollar with. I find it unlikely that they will back the dollar with gold. This would be playing into the hands of Russia and China who have far larger gold reserves.
This leaves the U.S. with their backs against a wall. Faith is being lost in the dollar and they would surely want to retain their global reserve currency status. The last time the U.S. was in a similarly vulnerable position was in the 1970s with high inflation. It looked like the dollar would fail until the U.S. effectively pegged the dollar to oil through the petrodollar agreement with the Saudis in 1973.
The country is faced with a similar conundrum today but with a different set of variables. They no longer have the option of backing the dollar with oil or gold.
Enter Bitcoin!
Bitcoin can stabilize the dollar and even prolong its global reserve currency status for much longer than many people expect! Most importantly, bitcoin gives the U.S. the one thing it needs for the 21st-century monetary wars: trust.
Countries may trust a gold-backed (petro-)ruble/yuan more than a dollar backed by worthless paper. However, a bitcoin-backed dollar is far more trustworthy than a gold-backed (petro-)ruble/yuan.
As mentioned earlier, the monetization of bitcoin not only helps the U.S. economically, but it also directly hurts our monetary competitors, China and to a lesser degree, Europe — our supposed ally.
Will the U.S. realize that backing the dollar with energy directly hurts China and Europe? China and Europe are both facing significant energy-related headwinds and have both infamously banned Bitcoin’s proof-of-work mining. I made the case that the energy crisis in China was the real reason China banned bitcoin mining in 2021.
Today, as we transition into the digital age, I believe a fundamental shift is coming:
For thousands of years, money has been backed by trust and gold, and protected by ships. However, in this millennium, money will now be backed by encryption and math, and protected by chips.
If you will allow me to once again engage in some speculation, I believe the U.S. understands this reality, and is preparing for a deglobalized world in many different ways. The U.S. appears to be the Western nation taking the friendliest approach to Bitcoin. We have senators all across the U.S. tripping over themselves to make their states Bitcoin hubs by enacting friendly regulation for mining. The great hash migration of 2021 has seen the lion’s share of the Chinese hash being transferred to the U.S., which now houses over 35% of the world’s hash rate.
Recent sanctions on Russian miners could only further accelerate this hash migration. Apart from some noise in New York, and the delayed spot ETF decision, the U.S. looks as though it’s embracing bitcoin.
In this video, Treasury Secretary Janet Yellen talks about Satoshi Nakamoto’s innovation. The SEC Chair Gary Gensler continually differentiates Bitcoin from “crypto” and has also praised Satoshi Nakamoto’s invention.
We’re transitioning from an oil-backed dollar to a bitcoin-backed dollar reserve asset. Crypto-eurodollars, aka stablecoins backed by U.S. debt, will provide the bridge between the existing energy-backed dollar system and this new energy-backed bitcoin/dollar system. I find it awfully poetic that the country founded on the ideology of freedom and self-sovereignty appears to be positioning itself to be the one that most takes advantage of this technological innovation. The bitcoin-backed dollar is the only alternative to a rising Chinese threat positioning for the global reserve currency.
Yes, the United States has committed many atrocities, I’d argue that at times they’ve been guilty of abusing their power as the global hegemon. However, in a world that’s being rapidly consumed by ramped totalitarianism, what happens if the mighty U.S. experiment fails? What happens to our civilization if we allow a social-credit-scoring Chinese empire to rise and export its CBDC-backed digital panopticon to the world? I was once one of these people cheering for the demise of the U.S. empire, but I now fear the survival of our very civilization is dependent upon the survival of the country that was originally founded on the principles of life, liberty and property.
Conclusions
Zooming out, I stand by my original thesis that we are in a new monetary order by the end of the decade. However, the events of the previous months have certainly accelerated that already-rapid 2030 timeline. I also stand by my original thesis from the 2021 article surrounding how bitcoin’s adoption curve unfolds because of how broken the current monetary regime is.
I believe 2020 was the monetary inflection point that will be the catalyst that takes bitcoin from 3.9% global adoption to 90% adoption this decade. This is what crossing the chasm entails for all transformative technologies that reach mainstream penetration.
Deglobalization will be the perfect scapegoat for what was always going to be a decade of government debt deleveraging. The monetary contractions and spasms are becoming more frequent and more violent with each drawdown we encounter. I believe the majority of fiat currencies are in the 1917 stages of the Weimar hyperinflation.
This article was very centered on nation-state adoption of bitcoin, but don’t lose sight of what’s truly unfolding here. Bitcoin is a Trojan horse for freedom and self-sovereignty in the digital age. Interestingly, I also feel that hyperdollarization will accelerate this peaceful revolution.
Hyperinflation is the event that causes people to do the work and learn about money. Once many of these power-hungry dictators are forced to dollarize and no longer have the control of their local money printer, they may be more incentivized to take a bet on something like bitcoin. Some may even do it out of spite, not wanting to have their monetary policy dictated to them by the U.S.
Money is the primary tool used by states to exercise their autocratic, authoritarian powers. Bitcoin is the technological innovation that’ll dissolve the nation-state, and fracture the power the state has, by removing its monopoly on the money supply. In the same way the printing press fractured the power of the dynamic duo that was the church and state, bitcoin will separate money from state for the first time in 5,000+ years of monetary history.
So, to answer the dollar doomsdayers, “Is the dollar going to die?” Yes! But what will we see in the interim? De-dollarization? Maybe on the margins, but I believe we will see hyperdollarization followed by hyperbitcoinization.
This is a guest post by Luke Mikic. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
This is an opinion editorial by Luke Mikic, a writer, podcast host and macro analyst.
This is the first part in a two-part series about the Dollar Milkshake Theory and the natural progression of this to the “Bitcoin Milkshake.”
Introduction
“The dollar is dead!”
“The Petrodollar system is breaking down!”
“The Federal Reserve doesn’t know what it’s doing!”
“China is playing the long game; the U.S. is only planning four years ahead.”
How many times have you heard claims like these from macroeconomists and sound money advocates in recent times? These types of comments have become so prevalent, that it’s now a mainstream opinion to declare that we’re about to see the imminent death of the U.S. dollar and subsequent fall of the great U.S. empire. Is modern America about to suffer the same fate as Rome, or does the country still have an economic wild card hidden up its sleeve?
Similarly dire predictions were made about the U.S. dollar in the 1970s during the “Great Inflation,” after the abandonment of the gold standard in 1971. It took the dynamic duo of Richard Nixon and Henry Kissinger to pull a rabbit out of the hat to save the U.S. dollar. They effectively backed the USD with oil in 1973, birthing the petrodollar experiment.
It was an ingenious move that prolonged the life of the dollar and the hegemonic reign of the U.S. as the world’s dominant superpower. The lesson we should take away from this example in the 1970s is to never underestimate a great empire. They’re an empire for a reason. Could the United States be forced to play another monetary wild card today to retain their power as the global hegemon in the face of de-dollarization?
History doesn’t repeat, but it often rhythms.
Another similarity to the 1970s is emerging today as Federal Reserve Chair Jerome Powell is aggressively raising interest rates in an attempt to fight the most ravaging inflation we’ve seen since that time. Is Powell simply fighting inflation or is he also attempting to save the credibility of the U.S. dollar in the midst of a 21st-century currency war?
I believe we are on the precipice of the implosion of a globally interconnected, fiat-based financial system. There are currently over 180 different currencies all around the world, and in these two articles I’ll outline how we will end the decade with two currencies left standing. Another dynamic duo, if you will.
Most people assume these two currencies left standing will be in violent opposition to each other, but I’m not so sure. I believe they will form a symbiotic relationship where they compliment each other, the same way a plump cherry compliments a milkshake on a warm, sunny day.
But how do we get there, and why do I believe the U.S. dollar will be one of the last dominos to fall? Simple gravity! Yes, the U.S. is running the largest fiscal deficits of all time. Yes, the U.S. has $170 trillion of unfunded liabilities. But gravity is gravity, and there’s an estimated $300 trillion of economic gravity around the world making it likely that the U.S. dollar will be the last fiat currency to hyperinflate. This is the biggest mistake people make when they analyze the dollar. We often only look at the supply of dollars and an exponentially growing Fed balance sheet.
However, everyone is forgetting the first lesson of Economics 101: supply and demand.There is an enormous demand for dollars all around the world.
This is a Bitcoin publication, so I will also be discussing the role that bitcoin may have in the cascading fiat currency collapse that I expect to unfold in the coming months and years.
If you accept the hypothetical assumption that one day the world will operate on a bitcoin standard, most people will then assume this is bad for the United States, as it is the current global reserve status holder. However, the monetization of bitcoin benefits one country disproportionally more than any other: the United States.
A strong dollar will lead to hyperdollarization.
A consequence of hyperdollarization is increased bitcoin adoption.
A consequence of increased bitcoin adoption is increased stablecoin adoption.
A consequence of increased stablecoin adoption is increased U.S. dollar adoption!
This dynamic feedback loop will ultimately become an all-consuming, fiat currency black hole.
Welcome to the “Bitcoin Milkshake Thesis,” the delicious macroeconomic dessert you haven’t heard of.
Let me explain many of these complicated-sounding macroeconomic theories prevalent today: petrodollars, eurodollars, dollar milkshakes, bitcoin milkshakes, Ray Dalio’s “Changing World Order.”
Most importantly, I will explain how they all relate to the most delicious dynamic duo in the macroeconomic dessert place: the Dollar Milkshake meets the Bitcoin Milkshake.
The Dollar Milkshake Theory
By now, you’ve probably at seen the effects that the “Dollar Milkshake Theory” had on financial markets. The Dollar Milkshake Theory, created and proposed by Brent Johnson in 2018, helps to explain why every asset class in the world is cratering. From global equities, blue chip tech stocks, real estate and bonds, money is flowing out of assets and the currencies of sovereign nations and into the global safe haven: the U.S. dollar.
If there is one chart that explains the Dollar Milkshake, this is it.
Distilled into its simplest format, the Dollar Milkshake Theory explains how the macroeconomic endgame will unfold for our debt supercycle. It details in what order Johnson believes the dominos will fall as we transition to a new monetary system.
The “milkshake” part of this delicious dessert consists of trillions of dollars in liquidity that global central banks have printed over the past decade. Johnson articulates that the USD will be the straw that sucks up all of that liquidity when capital seeks safety in times of financial risk. Capital flows to where it is treated best. Johnson proposes that the U.S. dollar will be the last fiat currency standing, as sovereign nations are forced to devalue and hyperinflate their own national currencies to source the U.S. dollars they need during a global sovereign debt crisis.
Put very simply, the Dollar Milkshake Theory is a manifestation of the structural imbalances present in our monetary system. These imbalances were expected and even predicted by John Maynard Keynes at the Bretton Woods conference in 1944 and critiqued by Robert Triffin in the 1950s and 1960s. The consequences of abandoning the gold standard without using a neutral reserve asset was eventually going to come back to haunt the global economy.
With the dollar wrecking ball currently wreaking havoc on our financial system and bankrupting governments all around the world, I thought it would be timely to revisit what I said over a year ago:
That quote originated from an article I published in a series titled “Bitcoin The Big Bang To End All Cycles.” In the piece, I analyzed the history of 80-year, long-term debt cycles and the history of hyperinflation to conclude that the inflation that had just reared its head in 2021 was not going to be transitory, and instead would be an accelerating catalyst that would propel us toward a new monetary system by the end of the decade. Despite expecting acceleration, the acceleration we’ve seen since mid-2021 has still surprised me.
Here, I will take a more granular look at the intermediary steps involved in this global sovereign debt crisis, exploring the role bitcoin will play as this unfolds. That will give us hints as to which is likely to be the next global reserve currency after the unwinding of this debt supercycle.
Many are puzzled by the U.S. dollar decimating every other fiat currency on the globe. How is this possible? There are two major systems that have led to the structural imbalances present in our global economy: the eurodollar market and the petrodollar system.
Much of the dollar-denominated debt mentioned above was created by banks outside of the U.S. This is where the term “eurodollars” comes from. I’m not going to bore you with an explanation of the eurodollar market, rather just give you the basics that are relevant to this thesis. The key takeaway we need to understand is that the eurodollar market is rumored to be in the tens and even hundreds of trillions of dollars!
This means there is actually more debt outside the U.S. than there is within the country. Lots of countries either chose, or were forced, to take on U.S. dollar-denominated debt. For them to repay that debt, they need to access dollars. In times of an economic slowdown, lockdown of the global economy or when exports are low, these other countries sometimes have to resort to printing their own currencies to access U.S. dollars in the foreign exchange markets to pay their dollar-denominated debts.
When the dollar index rises — indicating that the U.S. dollar is getting stronger against other currencies — this puts even more pressure on these countries with large dollar-denominated debts. This is exactly what we’re witnessing today as the dollar index (DXY) reached 20-year highs.
The one-month chart for the dollar index (DXY) going back to 1981 shows 20-year highs.
For a more detailed breakdown on the Dollar Milkshake Theory and the devastating effects it’s having on markets today, I dedicated a blog to explaining the thesis.
This milkshake dynamic creates an enormous demand for U.S. dollars outside of the country, which enables and actually requires the Fed to create enormous amounts of liquidity in order to supply the world with the dollars the world needs to service its debts. If the Fed wants the global economy to function effectively, it simply must supply dollars to the world. This is a key point. In a globally interconnected world during peacetime, it makes sense the Fed would supply the world with the needed dollars.
Since we’ve been on the petrodollar system for the past 50 years, we’ve experienced many calls for the death of the dollar. However, the most threatening times our financial system faced have emerged when there’s been a shortage of U.S. dollars, and the DXY has strengthened relative to other currencies.
The Deadly Dollar Bull Runs
The dominant narrative in the macroeconomic environment over the past decade has surrounded the Fed and central banks with historically unprecedented loose monetary policy. However, this appears to be changing in 2022.
As we watch the Fed and central banks around the world raise interest rates in an attempt to control inflation, many are shocked and confused as to what this new paradigm of tightening monetary policy will mean for our deglobalizing global economy. It’s paramount to remember: All fiat currencies are losing purchasing power against goods and services.
All currencies are being rapidly devalued and will eventually return to their intrinsic value of 0. Of the hundreds of currencies that have existed since 1850, most have gone to 0. Currently, we’re in the process of witnessing the final 150 or so trend to 0 in a globally competitive debasement to the bottom.
One of the major measurements everyone uses to measure this relative strength is the dollar index. It is measured against six major currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
The DXY has had three major bull runs since 1971 that have threatened the stability of the global financial system. Every time the U.S. dollar has rallied, it’s destroyed the balance sheets of emerging market countries that have taken on too much U.S. debt with too little reserves.
In this dollar bull cycle, it’s not just fringe emerging markets that are suffering from the soaring U.S. dollar. Every single currency is being decimated against the mighty greenback. The Japanese yen has long been regarded as a safe haven alongside the U.S. dollar and for years it’s been held up as the poster currency by Keynesian economists. They’ve had the joy of pointing toward Japan’s enormous 266% debt-to-GDP ratio, alongside the Bank of Japan’s enormous 1,280-trillion-yen balance sheet with decades of low inflation.
A weak Japanese yen is typically bad for China because Japanese exports become more attractive the weaker the yen gets. This is why every time the yen has significantly weakened, the yuan has typically followed. There appears not to be an exception to this rule in 2022, and close attention should be paid to the other exporting Asian currencies, like the South Korean won and the Hong Kong dollar.
Then we have the Hong Kong dollar peg, which is also on the brink of a major breakout, as it continues to knock on the 7.85 peg.
This peg has been held for over 30 years.
This peg has been held for over 30 years.
Shifting our attention to another energy-impoverished area, we can see that the USD is also showing enormous strength against the euro, which is the second-largest currency in the world. The EUR/USD has broken a 20-year support line and has recently traded below parity with the dollar for the first time in 20 years. The eurozone is suffering tremendously from a fragile banking system and energy crisis with its currency losing 20% of its value against the dollar in the past 18 months alone.
The euro has lost 20% of its value against the dollar in just 18 months.
The European Central Bank looks to be in crisis mode as they’ve barely gotten interest rates into the positive realm, while the Fed has moved its federal funds rate to almost 4%.
The Fed has moved its federal funds rate to almost 4%.
This has caused significant capital flight out of Europe, and due to the recent volatility in their bond market, ECB President Christine Lagarde was forced to announce a new form of quantitative easing (QE). This “anti-fragmentation” tool is a new form of QE where the ECB sells German bonds to buy Italian bonds in an attempt to keep the fracturing eurozone together.
This dollar bull run is wreaking havoc on the world’s largest and safest currencies. The yen, euro and the yuan are the three largest alternatives to the U.S. dollar and all are competitors if the U.S. were to lose its reserve currency status. But the emerging market currencies are where the real pain is being felt the most. Countries like Turkey, Argentina and Sri Lanka are all experiencing 80%-plus inflation and serve as great examples of how the dollar wrecking ball hurts the smaller countries the most.
The DXY has had a hell of a run over the past 12 months, so a pullback wouldn’t surprise me. Both the DXY and the more equally-weighted broad dollar index are very extended after having parabolic rises in 2022 and are both now breaking down from their parabolas.
One-day chart of the DXY showing a parabolic increase
One-day chart of the trade-weighted broad dollar index, also showing a parabolic increase
Could we see a Fed balance sheet shoot to $50 trillion while simultaneously seeing hyperdollarization as the eurodollar market is absorbed?
It’s possible, but I think the Fed is racing the clock. The petrodollar system is breaking down rapidly as the BRICS nations are racing to set up their new reserve currency.
It’s important to notice, this milkshake scenario was always going to unfold. The structural imbalances in our financial system would’ve always inevitably manifested themselves in this domino effect of currency collapses that Brent Johnson articulated.
Interestingly, I believe some recent events have actually accelerated this process. Yes, I see all the signposts that the dollar doomsayers are pointing out; the dollar will die eventually, just not yet. However, let’s entertain the idea that the dollar is in fact dying, and the USD will lose reserve currency status.
Who would take over the global reserve currency of the world?
For the economic reasons I’ve mentioned above, I don’t believe the euro, the yen or even the Chinese yuan are viable replacements for the U.S. dollar. In a recent article titled, “The 2020s Global Currency Wars,” I explored the theses of Ray Dalio and Zoltan Pozsar and explained why I believed both were ignoring the geopolitical, demographic and energy-related headwinds facing all the competitors to the U.S.
I do believe that commodities are significantly undervalued and that we will see a 2020s “commodities supercycle,” due to decades of underinvestment in the industry. I also believe securing commodities and energy will play a key role in a nation’s security, as the world continues to deglobalize. However — disagreeing with Pozsar here — backing money with commodities isn’t the solution to the problem the world is facing.
I believe the U.S. dollar will be the last fiat currency to hyperinflate, and I actually expect it to hold on to the reserve currency status until this long-term debt cycle concludes. To go one step further, I actually think there’s a strong possibility that the United States will be the last country ever to hold the title of “global reserve currency issuer” if they play their cards right.
We will explore the Bitcoin Milkshake Theory in part two.
This is a guest post by Luke Mikic. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
The Russian government said it suspended indefinitely a months-old deal allowing grain shipments to leave Ukraine’s ports, citing an attack on a base in occupied Crimea as the reason.
According to a statement issued Saturday by Russia’s foreign ministry, Moscow “suspends participation” for an “indefinite period” in a deal brokered by the U.N. to make sure agricultural products made in Ukraine can reach global markets.
The deal is considered critical to global food security given Ukraine’s role as a major producer of grain, which is then normally shipped via the Black Sea to markets worldwide, especially in Africa and the Middle East.
“The Russian side cannot guarantee the safety of civilian dry cargo ships,” the foreign ministry said, citing an alleged drone attack by Ukraine on the port at Sevastopol in Crimea in the early hours of Saturday morning.
Ukrainian Foreign Minister Dmytro Kuleba said in a tweet that Moscow was using a “false pretext to block the grain corridor.”
The Russian ministry statement repeated claims made earlier in the day that British experts had supported Ukraine in the attack on Crimea, with Moscow also accusing U.K. forces of being behind explosions that critically damaged the Nord Stream gas pipeline without providing supporting evidence. London denied the claims.
Ukrainian President Volodymyr Zelenskyy’s chief of staff, Andriy Yermak, accused Russia of “blackmail” and “fictitious terror attacks.”
The export deal, dubbed the Black Sea Grain Initiative, was supposed to run until November 19 when all sides would have needed to agree to extend it. The agreement enabled Ukraine to restart exports of grain and fertilizer via the Black Sea, which had been stalled when Russia invaded the country in late February.
Since the U.N.-backed grain deal was signed in Turkey on July 22, several million tons of wheat, corn, sunflower products and other grains have been shipped out of Ukraine.
The U.N. said it was “in touch with the Russian authorities” regarding the suspension of the agreement.
“It is vital that all parties refrain from any action that would imperil the Black Sea Grain Initiative which is a critical humanitarian effort,” Stéphane Dujarric, spokesman for U.N. Secretary-General António Guterres, said in a statement.
Nahal Toosi contributed reporting from Washington.
DETROIT — General Motors is suspending its advertising on Twitter following Elon Musk’s takeover of the social media platform, the company told CNBC on Friday.
The Detroit automaker, a rival to Musk-led electric vehicle maker Tesla, said it is “pausing” advertising as it evaluates Twitter’s new direction. It will continue to use the platform to interact with customers but not pay for advertising, GM added.
“We are engaging with Twitter to understand the direction of the platform under their new ownership. As is normal course of business with a significant change in a media platform, we have temporarily paused our paid advertising. Our customer care interactions on Twitter will continue,” the company said in an emailed statement.
Under CEO Mary Barra, the Detroit company was among the first automakers to announce billions of dollars in spending to better compete against Tesla in the battery electric vehicle segment.
A General Motors sign is seen during an event on January 25, 2022 in Lansing, Michigan. – General Motors will create 4,000 new jobs and retaining 1,000, and significantly increasing battery cell and electric truck manufacturing capacity.
Jeff Kowalsky | AFP | Getty Images
A spokesperson for Ford Motor, another Tesla rival, told CNBC that the automaker is not currently advertising on Twitter, and had not been doing so prior to Elon Musk’s take-private deal. They added, “We will continue to evaluate the direction of the platform under the new ownership.”
However, when presented with a screenshot of a promoted tweet from Ford CEO Jim Farley, the spokesperson could not confirm when was the last time Ford or its collaborators may have paid for ads, including promoted tweets, on the platform.
Ford is continuing to engage with its customers on Twitter.
Other auto companies, including Rivian, Stellantis and Alphabet-owned Waymo, did not immediately respond to requests for comment on whether they plan to suspend advertising or discontinue using the social media platform in wake of Musk’s $44 billion buyout of Twitter.
Electric truck maker Nikola said it had no plans to change anything regarding the platform.
The future direction of Twitter has been central to the takeover story. Musk has said he is a “free speech absolutist,” who would restore the account of former President Donald Trump, who was banned over his tweets during the Jan. 6, 2021, Capitol insurrection.
Musk said on Friday that he plans a “content moderation council” and will not reinstate any accounts or make major content decisions before it is convened. Musk also said in a statement to advertisers this week that he cannot let Twitter become a “free-for-all hellscape.”
Henrik Fisker, CEO of EV startup Fisker Inc., deleted his Twitter account earlier this year when Twitter’s board accepted Musk’s bid to buy the company and take it private. Fisker Inc. continues to use Twitter, which every major automotive brand utilizes for customer engagement and marketing.
Musk has long boasted that Tesla does not pay for traditional advertising, a cost that has added up for conventional automakers’ brands through the years.
Instead, Tesla rewards people who run, or are members of, Tesla owners’ clubs as well as other social media influencers who promote the company’s products, stock and Musk on social networks, especially Twitter and YouTube as well as on fan blogs.
They are often granted early access to Tesla products, like the company’s Full Self Driving Beta software, and given passes to company events where attendance is limited.
In September 2020, Tesla weighed a stockholder proposal to begin strategic, paid advertising to educate the public about its vehicles and charging network. The Tesla board recommended against it, and shareholders voted with the board against starting to pay for traditional ad campaigns.
In the company’s annual report for 2021, Tesla wrote: “Historically, we have been able to generate significant media coverage of our company and our products, and we believe we will continue to do so. Such media coverage and word of mouth are the current primary drivers of our sales leads and have helped us achieve sales without traditional advertising and at relatively low marketing costs.”
It reported marketing, promotional and advertising costs were “immaterial” for the years ended Dec. 31, 2021, 2020 and 2019 in financial filings with the Securities and Exchange Commission.
— CNBC’s John Rosevear contributed to this report.
After poor earnings reports from Amazon (AMZN) , Microsoft (MSFT) , Meta (META) , and Alphabet (GOOGL) , the logical move was for the market to the sell off. Even the mighty Apple (AAPL) talked about slowing growth and is trading at a price-to-earnings ratio of 24 while anticipating single-digit EPS growth.
However, in the stock market, the most logical move often sets up conditions for the exact opposite action. That is what happened on Friday as the indexes exploded higher on the negative news. The best explanation for the strength wasn’t the great fundamental news. The strength was largely a function of cash flows, poor positioning, short-squeezes, seasonality, the potential midterm election outcome, and hope that the Fed is about to become just a little less hawkish.
The action in Apple is particularly interesting.
Apple did not post a surprisingly strong earnings report. It was not a huge surprise, yet the stock jumped over 7%, which is its single biggest gain since announcing a four-for-one split back on July 31, 2020. Money poured into Apple because it is viewed as a “safe haven” stock that is going to hold up despite the valuation, the economy, or anything else. It is attractive for reasons that have nothing to do with the health of the market.
This sort of “flow” drove the action, but there was also quite a bit of hope about the likelihood of a slightly more friendly Fed. Despite that hope, bonds traded lower on Friday and saw increased inversions between different durations that suggest that a recession is coming.
This is not the first time this year that the market has had high hopes of a dovish pivot by the Fed. Every bounce this year has ended with either hawkish comments from Jerome Powell or economic data that suggest inflation remains elevated. The Fed is releasing its next interest-rated decision on Wednesday, and a big runup into the news is going to create a very dangerous technical setup for the bulls.
It is important to keep in mind that the Fed does not want a big market rally at this juncture. A market rally is inflationary, and it undermines the Fed’s efforts. Even if the Fed does cut its hawkishness a bit, it is likely to be accompanied by some severe rhetoric to remind the market that more hikes are coming and the battle against inflation is not yet over.
We have had a number of huge rallies similar to this so far this year, and they make market players feel very good, but these types of moves almost always lead to elevated volatility in the days ahead. With the Fed and the election coming up, we will have some handy catalysts for more big swings.
Have a great weekend. I’ll see you Monday.
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This is an opinion editorial by Hannah Wolfman-Jones, author of “System Override: How Bitcoin, Blockchain, Free Speech, & Free Tech Can Change Everything” and founder of We The Web.
Capitalism is controversialthesedays. Many look at societal problems today and lay the blame squarely at the feet of capitalism. What these crusaders who proudly label themselves as “anti-capitalists” fail to realize is the global fiat system we have today is not really capitalism.
Under capitalism in its pure form, people with capital invest in businesses and ventures that they believe have merit and thus are likely to generate returns. Investors need to make difficult prudent judgments and take on the risk of losing big. Their capital — when invested in a successful business — allows for the creation of services, goods and jobs that are desired by people, making the profits awarded to successful investors just. Through investors in a free market, worthy ventures can get the capital they need to launch or expand a successful business, increasing prosperity across society in a meritocratic manner.
Unfortunately, this system has been greatly disrupted as the decentralized judgements by millions of independent actors in a free marketplace have been supplanted by the unilateral judgements of a few bureaucrats. Under the fiat monetary system, money itself is controlled by a small cabal of unelected economists and bankers. Capitalism is all about free markets. When it comes to our money itself, the currencies used, their supply and interest rates are not market-determined but rather calibrated by bureaucrats. This is not capitalism.
So, instead of spending all their considerable analytical efforts looking at possible business ventures and market needs, savvy capital allocators must follow and predict the actions of central banks, whose edicts can tip entire economies into bear or bull runs. “Don’t fight the Fed,” is an old mantra on Wall Street referring to the idea that investments must align with the current monetary policies of the Federal Reserve to be successful. Investors thus have to follow and theorize around the actions of unelected, unaccountable, powerful centralized actors such as the Chair of the Federal Reserve Jerome Powell. This creates wasted effort and a huge misallocation of resources as the capital available to value-generating businesses fluctuates hugely on the words of one man — Powell — whose actions these businesses do not control. For example, Powell’s speech on August 26, 2022 precipitated a drop in the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite of 3.03%, 3.37%, and 3.94% respectively — a staggering fall for just one day. This greatly hinders the meritocratic value creation of capitalism: Savvy investors must make decisions based on Powell’s words rather than a business’s value.
Moreover, under the fiat system, designated legal tenders such as the U.S. dollar are in a perpetual state of inflation. This inflation forces ordinary people looking to save money to risk their capital on investments or else watch their purchasing power be steadily eaten away. Thus, people who are not investors, who lack the skill and desire to risk their capital on business ventures, are forced to do so. Without a venture they believe in for investment, hard-working normal people put their money in indexes and mutual funds. “Zombie companies,” — economically unviable companies that survive through investments while failing to deliver sufficient products and services to the market to cover their costs — can persist for many years due to their inclusion in these indexes and funds. These “zombie companies” receive passive investments from ordinary people who do not know company fundamentals but are forced to invest in indexes and mutual funds to preserve their savings in the face of constant fiat inflation.
If Bitcoin were adopted globally, it would provide hard money that does not depreciate in value long-term. Thus, ordinary people could save in Bitcoin rather than risk their retirements on companies they themselves have not evaluated through mutual funds and indexes. Moreover, the monetary policy of Bitcoin is transparently baked into its code rather than being controlled by powerful central bankers. In a world where Bitcoin dominated over fiat, investors could once again turn all their attention to finding ventures of merit rather than hanging on every word of the Fed. This would largely restore the prosperity-creating engine of capitalism — the least terrible economic system we have.
This is a guest post by Hannah Wolfman-Jones. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
BERLIN/PARIS — After publicly falling out, Olaf Scholz and Emmanuel Macron have found something they agree on: mounting alarm over unfair competition from the U.S. and the potential need for Europe to hit back.
The German chancellor and the French president discussed their joint concerns during nearly three-and-a-half hours of talks over a lunch of fish, wine and Champagne in Paris on Wednesday.
They agreed that recent American state subsidy plans represent market-distorting measures that aim to convince companies to shift their production to the U.S., according to people familiar with their discussions. And that is a problem they want the European Union to address.
The meeting of minds on this issue followed public disagreements in recent weeks on key political issues such as energy and defense, fracturing what is often seen as the EU’s central political alliance between its two biggest economies.
But even though their lunch came against an awkward backdrop, both leaders agreed that the EU cannot remain idle if Washington pushes ahead with its Inflation Reduction Act, which offers tax cuts and energy benefits for companies investing on U.S. soil, in its current form. Specifically, the recently signed U.S. legislation encourages consumers to “Buy American” when it comes to choosing an electric vehicle — a move particularly galling for major car industries in the likes of France and Germany.
The message from the Paris lunch is: If the U.S. doesn’t scale back, then the EU will have to strike back. Similar incentive schemes for companies will be needed to avoid unfair competition or losing investments. That move would risk plunging transatlantic relations into a new trade war.
Macron was the first to make the stark warning public. “We need a Buy European Act like the Americans, we need to reserve [our subsidies] for our European manufacturers,” the French president said Wednesday night in an interview with TV channel France 2, referring specifically to state subsidies for electric cars.
Scholz and Macron agreed the EU must act if the US progresses a ‘Buy American’ act offering incentives for companies investing on US soil, which would particularly affect French and German electric vehicle industries | David Hecker / Getty Images
Macron also mentioned similar concerns about state-subsidized competition from China: “You have China that is protecting its industry, the U.S. that is protecting its industry and Europe that is an open house,” Macron said, adding: “[Scholz and I] have a real convergence to move forward on the topic, we had a very good conversation.”
Crucially, Berlin — which has traditionally been more reluctant when it comes to confronting the U.S. in trade disputes — is indeed backing the French push. Scholz agrees that the EU will need to roll out countermeasures similar to the U.S. scheme if Washington refuses to address key concerns voiced by Berlin and Paris, according to people familiar with the chancellor’s thinking.
Scholz is not a big fan of Macron’s wording of a “Buy European Act” as it evokes the nearly 90-year-old “Buy American Act,” which is often criticized for being protectionist because it favors American companies. But the chancellor shares Macron’s concerns about unfair competitive advantages, the people said.
Earlier this month, Scholz said publicly that Europe will have to discuss the Inflation Reduction Act with the U.S. “in great depth.”
In a blow to Germany’s industrial core, chemical giant BASF announced plans Wednesday to reduce its business activities and jobs in Germany, with company chief Martin Brudermüller citing heightened gas prices — which he criticized for being six times as high as in the U.S. — as well as increasing EU regulation as the reason.
“The decisions of a successful company like BASF show that we need to improve the overall attractiveness of Germany as a business location,” German Finance Minister Christian Lindner said in a tweet, vowing to take various measures such as “tax relief for private investments.”
Before bringing out the big guns, though, Scholz and Macron want to try to reach a negotiated solution with Washington. This should be done via a new “EU-U.S. Taskforce on the Inflation Reduction Act” that was established during a meeting between European Commission President Ursula von der Leyen and U.S. Deputy National Security Adviser Mike Pyle on Tuesday.
The taskforce of EU and U.S. officials will meet via videoconference toward the end of next week, underlining the seriousness of the European push.
On top of that, EU trade ministers will gather for an informal meeting in Prague next Monday, with U.S. trade envoy Katherine Tai planning to attend to discuss the tensions.
In Brussels, the Commission is also looking with concern at Macron’s wording of a “Buy European Act,” which evokes protectionist tendencies that the EU institution has long sought to fight.
“Every measure we take needs to be in line with the World Trade Organization rules,” a Commission official said, adding that Europe and the U.S. should resolve differences via talks and “not descend into tit-for-tat trade war measures as we experienced them under [former U.S. President Donald] Trump.”
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So here’s a good trivia question: Of the “FAANG” megacap tech stocks, which has lost the most market value over the past year?
Amid the earnings-related bloodbath so far this week, there have been huge losses. Alphabet, Microsoft and Meta have already posted their results, and tumbled in the wake of the reports. Thursday afternoon, Amazon and Apple are on tap.
A staggering $3 trillion in combined market cap has been lost in one year. Most of the losses have occurred across six of these stocks, but it’s hard to leave Apple off the list.
Remarkably, Apple shares have basically been flat – losing a measly $35 billion, by comparison.
It’s also worth realizing that the total losses would have been much worse had Netflix shares not rebounded.
