The more speculative assets won’t be able to reverse themselves in the short-term as the Fed has singlehandedly crashed the Santa Claus rally that was on the verge of breaking out at the beginning of the month.
Meme stocks, technology growth stocks, and yes, Bitcoin (BTC) have been main participants of the repricing occurring in the risk markets as we condition ourselves to a new narrative of rising rates.
Moving up the timeline of rate rises has in effect, crushed the performance of cryptocurrencies and the inflationary headlines have become worse in the past week.
This time is important because we will be able to understand how cryptocurrency behaves during a tightening cycle, and there isn’t much recent historical data to compare.
The last time the Federal Reserve initiated a path of tightening monetary policy, following a period of easing, in 2015, the price of Bitcoin was $465, or about a hundredth of its current price.
Disappointingly, Bitcoin hasn’t been the haven for investors in times of risk-off trading, boding ill for the short-term projection of higher Bitcoin prices.
It looks that we will need more time to drag out these hawkish headlines that will suppress the price of crypto before we go higher again.
Today did nothing to help Bitcoin with wholesale prices spiking 9.6% from a year ago, the highest level going back to November 2010.
Bitcoin’s place within financial markets has still not been fully decoded, but how it reacts in the coming days is likely to tell us much more.
As a reminder, the Fed Funds Rate is the rate that banks charge each other to borrow “reserves” overnight, and it is currently 0% – 0.25%.
In the 1970s, it took bold political maneuvering to endure that much economic damage when the Federal Reserve attempted to choke off inflation by repeatedly raising the Fed funds rate until it hit 21%.
It won’t be possible for the Fed to raise rates that fast or that much without triggering an economic recession.
In mid-June, the Fed talked about the possibility of raising rates almost 2 years from now, and stocks corrected.
The truth is that our debt servicing responsibilities are so onerous that the Fed is trapped in a corner.
Total Federal Debt is about $28 trillion and growing, while State and Municipal debt is approaching $4 trillion.
The interest paid by the Fed for its debt this year will be just under $400 billion.
If rates returned to levels not seen in the 1990s, the Federal government will not be able to service the debt and will need to claim bankruptcy which would be the event of a lifetime forcing an avalanche of capital into Bitcoin.
There is about $11 trillion of corporate debt in the U.S., and this may be the biggest headache of all.
The heavy reliance on cheap capital and government help means that over 600 zombie firms aren’t growing but exist to payout employees and shareholders.
Investors know this too and that is why stocks drop every time the mere mention of higher rates surfaces in the press.
The Fed is most likely to find excuses as to why 2022 is not actually the ideal time for rapid interest rate rises but we will get the minimal rises required for the Fed to save face.
My overarching point is that Bitcoin will need to go through a sideways correction for speculative assets to absorb these 180-degree pivots in monetary policy.
The hawkish pivot is still playing itself out and we have had to minimize our trading portfolio with December looking like a washout.
I believe we must continue down the path of a Japanization to protect the health of the US economy. This will almost certainly contain bedrock policies as continued low rates, anemic growth, and massive government intervention.
These trends will underpin the rising price of crypto.
Hyperinflation is great for the price of Bitcoin, but when the Fed looks seriously about killing it, the crypto market gets spooked.
This will pass through.
