Federal Reserve interest rate sabre rattling is shaking retail out of markets. Is the Fed bluffing? I’m betting they are.
Article contributed by Tin Money.
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Inflation takes from the ignorant and gives to the well informed — Venita Van Caspel
Bottom Line Up Front (aka TL;DR)
- Successive high inflation prints are causing alarm.
- Fed posturing on rate hikes will continue to scare retail investors out of markets.
- Aggressive rate hike fears ignore 40-years of contrary evidence.
- The Fed will almost certainly continue printing.
- Crypto markets are well-positioned to absorb inflationary dollars.
- Approval for a Bitcoin ETF will drive mass adoption.
- Smart money will be out in front.
The everything bubble
Headline CPI inflation for the last two months has been over 8%. In response, the Federal Reserve is indicating the adoption of an aggressive interest rate hike schedule.
Predictably, crypto and equities markets slumped on the news. As of this writing, the “Fear & Greed Index” is sitting at an “extreme fear” level.
And I’m buying as much crypto as I can, as often as I can (within my budget, of course!).
What if the markets keep going down? I sincerely hope they do. I’ll buy that dip too. Call me contrarian, call me a madman, call me delusional. Hell, call me Sue. I don’t care.
Will I eat these words? Maybe. But I don’t think so. Why? Because if the Fed really cared about “fighting” inflation, rates would be somewhere between 8–10% right now.
That’s half what Paul Volcker did to combat inflation the last time it ran this high and this fast. Today, even the thought of interest rates being at 10% is absurd. Never mind, in Volcker’s time, rates hit 18%.
And thanks to 40 years of unchecked inflationary spending, we’ll likely never see rates like that again. Just remember, it’s all debt. Here’s a chart I love:
That’s the rate of bankruptcies in the US compared to the Dow Jones Industrial Average during the same time frame. Weird how they track almost perfectly, isn’t it? It also happens to coincide with a massive increase in deficit spending.
Since 1980, the US Dow Jones Industrial average has gone up 4,107%. Median home values have gone up 701%. Student loan debt has increased 909%. Health care costs have risen 983%.
Headline CPI during the same period increased 214%.
These are bubbles of epic proportions. I don’t think the Fed will let them pop. Here’s why: they can’t.
The Fed has never failed to bail out equity markets since 1986
You should take careful note of the 4,107% gain in the stock market. That’s important. Inflationary dollars in the US have been primarily shunted into equities. In turn, equities are now deeply embedded in the US economy.
What makes them so important? Every 401k, insurance fund, pension fund, municipal, county, and state government fund, all the major finance companies, 40% of Americans, and thousands of other entities all rely on the stock market to pay future obligations or returns.
The Fed can’t let the stock market crash. It would literally mean the end of America as we know it. The “Fed Put” is critical to the survival of the global financial system. When they talk about “aggressive rate hikes” the Fed is selling wolf tickets.
Markets don’t “cool off” when the Fed tapers. They tank. The US financial sector has been receiving $120 billion per month in direct support from the Federal Reserve in the repo markets for two years.
I’m buying crypto because I believe the repo markets will lock up as soon as that support is lifted. I also think the markets will tank shortly after, and then the Fed will be forced to resume dumping money into the equities pit.
They might wiggle around to find an excuse to resume the money printer. They’ve already started blaming Russia. Maybe a bad hurricane disrupts oil supplies in the Gulf of Mexico? Or, perhaps some Chinese bogeyman will come around, who knows?
Point is, the Fed is going to keep printing, one way or another. Or, the global economy collapses. It’s not a hard equation to figure out.
And once that money printer is on full steam, we can all go back to wondering when the next “bull cycle” is going to hit the crypto markets.
The Fed doesn’t know it yet, but crypto might be their savior
As mentioned earlier, the bulk of inflationary dollars have been going into equities. But now, equities are getting tapped out. You can only pump so much money into FAANGMs and Tesla.
Or, do they? Grayscale Investments has been pushing the Securities and Exchange Commission (SEC) for adoption of their proposed Bitcoin spot ETF. If they get it through (and I think they will), it’s going to swing the crypto doors wide for institutional investors.
Never mind the institutional investors are already starting to pile in. Here’s what that looks like:
Image: Glassnode Insights
For clarity, “Whales/Humpbacks” are wallets that hold more than 1000 BTC. With inflows like that, there’s only one direction for the price to go: up.
If you thought retail FOMO was crazy to watch, what do you think it will look like when Goldman-Sachs, or Citibank start FOMOing in? This is not even mentioning what happens when they turn their army of quants with PhDs loose.
In other words, why are they going to keep dumping all their inflationary dollars into equities and real estate for 15% returns when they can dump it into crypto for 40% (or better) returns? And, let’s not forget, retail will be right on their heels, no doubt about it.
Once that happens, I think this will have the knock-on effect of boosting GDP. In turn, this will give the Fed more cover to continue printing money. They’ve kicked the can about as far down the equities road as they can. Crypto markets might just give them some more road to work with.
Crypto is a $2 Trillion dollar space already. Nothing stopping it from an easy 10x once the inflation dollars hit in institutional sums. I don’t think it’s an “if”, I think it’s a “when.”
Riding a humpback whale
When those whales start gobbling everything up in sight, you’d best be WAY out in front, because there won’t be anything left in their wake. I’m a shrimp in the grand scheme of things.
And I’m swimming fast. I’m scooping everything I can get my little shrimp hands on. I think the writing’s on the wall. Doesn’t really matter to me if the markets take a crap tomorrow, or next week.
I have a job. I’ll DCA. I’m stacking Alts. I’m stacking BTC. I’m stacking projects I like and think will do well. Hell, I might even stack a meme. I just know I need stacks of large, mid, and small cap, non-trash cryptos.
Then I just have to swim around to the side, let the whales pass by and sell to the retail dorks coming up behind. Like I said, call me crazy, call me stupid, call me Sue. I don’t care.
I’m buying crypto because of Fed FUD. I think it’s the most bullish macro signal we’ll ever see. They’ve been painting themselves into a debt trap that’s chock full of moral hazard since 1980. The only thing that can keep that game going is for the Fed to keep blowing up bubbles.
My bet is crypto is going to be the next Fed bubble. Golden Girl redux, Janet Yellen, is on TV touting crypto and Bitcoin. With friends like that, it’s only a matter of time until Bitcoin is too big to fail.
Wen lambo bruh? 4realz.
Of course, these are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
Article contributed by Tin Money.
Follow him on Medium here.