Pivoting the Market Without the Federal Reserve – Bitcoin Magazine
“Fed Watch” is a macro podcast, true to bitcoin’s insurgent nature. In each episode, we question mainstream and Bitcoin narratives by examining macro current events from around the world, with an emphasis on central banks and currencies.
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In this episode, CK and I cover our reactions to the FTX debacle, the latest Consumer Price Index (CPI) numbers from the US and the new central bank digital currency (CBDC) pilot from the Federal Reserve and the banks. We touch on the G20 meeting in Bali, but run out of time at the end and don’t cover it in depth.
CPI figures from the US
We had to skip last week’s show due to scheduling conflicts, so we missed covering the CPI numbers. This week I read out some of the important details in the data.
October’s headline CPI change was +0.4%, nearly half the Cleveland Fed’s CPI Nowcast estimate of 0.76%, and well below the industry forecast of 0.6%. It really shocked the market and the shares rose sharply.
Bitcoin’s expected reaction would have matched stocks if it weren’t for the FTX collapse that happened at the time – even though FTX didn’t have any bitcoin anyway, as it turns out. This movement in the bitcoin price was therefore a sympathetic move with the industry. The correlation between altcoins and bitcoins won over bitcoin’s correlation with stocks. However, there is evidence that bitcoin is oversold from a fundamental perspective.
Housing was the largest component of the monthly CPI and accounted for almost half of the increase. On the show, I spend some time explaining how the shelter component is designed to last 12-24 months. Without the addition from the lagging housing sector, the CPI would have been 0.2% for the month. Annualized, it is 2.4%.
It’s important to focus on the month-over-month change because it’s the basic unit used to create year-over-year (YOY) headline numbers. The YOY change does not do a good job of recognizing directional changes as the top KPI. You can think of it as a rolling cumulative change over 12 months, similar to a moving average. The impact on the 12-period rolling cumulative change of a sudden qualitative shift will be minimal in the early periods. It is only after the new trend is well established that the broader 12-period moving average clearly communicates the data.
In this case, the YOY change in the CPI is still 7.7%, although the last four months have been 0%, 0.1%, 0.4% and 0.4%. If you annualize the last four months, you get 2.7%, not 7.7%. Also, don’t forget that half of the recent increases are due to the lagging shelter component. It is not easy to say that the current rate of change in prices is below 2% on an annual basis.
Diagrams
We went through 10 charts on the show, but I’m not going to cover them all here.
First up is bitcoin. You can clearly see the breakout of the pattern and the subsequent FTX dump. The horizontal zone was previously support turned into likely resistance. I also added a green line to indicate the level of most volume at price resistance as well, namely $19,000.
Bitcoin hourly chart
Next up is the US dollar. Shows current rally, top and possible new higher range. I expect the behavior of the dollar to remain similar to the post-GFC era.
Dollar chart with new suggested area and ghost pattern from 2015 high
So far, the behavior of the dollar has been very similar to 2015 when the dollar rose to the 1.618% Fibonacci extension and was then range bound – as you can see in the pink line. A copy of the pattern with tops matched up.
I expect the dollar to remain range bound as the financial system slowly recovers from the damage caused by the acute dollar shortage. We can see this rise in many currency charts, such as Hong Kong Dollar, Japanese Yen and Euro.
10-, 5- and 2-year US Treasury yields with the Fed Funds target range
We spent a few minutes discussing the chart above. For the first time this cycle, 5- and 10-year Treasury yields have entered the Fed Funds target range. Not only that, but the 10-year has fallen below the reverse repurchase agreement (RRP) rate of 3.8% and the Fed Funds floor of 3.75%.
This is a major change and an important component of my analysis of the Fed’s monetary policy going forward. If interest rates stop listening to Jerome Powell, the Fed will be forced to swing.
Federal Reserve’s Digital Dollar Pilot
We were surprised to hear about the Federal Reserve’s pilot program with banks going forward to test a new dollar CBDC. We have been quite clear on “Fed Watch” that we do not expect the Fed to approve the use of a CBDC, instead they will legitimize USD stablecoins, and bring them into the Federal Reserve system.
I read from an article on The Street, but during the show I ran out of time to cover it in detail. I recommend reading it in its entirety.
“The proof of concept (PoC) project will test a version of the regulated liability network design that operates exclusively in US dollars where commercial banks issue simulated digital money or ‘tokens’ – representing the deposits of their own customers – and settle through simulated central bank reserves on a multi-unit shared ledger.”
I don’t blame you if you don’t understand the word salad. CK and I are bitcoin specialists and we can barely follow it. Nothing in this pilot program shows that the Fed is anywhere near a CBDC. We maintain our reasoning that Jerome Powell and the Fed will not go down this path, but they must move quickly to make their intentions clear and bring USD stablecoins into the fold, or the next chairman may follow with globalist leanings.
I also quote from Vice Chairman Randal Quarles’ 2021 speech on CBDCs, where he demonstrates a solid grasp of the CBDC game. We also recommend reading it in its entirety.
“I emphasize three points. First, the payment system in US dollars is very good and it is getting better. Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, developing a CBDC could, I believe, pose significant risks.
Finally, we cover the G20, but to be honest we don’t have time to do it justice. Here is a link to The Guardian’s five takeaways from the G20 meeting.
This is a guest post by Ansel Lindner. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
