Worst of market crash may be over – 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.
Watch this episode on YouTube or Rumble
Listen to the episode here:
In this episode, CK and I cover a large part of the ongoing macro news. First, we update the situation in the British gold market. Then swing over to China to cover developments from the 20th Party Congress, the real estate market and the general investment climate. Finally, we discuss the European energy crisis and the current storage situation.
Charts and Bitcoin Sentiment
Each week CK and I lead with a few charts including bitcoin and other currencies to center our macro conversation from that perspective.
In the week of October 17, 2022, the bitcoin chart still showed strong support in the $17,500-$18,500 range despite all the geopolitical and global economic stresses. The stability of bitcoin compared to most other assets must be noticed by people who manage large capital pools in the world.
Bitcoin daily chart
CK and I also spoke briefly about the US stock market and its correspondingly stable results. If you were to only listen and read the mainstream financial press and never look at the charts, you could be fooled into thinking that stocks were much lower, or at least falling on a daily basis. But as it stands, the S&P 500 is over the low point in June.
S&P 500 chart
Below is my dueling dollar index chart, showing the DXY which is heavily weighted against the euro and yen, and the broad trade weighted dollar index which includes many more currencies depending on their share of trade with the US. Importantly, this includes the Chinese yuan and the Mexican peso.
As you can see, the trade-weighted dollar outperformed during the initial COVID-19 crash, but has lagged behind the euro-heavy DXY. What this means is that dollar strength has become more broad based over the past couple of weeks.
DXY versus trade-weighted dollar
The last currency chart we analyze is the Japanese yen, which is crashing against the dollar, reaching 150 yen to the dollar. In the broadcast, I mention that this is an example of the dollar’s current effects throughout East Asian currencies.
USD/JPY
UK Gilt Recap And Credit Suisse
Granted, CK and I haven’t been following the crisis in the UK as closely as other things, so we’re taking this opportunity to recap the timeline of what’s been happening there so far.
The Bank of England (BoE) announced intervention on September 28, after the long-term gilt market sold off from about 2% to 4.5% in a matter of weeks. On previous shows I mentioned the importance of the end of Q3 for financial stress, which is well known, but for some reason the BoE decided to start quantitative easing (QT) a week before the end of the quarter.
On 3 October the BoE adjusted its intervention size up to £10bn per day, and an end date for the program on 14 October. Most economic commentators did not think it would be possible to end it so quickly and in such a telegraphed manner. They were proven wrong, as the “no quantitative easing” program ended on the projected date. The latest is that the BoE will resume its QT trials on 1 November.
We also talked about the interesting coincidence of the emergency swap lines between the Federal Reserve and the Swiss National Bank (SNB) that took place during the height of the BoE’s problems. I speculated that this swap line might have functioned as a covert bailout for these troubled financial institutions in London, routed through the SNB.
The crisis appears to be under control at the moment, but the damage may have been done. In these financial crisis episodes, confidence is broken and despite the fact that the acute panic is over, the market is moved to a more fragile state of mind going forward. This can cause the crisis to reappear after a few months.
China’s Economy and the 20th Party Congress
I didn’t pull any quotes for the show from Xi Jinping’s two-hour opening speech. I provided a link to the full transcript and I encourage people to read it for themselves. It is eye-opening to see the rhetoric, the devotion to Marxist-Leninist communism and the hubris of authoritarian central planners.
What I covered directly in the episode was a blog post by BlackRock and a tweet thread by Michael Pettis, which confirmed some of my views on the state of China today and their path in the near term.
BlackRock’s words are important as they represent what large capital pools think about China. From their post, we learn that Chinese export volumes are likely to fall by 6% this year and next, although they will increase by 3% in nominal dollar terms. The authors also note the dire demographic situation in China, saying it precludes the necessary domestic growth to offset the effects of shrinking exports. In a country with massive debt and demographic problems, this is not a recipe for economic growth.
“Recession is now looming for the US, UK and Europe. But this time, China will not come to its own, or anyone else’s, rescue.”
Michael Pettis, senior fellow at the Carnegie Endowment and professor of finance at Peking University’s Guanghua School of Management, seems to agree with the direction of the Chinese economy in the medium term. His tweet thread reveals the no-win situation facing the Ministry of Finance in China.
The finance ministry said state-backed entities are strictly prohibited from buying land by taking on debt. Pettis agrees with this ban, because “local governments [reversing] the decline in land sales revenue by setting up SPVs to buy land from themselves [as] a way for them to borrow money and pretend that the income was actually income from land sales.”
However, Pettis is emphasizing the same no-win scenario with the Treasury Department that the BlackRock comments did. Namely that Beijing has no room to stimulate. They crack down but offer no help.
“The MoF stopped them from falsifying income without addressing the reasons why they had to do it.”
Pettis continues:
“Beijing must know how difficult the circumstances are that local governments are facing, and yet is not doing much to help. I think we are probably seeing the beginning of what will be, over the next few years, a very contentious relationship between local governments and Beijing.”
This does not bode well for Beijing and Xi, especially as US rhetoric, chip manufacturing sanctions and the arming of Taiwan gather momentum. There is a real existential threat to the emergence of the Chinese Communist Party.
European energy non-crisis?
We had Andreas Steno on the program a few weeks ago, because I wanted to hear his sober analysis of the European energy crisis. He was the one analyst I saw pushing back against the panic narrative.
He’s back in the form of a tweet thread this week and on the show I quickly read through the highlights. They are:
- Natural gas storage is almost full in Europe far ahead of schedule.
- Energy prices are quickly coming down to normal.
- There is a huge backlog of floating natural gas ships off the coast of Europe waiting to unload.
What struck me about this analysis is how much it reminded me of the oil futures crash in April 2020. At that time, oil storage was full and tankers were moving around the world – also full. There was simply nowhere to take delivery of the futures contracts, so holders had to sell at any price, leading to a flash crash to zero.
Could we see the same in Europe this month? Not quite yet, but it’s at least a possibility. What a clown world that happened. From massive record highs to a zero price is a possibility within a few months.
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.
