The Wolf Den #507 - The Fed Playbook
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In This Issue:
The Fed Playbook
Ripple Effects From Terra’s Collapse - IntoTheBlock
Bitcoin Thoughts And Analysis
Legacy Markets
Not Fun Facts
Richard Heart Debates Eric Wall
My Recommended Platforms And Tools
The Fed Playbook
The money printer goes brrrr, right?
Not lately.
Jerome Powell, Chair of the Federal Reserve of the United States, had the following to say in a recent speech.
“The process of getting inflation down to 2 percent will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched.”
“If things come in better than we expect, then we’re prepared to do less. If they come in worse than when we expect, then we’re prepared to do more.”
Does this mean that more pain is likely to come? Let's take a look.
First, we need to understand how inflation is determined in the United States. One common method is through CPI, which is frankly a bit arbitrary and the government takes some liberties with how it is calculated to "cook the numbers."
But I digress, because this is the number that everyone is watching.
From the US Bureau of Labor And Statistics: "The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available."
Based on April CPI, prices were 8.3% higher than a year before, levels not seen in over 40 years ago. Everyone is feeling the difference in their daily lives. You don’t have to read the paper or watch the news to know that there has been a dramatic increase in prices. Although it’s reasonable to expect prices to rise steadily over time, the recent increases have been shocking.
To fight inflation, the Fed is employing aggressive interest rate hikes. I am not saying that this is the wrong approach, but this obviously comes with pain. Even if this is the right approach, it is one they could have employed months or years ago, before inflation was out of control.
But I digress again.
The Fed already raised interest rates by half a percent this month, marking its most aggressive move since 2000. This concept is more abstract than the price of rising good, but its consequences are just as real. Take my word for it, these things are serious and the Fed knows it.
For the sake of simplicity, there are 4 ways that the Fed can approach this game. The idea is inspired by a thread I saw on Twitter, which you can read HERE.
When I refer to prices, I mean of assets, not consumer goods. Stocks, basically.
Scenario 1 - CPI higher than expected + prices have bounced = Decent Scenario
Scenario 2 - CPI lower than expected + prices have bounced = Best Case Scenario
Scenario 3 - CPI higher than expected + prices keep getting destroyed until then = Worst Case Scenario
Scenario 4 - CPI lower than expected + prices keep getting destroyed until then = Not So Decent Scenario
Which scenario is the most likely? Your guess is as good as mine. There are 1,000,001 outside factors that play into each of these outcomes that are well beyond our control. Mid-term elections, monkeypox, earnings, China’s cargo crisis... the list goes on.
I can't believe that I have to now include monkeypox.
Monkeypox!
The FED plans to slow inflation, and I think it’s become pretty clear that they are prepared to take the necessary measures. There is always a light at the end of the tunnel, but it is hard to see at the moment. Skilled investors will be looking for the first signs of that light to take advantage of the coming rebound. Sadly, most people will continue to live in the dark, for now.
By the time we see a path to beating inflation, the best opportunities will have passed. That's the nature of markets.
As always, good luck out there and be careful.
Ripple Effects From Terra’s Collapse - IntoTheBlock
In this report, we bring to you the latest in on-chain cryptocurrency analysis. We look at the blockchain directly and analyze balances, transactions, and the overall activity of market participants. This gives us a unique insight into the future of the market.
This section is written in conjunction with IntoTheBlock (ITB). ITB is an intelligence company that leverages machine learning and advanced statistics to extract intelligent signals tailored to crypto-assets. IntoTheBlock tackles one of the hardest problems in crypto: to provide investors with a view of a crypto asset that goes beyond price and volume data.
The Wolf Den research team uses IntoTheBlock to dig deeper and get the most important insights about the crypto market.
Ripple Effects From Terra’s Collapse
The crypto market is still experiencing ripple effects from Terra’s collapse. Particularly, many other stablecoins have been going through their own difficult situations — even if they have managed to sustain their peg to the dollar.
Via IntoTheBlock’s Token Analytics
USDT Loses $10B — The market cap of the largest stablecoin, Tether, contracted by over $10 billion
Users opted to redeem their USDT 1-to-1 for USD through Tether’s platform
This has resulted in USDT’s market cap decreasing 12% from $84B to $74B
Terra’s collapse also caused reverberations throughout other parts of the ecosystem.
Via IntoTheBlock’s DeFi Insights
stETH Discount — The price of staked Ether reached its lowest in over a year
Lido’s staked ETH token (stETH) dropped 0.95 ETH after remaining near parity with ETH throughout 2022
stETH is not “pegged” per se, with an argument to be made for it to be at a discount, and also for it to be priced at a premium
Bitcoin Thoughts And Analysis
There's so little to discuss on the Bitcoin chart that is becoming increasingly difficult to find things to share. The reality is that Bitcoin is chopping sideways, altcoins are generally bleeding slowly, and there's almost nothing to do.
DAILY CHART
The small bullish divergence confirmed with a weak elbow up on RSI, but we are once again looking at likely hidden bearish divergence. Hard to really get excited here at the moment unless we can break above $31,295.
4-HOUR CHART
This price action is ridiculous.
Massive candle down. Float up. Massive candle down. Float up. Very hard to trade.
Price is trading in the top half of this range, formed by the drop below $26K and the subsequent bounce.
Legacy Markets
Here are some key events to watch this week:
FOMC minutes Wednesday
ECB publishes its Financial Stability Review Wednesday
Bank of Korea rate decision Thursday
US GDP, initial jobless claims Thursday
US core PCE price index; personal income and spending; wholesale inventories; University of Michigan consumer sentiment Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 rose 0.5% as of 9:46 a.m. London time
Futures on the S&P 500 were little changed
Futures on the Nasdaq 100 rose 0.2%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index fell 1%
The MSCI Emerging Markets Index fell 1.7%
Currencies
The Bloomberg Dollar Spot Index rose 0.3%
The euro fell 0.6% to $1.0673
The Japanese yen fell 0.2% to 127.06 per dollar
The offshore yuan fell 0.4% to 6.6810 per dollar
The British pound was little changed at $1.2524
Bonds
The yield on 10-year Treasuries was little changed at 2.74%
Germany’s 10-year yield declined two basis points to 0.95%
Britain’s 10-year yield was little changed at 1.88%
Commodities
Brent crude rose 1.1% to $114.78 a barrel
Spot gold fell 0.5% to $1,857.04 an ounce
Not Fun Facts
Half of the top 30 cryptocurrencies by market capitalization are at least 80% below their all time highs (ATH). Bitcoin is holding "strong," down about 60% from its ATH, but other coins haven’t faired as well. UNI, VET, and DOGE are down over 90% from their ATH, with the majority of the top-30 sitting in the mid-80s.
If Bitcoin dropped another 50% from current levels, (down to roughly $15K) it would be down close to 80% from its ATH. The same applies to Ethereum. If it dropped 50% from current levels, (to about $1,000) it would also be down about 80% from its ATH.
As much as we don’t want to see these drops, an 80% Bitcoin drawdown is normal. In the past three bear markets, Bitcoin has undergone, more than 80% drawdowns each time before rising to new highs.
I am not saying this will happen. I am simply offering context.
Richard Heart Debates Eric Wall
Richard Heart, the founder of Pulse Chain and Hex, debated Eric Wall, a crypto Twitter OG known for the Bitcoin Rainbow Chart. The debate happened last night in Sweden. Hex is arguably the most controversial project in crypto. To Richard Heart, it’s the investment opportunity of a lifetime, but to many outside observers it appears to be a Ponzi Scheme. I have no opinion. You decide.
This is in no way, shape, or form a Hex endorsement.
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