The Wolf Den #89 - Control Your Losses, Trades And More
How A Dollar Is Born
This is an incredible thread on inflation and money printing.... so good that I copied and pasted it here for you to read... Enjoy.
Everyone is convinced the dollar is going to inflate because more dollars are entering the system. But are they really? Let’s take a look at how dollars are born and how they die.
A dollar is 'born' when a loan is made against collateral on a bank's balance sheet. Banks can issue multiples of dollars for every dollar of collateral they have. It's this multiplication effect that expands the amount of total dollars.
Generally, banks are limited in how much they can lend - let's say it's 10x their collateral. So for every dollar of collateral they have, they can lend 10 dollars. By so lending, they 'birth' new dollars into the system.
As banks lend more, more dollars are created and the money supply increases. This multiplicative lending is the chief driver of total dollars in the system. Banks lending a lot → more total dollars and inflation.
When do dollars die? Dollars 'die' when debts are paid back. This reverses the multiplication effect of lending, leading to less total dollars in the system and a contraction of total dollars in circulation.
So what is the Fed 'printer' doing - creating dollars, right? Actually no, not really. The printer only increases the collateral banks have to lend against. It does not directly 'birth' dollars, only *potential* dollars.
Banks are still the midwives, and the only ones who birth dollars into the system by lending. The Fed can increase collateral by 1000x but unless the banks lend against that collateral, dollars will not enter circulation for you and I to interact with.
Assume for a moment bank collateral was infinite - then what would drive total dollar amount? 1) Banks' appetite for lending. 2) Bank customers' appetite for borrowing.
That’s it.
Now let's observe that collateral effectively IS infinite, because banks have so much excess reserve capacity they haven’t been near their limits for years. Total dollar amounts are, right now, only a function of bank and customer debt appetites.
The Fed has made a big show of radically increasing collateral levels, but it doesn't matter -- at least right now. Not if banks feel weird about lending. Not when people feel weird about borrowing.
Why, then, does it look like inflation out there right now? Two reasons.
First, we just had a brief, manic borrowing pulse as corporates panic-borrowed out of fear. This borrowing was a bit inflationary (more dollars born). Second, and maybe more important, the government decided people could put debt payments on pause.
This 'froze' the dollar death process for a time. Because those dollars haven't died yet, we have more of them around right now. But, you see, that dollar death process is beginning to thaw. Loans need to be paid again soon as the forbearance ends. A lot of dollars are about to die.
Record numbers of people are losing their jobs, which means in aggregate customers' appetite for fresh debt is decreasing by a lot. So the dollar birth rate will decline. Banks also aren't really feeling like lending because the economy looks pretty dicey. This also is not good news for the net dollar birth rate moving forward.
So while, yes, we have just experienced a bit of an inflationary pulse from panic borrowing and freezing the dollar death process that looks like it's about to reverse in a big way. When it does there will be less total dollars.
The Fed can't do anything about this. Banks are already swimming in collateral, more of that won't do anything at all. The only thing that can make more dollars now is banks lending more.
So as you watch asset prices go nuts as everyone rushes to get rid of their dollars for fear of inflation, remember -- the dollar birthrate looks like it'll be decreasing for some time to come.
And that means the whole economy will be running on incrementally less of them until banks want to lend and we all want to borrow.
So you might want to hang onto a few of your dollars. There is a good chance they'll come in handy here in a bit.
Deflation 101
And since we are talking about inflation... let's talk deflation as well.
By Sahil Bloom.
Deflation 101 As often as the term "inflation" is thrown around, you've probably heard the term "deflation" just as much as of late. But what is deflation and how does it work? Here's Deflation 101!
Before you dive into deflation, it may be helpful to understand the basics of inflation. Inflation is a measure of the rate of increase of the price of a basket of selected goods and services.
First, a few definitions. Deflation is the decline in the price level of a basket of selected goods and services. It can be thought of as negative inflation. It is typically expressed as a negative % and serves as an indicator of the increase in purchasing power of currency.
The Consumer Price Index (CPI) and Wholesale Price Index (WPI) are the most common indexes for measuring inflation and deflation. While typically discussed on an economy-wide basis, we may see deflation in certain areas of the economy and inflation in others.
In very simple terms, deflation occurs when there is not enough money chasing too many goods. This may occur from a contraction in money supply or credit (i.e. people are saving or banks aren't lending). It may also occur from accelerated tech/productivity progression.
To illustrate how this works, let's use a simple story. Imagine the same primitive island society from our Inflation 101 example. On this island, they use rare seashells as currency. There are only 1,000 seashells on the island. The prices of goods are stable.
An earthquake strikes the region, triggering a tsunami that washes over the island. In the aftermath, the islanders find that 500 of the rare seashells (1/2 of them) have washed away. There are now only 500 units of the currency, but the same amount of goods. What happens?
So what we have is a 50% decline in money supply and no change in the supply of goods. Now there is too little money chasing the same amount of goods, so sellers of the goods lower their prices. Simple supply and demand. This is deflation in action.
The same dynamic may have occurred if producers of the goods had discovered new technology that allowed them to produce more efficiently. The original 1,000 seashells would not have been able to keep up with the increase in goods.
The impact of the deflation differs across the two types of islanders. Savers, who had stored seashells for later use, benefit as each stored seashell has become more valuable in its ability to purchase goods. Asset Holders may see the value of their assets decline.
Central bankers worldwide have a massive fear of deflation, so they target modest levels of inflation. Why? Deflation may incentivize saving over spending. If you believe your money will be worth more in purchasing power terms later, you are more likely to save it.
Central bankers tend to ascribe to Keynesian principles, which focus on spending as a critical driver of growth. In their minds, if deflation incentivizes saving, deflation is bad. So they seek the "Goldilocks solution" - with a level of inflation that is just right.
This view, it should be said, is highly-contested. Given the current balance between the pandemic shock and the rapid increase in money printing, these debates have taken center stage. It is important for everyone to understand the basics.
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She included this picture.
International Monetary Fund Talks Crypto
This is a big deal. The IMF is one of the most influential financial institutions on the planet. For them to take the time to do a primer on cryptocurrencies for the average Joe is meaningful. It paints crypto initially as a positive, but then predictably delves into the darker side of the industry. Still, more recognition means more adoption. Bitcoin is making its move into the mainstream.
Snappa Moves to Bitcoin
Snappa, a major graphics company based out of Ottawa Canada is the next major company turning to Bitcoin. The trend largely set by MicroStrategy weeks ago is picking up steam. Snappa CEO called Bitcoin, “a far superior savings opportunity” and put 40% of the company’s cash reserves into Bitcoin.
The CEO released an impressive article detailing why Bitcoin is a superior asset to hold along with their intentions to stack more coins. As more and more companies follow suit, it will become less exciting from a news perspective, but entirely more bullish for Bitcoin on the macro perspective.
Greyscale's LTC Trust Sees Wild Swings
Prices are volatile for Grayscale's LTCN stock asset.
Greyscale just recently received approval for its native asset LTCN to be traded OTC along with BCHG. Both LTCN and BCHG respectively represent Litecoin and Bitcoin Cash held in a trust secured by Greyscale which is supposed to mirror the real price movement of the tokens.
Due to a supply and demand crisis, along with overwhelming excitement, shares of LTCN publicly traded way beyond a premium swinging 2x and then shortly correcting to a reasonable premium. Like a Coinbase listing pump, it is bullish to see these assets listed along with high demand but beware of the premium when purchasing these assets. I always recommend holding your keys if you can.
The Wolf Of All Streets Podcast Ft. Sahil Bloom
Sahil Bloom had to make a pivot. The standout pitcher on the Stanford Baseball Team had professional baseball aspirations, but his career took a turn for the worse with a shoulder injury that derailed his big league dreams. A relentless worker, he dove head on into his new professional career in finance. Starting as an analyst, working 100+ hour weeks, he proved that hard work beats talent and steadily rose above the competition in the investment world. In addition to his “day job” as an investment professional, Sahil serves as an advisor to a number of startups and businesses (including us here at the Wolf Of All Streets!). Most recently, Sahil has been on a mission to demystify the world of finance, sharing simple lessons on finance and money through his Twitter account. Sahil has a unique ability to creatively simplify and distribute these lessons to the masses in a highly-enjoyable fashion.
Sahil and I further discuss how baseball failures taught him valuable lessons, his aspirations of a Major League career, how the grind of work prepares you for life, simplifying the world of finance, how “shooting your shot” can lead to amazing outcomes, the shortcomings of public and private education, Bitcoin 101 and more.
Bitcoin Thoughts And Analysis
It is Tuesday and I am writing a newsletter. So what does that mean? Bitcoin is making my life difficult by making a significant move. That said, I took a small, low leverage long at $11,360. I will discuss why below.
MONTHLY CHART
Still a week left in the monthly candle. Really cool chart at the moment, with price touching over head resistance and support below perfectly. We presently have a lovely doji - wicks up and down with a tiny real body. That won't last, most likely. If the candle did close like this, that would be a signal of indecision - a pause in the market. The next candle would determine the trend. This time frame is very straightforward for now - watch and wait.
This month's volume candle is already larger than last month's when we saw a huge move. That's encouraging - it signal that this is likely a true uptrend/
WEEKLY CHART
$11,518 is clearly a key area on the weekly chart. Look how many candles closed with that as resistance since 2018. Pretty crazy - in fact, 2 weeks ago was the first time that we have seen a candle close above that line on the weekly. I would really like to see that hold - we have 5 more days to wait and watch. Key areas are marked, but not much else to watch.
DAILY CHART
I shared this ascending wedge and the 2 bearish SFPs (the wick above that black line) last week. Both seem to be playing out as they should - with a breakdown. I REALLY want to buy Bitcoin at the red line, around $10,540, but I doubt I will get the chance. My gut is saying that it gets front run, maybe here above 11K. The 50 MA is also below on the daily for support.
Objectively, this chart looks short term bearish with that pattern breakdown. That cannot be argued. But only bearish to the bottom of the pattern - around $10,540, which was also the line that confirmed a higher high and a bull trend.
4 HOUR CHART
I took a long at the 200 MA on the 4 hour chart. There's potential bullish divergence (totally unconfirmed) and this MA has not been tested since July 20th. Seems like a good chance for a bounce there on the first retest in over a month. You can see this below.
I love taking a shot on a first retest of a key MA or support. Really high odds of at least a relief bounce.
Here is the potential bullish divergence with RSI on the 4-hour. A clear elbow up on RSI and price in the next 4 hour period would confirm. This also almost tapped oversold.
HOURLY CHART
We have 2 consecutive candles with wick down below support and closes above. Those are local bullish SFPs and indicate a lot of buying interest around $11,370. This is extremely oversold on RSI on the hourly as well.
Altcoin Charts
As seems to be the case every Tuesday, BTC is moving and making it hard to trust altcoins. Dominance is still below resistance, so I see no reason to change our overall bias on altcoins. That said, it doesn't mean there's a trade worth taking at this exact moment.
I try to focus on providing "if, then" trades. If a certain thing happens, then you consider a position if you like it. Most "if, then" trades never even trigger - that's the nature of watching a lot of assets at once. That said, it also helps eliminate the emotion from trading any single pair - you set your alarms and let the trades come to you.
I remain in quite a few alts. As I said, I see no reason to panic sell every time they retrace a bit. I am still confident that we are at the beginning of a significant cycle, and we have already secured some great entries far below.
I had quite a few more setups to share, but Bitcoin made me think twice.
ALGO/BTC
This is a coin that I want exposure to and continue to trade. It is holding support once again like a champ around 503, and retested the descending line. If Bitcoin chills, I still believe this is a candidate for a major move up. Initial targets are the top black lines. We will reassess if we get up there!
ARPA/BTC
This pair confirmed a perfect descending channel (some would say bull flag, but the pole is not so defined for me) with alternating touches up, down, up and down. You want to see 2 touches up and 2 touches down, without the touches up or down being consecutive. Alternating touches.
This has technically broken out of that pattern after making a small bullish SFP at the 289 support. It has also already had the "throwback" which is the retest of the descending resistance as support.
Bitcoin could ruin this, but this is a text book breakout and retest for the moment. I am already in, stop losses below 289 (spread out) with a bit of room to breathe (from basically 285 to 270). Target is the top of the pattern at minimum, around 490.
I always scale in and out.
PNT/BTC
A perfect example of an "if, then" trade. PNT could be setting up for an inverse head and shoulders. For now, this pattern is only an idea. It would be confirmed on a break of the red neckline on a volume spike. For now, there is no trade here. I am in this pair anyway and have been from far below, trading in and out with a partial position on numerous occasions. I am looking to add to the position if it breaks the red line - and ideally with a retest of that line as support. The target of this small move is shown, based on the depth of the pattern.
If alts reverse, this pattern could definitely a bottom for quite a while. I will not sell everything if it hits the target - I will scale out and watch for further bullish signals.
SBREE/USDC
This is a screenshot because it's charted on uniswap.vision. Always small positions on Uniswap because there are no stop losses. This is simple. I am looking for a close above this range, which would signal that it will go into price discovery for a new all time high. Right now it is struggling hard at the range top. No trade yet!
Legacy Markets
As you know, I have pulled back from trading legacy markets for the moment. I have not altered my investing strategy in any manner, which is to dollar cost average regularly without price in mind.
I asked my friend AMD TRADES to share a few of his favorite ideas. You should absolutely be following him for amazing trade ideas and information. Here's what he had to share. They are images, not interactive links. So you will have to refer back to these. These are also hourly charts, lower time frames than I usually trade.
You can also check him out here: https://www.greenecharter.com/
MSFT (MICROSOFT)
Straightforward trade here. First target is $220. If that breaks and holds, the next target is $225. This is one of his favorite long term trades, so it could go much higher. $212 is the key local support to hold.
NKE (NIKE
The target of this trade is $140-$150 after breaking through key resistance at $109.75. We want to see $109 and $106 hold as support. Assuming that happens, this should continue up to the target.
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This is where I spend my days teaching and learning! Our Discord group is a one stop shop for everything you need to learn to trade and control your emotions. Feel free to DM me on Twitter or respond to this email for questions.
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Follow me on Twitter at @scottmelker. This is where I am constantly updating my trades and sharing ideas.
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor.