Market Lab Report
by Dr. Chris Kacher
The Web3 Evolution Will Not Be Centralized™
The Fed's preferred measure of inflation (Core PCE) moved down to 2.9% in December, the lowest since March 2021. The Fed Funds Rate is now 2.3% above Core PCE, the most restrictive monetary policy we've seen since September 2007. This together with favorable econometrics is likely to help the Fed lower rates with less issue despite Powell's testimony of an unlikely rate reduction in March.
Note that in 2001 and 2008, rate reductions coincided with deep recessions. 2001 was the dot-com bust and 2008 was the Great Financial Crisis. Shortly after the GFC, QE was the first time the Federal Reserve used this tool to save the markets. Since then, the Fed has not been shy about its use of QE to reverse black swans such as COVID in early 2020 and in March 2023 when major banks blew apart such as Silicon Valley Bank. This year, the Fed is likely to use QE to potentially prevent or postpone recession, using the next black swan as the excuse.
The PCE Price Index moved down to 2.6% in December, its lowest level since February 2021. Cycle peak was 7% in June 2022.
On the other hand, the Leading Economic Index (LEI) declined for the 21st month in a row, the longest down streak since 2007-08. The Conference Board is now forecasting "GDP growth to turn negative in Q2 and Q3 of 2024," pushed back from prior calls for a recession to start in Q1/Q2/Q3/Q4 2023.
But they may have to push back their current call as US Q4 GDP came in at 3.3% vs exp 2.0% so we have had two quarters of strong GDP growth. The Fed doesn't have to rush to lower rates so can maintain its dovish stance while the GDP Price Index of 1.5% vs est 2.2% shows inflation continues to moderate.
We are therefore still in a Goldilocks economy but the porridge can quickly grow cold at which time QE may be launched. Further, the ample sums of capital sitting on the sidelines is being slowly deployed which could push markets higher overall, if not in a zig-zag manner.
Bitcoin vs GLD spot ETFs
As for the Bitcoin spot ETFs, Bitcoin is moving just like gold did back in '04 after the first gold ETF, GLD, was launched. The price of gold sold off right after the launch of GLD for 10 weeks before finding a major low, after which it went roughly sideways for another few months before starting on its long term ascent.
At present, inflows into Bitcoin spot ETFs which continue to increase are now greater than the outflows from Grayscale's GBTC which continue to decrease. Expect Bitcoin itself to move higher in the coming days and weeks.
The future long term direction of Bitcoin will largely depend on global liquidity which has been on a mild downtrend since the start of the year. This downtrend is likely to be temporary as central banks must continue to print for similar reasons that US debt continues to climb, now having topped $34 trillion. Interest on record levels of debt and payments to pensions, IRAs, and Medicare as well as the funding of multiple proxy wars overseas and to address the crisis at the southern border make an increasing amount of money printing a near certainty. Since 1959, we have only had two years of contraction in M2 money supply: 2022 and 2023.
That said, Powell's testimony made more firm the next rate cut will be in May, not March. Short term, this is hawkish. Long term, QE will reaccelerate given its ample use since the Fed launched it back in 2008 to address the Great Financial Crisis. Black swans are circling and ongoing government debts continue to climb. Given the way the system is structured, there is no other choice. Fiat will therefore continue to sink while stocks, cryptocurrencies, real estate, and other hard assets overall appreciate. But as said in prior reports, this might be achieved in a zig-zag manner with markets eventually ending the year higher.