Market Lab Report - Hottest inflation since 1982; Bitcoin dead cat bounce?

by Dr. Chris Kacher

The CPI came in above expectations at 0.6% vs est 0.4%, rising 7.5% YoY in January vs est 7.2%. This was above the 7% result for December. The core CPI which strips out food and energy, came in at 6%, beating estimates of 5.9%. CME Fed Futures is now pricing in 7 rate hikes for 2022 as well as a 75% chance at the time of this writing of a 50 basis point hike when the Fed meets in March. You cant print trillions and trillions without inflation soaring.

The historical perspective is jaw-dropping. The last time inflation spiked this high, the Fed funds rate was 11.5%, so the Fed had plenty of room to lower rates to spur the economy. This time, the FFR is on the floor at 0%.

 
Meanwhile, good 'ol Joe Biden was quoted as saying, "While today's report is elevated, forecasters continue to project inflation easing substantially by the end of 2022." The degree of disinformation is staggering. Not only does inflation tend to move higher, not lower, due to the central banks' inability to hike rates by any meaningful amount when debt gets to these extreme levels as history going back to ancient Rome has shown, inflation also has a long tail meaning it tends to persist at least a couple years after it spikes. Even if inflation stayed at current levels, we are looking at an annualized rate of inflation of 8% through 2024-2025. That said, the real rate of inflation is somewhere between 15-21% given soaring prices of services, goods, food, and energy.
 
The Fed is trapped. Rate hikes and QE reductions are their only tools to curb inflation. History shows they will instead find a way to increase M2 via QE while claiming they have more tools at their disposal to deal with the debt issue. Alternatively, they will manufacture another crisis to justify renewed levels of QE much as France did in the late 18th century.

Your fiat is a guaranteed money loser. If you take the Fed Funds Rate and subtract CPI, we are now at the most negative point in history. We are at worse levels than the soaring inflationary times of the 1970s. Inflation debases value and the 7.5% reported CPI is decimating to the average person's buying power especially when the real rate of inflation is far higher.


BTC

Meanwhile, the crypto markets which have been correlating as of late with stocks when it comes to tightening and crises such as the Russia-Ukraine standoff, have been in risk-off mode since late last year. The downtrend appears intact for both stocks and crypto. Crypto had steep corrections in 2014 and 2018 when the Fed was hawkish. Will history repeat once again? Will Powell have to reverse his hawkish position before stocks and crypto can rally? Debt far exceeds anything from the past due to C19 so the yield curve is materially less forgiving.

Despite the recent bounce in bitcoin and altcoins, history suggests crypto markets will trade in a wide range at best otherwise will continue their downtrend. In 2014 and 2018, two years where the Fed was hawkish, bitcoin had sharp bounces that persisted for only a number of weeks before the downtrend continued.

2014:


2018:


Given the macro picture and tightening across the planet, the current bounce is likely to be short-lived if history is any guide. Less QE means less capital to flow into stocks and crypto. 2014 and 2018 were two such years. When the Fed switched back to being dovish, crypto found major lows. Buyer beware. That said, if any crypto or stock is bucking market headwinds, pay attention as it is a sign of strength. Such could move higher or at least should be monitored. When the weight of the market comes off, it could shoot higher like a tightly coiled spring.