by Dr. Chris Kacher
CME Fedwatch expects 6 rate reductions in 2024 though this is subject to change as new data emerges.
While many waited for the recession that never came in 2023, the US had already posted 2 quarters of negative GDP in 2022 Q1 and Q2 which the Fed denied as being the mark of a recession.
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Fake and manipulated economic data rule the day. ShadowStats show the real rate of inflation around 25%.
Yet retail spending continues to reach new highs such as on the Monday after Thanksgiving and holiday spending overall. This could only be the case if credit card and other forms of debt are reaching new highs, which they are. The majority of Americans and Brits live paycheck-to-paycheck with less than $1000 in savings for emergencies. Those in the EU are not faring much better. Governments are dead broke and hunting for money via higher and higher taxes. In consequence, the middle class has been decimated. Only those families in the top 15% who own hard assets, real estate, and stocks are benefiting from sinking fiat. These individuals bought properties and let currency debasement push their property values much higher. Indeed, even homes that were once considered dangerous hovels such as this 1400 sq ft home currently listing in east Los Angeles's Watts in southern California now command market values approaching three-quarters of a million dollars! This would have been unthinkable a decade ago. But the massive sums of money created by central banks chasing the same amount of goods create soaring inflation. This is why it is estimated that the real estate industry produces 90% of millionaires in the United States.
We also are in an election year which historically is bullish for stocks as odds show an 85% chance of a higher market with an average return of 11%. The Fed will be at the ready to continue to employ QE, whether stealth or not.
The New York Fed's measure of underlying inflation ("multivariate core trend") ticked down to 2.3% in November from a downwardly revised 2.4% (originally reported as 2.6%) for October. This was the lowest reading since the end of 2020.
All of the above gives the Fed room to reduce rates which bodes well for stocks, bonds, cryptocurrencies, and real estate. The economy will be helped along with stealth QE courtesy of the Fed. Of course, nothing goes up in a straight line so expect opportunistic entries on both the long and short side.
Bitcoin ETF and halving on deck
It is anticipated that the Bitcoin ETF will launch sometime in January. The SEC has a January 10 deadline on the Blackrock Bitcoin spot ETF but they may delay once more. While there have been countless delays, this time looks far more certain that they will eventually approve the ETF sooner than later. Grayscale, the largest custodian of Bitcoin, has been meeting with regulators frequently to discuss listing rules for the Bitcoin ETF.
Once launched, roughly $100 billion will likely flow into the ETF. When taking into account that approximately 70% of all bitcoin in circulation has not moved in over a year, this $100 billion will flow into a liquid Bitcoin market cap of about $255 billion. This will therefore likely push the price higher by about 40%. Further, the bitcoin halving in early Q2 of 2024 will reduce the amount of incoming bitcoin to the circulating supply from 900 to 450 per day. So increasing demand from the ETF combined with decreasing incoming supply from the halving should lead to higher prices.
Finally, the Federal Reserve and central banks around the world are going to be forced to return to loose monetary policy over the next 18 months. CME FedWatch futures agrees with Fed Chair Powell's hints at interest rate cuts on the horizon, pricing in a terminal rate of 375-400, or six rate cutes in 2024. But depending on the severity of the slowdown in the economy and any black swans that emerge, the Fed may have to restart QE. That said, the Fed and other central banks have already been employing stealth forms of QE over the last couple of months which accounts for the increased liquidity from central banks and the rise in stocks and cryptocurrencies.
Bitcoin general uptrend to continueOne metric that has proven in both bull and bear markets is the accumulation by small vs. large Bitcoin holders, also known as fish and whales, respectively. Back in 2022, when big holders of Bitcoin were not accumulating Bitcoin but smaller holders were buying as represented by the green line, the price of Bitcoin typically fell. Retailers are often wrong when trying to pick bottoms.
But in 2023, when both big and small holders of Bitcoin were buying, this typically pointed to higher prices in Bitcoin. And thus far, the chart still shows that both types of Bitcoin holders are still buying.
Inflation not contained
Bitcoin should continue higher overall as the next cycle unfolds since inflation was not contained, nor was it reversed, as evidenced by every day expenses. The Fed failed. Their doctored metrics don’t reflect reality. Overt and covert QE among nations has helped push stocks and cryptocurrencies higher over the last few months. This trend will likely continue because we are in the middle of two global conflicts. Both could spread while other conflicts are brewing such as the major one between the US and China regarding Taiwan which has a monopoly on semiconductor chip production, essential to the exponential growth of AI.
BRICS vs. USD
Further, while BRICS and the developing world are moving away from the dollar, it is just a trickle at present, but as I've always said, the trend is key and illustrates that over the next decade, the dollar may face serious hardships at maintaining its sovereign status. Should another black swan arise, expect a breakneck acceleration of this trend. Interest rates have never been hiked at such a pace from near zero levels in the history of central banks. Some banks broke as a consequence. Other major vehicles such as pensions who have significant bond holdings have been hit hard. This is one reason why the Fed must continue to print if they wish to continue to honor these unfunded liabilities. Another is the interest rate payments on record levels of debt which for the first time exceed defense spending.
This is not the 1970s when debt was virtually near zero and Fed chair Volcker could hike rates into the stratosphere to break the back of inflation. Today's Fed does not have that luxury. The most they can do is lower rates and print via QE. This will ultimately increase the rate of inflation and will be the first time since World War II that major fiat currencies may spiral into higher and higher levels of inflation. Investing in hard assets, stocks, Bitcoin, and real estate are key.