March 15, 2020. C the most productive of times, it’s the worst of times.
Amid preparation for a global pandemic and a global currency crisis, the Federal Reserve convened an emergency assembly in which it announced a rate cut to 0 and introduced a large $700 billion quantitative easing (QE) program. Since then, we have noticed an unprecedented expansion of the Fed’s balance sheet and an appreciation in the costs of monetary assets. Billions of dollars of liquidity were injected into the economy to avoid a global slowdown that may have rivaled the global currency crisis of 2008.
The effects of this liquidity injection are not unexpected: as Howard Marks recently said, we are in a “bubble of everything. “Approximately 25% of all global government debt has a negative yield. More than $600 billion was invested in the global equity budget in August 2021 ($4 billion consistent with the day). There were over a hundred PSPC IPOs in March 2021 alone. The world’s dry PE dust hit an all-time high of $1. 9 trillion in January 2021 The venture capital budget was deployed around $160 billion in the third quarter of 2021 alone, with valuations of individual market places across the board.
For more than a year and a half, we have witnessed one of the greatest wealth creations in human history, catalyzed by billions of dollars in financial and fiscal stimulus around the world. But with wonderful wealth creation, you get a wonderful appreciation of value. that is, inflation, is precisely what we are beginning to see in the US economic data. UU. La week, U. S. inflationreached a 31-year high, and customer value increased more than 6% year-over-year.
The big question that considers everyone is whether the increase in inflation we are seeing is “transitory,” as the Fed claims, or more permanent that would force the Fed to tighten financial policy (a procedure known as “tapering”).
The transient inflation thesis is simple: covid-induced supply chain shortages, combined with customer demand for services, has temporarily inflated prices. As the global economy recovers, those effects are expected to become short-lived. In short, technology, automation and globalization are expected to have deflationary effects in the medium term.
On the other hand, some argue that we are heading towards a significant era of emerging inflation due to a surprise call induced by the Fed’s accommodative financial policy. It is estimated that $2 trillion has been added to customer balance sheets in 2020, and this wealth effect can simply translate into a more permanent construction in customer demand that exceeds production and origin capacities.
At a very high level, the Fed has two main mandates:
Thus, the Fed continues to play an equilibrium role: lowering interest rates to stimulate the economy when unemployment is too high and raising rates to fight inflation when the economy is overheating. When done effectively, it stabilizes the economy and reduces economic market volatility through debt cycles. When done inefficiently, it leads to stagflation: low economic expansion in times of peak inflation, when the effects of the economic policy team are very limited.
“The Federal Reserve . . . he is in the position of the companion who ordered the removal of the puncher just as the party was getting ready. Fed Chairman William McChesney Martin, Jr. , October 1955.
With inflation accelerating in recent months, the Fed has been forced to react. At its last meeting, the Fed announced a plan to slow down consistent with the month of asset purchases (which lately is $120 billion/month) through $15 billion consistent with the month. from November and finish the program completely until the middle of next year.
The important thing now is when will the Fed start raising interest rates?While the market venue forecasts two increases through the end of 2022, Fed officials are far less competitive in their expectations. As this narrative continues and more and more knowledge about inflation is coming, the Fed will likely come under increasing pressure to raise rates faster than expected.
The implications of the broader macro environment and inflation problems in Bitcoin are twofold: on the one hand, Bitcoin is an opposite hedge to inflation, so higher inflation makes it more valuable; on the other hand, higher inflation implies higher interest rates. lead to the sale of dicy assets, adding Bitcoin.
Empirical knowledge is not useful in solving this dilemma. While Bitcoin has sometimes appreciated throughout emerging inflation expectations, its long-term relationships with inflation and gold have been weak.
Bitcoin’s value has followed U. S. returns. USA For 10 years during the following year. If this trend continues, it would be the “inflation hedging” thesis, and we would see Bitcoin appreciate as the Fed raises rates to combat inflation.
However, over the past two years, we have noticed Bitcoin trading in line with other threatening assets, such as stocks. As giant asset managers and institutional investors allocate more capital to the crypto ecosystem, we can expect this trend to continue. , a tightening of financial policy in reaction to emerging inflation would be bearish for Bitcoin and, more broadly, for all threat assets.
Where does this take us? In short, even if the Fed may say otherwise, the market anticipates sustained inflation and competitive Fed rate hikes through the end of next year. If this happens, it will be attractive to see how Bitcoin reacts. While the “inflation hedging” thesis is expected for Bitcoin prices, its expanding correlation with threat assets can also lead to significant downward pressure on prices, as tightening financial policy leads to a general collapse in valuations.
The ultimate purpose of Bitcoin was to create a decentralized currency, secure from the economic policy of any central bank; however, as cryptocurrency markets integrate with classic economic markets and more institutional capital flows into virtual assets, this purpose increasingly fits into a myth. Next year’s development will be very important in uncovering the narrative of Bitcoin: is it a price store or is it now an incredible asset?
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