Is the World Collapsing?| Jim Bianco
In today’s episode of In Case, You Missed It, we’re going to talk about the changing stance of the Federal Reserve. We’re going from quantitative easing to quantitative tightening. What does that mean for the different types of markets of the world? The bond markets, the stock markets, and the crypto markets? How does it affect risk on assets versus risk-off assets? Plus, Microsoft buying Activision Blizzard for some crazy billion numbers, and how they are also trying to co-op the metaverse. The current state of the nation is denial. Whether that’s a healthy or unhealthy denial we aren’t sure, we will see what Jim Bianco’s thoughts on this matter, Can we expect that the crypto markets will continue to rise indefinitely, or are we being naive?
The Bond Market Got Killed
The bond market had one of its worst weeks on record in the first week of January. When interest rates go down, the prices of bonds get more volatile, we refer to that as positive convexity. And so when you have record low-interest rates, the amount that bond prices move right now is huge. Interest rates are the price of money in the TradeFi world, it is probably the basis where everything starts. If the bond market is signaling to us, that money is going to cost a lot more remember, lower bond prices mean higher yields. Why did it happen at the beginning of the year, these markets are so institutionalized. When we talk about interest rates rising, we’re usually talking about US Treasuries, corporate bonds, high yield bonds, municipal bonds, asset-backed securities, usually get priced off of those. But if there are perceived more risk because there’s a credit risk their spread might widen and they might go a little bit more. So essentially, if treasury bond yields are going up, then they are all going up.
Inflation is a Problem
Inflation is not transitory anymore, at least in the short end of the bond market Macroeconomic Markets. The Federal Reserve is going to have to deal with that by raising rates many times. In the equity market, there’s a little bit of disagreement about whether or not the Fed will raise rates as aggressively as the short in the market thinks. Four rate hikes for this year are priced in, we’re not that far away from a fifth. So they’re big aggressiveness that’s priced in the market, you ask equity traders now, that’s not going to move that much. A lot of strategists and economists are either unwilling or won’t go willing to go there, whatever word you want to use. They don’t believe that the Fed would raise rates multiple times and put the stock market or the economy at risk. But something is changed now. And that’s inflation. There’s no escaping it. 40% of the public has less than $1,000, to savings in rents.
The Fed chair faces a choice between protecting the stock market or dealing with this insipid inflation problem, says economist John Taylor
The Fed’s Perspective
As a result, the bond market experienced a huge reduction in asset prices. These things are inversely correlated, the prices of bonds go down, but the yield that they generate goes up, and that sets a new level for the cost of money, which is what you’re talking about with how much money costs because if you can get a dependable 3% AP, the yield on your dollars in the bond market, which is deemed very safe, perceived by investors, why would you take your USDC and put it into the stock market?
The Fed has been confronted with a new problem, inflation, for the first time in a long time. Can you imagine yourself in the Fed’s shoes? Because the Federal Reserve has a dual mission of maximizing employment and price stability.
Signaling and Fedspeak
The signaling is what they’re afraid of in the market, is doing something that upsets the market quite a bit. And so they like to signal it. That signaling even gets a little bit more nuanced than that. Robin Wigglesworth at theft or Nick timorous at the Wall Street Journal will occasionally write stories like senior Federal Reserve officials are thinking about x. That’s usually them calling up the papers and saying, Hey, tell everybody we’re thinking about doing quantitative tightening. They don’t want the market to be surprised. They are afraid, especially in the OAE period, that they come up and. they just say, today, we’ve decided something else, and the markets completely crash. So they want to try and lead us all.
And then if the market likes it, okay. That’s the policy. If the market doesn’t like it, I don’t know what the hell they’re talking about.
Transitory vs Reality
One year ago, the inflation rate was 1.4%. And now it’s 7%. The reason that we’re seeing these higher prices is, it’s an echo of the lockdowns in 2020, we were all sent home. We didn’t spend money, and in 2021 things opened up. So we’re going to see this echo of this pent-up demand to buy stuff in the marketplace. By the end of the year, we’ll still be at 4%, maybe five, maybe three and a half. That’s still unacceptably too high. The 40% that have less than $1,000 savings are not happy that they’re that everything costs more money. Even if it does peak and it comes down, it’s probably not going to come down fast enough to bring inflation back to heal.
Rock and a Hard Place
The Fed has a history of raising rates too much until they break something. They break something that is either the stock market; plunge the economy goes into recession, or some other financial crisis seems to occur. There isn’t a magic policy that makes both sides happy at the same time. So they got to pick one or the other. The Fed is going to raise rates too much, and they’re going to break the stock market or the economy or create some other kind of a mess, somewhere along the line. Partially because they waited way too long, and letting it get to this point, it’s left them with no good options. But also, if the stock markets keep stumbling, so be it, you never want to be put in that position.
The Fed has been pursuing a quantitative easing type policy since 2009. Why are we just suddenly seeing inflation crop up? I remember people who used to talk about inflation, it’s coming right around the corner in 2012/ 2013. It never came. But we saw a massive asset price inflation. A lot of money; the kind of stimulus checks and employment, didn’t go to the banks and asset prices. They went directly to the consumer, which makes me wonder if the Fed can even fix some of these issues. Or, possibly it’s not a fiscal policy, that is causing inflation to happen.
Inflation is kind of a monster that we don’t understand.
But, the Federal Reserve wants you to believe that they know how to, they’ve got these little tools and knobs and levers that they can move, to the third or fourth decimal place anytime they want, they give you that illusion that they have that kind of control on inflation. I would postulate that one of the things that are changed is that in the lockdowns, work from home, lifestyle choices that we’ve made, we now want more stuff and fewer services. Now that runs counter to what a lot of people think. In the light, because we’re at home more, we’ve made a lifestyle change and that we want more stuff. That’s why you’ve got these higher and higher prices. Now to your question about fiscal policy, they allowed the government to borrow trillions of dollars without interest rates meaningfully going higher. Inflation has been driven more by capital goods than it has been by services.
Working at home wanting more stuff is a big driver of this inflation. I don’t think it necessarily has to be bad, where we’re going to go. And I would argue it’s not going to be don’t look to how are things in 2019.
What Should You Pay Attention To?
In the next year or so, what was the big adoption of 2021? It was traditional institutions coming into crypto, thinking of it as either a hedge against inflation. But they viewed it as the next end, we’ve extended out the risk, the risk parameter, which was crypto. Eventually, I think that the crypto market is going to become independent of the financial world, too. And once it becomes independent, then it won’t be stuck with all of these problems of what is the Fed going to do?
Crypto has to break that link with TradeFi but it’s probably not going to do that anytime soon, because they just got everybody in on the idea that it was the further out part of the risk spectrum. We’ve been in eight or nine months of choppy waters already. And I think we’re going to see more of the same as we go forward from here.
Crypto & Expectations
The Fed has to do something about inflation, it will probably get that in q1, q2, q3 as well. And then one of two things might happen, either something will break, and the Fed will be like, Okay, time to dial it back, or midterms will be over.
When the Fed keeps raising rates, something breaks when this game ends, the far end of the risk spectrum comes screaming out of this thing. That’s what we saw last summer when the stock market took off in July. This is when we bought around 1700 Eth, and it took off as well, too.
Deflation?
Crypto investors need to hear the long-term perspective, right? And we’re not even talking about like years here decades. We’re just talking about months. Interestingly enough Raoul Paul, says he doesn’t think that inflation is going to be a big deal in the next decade. It’s the economy’s a snake and ate the baby boomer generation, working its way out of the system.
The three big things that have driven inflation down for the last generation have been demographics, globalization, and technology DGT, they have come in. The problem I see is that demographics are not going to change, that should continue to be a downward push on inflation. Globalization is changing. There is all of a sudden, you know, China’s not our friend anymore. We just don’t view China like we did, even three or four years ago, we view them with suspicion. What we’re seeing is a change in the way we spend our money, and that’s why we’ve got inflation. The tenure yield is at 185, the fed funds rate is at zero, those interest rates are way too low. They’re going to have to come up a lot, maybe even approach those rates of three or 4%. That’s going to put a lot of pressure on traditional financial markets. So I agree with Raul, we’re not going to see the 70s, but if we see 9, 10, 12% inflation, that’s going to be a problem.
A Centralized Metaverse
Right now is the conversation of the Metaverse because markets are dealing with this crazy volatility due to inflation. The Metaverse continues to get built out. Activision Blizzard Call of Duty has been being blocked by Microsoft for $70 billion. Stock is now up. 16 bucks for today, so about a 30% gain for today. They know they are the web to a world if you will, Facebook and Microsoft. They know web3 is coming and what they’re going to try and do with the Metaverse.
A lot of these big companies want that to be the place that we’re going to go. They’re trying hard to grab control of whatever the Metaverse turns out to be. Hopefully, at the end of the day, it does become its vision of being a truly decentralized world. I do believe that everything has to start with decentralization and anytime you get centralization. Lots of these big companies want that to be the place that we’re going to go and they’re making big bets on it, as well. I hope it’s not the case. But they’re trying hard to grab control of whatever the Metaverse turns out to be, they want to try and roll it, call it web3, but make it web 2.2 is really what they’d like it to be.
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