Many do not understand how the current excessive optimism in the markets will end; why the AI bubble and tech company stocks are being inflated; when it might be time to start exiting Bitcoin (addition to the previous post) and so on.
Let’s start from afar, looking at the US macroeconomy and the Federal Reserve’s actions within the framework of monetary policy. After all, macroeconomics is the first step in the hierarchy that predetermines the global direction of market trends.
I wrote last spring that the mechanisms of monetary policy are slightly broken. The Federal Reserve’s cycle of restrictive policy, QT, rate hikes, and withdrawal of liquidity from the economy has been ongoing for more than two years. This is causing significant damage to the banking and many other sectors => to the growth rates of the global economy. However, to reduce inflation and maintain the purchasing power of the dollar, restrictive policies are still being implemented. At the same time, the necessary inflation targets of 2%-2.1% have still not been achieved.
After all, in 2020-21, a record amount of money was printed and injected into the economy. And with each cycle (saturation of the economy with money, acceleration of inflation —> withdrawal of excess money, slowing down of the economy, weakening of inflation), the usual monetary policy tools (key rate, QE and QT, verbal interventions, REPO operations, etc.) work worse and worse. As expenses, for example, on servicing the national debt, become larger. More and more money needs to be printed. It’s becoming harder to contain inflation against this backdrop. Therefore, the Federal Reserve and those responsible for the dollar’s stability are forced to wriggle and resort to unconventional solutions.
And right now, they are trying to get out of the trap I warned about a year ago.
If they start lowering the key rate and injecting money into the economy without weakening inflation, they will get hyperinflation of 10-15% in the next cycle, as was the case 50 years ago. That is a gradual devaluation of the USD with all the ensuing consequences.
If they continue to pursue a restrictive policy, keep the key rate at a high level, “pinch” money from the economy — they will get a sharp crash of the largest banks, through which the financial system “breathes.” Then, an abrupt recession, with all its consequences.
In previous messages, I wondered… How, during the active withdrawal of liquidity from the economy, is the stock and crypto market growing?
Over the last six months: Bitcoin = +100% NVIDIA = +75% S&P500 = +20% and so on.
Where is the money coming from?
We see that through REPO operations, quietly, $1 trillion was pumped in six months. They provided liquidity to banks so that they would not fold prematurely + part of the money flowed into the markets. Strong verbal interventions, i.e., artificially creating positive expectations (they said, for example, that they would start lowering the rate in January, knowing that it was impossible; a powerful PR campaign around BTC, etc.) — triggered a powerful influx of money into risk markets from retail. And, by the way, JP Morgan confirms that BTC is growing on “private” money.
Now, let me tell you about what burning the money supply through risk markets means for the Federal Reserve. It’s very simple. You have $100,000… and instead of buying a new car (you could create additional demand for cars => further price increase on cars, i.e., higher inflation), you, seeing a great opportunity to earn, bring these money to NVIDIA and BTC. Naturally, you buy at prices 80% higher than you could have half a year ago. And, you wait… Meanwhile, Powell rejoices because your money is not in the economy but in a bubble…
And, obviously, in a situation when it’s almost time to pump new money into the economy to settle debts, not let key sectors perish… and they can’t do it because they can’t reduce inflation — they won’t let you pull out, say, $200,000 from NVIDIA and BTC. Why? So you would go and provoke double demand for cars? That’s not why they are herding you there. Their goals are exactly the opposite.
This post is not a call to any actions at this stage. While the bubbles are inflating — take the opportunity and earn at the expense of later investors. But, if you fail to jump out in time — the consequences will be dire.