Crypto Market Commentary 

31 July 2019

Doc's Daily Commentary

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Mind Of Mav

Two Words That Shook The World Today

Two words sent the entire global market into upheaval today:

Rate. Cut.

The Federal Reserve is cutting interest rates for the first time since the 2008 financial crisis, the year the bitcoin whitepaper was released. 

In a statement, the Fed pointed out that the U.S. economy has seen steady growth, with the unemployment rate remaining low and household spending increasing from earlier in the year. The agency also noted that inflation is running below 2 percent. 

 “Let me be clear: What I said was it’s not the beginning of a long series of rate cuts,” Powell said. “I didn’t say it’s just one or anything like that. When you think about rate-cutting cycles, they go on for a long time and the committee’s not seeing that. Not seeing us in that place. You would do that if you saw real economic weakness and you thought that the federal funds rate needed to be cut a lot. That’s not what we’re seeing.”

Ask yourself: Why does “the greatest economy ever,” with a 3.8% unemployment rate and 21.54 million new jobs created since January 2010 (when the recession ended) even need a rate cut?

There are very few legitimate reasons to cut rates from the low Effective Federal Funds rate of 2.38%. Some argue Underemployment is a reason, others say its insurance against an ordinary recession (?!), still others say it is needed to reduce the strength of the US Dollar.

The punchline here? Whereas the Fed seemed to almost praise the US economy, it had no choice but to blame the global economy for the rate cut:

“In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent”

So, it’s the world’s fault. And even more otherwise, any time there is economic instability in the world from now on, buy US stocks.

I don’t think people are going to buy that.

Just to be explicit for anyone who isn’t looking to understand the economic implications: The buying strength of the USD will be reduced even further, devaluing the currency. Bitcoin on the other hand will increase in value due to its anti-inflationary coding (fixed market cap).

Essentially: Yes, this is good for Bitcoin in some respects, but it’s not black and white as some might want to paint it.

If the Fed cuts rates, it means you can take out a loan to buy a house much easier. This means, on aggregate, more people will be taking out loans, because it’s just cheap. Since loans are basically ‘money printed out of thin air’ using the Federal Reserve fractional reserve lending, this means each time a neighbor takes out a loan from the bank to buy a house, that neighbor is devaluing your money by causing more dollars to exist in the market.

You rarely notice it – you have to zoom out – but most adults know what used to cost $1 is now costing $3. This means in 20~ years prices have gone up tremendously even though technology and automation should have made everything cheaper. Inflation is not just the amount of money pushed into the system, it’s also the amount stolen from innovation, efficiency and so on. Remember every company sending their workers overseas to manufacture products in other countries? Why didn’t products get cheaper if they’re saving on manufacturing?

Yes, the rate cut will mean more cheap dollars flooding the market, which means your dollar is worth less annually, which means people will look to buy things that hold value more. It means your money will lose value faster over time, not slower. As we’re getting into interesting areas like negative rates and so on, this cannot last, and some war/crisis/failing of banks/some event will have to occur to con the people into accepting more of their assets taken away “for the good of the country” and so on.

The rate affects pretty much every loan, because if you can get it cheap from bank A, then bank B has to compete even if they were allowed to operate without using the Federal Reserve, which they’re not. So all loans end up competing on the price and end up being lower as a whole, since if your rate is 0.5% higher no one will take out a loan from you.

All of Fed’s given reasons must be weighed against a basic understanding of what we just lived through a mere decade ago in the financial crisis: It had numerous drivers, but the entire crisis can trace its roots back to the ultra-low rates of the Greenspan Fed. They took rates under 2% for 3 years, to 1% for a full year. That kicked off a massive inflationary spiral in everything priced in dollars or credit. Dropping rates raises the risk of a repeat of that disaster. That’s why the Fed had been on the path to normalizing rates the past 24 months.

Remember that this is the same Fed that didn’t see the housing bubble in 2006.

The same Fed that didn’t see 2008/9 coming.

The same Fed that didn’t realize that zero percent interest rates and QE (quantitative easing) hadn’t done Japan any good, and went down that path anyhow.

The same Fed that told us, more than ten years ago that ZIRP and QE were only short-term, temporary things/

The cringe-worthy Fed in this video? 

What’s more, here are some jitters from the market that are worth paying attention to as you consider your own set of investing risks:

 

2019 Q2 US GDP growth was weak.

2018 U.S. GDP growth just got revised sharply lower.

The U.S. federal deficit is spiking.

U.S. car sales are floundering.

Some hot tech companies are taking a whacking this earnings cycle.

Leveraged loans are looking pretty bad.

Home equity delinquencies are rising.

Which is bad, because consumer spending is holding up the current U.S. expansion.

And here’s more of the same flavor from abroad:

Negative yielding debt now makes up almost 20% of the total market capitalization of the Bloomberg Barclays Global Aggregate Index

German debt yield is yikes-level negative.

China’s economy continues to slow.

China’s debt issues remain.

China’s return on capital over time has fallen sharply.

China’s venture market has contracted.

EU economic growth is anemic.

Add on top of all of that,

43% of global bonds ex-US trade at negative yields

As the nearby chart shows, global markets don’t appear to need a rate cut. 

Torsten Sløk of Deutsche Bank Securities explains:

Excluding US Treasuries, US corporate bonds, MBS, CMBS, and ABS shows that 43% of the global ex-US IG index is trading at negative yields at the moment, up from 20% late last year, see chart below. With this backdrop, it is not a surprise if real money investors in Europe, Japan, and Asia show renewed interest in buying US credit, in particular when the Fed at the same time is cutting short rates and thereby lowering hedging costs for foreigners buying US fixed income.

Bloomberg:

“The S&P 500 Index fell as much as 1.8% after the Fed chairman said the quarter-point cut amounted to a “mid-term policy adjustment,” fueling speculation the central bank is not necessarily at the start of an easing cycle. The measure rebounded more than 1% after Powell said the Fed hasn’t ruled out further cuts. The 10-year yield held near 2.01%, while the two-year rate jumped to 1.88%. The dollar advanced versus major peers, and gold slid.”

Why is the market anxious in front of this Fed rate cut?

FundStrat points out “Consider this fact: – the average portfolio manager has 8.7 yrs experience per Morningstar, which means running portfolio only since 2010 – half of fund managers NEVER SEEN A RATE CUT IN THEIR PROFESSIONAL CAREER!!”

Buckle up, it’s going to get bumpy.

NYT:  Why We Should Fear Easy Money
Fortune: Why the Fed Lowering Interest Rates Would Be a Mistake
WSJ: Why the Fed Is Cutting Rates When the Economy Looks Good
CNN: Trump’s attacks on the Fed are about to get worse. 

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