Horrible CPI data
After the Fed’s interest rate hike resolution in 2022–3–17 announced an increase of 25 basis points to 0.5%, the market agreed that the Fed’s interest rate hike was relatively moderate and within the range that the market could bear. Therefore, after the interest rate hike, gold, silver, crude oil, BTC , etc. Instead of falling, cryptocurrencies have risen to varying degrees.
However, this is just a test by the Federal Reserve for the market. In subsequent interest rate hikes, the magnitude of each interest rate hike will exceed the market’s imagination!
Since the Fed’s unlimited QE has pushed up the prices of commodities since the epidemic, the CPI has continued to rise, and the monthly rate of the US CPI has reached as high as 0.8 from 2022-3-10!
After the Federal Reserve started raising interest rates on March 17, the CPI did not drop significantly. On the contrary, with the Russian-Ukrainian war and the sanctions on Russian energy by the United States and Europe, the CPI rose along with the prices of crude oil and natural gas and other energy sources. Special crude oil touched a maximum of 140 US dollars, and WTI crude oil reached a maximum of 130.5 US dollars.
Brent Crude Oil Chart WTI Crude Oil Chart
In modern society, the rise of energy means that the price of energy and chemical industry will rise, and the rise of these two will drive the rise of other means of production, thereby driving up the overall price and pushing up inflation!
As long as energy prices remain high, it will be difficult for the CPI to fall quickly. The current US CPI of 0.8 is close to the level of the 1970s and 1980s, when the US entered a period of stagflation and a great recession.
The stagflation in the United States in the 1970s and 1980s was caused by multiple factors:
- Due to the serious deficit and insufficient gold reserves in the United States caused by the Vietnam and Korean Wars, in August 1971, President Nixon announced the unilateral abolition of the Bretton Woods system. This unilateral abolition of the Bretton Woods system was essentially a breach of contract. A crisis of confidence followed, and the dollar continued to fall, while rising prices for raw materials in international trade pushed up U.S. inflation.
- In 1972, due to the El Niño phenomenon, the global food harvest failed, causing its supply to plummet and food costs to rise sharply; in October 1973, the fourth Middle East war broke out. Due to the US government’s support for Israel, Saudi Arabia and other countries reduced crude oil production and subsequently adopted a crude oil embargo. In the United States, because Saudi Arabia and other OPEC countries were the main source of global crude oil at that time, crude oil led other energy prices to rise sharply.
- The promulgation of two economic policies to implement mandatory wage price control has restricted the public’s wages and desire to buy, as well as liquidity, distorted supply, and caused supply shortages due to artificial hoarding. After the control was lifted, prices were completely out of control.
Loose monetary policy + aggressive fiscal policy + extreme weather + war factor + crude oil crisis + food crisis, this series of factors + the decision-making mistakes of the United States, escalated inflation to stagflation, and the US economy fell into recession for as long as ten years.
The U.S. economy is on the brink of stagflation
At present, whether it is monetary policy, or the factors of war, the oil crisis, and the food crisis, it is very similar to the 1970s and 1980s.
First of all, behind the conflict between Russia and Ukraine, the United States is playing a game with Russia, and it will escalate at any time as the situation develops.
Second, the United States kicked Russia out of the SWIFT system, and the sanctions against Russia exceeded 1.2 trillion US dollars, of which 300 billion US dollars of Russia’s overseas gold and foreign exchange assets were frozen, accounting for 640 billion US dollars of Russia’s total international reserves. nearly 50%.
In the short term, the United States has won the financial war through its financial influence, but in the long run, it will damage the U.S. dollar credit system and the national credibility of the United States. All countries will worry about the safety of their foreign exchange reserves , thus reducing the dollar and the United States. The allocation of debt and its related assets.
Finally, Russia and Ukraine are both major producers and exporters of wheat and other crops. Together, these two countries account for about a quarter of the world’s total wheat exports. However, because of the war, the spring planting cycle will inevitably be delayed.
Before the outbreak of the war, the sown area in Ukraine was expected to be 15 million hectares, but by March 23, the sown area may only be 7 million hectares, so by the harvest season, a reduction of more than 50% or even more will be inevitable, and there will be a huge gap in world food. , the crisis after the war will be a food crisis, and the reduction of food production will inevitably push up the price of food.
Judging from the level of inflation and the environment in the United States, it is almost a replica of the 1970s and 1980s. The US is again on the brink of stagflation.
Radical means to turn the tide
The US now faces two major problems: inflation on the brink of stagflation and the 2022 midterm elections.
The U.S. midterm elections are held on November 8, 2022, with all 435 seats in the House of Representatives and 34 of the 100 Senate seats up for grabs, as well as 39 gubernatorial positions.
This is an extremely important election. If inflation cannot be lowered before the election, then public opinion satisfaction will continue to decline, and the support rate will inevitably be low.
Although Biden is the president with the most popular votes in the history of the United States, he is also one of the presidents with the fastest decline in approval ratings today. Issues such as inflation and material shortages have followed, and Biden’s approval rate has fallen to 41%.
In the context of the Russian-Ukrainian conflict, to control inflation and reduce CPI, the methods are as follows:
- If the Biden administration and the EU drop sanctions on Russia and increase production with OPEC countries, then energy prices can fall back quickly, which will lower CPI.
- At least 7 crazy interest rate hikes + debt reduction, siphoned out a lot of hot money in the market, squeezed the bubble, thereby suppressing the prices of bulk and various commodities, to reduce the CPI.
But now the domestic inflation in the United States cannot be reduced in the short term, and the shortage of materials cannot be solved; diverting contradictions, sanctioning Russia, and gaining public opinion have become Biden’s first choice to increase his support rate. Then there is only a crazy way to raise interest rates + shrink debts and drain a lot of money from the market.
In order to prepare for the upcoming elections, and to prevent the United States from entering stagflation and recession again, I think the Fed will inevitably use very aggressive measures to contain or delay the occurrence of stagflation.
Therefore, the rate hikes in 2022–3–17 are just an appetizer to test the market’s reaction and to test the sensitivity to the CPI. At the beginning of the next interest rate hike, there is a high probability that the interest rate hike will start at >=50 basis points, and in addition to the interest rate hike, the Fed will shrink its balance sheet as soon as possible, and it may be a combination of interest rate hike and balance sheet shrinkage.
Many people in the market only see the impact of a high interest rate hike on the financial market, but ignore the impact of shrinking the balance sheet.
According to the current information revealed by the Fed’s Bernanke, the scale of the shrinking of the balance sheet in the next one year will be 1 trillion US dollars, and it will shrink to 3 trillion US dollars in 3 years. To estimate, it is equivalent to 3~4 additional interest rate hikes, which is a very serious tightening of monetary liquidity.
The impact of this impact on financial markets, especially the cryptocurrency market, will be dramatic.
On March 23, 2020, the Federal Reserve announced unlimited QE, announcing that it would purchase $75 billion in treasuries and $50 billion in agency mortgage-backed securities every day, and the daily and term repurchase rates would be reset to 0%. And a lot of hot money has flowed into the financial market, of which hot money has flowed into the cryptocurrency market, making BTC and the entire cryptocurrency market enter a super bull market.
It can be seen that before the Fed announced unlimited QE, the price of BTC was still falling, but after the Fed announced, hot money began to flow into the cryptocurrency market. After March 31, the price of BTC began to bottom out. With the continuous inflow of hot money, Prices also climbed all the way up to $69,000.
Therefore, this bull market of BTC and other cryptocurrencies is not an outbreak of its own trend, but a large inflow of hot money. Therefore, when the interest rate hike is only 25 basis points, it has little impact on the entire cryptocurrency market, and the market can even be regarded as a boot that has been exhausted, so as to carry out a strong rebound in the market.
However, when each interest rate hike in the next year will increase by 50 basis points, there will be at least 7 times a year, plus the reduction of the balance sheet, which is equivalent to 11 to 12 times, then this will cause a crazy siphon effect on the cryptocurrency market. While taking a lot of liquidity, it will bring huge pressure on prices.
The next Fed interest rate decision will be around 2022–5–5. Before that, it is the time window for cryptocurrencies such as BTC to run without pressure this year. The storm to come! The rally that started on March 16 is this principle.
The last thing that needs to be emphasized is that the Fed changed from monetary easing to monetary tightening in the 1970s and 1980s, which led to the emergence of stagflation, and the environment for this rate hike will be worse than the last time.
As the United States imposes sanctions on Russia’s overseas gold and foreign exchange reserves, countries will inevitably open up diversified currency reserves, as well as bilateral currency settlement and swap agreements, so no matter how crazy the Fed’s interest rate hikes are, it will be difficult to withdraw as before. For all funds, a lot of funds will flow into more trustworthy assets, and many of them will enter into natural non-sovereign financial products, such as gold, and this attribute is also applicable to cryptocurrencies such as BTC, then cryptocurrency The market will not be so pessimistic, and should even remain optimistic.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/where-will-the-crypto-market-go-under-the-influence-of-the-world-macro-situation/
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