- In the latest report published by Capriole Investments’ Charles Edwards, he examined the possible consequences of the Federal Reserve’s expanding war chest and Bitcoin for the crypto market.
- Edwards emphasizes the interconnectedness of global markets, stating that “larger markets drag smaller markets.” This mutual relationship is also evident in the crypto world, where the performance of altcoins is closely tied to Bitcoin’s movements.
- The broader macroeconomic picture emerges as a mosaic of different colors. The aggressive tightening cycle, which is a sign of the Fed’s recent monetary policy, is still being assimilated by the markets.
Bitcoin had a good start to 2023, but the Fed’s tightening policies put it in a difficult position; how will the Fed’s future moves affect Bitcoin?
Possible Consequences for Bitcoin According to the Fed’s Moves
In the latest report published by Capriole Investments’ Charles Edwards, he examined the possible consequences of the Federal Reserve’s expanding war chest and Bitcoin for the crypto market. As Bitcoin prepares for its halving in April 2024, this is a significant event that will make it less abundant than gold, and understanding the macroeconomic environment is important.
Edwards emphasizes the interconnectedness of global markets, stating that “larger markets drag smaller markets.” This mutual relationship is also evident in the crypto world, where the performance of altcoins is closely tied to Bitcoin’s movements. Drawing parallels with traditional markets, Edwards states, “Bonds drag stocks, stocks drag Bitcoin, and Bitcoin drags altcoins.”
Contrary to the widely felt expectation of an impending recession in 2023, the stock market defied expectations with a strong rise. This rise was not coincidental but driven by the groundbreaking integration of artificial intelligence, which has the potential to significantly increase GDP. Edwards points out the NAAIM Exposure Index, which is an indicator of NAAIM managers’ stock positions. This index currently resembles the local bottoms for the S&P 500 seen in June and October 2022.
Additionally, the current moderate AAII sentiment survey results, if consistent with the NAAIM Exposure Index, could provide a more convincing buying signal. Another measure that Edwards values highly is the Put/Call ratio. This ratio provides information about market participants’ relative optimism or pessimism about a rise or fall in the options market. The recent increase in this ratio suggests that the traditional financial market may be on the verge of a short-term rise, which could be followed by Bitcoin and crypto.
However, Edwards limits this optimism with a note of caution. For a more definitive bullish signal, the S&P 500 will need to surpass and sustain its critical monthly resistance level at 4600. Continuous performance above this threshold will dispel the notion of a temporary “dead cat bounce.”
Macro Fundamentals: A Mixed Picture
The broader macroeconomic picture emerges as a mosaic of different colors. The aggressive tightening cycle, which is a sign of the Fed’s recent monetary policy, is still being assimilated by the markets. As household savings accumulated during the years of stimulus are running out, a contraction in consumer spending is expected to result.
Edwards highlights several particularly concerning measures: a significant decline in manufacturing, which historically has been a precursor to recessions, and consumer spending, which not only fell below the 20-year average growth rate but did so at an alarming pace.
Among other red flags in the US economic landscape are a relative increase in the cost of living behind inflation, with income growth lagging behind at a meager 1% annual increase; an unprecedented $1 trillion credit card debt; increasing delinquency rates and a squeeze in net worth due to declining housing prices against decreasing demand.
However, despite these ominous signs, strong employment rates make an immediate recession declaration premature. Edwards emphasizes the importance of “claims” as a leading indicator for unemployment trends.
However, the integration of artificial intelligence into the workforce is not only a technological marvel but also a potential economic game-changer. Edwards notes that productivity has increased by 50% with the help of artificial intelligence. Referring to a statement by Sam Altman, CEO of OpenAI, he predicts that in the near future, a single programmer equipped with tools like ChatGPT and Copilot could compete with the productivity of 20-30 programmers today.
Fed’s War Chest
The Federal Reserve, aware of economic uncertainties, continues to strengthen its defense. Extraordinary interest rate hikes, which have raised rates from zero to 5%, combined with a contraction in the money supply over the course of a year, have created historically tight economic conditions and put significant pressure on traditional finance, Bitcoin, and crypto.
Fed’s dual strategy based on high interest rates allows flexibility in lowering rates during crises, and its recent success in reducing its balance sheet by a full trillion dollars is at the center of its defensive position. Edwards speculates on the timing of the next QE round and suggests that due to an upcoming election year, the Fed may need to use its liquidity weapon earlier than expected.
Based on the current macroeconomic landscape and the 90% probability of already priced-in interest rate hikes according to CME FedWatch, Edwards suggests that the Fed may need to inject liquidity in the near future, especially if indicators such as rising unemployment or declining consumer spending emerge. What will happen then should be clear to everyone: risk assets like Bitcoin and crypto will rise and align perfectly with the Bitcoin halving.
