Do you ever feel like there’s no safe haven asset when markets start to crash? Well, you’re not alone lately. All asset markets, including the crypto market, have been moving in lockstep in response to the same macro factors. That’s why today I’m going to give you an overview of the current macro situation. They will tell you exactly which macro factors to watch and how they could affect crypto.
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The Current Macro Situation
Let’s start with an overview of the current macro situation. For those who don’t know, macro is short for macroeconomics, and it essentially involves analyzing the economy from a bird’s eye view. Macro factors include things like inflation and supply chain issues, labor shortages, raw material shortages internal revolutions international conflicts, you know, everything we’re experiencing right now. You don’t need to be an economist to understand that these macro factors have the potential to move asset markets, be they stock markets or the crypto market. What does require some economic knowledge is? However, it is important to understand exactly how these macro factors interact, especially when they seem to be having the same effect on all asset valuations.
As I mentioned in the introduction, investors across the board have been having a hard time finding safe haven assets in the current macro environment. What’s odd is that this hasn’t really happened before. You see, historically, government bonds and precious metals have been good assets to hold when the world goes wonky, but this time around, neither of the two has held up particularly well. Even real estate is starting to show signs of weakness in some countries. This is the part where other influencers would say fine art is an exception and shill your masterworks referral link. Don’t worry, I’m not going to do that, at least not yet.
It appears that what’s causing all assets to move in tandem is an important macro factor that they all have in common, and that’s the federal reserve, specifically the Fed’s monetary policy. It’s believed this correlation across asset classes was caused by the trillions of dollars the Fed pumped into the economy in response to the pandemic by cutting interest rates to zero among other things. These trillions inevitably find their way into just about every asset class. Now that the Fed is starting to increase interest rates, these trillions are slowly being sucked back out of all asset markets.
As a case in point, almost everything has been crashing since November, which is when Federal Reserve chairman Jerome Powell said the fed would begin raising interest rates in response to inflation. As such, investors are viewing all the macro factors I mentioned earlier through the lens of the Fed and asking themselves whether they will result in the Fed raising or lowering interest rates in response. As I just hinted, the Fed raising interest rates or even just hinting that it will do so means that asset markets are likely to crash, whereas any indication that interest rates will be lowered results in a rally.
This is why a recent Bloomberg article said that the Fed is forcing every investor to focus on macro factors and why the saying “it’s all one trade” is becoming increasingly popular among investors. As you’ll soon see, this new economic paradigm means that some macro factors that are objectively positive are seen as negative in the eyes of investors simply because of the Fed’s assumed response.
As a quick pro tip, pull up a calendar or piece of paper to take notes of the dates I’ll be mentioning as they will tell you when the crypto market is likely to see some big moves.
Fed Press Conferences And Minutes
The first macro factor to be on the lookout for is a no-brainer, and that’s the Fed’s monthly press conferences along with the minutes of the Fed’s monthly meetings. That’s because the Fed announces interest rate decisions during its monthly press conferences. If the Fed’s interest rate announcement is consistent with investor expectations, asset markets tend to see a small rally, and that’s because investors love certainty more than anything else. If the Fed’s interest rate announcement exceeds investor expectations, asset markets tend to see a big rally since it’s better news than what investors had priced in. As you might have guessed, exceeding investor expectations is code for the Fed announcing it will be raising interest rates less than it initially said or even lowering them. If the Fed’s interest rate announcement falls short of investor expectations, asset markets tend to see a big crash. As you might expect, falling short of investor expectations is code for the Fed declaring it will be raising interest rates more aggressively than it initially said.
If you’re wondering where these investor expectations come from, the answer is the Fed’s board of directors, especially chairman Jerome Powell, as he basically has the final say on interest rates. Besides comments made by the Fed’s board of directors during various conferences and interviews, what Jerome says during the Fed’s monthly announcements gives investors insights into the Fed’s plans.
What’s mentioned in the minutes or summaries of the Fed’s monthly meetings is also eyed closely by investors. What’s funny is that the minutes of the Fed’s monthly meetings are typically released around three weeks after the meetings take place, presumably to prepare investors for the Fed’s next announcement. Obviously, if the Fed minutes suggest that the fed will be raising interest rates more aggressively, markets tend to tumble, and if they suggest the fed will be easing off, markets tend to rally.
As it so happens, the Fed’s next monthly press conference is just around the corner. It will take place on Wednesday the 15th of June, so prepare to see some volatility across asset markets, including crypto. In terms of the Fed’s minutes for the meetings taking place on the 14th and 15th of June, these will be released on Wednesday the 6th of July, so mark your calendars or set a reminder.
Inflation – CPI and PCE
The second macro factor to be on the lookout for is inflation in the United States as measured by the consumer price index, or CPI, and the personal consumption expenditure price index, or PCE. This is because the Fed is ultimately raising interest rates to reduce inflation. So if the CPI is high, the Fed is likely to raise interest rates more aggressively and vice versa. For reference, the Fed targets a 2% inflation rate, so anything above that is considered high in the fed’s size. Let’s just say the CPI is closer to 10% than it is to 2%.
How asset markets react to CPI prints once again boils down to investor expectations, and the dynamic is more or less the same as with the Fed’s press conferences and minutes of monthly meetings. If the CPI print is consistent with investor expectations, asset markets tend to see a small rally, but with the high levels of inflation we’ve seen lately, investor certainty doesn’t necessarily translate to a pump. If the CPI print exceeds investor expectations, i.e. comes in much lower than expected, then asset markets tend to see a massive rally. The fact that we haven’t seen one of those in a while says it all.
What investors are looking for now are signs of peak inflation. In other words, they’re looking for signs that inflation has topped out and is on the decline. Even if it’s still objectively high. The rationale there is that the Fed will see this downward trend too and raise interest rates less aggressively or not at all since inflation is already falling with its current monetary policy. If the CPI prints fall short of investor expectations, i.e., comes in much higher than expected, asset markets typically experience a massive crash because the Fed will respond by raising interest rates.
The caveat here is that the fed apparently doesn’t watch the CPI all that closely, and that might have something to do with the fact that the CPI isn’t exactly the ideal inflation gauge. As far as the Fed is concerned. The aforementioned personal consumption expenditures price index, or PCE, is a better measure of inflation than the CPI. The PCE is a measure of how much the average American household spends on goods and services each month. Let’s just say it does this in a different way as it so happens.
The last PCE print suggests that inflation could be peaking and this will probably be confirmed by future inflation prints, be they from the PCE or CPI. The next PCE print will come on Thursday, June 30th, but I’ll reiterate that asset markets don’t seem to react too strongly to it, even though it’s the Fed’s favorite inflation measure. That’s why the date you need to highlight is Friday the 10th of June, which is when the next CPI print comes out.
The PPI is seen as a leading indicator for the CPI since the costs of production eventually find their way to consumers, though the markets don’t seem to react too much to PPI prints either. For anyone wondering, the last PPI print was a whopping 11%. The next PPI print will be released on Tuesday, June the 14th, just before the Fed’s press conference. Perfect timing indeed.
Anything That Causes Inflation
This ties into the third macro factor to be on the lookout for, and that’s anything that could cause more inflation. This is again because the Fed is raising interest rates to reduce inflation. So if inflation continues to rise for whatever reason, the Fed will continue to raise interest rates.
These days there’s no shortage of macro factors that could increase inflation, but almost all of them involve the supply side of the inflation equation. Now don’t get me wrong. Much of the inflation we’re seeing today is a direct result of the Fed’s financial response to the pandemic. This had the effect of artificially increasing demand for assets of all kinds.
However, much of the inflation we’re going to face tomorrow is going to come from the supply side of the inflation equation, which is entirely outside of the Fed’s control. No matter how much the Fed raises interest rates, it can’t stop Chinese cities from going into lockdown or convince Russia to export the natural resources required to make much of the world’s food. The Fed also can’t convince policymakers in western countries to increase the domestic production of fossil fuels to bring down the rising energy costs that are starting to threaten their own economies. This is why some believe that the Fed’s interest rate increases will be futile and why others believe that the Fed will increase interest rates into the double digits. That’s because the only way the Fed can reduce inflation is to destroy demand to the point that supply side pressures are irrelevant because nobody can afford to buy it. This is arguably next to impossible to do because there will always be demand for things like food and energy, but this doesn’t mean the Fed won’t try to destroy demand as much as it can to fight inflation. This will, of course, have profound implications for all assets, especially cryptocurrencies and even major altcoins, because they’re still considered high-risk by most institutional investors.
In a worst-case scenario, it could cause companies and even some countries to default on their debts. If the alternative is the hyperinflation of the US dollar, you can bet the Fed will make that sacrifice. The worst part is that the macro factors that could cause supply side inflation don’t exactly run to a schedule. They’re usually announced as they happen, with little to no forewarning. In my experience, keeping up with the news can help predict these macro factors, but in truth, I’ve never managed to get the timing right and I’d never think of trying to trade these events either.
For what it’s worth, I suspect we’re going to see many of these supply-side issues resolved by the end of the year because of the upcoming elections in the United States and elsewhere. Inflation has been the number one issue on the minds of voters, so much so that it has resulted in record low approval ratings for the leaders of just about every country.
Jobs Reports
Anyhow, the fourth macro factor to be on the lookout for is the employment situation summary, aka the jobs report, along with other employment-related indicators. This is because the Fed is tasked with doing two things: ensuring price stability, i.e., ensuring 2% inflation, and ensuring maximum employment, which the Fed interprets as 4% unemployment.
On that note, it’s important to point out that unemployment is the percentage of people who are actively looking for a job but can’t find one. It does not count the actual labor force participation rate, which fell off a cliff at the start of the pandemic and is yet to recover to its pre-pandemic levels.
As you can see, the labor force participation rate has actually been on a long-term decline since the early 2000s. This is mainly because more and more baby boomers are retiring. This is actually why many macro investors are leaning bearish. If the labor force is shrinking, then it’s very hard to have economic growth in the long term absent AI and other such technologies. Not surprisingly, the labor force is shrinking because not enough people are being born, and this is something that Tesla CEO Elon Musk is extremely concerned about.
Anyway, apologies for the tangent. According to the latest jobs report, unemployment in the United States is sitting at around 3.6%. This is significant because increasing interest rates tends to increase unemployment, so the fact that unemployment is slightly below the Fed’s target means the Fed has room to increase interest rates. This is where the paradox comes in, because you’d think the markets would rally on the news that lots of people are getting hired. As far as investors are concerned, however, if lots of people are getting hired, it means that unemployment is on the decline, and the Fed could raise interest rates more aggressively. As we’ve established, raising interest rates means it’s more difficult for investors to get their hands on easy money, particularly the big banks and asset managers who transact directly with the Fed. This is why the markets crashed in response to the most recent jobs report, which revealed that more jobs had been added than investors were expecting. Had the jobs report revealed that jobs were actually being lost, the markets would have rallied because it would mean that the Fed couldn’t raise interest rates as aggressively as before. This is the clown show of the fiat financial system we find ourselves in.
Speaking of which, it begs the question of whether it creates an incentive for the big banks and asset managers to destroy the economy. Rick Rieder predicts that the strong jobs report the United States saw may be the last solid one for a while. Rick reckons this is the case because big companies have begun cutting their workforces and putting a freeze on hiring, not just crypto companies. Luckily, for Blackrock, this means profits are on the way. Unfortunately for the average person, this means there are some hard times ahead. We will know for sure when the next jobs report comes out on Friday, July the 8th.
Company Earnings
The fifth macro factor to be on the lookout for doesn’t necessarily involve the Fed, and that’s company earnings, namely tech company earnings. This is because the crypto market is highly correlated with tech stocks, especially stocks belonging to tech companies that work with crypto or hold cryptocurrencies on their balance sheets. As many of you will know, publicly traded companies publish earnings reports almost every quarter, i.e., every three months, give or take a few weeks. As with many of the other macro factors I’ve mentioned so far, how company earnings impact the price of their respective stocks fundamentally depends on investor expectations. If earnings are above expectations, the stock will see a massive rally. If they’re within expectations, the stock will see a slight rally, and if they’re below expectations, well, you all know what happens.
As to why tech stocks are so important, it’s primarily because they make up most of the S&P 500. The stock index that tracks the price of the top 500 U.S. companies by market cap rises when tech stocks rally after the release of robust earnings reports, it has a tendency to cause other stocks to rally, as well as the crypto market, which likewise consists of cutting-edge tech.
The importance of crypto-related tech stocks is pretty straightforward. It’s possible if a company like Coinbase posts some serious profits. It is unlikely that any of this money will be invested in cryptocurrency. If a company like Coinbase starts to see some serious losses, it might be forced to sell some of the crypto on its balance sheet to cover its operating costs.
However, the price action of tech stocks also acts as a de facto indicator of how much risk investors are willing to take on, and to many institutions, Bitcoin falls into the same risk category as the likes of Tesla. Note that the Fed’s monetary policy can have a significant impact on tech company earnings indirectly, and tech company earnings are not nearly as significant as the other macro factors I’ve mentioned. Even so, they’re significant enough to the crypto market that they’re worth mentioning.
That’s all for today about the macro factors that could affect the crypto market.
[This article is a transcription of a video made by Coin Bureau]
Original video: https://youtu.be/XGXJSVV52WY ]
