Macro update 20.6.22
The SNB was the biggest story of last week — a tightening nobody anticipated and the potential selling of its substantial holdings of US equities. It also signals that global central banks are now competitive hawks, rushing to tighten.
Meanwhile, the Fed’s performance at its June meeting was unconvincing. Last week’s 75bps hike (after guiding for 50bps in May) was, we believe, a sign of a fickle Fed. The central bank is likely to go whichever way the political winds blow. We expect this is the case globally as central-bank independence erodes in times of crisis, especially when potential voters are affected by economic conditions.
It isn’t hard to imagine the Fed shifting to a stance whereby growth is prioritised over inflation (“the current thing”) if and when growth becomes a concern. This would justify a less hawkish stance, but is likely at least a few months away.
We believe this pivot to the next “current thing” is something to watch out for and would result in a more bullish market outlook in time. That is, a Fed put rally is likely if the economy turns out to be weaker than expected. Indeed, given high levels of debt (household, private and public sector), higher interest rates are likely to punish many parts of the economy.
All that tightening and where did it get you?
The lowflation of the past 30 years gave the perception that central banks have the power to determine economic conditions, but there is little they can do about supply-side shocks. Brazil is a case in point (see chart below). Indeed, the Bank of Japan kept its dovish stance last week and believes that some price pressures are outside its remit!
Bad bear market
This bear market’s optics look bad compared to prior ones (see chart below). This, combined with the idea that a Fed pivot could come later this year, suggests that the current entry point for risk assets is attractive on a 6–12 month view.
Ongoing concerns over who is exposed to Three Arrows Capital and what other dominoes could fall (e.g. Microstrategy) remain a clear shadow over digital assets. The price falls in Bitcoin has also led to significant selling from miners.
Nevertheless, we believe these moves are necessary for a true flush out and would make the following points:
- Previous cycle all-time high broken. The weekend move below the 2017 high of $18K was unprecedented. This added to negative sentiment and we believe this is needed for the market to flush out its excesses. More casualties will likely push price back below $18K, but also brings the market closer to a clearing level.
- Miner cycle. Miners selling has historically been a bottom signal. This thread explains the cycle and is something to watch as it could push prices lower still from here, but it also worth keeping in mind that this selling pressure will be removed as rewards for efficiency rises.
- The feel bad factor. It isn’t supposed to feel good to buy at or near the bottom! It does feel discomforting. Nevertheless, as the chart below shows, sentiment indicates the current entry point for Bitcoin is favourable in the medium term.
Chief Economist and Project Specialist
Disclaimer: The content above does not constitute investment or financial advice. All statements are opinion and not statements of fact.