SNIPPETS OF MACRO, MARKETS & CRYPTO

Published in

Coinmonks

7 min readApr 11, 2022

Weekly Market Review N°3
11/04/2022
by Alessandro Gherzi

Weekly Market Review N°3 by Alessandro Gherzi

At one point on Monday we were hopeful that the headlines for the week would be dominated by the Bitcoin conference in Miami and Elon Musk’s unadulterated desire for freedom of speech. Then Tuesday came along and it reminded us all of the very fist line of our very first weekly write up in which we stated that the one and only thing that overshadows all else and that dominates markets is the FED. This week was no different and it underscored how just a handful of words coming out of a person’s mouth can rattle markets. Federal Reserve Governor Lael Brainard, considered the dove of all doves, who normally favors loose policy and low rates, said on Tuesday that the central bank needs to act quickly and aggressively to drive down inflation. In our view it was no coincidence that Brainard was chosen as the flag bearer to deliver the news. The FED has to give the impression that it’s the toughest kid on the block and that it’s dead serious in it’s mission to curb inflation. Brainard was reading off a screen, she looked unconvinced and appeared like she was doing so at gunpoint. But it had to be done, as what the Fed is trying to do is alter inflation to the downside without lifting a finger. By adopting a very aggressive stance, at least for now verbally, they are hopeful that inflation expectations will subside causing ordinary folk to believe their rhetoric and hence lower actual and not only expected inflation. In our view this is like pea shooting at an elephant and is likely to fail, the Fed will need to show it’s hand one way or another.

So what words did Brainard utter to cause havoc in the markets? In her speech written for a Minneapolis Fed discussion, she said that policy tightening will include a speedy reduction in the balance sheet and a steady pace of interest rate increases. Her comments indicated that rate increases could be higher than the traditional increments, and base case scenario, of 0.25 percentage points. But what in our view was really key in spooking markets were comments that we should expect the FED’s balance sheet to shrink considerably more rapidly than in the previous recovery. Now this really does matter as if

there is one thing that is highly correlated to stock market performance is the size, or better growth or deceleration of the balance sheet. For years analysts have looked at a myriad of factors ranging from GDP growth and earnings, to the amount of rainfall and reproduction of locusts to find a reliable correlation to equity markets, but to no avail. The Holy Grail is under our noses, the FED’s balance sheet, when it expands markets do well, when it shrinks (something that we haven’t seen often of late) markets tend to do poorly. A brief explainer as to why this happens. During expansionary periods the FED buys Treasuries and mortgage-backed securities, providing liquidity to the system and this ultimately translates in an appreciation of risk assets, as this money has to find a home somewhere. On the contrary when the FED dries up liquidity the opposite happens.

“This is like pea shooting at an elephant and is likely to fail, the Fed will need to show it’s hand one way or another.”

Brainard and her compadres at the FED weren’t done though as on Wednesday the FED minutes detailing what was said during their last meeting were released. Lo and behold, on the footsteps of what was said a day earlier, the minutes explained how FED officials discussed their intention to reduce their trillions in bond holdings with a consensus around $95 billion a month. Officials “generally agreed” that a maximum of $60 billion in Treasurys and $35 billion in mortgage-backed securities would be allowed to roll off, phased in over three months and likely starting in May. That total would be about double the rate of the last effort, from 2017-19, and represent a historic switch from ultra-easy monetary policy. It is this switch in stance that matters not so much the size of the balance sheet reduction. Let’s not forget that the Fed expanded its holdings to about $9 trillion, or more than double, during monthly bond purchases in the wake of the pandemic crisis, hence it will take years to go back to a pre-covid balance sheet. Nonetheless these were seismic news...

Lastly, as all of the above wasn’t bad enough to cripple markets, in addition to balance sheet chatter, FED officials also discussed the pace of interest rate hikes ahead with members leaning toward more aggressive moves. The minutes, pointed to a more aggressive policy going forward with potential rate hikes of 50 basis points at upcoming meetings, starting with their next rendezvous in May.

Contrary to popular belief it is the market testing the FED and not vice versa.

Tuesday and Wednesday were hence unsurprisingly brutal on markets, especially for technology stocks and crypto, the main beneficiaries of loose monetary policies and ample liquidity in the system. In our view however and contrary to popular belief it is the market testing the FED and not vice versa. The FED wants the economy, and as they have openly stated risk assets to cool, enough so to have a meaningful impact on inflation. With equities hovering near all time highs the FED feels emboldened to be aggressive in it’s monetary policy and in their view they haven’t inflicted nearly enough pain to markets in pursuit of their inflation-fighting policies. It’s a tug of war and the more markets stay resilient the more they give the green light to the FED to be aggressive...something will have to to give eventually.

What initially looked like a week where the talk of the town would be Musk’s acquisition of a minority stake in Twitter and resulting implications for his favorite canine themed crypto, and Dogecoin did bounce on the news to quickly come down to earth, ended up being a FED slugfest. Even the much anticipated Bitcoin conference, the largest ever get together of crypto enthusiasts, was overshadowed by FED related news that were the principal culprit of a lackluster performance by most cryptos. The conference in Miami had an impressive roster of speakers however was devoid of a knock out punch that would awe and ore the masses. Not only that, but it seems that the limelight was somewhat stolen by SEC Chair Gary Gensler earlier in the week.

As we said on multiple occasions 2022 will be the year of regulation in crypto land and this week didn’t deviate from script. Gensler is actively looking at how his employer can regulate crypto exchanges and crypto trading platforms, with such regulation having a profound effect on the evolution of the crypto industry. As the SEC oversees platforms that trade securities, Gensler commissioned SEC staff to untangle “how best to register and regulate platforms where the trading of securities and non-securities is intertwined.” He stated that the SEC and the Commodity Futures Trading Commission, using their respective authorities, should jointly address platforms that might trade both crypto-based security tokens and some commodity tokens, with in his own words “Investors being protected in the same way.” Gensler said that if a company builds a crypto marketplace that protects investors against fraud and manipulation and safeguards market integrity, “then customers will be more likely to trust and have greater confidence in that market.” We can only agree that sensible and responsible regulation would be a boon to the crypto industry and that it is absolutely paramount for a wider adoption of crypto assets, especially on the institutional side. The jury is still out whether Gensler is a friend or a foe of crypto, however it is undeniable that the man is in a unique position due to his knowledge of both crypto and regulation to provide a sensible regulatory framework to the space. That is if the corridors of power allow him to do his job unencumbered and unshackled.

The jury is still out whether Gensler is a friend or a foe of crypto.

Lastly Treasury Secretary Yellen, an historically staunch opponent of anything crypto related, is showing signs of mellowing out and seems to be slowly warming up to crypto. She wanted to have her say on crypto regulation echoing Gensler, stating that regulation should be “tech neutral” and should be based on risk and not the underlying technology. Rumor has it that this softening of tone towards crypto is Gensler’s whispering words of crypto wisdom in Yellen’s ear. Perhaps a friend he is after all…

Alessandro Gherzi
CFO STIMA

Check our website for more information:
🟣 https://stima.io/

Follow us on:
Instagram: https://www.instagram.com/stima.io
Facebook: https://www.facebook.com/stima.io
Twitter: https://twitter.com/STIMA_Crypto
Reddit: https://www.reddit.com/r/stima

Join Coinmonks Telegram Channel and Youtube Channel learn about crypto trading and investing

SNIPPETS OF MACRO, MARKETS & CRYPTO

Also, Read

Written by STIMA