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Hi Everyone,
Yipes. The market certainly didn't appreciate the latest comments from Federal Reserve Chair Jerome Powell, also known as J-POW.
The Nasdaq composite index is now down 3% since the start of the year and 10% from its all-time high on Feb. 16.
Even bitcoin appears to be reacting to the latest Fed comments, and contrary to common narratives, it is actually declining in the face of higher inflation. |
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No matter how temporary the Fed may think that inflation will be, its sudden change in narrative from "we don't see it coming" to "yeah, it's coming but will probably not last long" is not at all reassuring.
The bond markets, which have been in increasing focus over the last week or so, are bearing the brunt of the selling. Remember, when yields go up, it means that people are selling bonds.
With that, here's the yield of the U.S. 10-year Treasury breaking through 1.5%.
It's a measly yield by nearly any measure, but it's their rapid increase that has investors nabbing profits off the table today. |
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Of course, if we zoom out on the above graph, you'll see exactly how silly these rates are in historic perspective.
Meanwhile, interest rates in the DeFi space do not seem affected as of yet and are still offering, in some cases, more than five times what government bonds are. |
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But why did bitcoin go down?
This did confuse a lot of people on social media today, myself being one of them.
After all, one of the driving narratives at the moment is that higher inflation means people should be buying hard assets that are limited in supply including gold, land, and bitcoin.
So why, if inflation is now suddenly in the cards, would bitcoin go down?
So here's the difference between narrative investing and understanding how the markets tend to flow.
First, it's imperative to point out that the move in bitcoin following the Fed's comments was actually pretty small.
The charts leave little room for doubt that there was a time correlation between the Fed's statement and the bitcoin move.
Here we can see the approximate time of the speech circled in purple. Each candle equals 30 minutes.
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So we're still up for the month of March, and way up since the start of the year.
If we think about it though, bitcoin wasn't reacting to the Fed at all. It was reacting to the stock market.
As of March 2020, when the pandemic first hit the financial markets, bitcoin discovered a strong correlation with risk assets like the pop-stocks for the very first time.
No doubt by now it is the basis of many trading strategies around the world, both automated and manual.
So when we see those stocks selling off, it almost seems natural that crypto would come down a bit too. |
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Right, so why should I care?
The answer to that depends entirely on who you are and how you're invested, of course.
For example, if you're the chairman of a central bank, the fact that inflation is coming and the dollar will likely fall further is probably pretty welcome news. It's actually what they're trying to do.
If you're a hedge fund manager, you might want to consider what percentage of your portfolio is in the bond markets.
With higher yields, and the expectation that they will rise even further, it might be worthwhile to take some profits off those risky stocks.
You may be slightly annoyed that the Fed has outlined a problem without offering a solution, but I'm sure you'll get over it.
For the average Joe casual investor, now is not the time to panic. We knew this would happen. We understood that inflation would come even though the Fed wasn't sure.
We understand the affects of asset inflation in the current economy.
Sure, the markets got ahead of themselves and yeah J-Pow is being a bit stingy with the injections, but not to worry, the Fed has said they'd rather act quickly, especially if the markets get disorderly.
Rest assured, a few more days of this, and they'll be far more likely to bring on the money printing. ...
Huge thanks to everyone for the abundant birthday wishes. So glad to see so many of you enjoying the updates and reading all the way to the end. For me, this is truly inspirational!
Have an awesome day!
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Mati Greenspan Analysis, Advisory, Money Management |
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