The Fed Is Afraid... Of Something

Tyler Durden's Photo
by Tyler Durden
Sunday, Dec 24, 2023 - 07:40 PM

Authored by Mark Jeftovic via,

In the last issue we covered how Ecoinmetrics posited that the Bitcoin rally wasn’t being confirmed on-chain and that there was a chance of a 10% pullback in the month following his analysis, which was published November 22.

We did get a pullback, from $44K, which touched bottom around $40K before reversing, for a roughly 10% retracement.

If that was the pullback, it was kind of a snoozer, lasting all of 72 hours (although as I type this on Dec 17, it does look as if Bitcoin is weakening around the low-40’s – and could drop below 40K over the next few days).

If you are new to this sort of thing (this is your first Bitcoin cycle), you should be warned that there will be larger pullbacks, in the order of 25% or more. Or more.

Remember that – and remember our guidance to people experiencing fear, uncertainty or doubt during said pullbacks:

The number one attribute required to navigate a full Bitcoin cycle is conviction. The entire point of The Crypto Capitalist Manifesto was to provide the basis for that.

If anybody here got shaken out during this pullback (we have a lot of new readers to the list), my advice would be to close out your positions here and unsubscribe from this list.

What did happen on Dec 13th, was the Fed basically pivoted: they held the benchmark rate, again – then signalled that they were now looking toward cuts in 2024.

The dot plot moved immediately to reflect a 75bp cut over 2024:

With even unofficial Fed spox Nick Timiraos (“Nikileaks”) seemingly caught flat-footed:

“The Powell pivot begins.

Dec 1: “It would be premature to … speculate on when policy might ease.”

Dec 13: Rate cuts are something that “begins to come into view” and “clearly is a topic of discussion.”

What a difference two weeks can make.”

In his WSJ piece, Timiraos basically officially canonized the Powel Pivot:

“Powell’s remarks, along with new projections showing Fed officials anticipated three rate cuts next year, marked a notable U-turn. For more than a year, he had warned that they would raise rates as much as needed to lower inflation even if that triggered a recession.”

What changed?

“The comment about rate cuts was surprising because just two weeks ago during an appearance at Spelman College in Atlanta, Powell said it was too soon to speculate about when lower rates might be appropriate.”

Typically the Fed tries not to rock the boat in an election year, and this time out the boat is balanced atop a razor:

  • CPI core print came in at 4% YoY; still well above the target – or even the posited, modified, raised inflation target of 3% (as per Paul Krugman’s shilling and even Fed issued think pieces).

  • Cutting rates, while not directly expanding the money supply, will create looser credit conditions that will almost certainly reignite inflation.

  • Assets are already reacting with stonks, gold and Bitcoin all reversing sharply higher (well, Bitcoin actually reversed off its low before the Fed minutes).

  • Inflation and asset bubbles are clubs that Trump and the rest of the GOP contenders will happily use to bludgeon Biden, or whoever the Dem nominee will be (to be sure: whoever wins the election will almost certainly continue on a path of monetary debasement, blowout deficits and out of control debt.)

  • So for the Fed to telegraph rate cuts that herald a “Fed Pivot” which many commentators have gone on record to say “can’t happen”, they must see something dead ahead that has them back-pedalling.

The market is intuiting the Fed is scared of something; what could it be?

Speculation abounds across FinTwit:

M2 money supply contracting for the first time since WWII:


The imminent tapping out of the Fed’s Reverse Repo Facility:

Even a crash in the “Second Hand Rolex Watches” index (I think that one is satire).

Via @DeItaone

But what I’m looking at is something we’ve touched upon in previous issues, and that’s the unrealized losses the major banks are suffering at the hands of higher interest rates:

Looks nasty. Via @Schuldensuehner

Whatever it is, it’s something which at the moment is so esoteric that there are still strong elements of denial that this is the beginning of a Fed pivot at all; John Hussman comes to mind, pointing out that the dot plot (which is currently forecasting 75bp worth of cuts in 2024) is never really accurate (the correlation is around 0.6, apparently), and that no previous Fed pivot has occurred from these equity valuations.

I get that. And Hussman is an investing legend, but he’s also been calling for a HUGE crash for a LONG time and if the Fed really is pivoting, that might not happen (we get a different kind of crash, in the currency, for starters).

What this does remind me of, is the time the Fed did an actual pivot in 2019: after more than ten years of ZIRP and QE, Powell finally started trying to normalize rates in 2018 – and the markets promptly shit the bed.

From “The Crypto Capitalist Manifesto”

The Fed came out and said “we made a mistake hiking”, stopped trying to normalize, and did three cuts over 2019.

Markets took off accordingly, but something still seemed to have come unglued under the hood; weird things were happening with reverse repos and the corporate bond markets (sound familiar?) until according to some observers, the Fed and the world’s central banks caught a big break in 2020: the Covid pandemic erupted. Now the central banks had the perfect excuse to “run their playbooks on steroids” and flood the world with liquidity:

“By the end of ’19, and because of what happened with the corporate credit meltdown a year prior, the Fed had its Black Swan game plan in hand. They needed COVID but destroyed an opportunity. What the system needed was reserves.” — Danielle DiMartino Booth

Without that fortuitous turn of events, the banking system would have been in real trouble. (And given how the “lab leak” hypothesis now looks plausible, one really does wonder if some of the conspiracy theories around a “plandemic” were in the ballpark.)

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This post was an excerpt from The Bitcoin Capitalist Letter, learn more here.