Don't look at Bitcoin too close, you'll miss the trend
Also the financial conditions are getting looser and inflation is not under control
Welcome to the Friday edition of the Ecoinometrics newsletter.
Every week we bring you the three most important charts on the topics of macroeconomics, Bitcoin and digital assets.
Today we'll cover:
Don't look at Bitcoin too close, you'll miss the trend.
The Federal Reserve is keeping rates high, so why are the financial conditions are getting looser.
No, inflation is not under control.
Each topic comes with a small explanation and one big chart. So let’s dive in.
In case you missed it, here are the other topics we covered this week:
A massive generational wealth transfer is bound to lift Bitcoin's price.
Bitcoin is fairly priced, but the mining sector is getting cheap.
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Don't look at Bitcoin too close, you'll miss the trend
Here is some mistake I used to make when I was a less experienced investor: spending too much time rationalizing short term price fluctuations.
When you do that:
You give yourself a chance to make a bad decision in the moment.
You are using a lot of mental energy for something that's most likely not worth it.
Personally I ask a single question when looking at those short term price moves: has anything obvious changed that makes my investment thesis invalid?
If not I'll stop thinking about it and move on with my day.
A lot of ink was spilled on Bitcoin's "crash" from $45k to $40k last week... that's absurd. One if you zoom out and squint at the chart you can't even see that move. Two clearly nothing has changed regarding the long term prospects of Bitcoin. Price fluctuates, sometimes fast, deal with it.
The Federal Reserve is keeping rates unchanged, so why are the financial conditions are getting looser
We have some paradox on our hands. Actually we might even have multiple paradoxes.
The Federal Reserve is running a Quantitative Tightening playbook. In particular at the latest FOMC meeting they have chosen to keep the Fed Funds rate unchanged. This is the "higher for longer" policy.
They are doing that to keep financial conditions tight thus slowing down the economy and taking care of inflation.
However the financial conditions as measured by the National Financial Conditions Index (NFCI) are clearly becoming looser. As a matter of fact the financial conditions are now looser than when the Federal Reserve started hiking rates in 2022.
Why is that?
Well the issue is that the markets believe the Federal Reserve will cut rates sooner than first thought because they have already done enough and there is a risk to over tighten...
But wait if the market is easing the conditions this is giving the opposite incentive to the FOMC. There is no risk of over tightening in that case. Which actually means the Fed has no reasons to cut rates early... Which also means the market has no reason to ease the financial conditions...
If you are confused at this point, so am I. What this shows is that the financial markets are often, in the short term, more driven by the dominant narrative than by hard facts.
The only question is, how long can this divergence last?
No, inflation is not under control
To drive home the point we've just made with the financial conditions let me emphasize that the data does not show that inflation is under control.
One of the narratives that's driving the markets is that the Federal Reserve is nailing a soft landing. They have masterfully managed to control inflation without plunging the US economy in a recession.
I won't comment on the recession part today. But you just have to look at inflation in the services sector to convince yourself that it is too early to take a victory lap.
As a reminder the services sector is a huge part of the US economy. More than three quarters of the US GDP come from the services sector.
Now divide the distribution of the month-on-month CPI inflation in core services in three groups:
Before the inflation spike post-COVID (blue).
The inflation spike post-COVID (red).
The last six months (yellow).
As it turns out the last six months of core services inflation don't look at all like the decade of stable inflation the US experience pre-COVID. The last size months are basically undistinguishable from the post-COVID spike.
This is not what you expect to see if inflation has indeed been tamed.
That’s it for today. I hope you enjoyed this. We’ll be back next week with more charts.
Cheers,
Nick
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