We haven't been very active in 'traditional' financial markets in recent years. In fact, the last move of significance we made was in December of 2018 to go long again US equities. Oh yeah, this was right after the Fed tried to hint at tightening/tapering only to rapidly shift course and launch a monster easing bazooka well coordinated across global markets and central banks. The result was Spider rocketing higher after at 20%-ish plunge with little dips along the way to all time highs heading into COVID. We all know, as does the Fed, that if the punch bowl is ever completely removed it's game over for the existing system. Just check the correlation between the S&P and the Fed's balance sheet.
Alas, so nice to feel secure we are well past those days . . . . or are we? Even the 'wrong a lot more than he's right' financial wizard Paul Krugman was spot on when he declared that the Fed must create a new asset bubble to replace the crumbling of the Nasdaq bubble and business spending post-Y2K. No problem - enter the first housing bubble and HELOC ATMs. This time period also saw the initial phases of the, we'll take the liberty in calling it, Globalism/Tech Bubble.
Then we saw the GFC from 2008-2010 during which the Fed intentionally sucked liquidity out of the system. Money markets froze and nearly busted. What happened after that? The Fed and central banks in general initiated what has become an absolutely insane, excessive, and ludicrous money printing orgy (ever ask yourself how banks create money?). This took the Spooz and residential real estate in many developed countries (especially the U.S.) to all time highs with SPY going from 666 to almost 5,000 and resi RE going to prices well above 2008/2009 peaks.
Fast forward to today. We have tens of trillions in sovereign debt with negative interest rates. The Fed's balance sheet was already ramping and then went hockey stick vertical during COVID. Inflation and consumer prices are rising strongly and eating away at the individual's ability to manage their finances and absorb the cost of living. Rents and home prices are at record highs generally. Interest rates can only go lower by going negative. No matter how many times some politician tells you there is no inflation, all one has to do is try and buy some steak at the grocery store and look at renting or buying a home to see the truth. Kind of a tough time for the Fed to ignore all of this and accelerate QE . . . . . . even if the math suggests that is precisely what needs to ultimately happen again. Even bond market gurus are calling for alternative assets to replace UST as the pristine choice of collateral.
So, now what? Wouldn't it be great if there was a life preserver of sorts to catch some fallout and give people and institutions a raft to hold onto or jump aboard if things get rocky. Wouldn't it be even better if there was an entirely separate system whose infrastructure and ecosystem were well beyond the fringe and beta testing stages. Wouldn't hurt if a few billionaires and institutions had been live testing these systems for market depth and liquidity as well.
The Fed tells us it is tapering asset purchases and the market is pricing in a few rate hikes for 2022. Ok. The market is also telling us this "tightening" is projected to be quite short lived and followed by more easing. Remember folks, tapering is just slowing the rate/size of asset purchases - it is not pulling liquidity from the system. Call it tightening if you want, but what jumps out more to us is the strong reactions to merely tapering and not even outright drainage of liquidity.
The Fed needs asset bubbles. The Fed does not want to have to also buy yet even more Treasuries if/when capital gains taxes collapse and the politicians come crying to the U.S. Treasury for more funding. Hell, the Fed is already monetizing much of UST issuance as it is! The Federal Reserve needs Bitcoin and preferably a Bitcoin ecosystem and infrastructure that can handle an onslaught and tsunami of new customers and various fiat currencies entering its domain. The Fed needs a dumping ground for all the damage if/when traditional asset bubbles deflate and it needs a 'safe place' to which it can (wink, wink) point participants seeking shelter.
BlockFi pays you about 9% currently for holding cash (i.e. stablecoin). Coinbase has tens of millions of accounts and is publicly traded. Earlier in 2021, the Chinese (very foolishly) literally gave away the global Bitcoin mining market. BTC mining market share in the U.S. has risen dramatically as a result. Bitcoin is ready. One nation, albeit a small one, is already using the Bitcoin Lightning Network on a daily basis and made Bitcoin legal tender.
This isn't to say all assets in the world are about to crash except for Bitcoin. This isn't a prediction about exactly what equities or the Fed will or will not do. This is merely an analysis suggesting that Fed tapering action could intentionally deflate certain asset bubbles while at the same time nudging more participants into an ecosystem that is now much more prepared for their arrival than it was 2, 5, and certainly 10 years ago. Heck, now you can even throw an app on your phone and earn free Bitcoin for walking and playing games.
The Fed is in the business of further enriching its privately owned stakeholders. It's not in the business of making each and every one you happy. Over the next couple of years, while trying to walk a fine line between "fighting inflation"/tapering/politics/etc., the reality is that the Fed needs to help rather than destroy Bitcoin. Helping Bitcoin thrive is what is most likely to help the Fed itself escape another bubble problem by either creating or enhancing a new bubble towards which it can shift more attention and focus.
As to when "the dollar crashes " or "the dollar gets replaced by Bitcoin" . . . we'll leave that for another post. Suffice to say our view is that USD and Bitcoin can and will BOTH thrive for the foreseeable future. When will we know the dollar is toast and losing relevance? A future post will dive into just that.