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Macroeconomic events continue to drive asset prices across all markets. So, what’s the state of macro?
- Interest rates increased 75 bps after the June Federal Reserve meeting
- May year-over-year (YoY) CPI surprised to the upside at 8.6%
Annual Growth in CPI; 2-Year Stacked CPI Growth. (Source: U.S. Bureau of Labor Statistics)
- Quantitative Tightening (QT) began removing liquidity from the economy
- Average U.S. gas prices. surpass $5 at the pump
- Stocks officially enter Bear Market territory (down 20% from highs)
The Fed can only combat inflation by issuing higher interest rates to dampen demand while negatively affecting asset prices at the same time. Not only is the Fed hiking interest rates, they’re doing so at a speed not seen in 50+ years. While the actual Fed Funds rate has only moved 0.75% since March, market expectations have skyrocketed and have now fully priced in ~4.1% a year from now. While these numbers may sound mundane, they have enormous consequences, even for the government. With the U.S. debt at ~$30 trillion, a 4% interest rate means the government will have to pay ~$1.2 trillion just to service the debt it already has! Higher interest rates burden highly indebted countries, and since asset prices have plummeted, there’s less capital gains taxes to collect to help pay for it, meaning the government will have to find a new source of revenue to meet its debt obligations.
Rising Federal Fund Futures Implied Rates show an inversely-correlated relationship with Bitcoin's price. (Source: Twitter) In June, the Fed began Quantitative Tightening (QT) by letting its bond holdings mature to expiration without replacing them, thereby reducing its massive $9 billion balance sheet. This is expected to cause bond yields to rise, making risk assets such as growth stocks and crypto less attractive relative to risk-free bonds. As liquidity is removed throughout the economy, Bitcoin and all crypto could face added selling pressure.
