March 31, 2023
Market Calm: A False Sense of Security
Dear Subscriber,
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| By Juan Villaverde & Alex Benfield |
This week, the financial markets have been quiet and media pundits are just thrilled, believing everything is hunky-dory in the financial world.
This naive normalcy bias might be comforting, but let's not kid ourselves. Just because banks have not failed recently does not mean we are in the clear.
Last Friday, the mighty government figures — Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell, among others — held an emergency meeting to discuss the “stable” banking situation.
Of course, no one knows what was discussed. But it is safe to assume it was mostly symbolic — a show of force to convince the markets that everything is under control.
How reassuring!
Meanwhile, in Europe, Deutsche Bank (DB) is the center of attention again.
Technically bankrupt for years, the bank is kept alive by the ever-so-gracious European Central Bank, currently led by Christine Lagarde. Deutsche Bank's situation matters because it is like a master class on how financial panics unfold.
Once Credit Suisse (CS) got its bailout and was snapped up by UBS Group (UBS), the markets thought, "Hey, why not focus on the next weakest link?"
Enter Deutsche Bank.
If this thrilling saga remains unresolved, another bailout will be needed. Then, it is on to the next problem child … like a game of financial Wack-A-Mole!
This contagion will keep on spreading as long as the high priests of global finance stick to their brilliant strategy of bailing out troubled banks one by one.
Brace yourselves for 2023, the year of the financial roller coaster: Something blows up, regulators whip up a patchwork solution and we enjoy a brief moment of calm before the next thrilling crisis.
A couple weeks of relative quiet is not an indicator that everything is fine. We are just enjoying the eye of the storm.
How do I know this? Behold the chart of the Fed's balance sheet.
Introducing the Fed's new quantitative easing to infinity program, a.k.a. the Bank Term Funding Program. As of last Friday, the Fed pulled a magic trick and reversed two-thirds of its quantitative tightening program in just two weeks!
Some clever folks argue that this can't be "real" Q.E. because the Fed is not actually buying Treasurys, just lending against them. This is a distinction without a difference.
In both cases, the money comes from the same enchanted source: the printing press. When the Fed's balance sheet goes up, it is a printing extravaganza!
And as a result, asset prices soar and people flock to gold, Bitcoin (BTC, “A-”) and other hard assets like they are going out of fashion.
The entire world gets a front-row seat to the undeniable truth that the fiat money system is a beautifully flawed work of art, completely dependent on constant money printing.
Social media gurus have even repurposed the Fed's acronym BTFP as "BUY the F**KING PIVOT," a sarcastic nod to our unshakable faith in the fiat money system.
Fasten your seatbelts, because 2023 is going to be a wake-up call for many as the true state of the global financial system is unveiled.
This is why you need to own hard assets like gold, among others.
And what about market action in the near term? Well, Alex has a bit more to say on that …
Bitcoin Climbs Toward $30,000
The Fed, The Fed, The Fed — Bo Schembechler, or something like that.
Lately, it seems like that is all we have been talking about. But this is because the Fed’s actions are so central to just about everything going on in the world of finance since the start of 2022.
Now, to kick off 2023, we can also add in an extremely aggressive U.S. administration and regulators on an absolute warpath against cryptocurrencies.
For example, just yesterday, we saw Elizabeth Warren’s new campaign statements:
It is apparent that Bitcoin and Ethereum (ETH, Tech/Adoption Grade “B”) are smack-dab in the middle of the government's crosshairs nowadays. With the current banking crisis, high inflation and the new pressure on the petrodollar, the last thing the U.S. government wants is another currency to challenge the USD.
However, despite the U.S. government adding to the selling pressure, BTC is sitting just under yearly highs.
With each passing day, $30,000 is a magnet that seems to be pulling the price of Bitcoin closer and closer.
Although Bitcoin has been steadily climbing upward, most cryptos have been trading in a sideways channel for the last two weeks. And this could continue for a little while longer.
Regardless, the crypto market’s resiliency should be noted. In fact, asset prices have hardly changed over the last two weeks despite a barrage of regulatory news.
Even better, most cryptos are up significantly from the start of the year despite the attacks.
People are catching on that now is a good time to buy and hold Bitcoin, and they are ignoring the distractions coming from the media.
This year has already been a wild ride, but things are likely just getting started and the battle lines are now drawn.
We know which side we stand on. What about you?
Best,
Juan & Alex
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