September 20, 2024
Markets Are Not Linear
Dear Subscriber,
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| By Juan Villaverde |
Back in 2022, the Federal Reserve launched one of the most aggressive rate-hiking campaigns in history.
In a matter of months, rates soared from nearly zero to over 5%. The Fed even broke tradition by raising rates by 50 basis points per meeting, rather than the usual 25.
Why?
Because it realized it had been “a bit late” to address inflation, which had been quietly ballooning since 2021 while rates remained near zero.
Crypto markets, of course, bore the brunt of those rapid hikes.
Many analysts now point to that rate-hiking cycle as the main culprit behind the 2022 bear market in crypto.
Fast forward to today, and the general consensus is that if rate hikes were bearish for crypto, then rate cuts must be bullish. Right?
Oh, if only markets were that predictable!
Here’s the nuance that’s often missed: Rate hikes are not the main story investors should be following.
Rather it’s the signal they send to global markets that should be our focus.
In the lead-up to Wednesday’s Federal Open Market Committee meeting, everyone was debating whether the Fed would cut by 50 or 25 basis points.
Is there a huge difference between the two? Not really.
But markets are jittery, and the steady decline in economic indicators throughout 2024 has investors clutching their pearls.
Today, the markets are laser-focused on one thing …
That is, whether this week’s “jumbo” cut — and promises of more where that came from — tells us a recession looms.
When the Fed slashes rates aggressively, it’s a signal it is worried about a downturn. In turn, the market could interpret this as a big, flashing “WARNING: Recession Incoming” sign.
In that case, the big crypto price bump we’ve seen since Wednesday may not necessarily have legs.
Such is the non-linear nature of markets.
Back in 2022, the Fed’s aggressive rate hikes hammered crypto.
But now, a too-aggressive rate-cutting cycle in 2024 could be a bearish signal too. Why?
Because big rate cuts usually mean the economy is teetering on the edge, and when the economy rolls over, it tends to drag all asset classes down with it.
You know where this is heading.
It’s not the interest rate level that really matters. It’s all about global liquidity — the money flowing into the system.
Sadly, central banks have been more obsessed with tweaking interest rates than ensuring enough dollars, euros and yen are circulating.
But here’s the silver lining: We’re starting to see hints of liquidity injections, especially from China. And there are signs the Fed is starting to pump cash as well.
That’s the real catalyst for higher crypto prices—not the interest rate cuts themselves, but the liquidity injections that could follow shortly.
So while the rate cut was less bullish than expected, there’s no reason not to be a crypto bull.
My Crypto Timing Model continues to point to a key cycle low on the U.S. Election Day, Tuesday, Nov. 5.
Until then, near-term corrections can be used as buying opportunities for quality crypto projects.
Long-term investors may even consider strategies such as dollar-cost averaging, which my colleague Marija Matić previously broke down for the crypto market.
And, of course, check in with our next Weiss Crypto Daily for more market updates and highlights.
Best,
Juan
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