In a recent report from Capriole Investments, Charles Edwards examined the Federal Reserve’s ever-growing war chest and its possible implications for the Bitcoin and crypto market. As Bitcoin gears up for its April 2024 halving, a pivotal event that will make it scarcer than gold, understanding the macroeconomic environment becomes critical.
Why Macro is Important for Bitcoin and Crypto
Underlining the inherent interconnectedness of global markets, Edwards argues, “Larger markets drive smaller markets.” This symbiotic relationship is evident in the crypto world, where the performance of altcoins is closely tied to Bitcoin’s movements. Drawing a parallel with traditional markets, Edwards explains, “Bonds drive stocks, stocks drive Bitcoin, and Bitcoin drives altcoins.”
Contrary to the prevailing sentiment of an impending recession in 2023, the stock market defied expectations with a robust rally. This increase was not random, but was driven by the groundbreaking integration of actionable AI, which has the potential to significantly increase GDP. Edwards draws attention to the NAAIM Exposure Index, a barometer of NAAIM managers’ equity exposure. The current position of this index is reminiscent of June and October 2022, both of which marked local lows for the S&P 500.
In addition, AAII sentiment survey results, which are currently moderate, could provide a more compelling buy signal if they tie in with the NAAIM Exposure Index. Another metric that Edwards holds dear is the Put/Call ratio. This ratio provides insight into the relative bullishness or bearishness of market participants in the options market. A recent spike in this ratio suggests that the traditional financial market could be on the cusp of a near-term upward movement, with Bitcoin and crypto following suit.
However, Edwards tempers this optimism with some caution. For a definitive bullish signal, the S&P 500 would need to break through the critical monthly resistance level at 4600 and hold above the critical monthly resistance level. A consistent performance above this threshold would dispel any idea of a passing dead-cat-bounce.
Macro fundamentals: a mixed bag
The broader macroeconomic picture shows a mosaic of different shades. The aggressive tightening cycle, a hallmark of the Fed’s recent monetary policy, continues to be assimilated by markets. With the reservoir of household savings built up during the Corona stimulus years now drying up, a consequent contraction in consumer spending is on the horizon.
Edwards highlights some particularly troubling numbers: a marked decline in manufacturing, an industry whose decline has historically presaged recessions, and consumer spending, which has not only fallen below its 20-year average growth rate, but once again have done so at an alarming rate.
Other red flags in the US economic landscape include a relative rise in the cost of living as income growth, at a paltry 1% per year, lags inflation; an unprecedented $1 trillion credit card debt; escalating delinquency rates; and pressure on equity as house prices fall as a result of falling demand.
But despite these ominous signs, the robust employment data makes any immediate announcement of a recession premature. Edwards emphasizes the importance of the “initial claims” metric as a gauge of unemployment trends.
However, the integration of AI into the workforce is not only a technological marvel, but also a potential economic game changer. Based on personal experience, Edwards observes a 50% increase in productivity with the help of AI. He refers to a statement by Sam Altman, CEO of OpenAI, predicting that in the near future, a single programmer, with tools like ChatGPT and Copilot, could rival the productivity of 20 to 30 programmers today.
The Fed’s war chest
The Federal Reserve is aware of the looming economic uncertainties and has strengthened its defenses. The unprecedented rate hikes, which catapulted interest rates from zero to 5% in just one year, coupled with a contraction in the money supply, have led to the harshest economic conditions on record, weighing heavily on tradefi, Bitcoin and crypto.
The Fed’s two-pronged strategy of high interest rates, which provide room to cut rates during crises, and its recent success in shrinking its balance sheet by as much as $1 trillion, are central to its defensive stance. Edwards speculates on the timing of the next round of QE, suggesting that given the approaching election year, the Fed may be forced to deploy its liquidity arsenal earlier than expected.
Given the current macroeconomic scene and the 90% of rate hikes already factored into the market, according to the CME FedWatch, Edwards argues that the Fed could be forced to inject liquidity in the near future, especially if indicators such as the rising unemployment or declining consumer spending. . What will happen then should be clear to everyone: high-risk assets such as Bitcoin and crypto will rise, which aligns perfectly with the BTC halving.
At the time of writing, BTC was trading at $26,015.
Featured image from iStock, chart from TradingView.com