Statistics Canada released a surprising new batch of inflation data this morning: month-over-month CPI failed to meet market forecasts, declining by 0.3% instead of the anticipated 0.1%. Rather than being an outlier, the other measurements of CPI mostly followed suit, as both year-over-year Trimmed CPI and Median CPI likewise failed to meet expectations. Trimmed CPI’s poor performance, clocking in at a 5.2% increase year-over-year instead of the expected 5.5%, could be interpreted as particularly significant in that it excludes the 40% most volatile prices. This may theoretically set CAD fundamentals apart from USD, in that the Federal Reserve has incentive to keep hiking interest rates due to stubborn core inflation, while the Bank of Canada no longer does. Regardless of your overall Canadian Dollar bias, this is shocking CAD inflation news.
Best Pairs to Trade
While there are multiple ways to take this news, I personally have two takeaways: 1) USD/CAD bullishness now seems more compelling in light of the growing disparity between Canada’s inflation problem and the US’ inflation problem, and 2) the market reaction to this news could present discounted opportunities to buy CAD against less promising currencies. These readings are consistent with current EdgeFinder signals as well, as can be seen with the following pairs:
1) USD/CAD (Receives a 3, or ‘Buy’ Signal)
Price action has just hit a historic resistance zone, with Keltner Channels also indicating overbought conditions. Conservative traders may want to wait for a more optimal buying opportunity, though there may be some breathing room left before hitting the upper trendline and top of this resistance zone.
2) GBP/CAD (Receives a -6, or ‘Strong Sell’ Signal)
Price action is currently retesting the depicted zone as resistance and could potentially serve as an optimal selling point.
3) NZD/CAD (Receives a -4, or ‘Sell’ Signal)
Despite the bearish CAD news and support at 0.79, price action has still been bearish for this pair today. There is also ample room to potentially continue selling off before touching support from the lower trendline.
The past two years have been historic for gold against the US Dollar (XAU/USD), as XAU/USD crossed above the 2000 level for the first time in history in 2020, and then again in early 2022. However, shortly after touching resistance in March this year, the pair began trending downward, recently hitting key support at 1700. With year-over-year inflation still roaring at 8.5% as the US experiences a technical recession (two consecutive quarters of negative GDP growth), it may seem strange that gold, renowned as a perennial safe haven asset, has not been performing well. Now is the perfect time for us to discuss, and ask: is gold's value a myth?
Gold has a revered status among many traders and investors, with some economists and financial gurus even believing gold’s fundamentals guarantee its value as a sort of ultimate security. Some of this is rooted in nostalgia for the gold standard, and the belief that USD only had real value when it was backed by gold. This belief is an instance of a monetary theory called metallism.
However, even those who don’t subscribe to metallism still have reason to be concerned about the risk inherent to today’s fiat currencies, which are backed by governments rather than commodities. Worries about fiat money are often central for gold bulls, as they consider gold to be a perfect alternative to the waning purchasing power of cash. For the sake of evaluating these biases, let’s consider compelling arguments for both gold bullishness and bearishness.
The Bullish Case for Gold
Although there are many reasons to be bullish on gold, there appear to be three primary ones. First, gold is a scarce resource; there is a finite amount of gold in the earth, and unlike certain commodities like lumber and grain, the total amount of gold in existence cannot (practically) be manually increased. This inherently limited supply reinforces gold’s millennia-long precious metal status.
Second, demand for gold has persisted since the earliest recordings of human civilization, only increasing exponentially as the earth’s population grows. While much of consumer spending on gold is still grounded in demand for jewelry and other luxury items, gold is also used across many industries to create computer chips, dental crowns, and more. Much of this demand also comes from gold investors, of which there are many, including the Federal Reserve.
Third, gold is a store of value, retaining purchasing power while a fiat currency’s purchasing power gradually (or rapidly) declines over time. This is because, as governments and central banks coordinate economic growth and expansion, increasing a given country’s money supply accordingly, inflation occurs as consumer demand outpaces the supply of goods and services. Gold is exempt from this process since it cannot be printed ad infinitum, and its purchasing power is bolstered with time as investors seek a hedge against inflation.
The Bearish Case for Gold
There are also many reasons to be skeptical of gold as an investment, including these three. First, while gold is indeed scarce, this does not mean the supply of gold is static, as mining production increases over time. According to Statista, global gold production has even surpassed 3000 metric tons per year several times this past decade, which means increasing availability for consumers.
Second, though there is indeed consistent demand for gold, over 33% of this demand comes from investors, including central banks. While gold is certainly a store of value to some degree, the fact that approximately one-third of spending on gold comes from investors seems troubling, as some of this could be reducible to speculation. This is especially worth considering since central banks are effectively subsidizing the gold markets with additional demand, which may not last.
Third, although fiat currencies and the foreign exchange market lend permanent precariousness to the value of money, XAU/USD’s performance has also been volatile and erratic. While XAU/USD is up 5000% since 1971, it has been a rocky road getting there, with many consecutive years of stagnation and decline as well as jumps. Considering the effect of monetary policy on XAU/USD, as well as dips following historic highs, there is reason to believe gold’s value will continue dropping amid the Fed’s aggressive rate hikes.
Conclusion: Truth, or Fiction?
The bad news is the world has seldom encountered a financial situation like the one we are currently in. Conventional Keynesian wisdom prescribes that governments and central banks spend their way out of recessions, and tax and tighten amid high inflation; however, this doesn’t take supply-side issues into account, or consider these two phenomena occurring simultaneously. Thus, we are in uncharted waters, and it is unclear what effect this will have on XAU/USD.
The good news is we still have recent historical data to work with, and new circumstances don’t render it altogether worthless. On top of this, these bullish and bearish arguments for gold are not mutually exclusive, as both can be helpful regardless of bias. While short-term bearish momentum seems to be more likely amid contractionary monetary policy over the next few years, this doesn’t negate existing demand for gold, and presents myriad buying opportunities for long-term bulls who may look forward to the eventual return of expansionary monetary policy. A1 Trading's EdgeFinder tool is also a helpful way to keeps tabs on XAU/USD sentiment and fundamentals going forward.
• After soaring in value over the course of the pandemic, XAU/USD experienced a sharp bearish reversal in 2022. With such mixed results in a time of high inflation and technical recession, it is worth wondering whether gold’s mythical safe haven status is outdated.
• Gold has a prominent reputation among traders and investors as being perhaps the most promising of all financial assets, destined to appreciate amid the inevitable uncertainty brought by fiat currencies. There are compelling arguments both for, and against, this.
• Three reasons to subscribe to XAU/USD bullishness are 1) gold’s scarcity, 2) persisting demand for gold, and 3) the depreciating value of fiat currencies, including USD.
• Three reasons to subscribe to XAU/USD bearishness are 1) gold’s increased availability, 2) subsidized demand for gold, and 3) XAU/USD’s erratic historical performance.
• Unfortunately, given the experimental nature of today’s monetary systems, it is impossible to know what gold’s value will eventually be. However, when money supplies continue expanding, there is reason to believe gold’s value will grow in correlation.
• As the Federal Reserve pursues monetary policy hawkishness in the face of 8.5% year-over-year US inflation, the XAU/USD downtrend seems likely to continue due to USD strength. Once the end of Fed tightening is near, buying opportunities may abound.
This past year has been distressing for economies and markets around the world. From limited supply amid war, geopolitical tensions, and environmental disasters, to scrambled supply chains post-COVID, to flooded money supplies following unprecedented degrees of economic intervention, high inflation has ravaged many countries, and the US is no exception. Given the erratic market behavior that comes courtesy of economic crises, traders and investors may be hunting for safer securities to keep their money in. For those who are looking for the most stable financial assets available, US Treasuries often make the top of the list. Let’s explore when (and how) to buy Treasuries.
What Are Treasuries?
‘Treasuries’ is an umbrella term that refers to many kinds of debt securities for sale via the US Department of the Treasury. Available in short-term T-Bills, 2-to-10-year T-Notes, and 30-year T-Bonds, they are a type of financial asset that enables investors to effectively lend money to the US federal government for a set duration of time and receive a fixed rate of interest in return. Another prominent kind of Treasury are Treasury Inflation-Protected Securities (TIPS), which indexes your money to the rate of inflation in the US.
Why Purchase Them?
Owning Treasuries comes with a variety of benefits that can seldom be found elsewhere among financial assets. Perhaps the greatest perk is extremely low risk, since your purchase comes with a guaranteed return for those holding until maturation, quite different from most financial markets where traders must fend for themselves in terms of risk management. Another factor that minimizes risk is the financial stability of the US federal government, for which bankruptcy is ostensibly impossible.
Are There Downsides?
While there are unique perks to opting for Treasuries over other securities, there are built-in disadvantages as well. For those planning on holding onto a Treasury until it matures, perhaps the most noteworthy is the additional risk of inflation diminishing one’s real rate of return, since inflation is a dodgy phenomenon that cannot be anticipated perfectly.
Combined with frequently low yields on Treasuries the past few decades, there is always a chance that inflation could completely negate the income’s new purchasing power. Additionally, for those who may want to sell a Treasury before its maturation date, there is a significant degree of ‘interest rate risk’ since the security likely won’t have an identical market value to when it was first purchased.
When Are Yields Highest?
If earning passive income is the goal (rather than simply protecting purchasing power via TIPS), timing matters a great deal for the sake of purchasing Treasuries at an optimal price, i.e., receiving a meaningful yield. Historically, higher Treasury yields often correlate directly with a higher federal funds rate (which is intentional, not coincidental), with the 10-Year T-Note yielding over 10% annualized interest in the late 1970s and early 1980s. The more the Federal Reserve raises interest rates, the higher yields are likely to be; considering how hawkish the Fed has recently become to quell high inflation, substantial yields could be around the corner.
How High Could They Go?
If inflation remains a persistent threat, enough for the Fed to continue hiking interest rates according to their most recent projections, the federal funds rate might be raised to a range between 2.9% and 4.4% in 2023. If the fed funds rate does surpass 4% for the first time in over a decade, this may well correspond with the 10-year Treasury doing the same, presenting lucrative buying opportunities for those interested in waiting out high inflation for a longer-term maturation period. It could even be the case that the Fed must hike rates even more severely, in which case Treasury yields could become far greater than currently expected. Currently, the EdgeFinder market scanner rates the US 10-Year and 30-Year Treasuries as a 5 ('buy') and a 6 ('strong buy'), respectively.
Ways to Buy
Anyone may purchase US Treasuries from the US Treasury Department via the TreasuryDirect website, at recurring auctions you can track throughout the year. However, one may also buy or sell Treasuries through a variety of banks, brokers, and exchange traded funds (ETFs).
• In times of market turmoil amid economic uncertainty, it can be helpful to consider safe securities to invest in. Among these options, US Treasuries historically reign supreme.
• There are several different kinds of Treasuries which have different maturation lengths, including T-Bills, T-Notes, T-Bonds, and TIPS (which are indexed to inflation).
• US Treasuries are debt securities backed by the US federal government. They enable buyers to lend money to the US government in exchange for fixed interest payments.
• There are certain benefits to owning Treasuries that are quite rare for financial assets. Chief among them is a near absence of risk, as fixed interest payments guarantee specific returns and the chances of the US federal government going bankrupt are near-zero.
• However, there are downsides to owning Treasuries too. Perhaps the biggest risk for those holding on until maturation is that the severity of inflation will impact the real rate of return.
• For those who may want to sell a Treasury before maturation, there is ‘interest rate risk’: the Treasury’s new market value may have depreciated from the time it was purchased.
• Thus, to maximize income from Treasuries, it is helpful to wait until Treasury rates are optimal. Historically, the higher the US federal funds rate is, the better Treasury yields will be.
• Depending on how high the Federal Reserve sets the fed funds rate, it is possible that the 10-Year Treasury yield could cross well above an annualized rate of 4% for the first time in over a decade. This rate could potentially far outlast high inflation, bolstering returns.
• While all kinds of Treasuries are available directly through the TreasuryDirect website at recurring auctions, they are also available for purchase through brokers, banks, and ETFs.
At 2 am Eastern Time today, the United Kingdom’s Office for National Statistics reported that annual inflation has officially crossed into the double digits for the first time since 1982. In July, year-over-year CPI in the UK beat expectations by rising 10.1%, while year-over-year Core CPI (which excludes volatile food and energy prices) similarly beat market forecasts by increasing 6.2%. While high inflation of this magnitude is typically a bullish indication for a currency, implying rampant growth which must be slowed through higher interest rates, there is reason to believe that is not the case here. This is primarily because a) the UK’s economy is contracting, and b) the Bank of England has thus far been too timid to be effectively hawkish. With this in mind, let’s discuss the EdgeFinder’s top 4 pairs to sell today, which happen to all be GBP pairs.
This pair makes the top of the bearish list, earning a -8 or ‘strong sell’ signal from the EdgeFinder. This is because the US economy’s fundamentals are better than the UK’s (except for severity in GDP contraction), trader sentiment heavily favors USD, and both trend reading and seasonality (historical performance this month) indicate bearishness.
This pair also earns a ‘strong sell’ signal, or -6. Most variables favor CHF due to the Swiss economy’s resilient performance in contrast to that of the UK. COT data and interest rate divergence are the only categories that don’t support this signal because institutional traders have similar sentiment regarding these currencies, and the Swiss National Bank has not had to confront high inflation.
Earning yet another -6 or ‘strong sell’ signal, all categories but two favor CAD due to Canada’s economic stability and hawkish central bank. Only seasonality favors GBP, along with the UK’s superior unemployment rate (currently 3.8% to Canada’s 4.9%), though Canada’s has been declining.
This pair earns a milder, but still significant, ‘sell’ signal at -5. All listed fundamentals lean in AUD’s favor, while both institutional and retail sentiment remain neutral, with only seasonality supporting GBP.
At 8:30 am Eastern Time today, the Bureau of Labor Statistics reported staggering new US labor market data, revealing a far hotter economy than traders and investors expected. They reported on three different economic indicators, each of which signal roaring US inflation and the likelihood of an even stronger US Dollar in the foreign exchange market. Let’s analyze each of these as we discuss the shocking news for USD.
1) Average Hourly Earnings (Month-over-Month)
Average hourly earnings, i.e., the cost of businesses paying their employees for labor, were expected to rise by 0.3% month-over-month in the US. Instead, they rose by 0.5%, nearly double that expected. More money in the hands of workers creates more opportunities for consumer spending, which indirectly causes higher prices for goods and services as well, contributing to inflation, which is bullish for USD.
2) Non-Farm Employment Change
Non-farm employment change, or non-farm payrolls (NFP), is the net change in hired people across all industries besides farming. Reported monthly, 250,000 net new hires were forecast to be added to the US economy; instead, the real number was 528,000, more than double that expected. Over half a million new workers will mean far more consumer spending, and also confirms that companies currently have enough revenue to afford to hire them. This number is also significantly greater than last month’s 398,000 jobs added, indicating rampant overheating unthwarted by the Fed, which is extremely bullish for USD.
3) New Unemployment Rate
The new unemployment rate in the US was anticipated to be unchanged from last month’s 3.6%. Rather, the unemployment rate surprisingly declined, settling at 3.5%, a pre-pandemic level. This is shocking data amid a technical recession and rapid, substantial interest rate hikes, and signals that recent high inflation rates are nowhere near dealt with. This labor market is holistically hotter than expected and will likely translate into more buying pressure for USD into the near future, benefitting USD bulls.
Best Pairs to Trade
For those who are interested in exploring which currency pairs present the most promising trade opportunities, consider investing in the EdgeFinder, a helpful A1 Trading tool for supplemental analysis. Fellow analyst Frank Cabibi also wrote an illuminating article on several optimal major pair trade setups for USD bulls that you can read here.
Why Sell USD?
While many USD bulls (including myself) think that bullish momentum in the US Dollar Index has a ways to go before buying pressure is exhausted, there is a compelling argument that this is not the case. First, the United States economy officially met the criteria for a technical recession as of Thursday morning: two consecutive quarters of GDP contraction, which is bearish for USD in theory.
Second, Fed Chair Jerome Powell gave ambiguous comments at the FOMC press conference this past Wednesday, which many analysts and traders interpreted as subtly dovish. If true, this would be monumentally bearish for USD, considering US inflation remains at 40-year highs. For those interested in shorting the US Dollar, here are three major pairs that the EdgeFinder, an A1 Trading tool for supplemental analysis, signals as opportunities for selling USD.
1) Sell USD/CHF
With a rating of -6, earning a ‘strong sell’ signal, fundamentals currently favor CHF for the most part, between Switzerland’s 2% unemployment rate and growing economy. The only strike against it is currently COT data, with a higher percentage of institutional traders buying USD rather than CHF.
2) Sell USD/CAD
With a rating of -4, earning a ‘sell’ signal, fundamentals are somewhat mixed for the pair, and are especially unique considering that the US is one of Canada’s primary trading partners. However, retail sentiment, seasonality, and trend reading currently weigh in CAD’s favor.
3) Buy NZD/USD
With a rating of 4, earning a ‘buy’ signal, fundamentals currently favor NZD in light of New Zealand’s 3.2% unemployment rate and smaller economic contraction, as well as their exports. While institutional and retail sentiment don’t favor NZD, seasonality and trend reading do.
How To Monitor USD
For those who are interested in keeping tabs on USD fundamentals and sentiment before trading major pairs, investing in the EdgeFinder will help you keep up with the latest economic data, COT data, and more. Use this link if you would like to purchase the EdgeFinder, or perhaps try it out for free.
GBPUSD reached a new two-year low today upon falling beneath 1.19 support yet again, the second time since last week. These lows are due in part to USD strength after Friday’s strong Non-Farm Payroll data revealed over 100,000 more new US jobs than were expected; as traders anxiously await Wednesday’s new CPI numbers, anticipation for red-hot US inflation grows. However, much of GBPUSD’s bearish momentum is due to the Pound itself, and unusual, pessimistic circumstances that the UK’s economy is facing. Let’s explore what these conditions are as we issue a warning: how doomed is GBP?
1) Resignations & Other Chaos
On July 7th, a Thursday morning, UK Prime Minister Boris Johnson resigned as leader of the Conservative Party. His stepping down came amid an unexpected mass resignation of over fifty Conservative members of parliament (MPs), due to disappointment in party leadership over a slew of scandals. It is worth noting that while Johnson has resigned as head of his party, he intends to remain Prime Minister over the next few months, until the governing Conservative Party elects a new leader to replace him. These events have aided in throwing Parliament into disarray, and will certainly not improve its economic problem-solving efficacy, nor any sentiment adjacent to it.
While political resignations of this magnitude would be inconvenient for any country to experience, this is especially difficult for the UK, since post-Brexit trade deals are still either in their infancy or have yet to be negotiated. Since 2020, when Brexit took effect and the UK’s trade to GDP ratio declined by 8.31% (from 63.4% to 55.09%), trade statistics have been volatile and tricky to analyze, especially in light of post-COVID supply chain issues. According to the UK’s Office for National Statistics, “It continues to be difficult to assess the extent to which trade movements reflect short-term trade disruption or longer-term supply chain adjustments.”
2) A Reluctant Bank of England
The UK’s annual inflation rate hit a staggering 9.1% in May, the highest among the G7 countries. In theory this should be bullish for GBP, because higher inflation implies a growing economy and serves as an antecedent to rate hikes, which are central bank attempts to stabilize prices. However, despite the Bank of England (BoE), the UK’s central bank, warning that annual inflation could reach 11% in the coming months, they lag significantly behind the US’ Federal Reserve in terms of hawkish aggression. They have thus far only resorted to 25 basis point rate hikes within the past year, with their target interest rate currently at 1.25%; this slow pace is nearly as tepid as tightening monetary policy can be. This hesitancy to stamp out UK hyperinflation is extremely bearish for GBP.
3) A Rising Unemployment Rate
The UK’s unemployment rate recently ticked up to 3.8%. While rising unemployment is a bad sign for the performance of any country’s economy, this is particularly problematic for the UK and the Bank of England for two reasons. First, considering that the BoE’s target interest rate is a relatively low 1.25% while inflation is at 40-year highs, for unemployment to already be increasing is discouraging. This indicates fragility in the UK’s labor market, and by extension their economy, which likely contributes to the BoE being wary of contractionary monetary policy. Second, if the UK labor market continues to be acutely sensitive to a cooling economy, this joblessness might especially aid in slowing consumer spending, reducing the overall need for BoE intervention via rate hikes (unless stagflation surfaces).
4) Bearish Institutional Sentiment
According to recent Commitments of Traders (COT) data, GBP clocks in as the third most shorted COT asset, with 70.75% of all institutional traders selling the Pound. This bearishness is a significant factor in creating GBP selling pressure, since much of forex price action is generated by institutional activity, due to the sheer scale of their purchases and sales.
What Happens Next?
For now, fundamentals for GBP appear rather bleak despite high inflation, and COT data reflects this. However, there is a chance that this hyperinflation in the UK could eventually force the BoE’s hand, prompting them to eventually lean into hawkishness to prevent catastrophic overheating. While this pivot could be around the corner, along with newfound GBP bullish momentum, traders would be wise to not assume this is the case until there are clear signs from the BoE. Unless this happens, GBP seems primed for continued selling.
Best Pairs to Trade
While GBPUSD has received a ‘strong sell’ signal from the EdgeFinder, an A1 Trading tool for supplemental trading analysis, there are many other GBP pairs potentially worth trading too. Such pairs include GBPCAD, which likewise receives a ‘strong sell’ signal, as well as GBPAUD and GBPNZD, which both receive ‘sell’ signals. Along with GBPUSD, these four pairs all rank in the EdgeFinder’s top eight pairs worth selling.
Demand for USD continues to pick up steam as the US Dollar Index (DXY) jumped above the 106 level today, reaching highs not seen since 2002. Today’s USD buying pressure coincides with increasing demand for Treasuries and decreasing demand for stocks; the 10-Year Treasury yield has hit 2.81% intraday, while the Dow Jones Industrial Average has dropped 700 points intraday. Many traders may be wondering how long this bullish run will last for USD, and whether it is still worth hopping on the bandwagon. Will the Federal Reserve continue its recent, historic decent into hawkishness, or will rate hikes and US price increases subside? This leads us to a key question that ought to be explored: just how bad is US inflation?
Insufficient Inflation Proxy
Whenever discourse about inflation involves specific inflation rates, such as the 1% month-over-month US inflation recorded in May, we are not actually referencing inflation itself, per se. This is because real inflation is quite nebulous; markets are extremely complex and organic by design, rendering a perfect gauging of price increases within a whole country practically impossible. This explains why there are so many existing measurements of inflation, such as the Consumer Price Index (CPI), Personal Consumption Expenditures (PCE) Price Index, Producer Price Index (PPI), and more: because no one such measurement is completely reliable.
This is helpful to consider when addressing the shortcomings of CPI, widely considered to be a proxy for inflation. CPI in the US, recorded by the Bureau of Labor Statistics (BLS), is why we say that annual inflation recently hit 8.6%, and hovers at 40-year highs. However, many are unaware that the way the BLS calculates CPI changed in 1983. According to the Economist, writing about research conducted by Marijn Bolhuis, Judd Cramer, and Larry Summers, CPI changes made in light of housing market volatility have ‘distorted’ historical US inflation data. Apparently, adjusting for these changes in calculation, the stagflation of the early 1980s is significantly closer to today’s inflation highs than historical charts reflect (read more here). Unfortunately, this means that today’s hyperinflation is likely even more significant than is recognized.
Daunting Historical Data
Considering how contemporary hyperinflation in the US is closer to historical highs than current CPI data indicates, this presents the Federal Reserve with an even tougher challenge than previously thought. While the Fed has recently shown that they are willing to resort to unusually big rate hikes in eager attempts to slow down hyperinflation, the current federal funds rate has still not even reached 2% yet. By contrast, the stagflation encountered in the late 1970s and early 1980s warranted a far more severe response from the Federal Reserve, with a target interest rate frequently hovering in the double digits, even hitting 20% in 1980.
While today’s Federal Reserve is likewise pursuing tighter monetary policy, these two variations of hawkishness are apples and oranges. A 2% interest rate is a far cry from 20% no matter how you justify it, and considering that rate hikes are still the Fed’s primary tool for stopping a hyperinflation problem that more and more closely resembles that of decades past, the cooling effort may have only just begun. While today’s inflation debacle is certainly not identical to that of 40 years ago (with such variables as significantly higher levels of consumer, business, and government debt possibly increasing rate hike effectiveness), they are far from being dissimilar.
Impact of Globalization
Another significant factor contributing to persisting hyperinflation in the US is globalization. This is because of the frequency with which the US economy indulges in gigantic trade deficits, relying on international supply for the sake of ostensibly cheaper goods, services, and labor. These supposed benefits can exacerbate higher prices in the US when hyperinflation is a global problem, as it is today. The Federal Reserve may be able to create lower demand within the US, indirectly generating lower prices and slower price increases, but their influence over rising import costs is lesser.
For example, while the surging value of USD against other currencies has thus far protected US consumers from the full brunt of import price increases, global supply chain issues have nonetheless left the US vulnerable to sharp rises in food and energy prices. These are particularly difficult dimensions of inflation for the Federal Reserve to contend with, since Chair Jerome Powell cannot hope to finagle monetary policy to increase gas and grain supply or soften Putin’s heart. These worldwide supply problems will likely mean more Fed hawkishness, not less, as these near-ubiquitous conditions dull the effect of rate hikes in the US.
The Fate of USD
The USD bullish run likely won’t last forever. Even in 1985, just after the DXY peaked above the 160 level, price action began to plummet, all the way down to the 85 support zone by 1987. However, considering that the global economy is still deep in the throes of supply crises, wartime concerns with corresponding sanctions, and the aftereffects of unprecedented emergency expansionary monetary policy, the hyperinflation problem is likely far from resolved. Considering that USD continued to soar with inflation in the late 70s/early 80s, in spite of increasing unemployment and periodic contractions in GDP, there seems to be a high probability that USD and US inflation will continue their climb into the near future.
This morning US investors were greeted to yet another unwelcome, though perhaps not unexpected, decline in the stock market. At the time of writing, the Dow Jones Industrial Average has slid over 300 points today, or over 1%, after recovering slightly from dropping over 500 points earlier this morning. The Nasdaq and S&P 500 have likewise dropped over 1% intraday. While these events are disappointing in themselves, they are part of a recent disturbing downtrend of significant proportions, including a brief dip into bear market territory and the worst performing first half for the S&P 500 in fifty years. Unfortunately, there only appear to be several possible paths forward, with none of them favorable to stock market bulls. Let’s explore what this means for traders and investors as we issue a warning: stock market looking bleak.
Path #1: Selloff by Further Rate Hikes
One likely possibility for the US economy is that the Federal Reserve continues implementing further rate hikes to curb hyperinflation. This seems quite plausible for three reasons: a) high inflation in the US has thus far persisted, with the most recent CPI data for May reflecting a 1% increase in inflation month-over-month, and an 8.6% increase year-over-year; b) historically, high inflation seems likely to continue, considering cooling the similarly overheated US economy forty years ago required double-digit target interest rates; c) Jerome Powell, Chair of the Federal Reserve, has already signaled that the Fed is willing to continue rate hikes as necessary, perhaps even resorting to more 75 basis point ones if needed.
If this comes to fruition, it would likely be bearish for the stock market since the Fed’s past several aggressive moves have ultimately prompted increased selling pressure for stocks. The Fed’s hawkishness particularly affects the stock market because its recent highs were due in large part to COVID-era dovish monetary policy, which shareholders ostensibly can’t rely on anymore.
Path #2: Selloff by Impending Recession
Another plausible possibility for the US economy is that it continues its descent into full-blown recession. Such features include recurring contractions in gross domestic product, higher unemployment rates, and lower consumer spending from the lack of work or decent income. This would likewise be a disaster for the stock market, since its performance is often interpreted as, and anticipated to be, a proxy for the health of the US economy. Low consumer spending equates to less money spent purchasing goods and services from businesses, as well as dwindling confidence and spare capital from potential buyers, sending share prices lower and forcing even more layoffs.
While a recession can theoretically cause low inflation via lower demand, and thus no more need for further interest rate hikes, the stock market would nonetheless be caught in the crossfire. While many economists anticipate recession being likely, if not imminent, even the Federal Reserve acknowledges the risks as they forecast higher unemployment and slower economic growth as unfortunate sacrifices for having stopped hyperinflation via contractionary monetary policy. The US stock market would thus be a central casualty if a recession is induced.
Path #3: Selloff by Stagflation
One particularly disturbing possibility for the US economy is the chance of stagflation, a nightmarish fusion of both recession and hyperinflation. This would entail most aspects of both paths 1 and 2 playing out simultaneously: economic activity would contract as consumers and businesses lose money in a vicious cycle, while prices remain unusually high, exacerbating the effects of recession. This unfortunately seems possible in the US because of how current global supply chain bottlenecks are contributing to inflation by restricting supply, causing the price of oil and other commodities to soar. Thus, there is a significant chance that this tragic phenomenon could occur, which would be doubly disastrous for the stock market.
The Bad News
Unfortunately, it is difficult to imagine a probable scenario in which the US stock market doesn’t plunge deeper into selling pressure. Continued bearishness over the next few years seems incredibly likely regardless of what exact problems deal these next few blows to the US economy. Thus, for any traders who are short-term stock market bulls, please know that the chances of a prolonged, near-future rally for equities seem slim. The US is no outlier, either; the global economy is currently afflicted with these same issues. We will have to weather this economic storm altogether.
Some Good News
However, for those who are long-term investors, any stock market selloffs can be understood as optimal buying opportunities. This is because the US economy, like other market or mixed economies, experiences business cycles: periods of expansion, followed by contraction, rinse and repeat. Due to the US’ abundance of natural resources, huge population, international influence, and more, the US economy is incredibly resilient and able to rebound from recession long-term.
This means that even if fundamentals don’t currently look good for the stock market, they are still promising through the decades, which net favors long-term shareholders and bulls. So long as investors stick to a thoroughly diversified portfolio, investing regularly in historically reliable funds such as index funds and other trustworthy ETFs, and abstain from premature selling due to worries and disappointment, bear markets present bargains for future wealth building.
As the value of a bitcoin continues to depreciate this week, currently holding above the $20,000 support level after having fallen to nearly $18,000 on June 19th, it is worth reflecting on the cryptocurrency’s performance. Certain questions come to mind: has it lived up to investor and user expectations? Is it destined for endless cycles of volatile buying pressure and selling pressure? Is it worth buying these dips, or is it just a pyramid scheme as many economists have claimed? Is it a true alternative to fiat money as its mysterious inventor, Satoshi Nakamoto, ostensibly hoped it would be? Let’s explore these concerns, and the merits of Bitcoin, as we ask the central question: is Bitcoin worth buying now?
Supposed Benefits of Bitcoin
According to Bitcoin apologists, there are myriad benefits that warrant use of, and investment in, this cryptocurrency. Chief among them is its ‘decentralized’ status: rather than being issued, regulated, and influenced by a central bank and government, as is the case with fiat currencies, Bitcoin is liberated from these authorities by means of a blockchain. The blockchain is essentially a decentralized data storage system that is operated and shared via computer network, perfectly tracking all transactions and ‘mining’ of new bitcoins.
This system enables Bitcoin users and investors to circumvent traditional bureaucratic and unreliable institutions such as banks and the aforementioned authorities by means of distributed ledgers, which can’t be tampered with. Other such benefits that follow from this include scarcity (there are a finite number of bitcoins to be mined, with no option for bitcoin-printing ad infinitum), privacy (the blockchain does not track your identity, credit score, etc.), simplicity (there is no need to fill out piles of paperwork for hefty transactions or pay clusters of fees to third-party institutions), and security (because it is entirely virtual, it cannot be stolen off your person, nor can Bitcoin’s blockchain be hacked or modified retroactively). For more information on supposed benefits, read here.
Criticisms of These Claims
Unfortunately, the past couple years in the financial markets have revealed an unpleasant truth: Bitcoin is apparently not nearly as decentralized as it intends to be. Even with no Bitcoin-specific central bank affecting its quantity or value via monetary policy, the value of a bitcoin is nonetheless vulnerable to the decisions of central banks worldwide.
As central banks around the world pulled out all the stops to stimulate their respective countries’ economies during COVID-induced slowdowns, even engaging in quantitative easing en masse to artificially promote lending and buying, Bitcoin’s value soared accordingly. Likewise, as many central banks have begun interest rate hikes and implementing quantitative tightening to quell near-ubiquitous hyperinflation, Bitcoin’s value has plummeted as investors flee risk assets. Thus, both Bitcoin’s all-time high of nearly $69,000 per coin in the fall of 2021, as well as its current drop down to the $20,000 zone, are relatively synchronized with global central bank efforts, particularly those of the US’ Federal Reserve. This behavior strongly indicates that Bitcoin’s price action is indirectly influenced by monetary policy after all, regardless of an innovative blockchain. After all, central banks exist to help control markets, not currencies alone.
Likewise, many of the other alleged perks of Bitcoin are less enticing than they appear at face-value. Regarding its scarcity, a limited supply of anything is not enough to guarantee it has a store of value, especially if demand for it is volatile. Regarding privacy, this may grant a user some comfort, but it is not too helpful here; surveillance states still exist, and you cannot approach the blockchain about refinancing a mortgage. Regarding simplicity, these features can also be interpreted as bugs: easy, peer-to-peer transactions of this kind are a scammer’s dream, and what you avoid paying in fees you might pay exponentially in unrealized/realized losses. Regarding security, these benefits are not particularly special; many consumers don’t carry physical cash around anymore, and banks’ mutable records can enable them to better protect customers from theft and mishaps, even retroactively.
Why It’s Worth Something
Nonetheless, despite all these legitimate concerns and chaotic volatility, Bitcoin is still valuable. How can we tell? Because its price isn’t at zero. This may seem silly, but it is true. For as long as demand for Bitcoin exists, it will always be worth something. It only ought to be recognized that this value is primarily the result of speculation, not fundamentals.
Though Bitcoin’s value will likely continue to depreciate as interest rates rise, consumer spending slows, and the novelty of cryptocurrency wears off in the face of disappointing losses, this is likely not the end of its story. Even as the utopian mythology and bizarre religious language surrounding the crypto movement (hopefully) fade, Bitcoin has historically proven itself as a viable way to make money, if you accept the inherent risk. After all, Bitcoin’s value is contingent upon the desire of institutions and regular Joes to make a quick buck, an intention pervasive throughout most of human history. To expect the value of a bitcoin to soon hit zero seems akin to expecting most casinos to close up shop soon.
How to Trade Safely
The notion of trading Bitcoin safely is a bit of an oxymoron, considering that Bitcoin is arguably one of the most unsafe assets available to own. However, with careful risk management, this is not an issue. Here is my personal approach to trading Bitcoin: 1) Keep your position size small enough that no actual damage can be done to your account, i.e., only purchase what you would feel completely comfortable losing. 2) Opt for holding a position for months or a few years as opposed to day trading, short-term swing trading, or investing. With both day and short-term swing trading, you risk missing out on the longer-term climbs, whereas investing should be reserved for trustworthy securities that have fundamentals which are promising decades down the road. 3) Have fun; at its best, trading Bitcoin has more in common with playing a game than making meaningful financial decisions.