Bitcoin surged to over $40,000 as a flurry of short-covering intensified a rally apparently sparked by speculation over Amazon.com Inc.’s involvement in the crypto industry.
A job posting from the retail giant seeking an executive to develop the company’s “digital currency and blockchain strategy” stirred questions among analysts over whether the move could eventually lead to Amazon accepting Bitcoin as a method of payment.
As the largest digital token gained on the speculation, investors rushing to cover bearish bets fueled the rally, with the coin up as much as 15% to $39,681 on Monday. More than $950 million of crypto shorts were liquidated on Monday, the most since May 19, according to data from Bybt.com.
Since the Covid outbreak of March 2020, The Federal Reserve entered markets in force, spiking their assets purchases and continually expanding their balance sheet.
Consequently, stock and bond market volatility (as measured by VIX and MOVE) have been repressed.
But commodities are a different story.
Crude oil futures are tracking The Fed’s balance sheet pretty closely while coffee “Arabica” futures have soared since July 17th. On the other hand, lumber futures prices have declined considerably since spiking in early May. Steel rebar prices have risen dramatically since mid-December 2020, a month before Biden’s inauguration as President.
Now, that’s volatility.
Home price growth jumped from 4.28% YoY pre-Covid to 14.59% after Fed intervention.
Ever since the US Dollar went off the gold standard, it is only the good faith and credit of the Federal government with its taxing authority that stands behind it. Ethereum and Bitcoin and also Fiat currencies with no backing. And while Goldman Sachs prefers Ethereum to Bitcoin (as risk-on devaluation bets), “Gold is a value buy” according to Goldman Sachs’ Jeff Currie and his Commodities Research group.
But today it looks a race to the bottom for fiats.
Since May, we have seen both Bitcoin and Ethereum fall from record highs as the US Dollar crawls back.
And while Goldman Sachs prefers Ethereum to Bitcoin (as risk-on devaluation bets), “Gold is a value buy” according to Goldman Sachs’ Jeff Currie and his Commodities Research group.
Banks like JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley are taking a cautious approach as they wrestle with how best to offer their clients access to cryptocurrencies. While several now clear crypto futures, most have largely steered clear of other services, according to a Bloomberg analysis of the offerings from some of the world’s biggest banks. The Basel Committee on Banking Supervision said June 10 that lenders will face the toughest capital requirements for holdings in Bitcoin and other crypto assets.
Cryptos are acting very crypt-like (as in dying) with most of the cryptos down 15% today.
The banks have been quicker to embrace the underlying technology that underpins such digital assets. JPMorgan has been a longtime proponent of Ethereum, the world’s most-used blockchain that uses smart contracts to accomplish blockchain-based tasks that are impossible with Bitcoin.
In one example, JPMorgan is using its private version of Ethereum to conduct overnight repurchase agreements where digitized U.S. Treasury bonds are swapped for JPM Coin, the bank’s version of a digital dollar. It says it’s doing more than $1 billion of such trades a day.
Not surprised that Elizabeth Warren wants to regulate cryptocurrencies.
Here is a chart of various asset prices since the Covid virus struck in March 2020 when The Federal Reserve massively increased their balance and lowered their target rate to 25 basis points.
The Case-Shiller National home price index (HPI) is up 13.2% since Covid and Fed intervention. The Russell 2000 index is up a staggering 123.2% and the MSCI US REIT index is up 79.6%. Commodity prices are up 48.8%.
Notice that before Covid struck and The Fed intervened with a massive increase in M2 Money, commodity prices were falling and the Russell 2000 was pretty flat. Home prices were increasing, but not at a 13.2% clip.
Is this inflation, economic growth and/or a massive asset bubble produced by The Federal Reserve? The economy is growing and Washington DC is doling out money like there is no tomorrow. But if the economy is so hot, why is The Fed holding off on rate increases given that inflation is heating up?
Housing is hot in Russia, Turkey, Portugal and, of course the USA. New Zealand too.
The USA, Canada and Colombia (along with the UK, the EU, Sweden, Norway, Finland and Saudi Arabia) are at zero or near zero. Throw in Australia at 0.05 and Japan at -0.1% and we have the makings of a global bubble.
Inflation may be transitory if Washington DC somehow can’t keep spending and slows down.
Yesterday’s GDP report was great with real GDP growing at a 6.4% annualized pace.
To get 6.4% annualized GDP growth, The Federal Reserve had to print a massive amount of money. Even with a great GDP report (preliminary), M1 money velocity is at a historic low. In other words, the US economy got relatively little for all the money it is printing.
Things improved if we look at the broader definition of money, M2. Again, despite the excellent real GDP report, M2 velocity for Q1 actually declined since The Fed went ballistic printing money. Again, the bang for the buck, so to speak, is near the historic low.
Today’s release of personal income and spending shows that personal consumption expenditure (PCE) rose 28.5% YoY in April. Zowie!!
And the PCE PRICE index grew at 3.58% YoY, the highest since 2008.
The good news is that The Fed is slowing its M2 growth rate YoY. We shall see if Q2 GDP growth slows as well.
Then we have this chart showing the massive expansion of The Fed’s balance sheet and the near-zero Fed Funds effective rate. Fuel for the Veloci(ty)raptors! We will discuss the relationship between bank reserves and money supply when summer class begins on June 21st.
Another troubling chart is average hourly earnings of all employees, year-over-year. That is 0.3% in April and is not a great signal for Q2 GDP.
Then we have CPI growth (aka, inflation) growing at 4.2% YoY, the highest since 2008 and The Great Recession.
We shall see if President Biden’s $6 trillion budget 1) gets through Congress and 2) whether the money passes through to workers.
Lastly, I want to reiterate the decline in purchasing power of the consumer dollar since the creation of The Federal Reserve in December 1913 when the dollar had a base index of $994.2. The index is now at $37.4. That is a 96% loss of consumer purchasing power since The Fed’s creation.
Yes, The Fed’s veloci(ty)raptors are hard at work destroying the US Dollar.