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Fed Watch - Bitcoin and Macro


May 11, 2022

Market Mayhem and Calling the Bitcoin Bottom - FED 92
 
Keywords: Hosts: Ansel Lindner and Christian Keroles Listen To This Episode:
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In this episode of the Fed Watch podcast, CK and I, along with the livestream crew, discuss macro developments relevant to bitcoin. Topics include the recent 50 bps rate hike from the Federal Reserve, a CPI preview (recorded live on Tuesday before data release), discussion on why Owner Equivalent Rent is often misunderstood, and wrap with an epic discussion of the bitcoin price. This could be a pivotal episode in the history of Fed Watch, because I’m on the record that bitcoin is “in the neighborhood” of the bottom. This is in stark contrast to the mainstream uber-bearishness in the market right now. I rely heavily on charts in this episode that didn’t always line up during the video. Those charts are below with a basic explanation. You can see the whole slide deck I used here.
 
Fed Watch is a podcast for people interested in central bank current events and how Bitcoin will integrate or replace aspects of the aging financial system. To understand how bitcoin will become global money, we must first understand what’s happening now. Federal Reserve and Economic Numbers for US On this first chart, I point to the Fed’s last two rate hikes on the S&P 500 chart. I wrote in a blog post this week: “What I'm trying to show is that the rate hikes themselves are not the Fed's primary tool. Talking about hiking rates is the primary tool, along with fostering the belief in the magic of the Fed.” Remove those arrows, and try to guess where the announcements were. Same goes for the next chart, gold. Lastly, for this section, we looked at the Bitcoin chart with QE and QT plotted. As you can see, in the era with “No QE”, from 2015 to 2019, Bitcoin experienced a 6000% bull market. This is almost the exact opposite of what one would expected. To summarize this section, Federal Reserve policy has little to do with major swings in the market. Swings come from the unknowable complex ebbs and flows of the market. The Federal Reserve only tries to smooth the edges. CPI Mayhem It’s hard to write a good summary of this part of the podcast, because we were live the day prior to the data dropping.
Year-over-year CPI can be very confusing. This chart looks like inflation in April was measured at 8.3%, when in fact, it was measured at only 0.3% (second chart below). Year-over-year CPI Month-over-month CPI Source: FRED
 
Next topic we cover in the podcast is rent. I very often hear total misunderstandings of the CPI measure on shelter and specifically Owner Equivalent Rent (OER).
For starters, it’s very hard to measure the impact on consumers of increases to housing costs in general. Most people do not move very often. We have 15 or 30 year fixed rate mortgages that are not affected at all by current home prices. Even rental leases are not renewed every month. Contracts typically last a year, sometimes more. Therefore, if a few people pay higher rents in a certain month, that does not affect the average person’s shelter expenses, or the average landlord revenue. Taking current market prices for rentals or homes is a dishonest way to estimate the average cost of housing, yet not doing so is the most often quoted critique of the CPI.
 
Caveat: I’m not saying CPI measures inflation (money printing), it measures an index of prices to maintain your standard of living. Of course, there are many layers of subjectivity in this statistic. Owner Equivalent Rent more accurately estimates changes in housing costs for the average American, smooths out volatility, and separates pure shelter costs from investment value. Bitcoin Price Analysis The rest of the episode is talking about the current bitcoin price action. I start my bullish rant by showing the hash rate chart, and talking about why it is a lagging and confirming indicator. With hash rate at ATHs and consistently growing, that means bitcoin is fairly valued at its current level.
Source: Sipa
The next chart shows the history of bitcoin drawdowns. Recent years have seen shorter, smaller rallies and shorter, smaller drawdowns. This chart suggests that 50% drawdowns are the new normal, instead of 85%.
Source: glassnode
Now, we get into some technical analysis. I concentrate on the Relative Strength Index (RSI) because it is very basic and a fundamental building block of many other indicators. Monthly RSI is at levels that typically signal cycle bottoms. Currently, the monthly is more oversold than the bottom of the corona crash in 2020. Weekly RSI is equally as oversold. It is as low as the bottom of the corona crash in 2020, and before that at the bottom of the bear market in 2018.
 
In summary, my contrarian, bullish argument is; 1) bitcoin is already at historic lows and could bottom at any moment; 2) the global economy is getting worse and bitcoin is counterparty free sound money, it should behave similar to 2015 at the end of QE back then; 3) the Fed will be forced to reverse its narrative in the coming months which could relieve downward pressure on stocks; and 4) bitcoin is closely tied to the US at this point, and the US will weather the coming recession better than most other places.
 
That does it for this week. Thanks to the watchers and listeners. If you enjoy this content please SUBSCRIBE, and REVIEW on iTunes, and SHARE!
 
Written by Ansel Lindner Economist, bitcoin specialist, and author of the Bitcoin Dictionary and the free weekly Bitcoin Fundamentals Report. Find more from Ansel at the bitcoinandmarkets.com