by Dr. Chris Kacher
Jobs report
Friday's jobs report will be important to see if unemployment continues to outpace estimates since this has often occurred shortly before past recessions.
Stealth QE bull market
Fed chief Powell recently said US jobs still look strong and inflation does appear to be cooling as anticipated. He did not specify a September rate cut, but seemed optimistic on recent data, saying “We’re getting kind of what we want to have.”
The head of equities for UBS Global Wealth Management pointed out that the three bullish drivers of the year remain intact: 1) Solid earnings growth, 2) Cooling inflation, 3) Huge money pouring into AI. UBS has said all these three drivers underscore a continuation of the bull market despite valuations being at the high end.
A fourth factor is stealth QE. The US budget deficit is projected to surge to $1.915 trillion in fiscal 2024, exceeding last year’s $1.695 trillion and marking the highest level outside the COVID-19 era.
While some continue to wait for recession, it is mathematically difficult to experience a recession when the government is spending nearly $2 trillion in excess of tax receipts for this year. This represents 7.3% of the 2023 GDP. If bleeding edge technologies such as AI and blockchain dont create sufficient growth, central banks will answer by printing more fiat with the US Federal Reserve leading the way as usual.
Interestingly, US GDP growth fell by 0.1% in 2008 and 2.5% during the Great Financial Crisis. Hypothetically, if another GFC happened this year at a similar severity to the last one, the fall in private economic growth would still not exceed the amount of government spending for this year.
Fiscal and monetary conditions are loose and will continue to be loose. Debasement through the expansion and centralisation of credit allocation through the banking system will continue.
In addition, election years tend to be bullish for markets, and a Trump presidency and Republican congress is also bullish for markets as lower taxes and less government can result in a stronger economy. However, this may mean rates will remain higher for longer which can be temporarily bearish as major averages grind their way higher.
While global liquidity as a measure of total QE has been in a downtrend, Arthur Hayes has mentioned another boost in stealth QE will come from preventing Japanese banks from selling their US Treasury bonds due to steep losses on their books from rates having risen at the fastest pace in history. Using the FIMA repo facility which was created by the Fed, Japanese banks will raise cash via stealth QE courtesy of the US Fed without having to sell their US Treasuries. The Fed will not allow that to happen since yields would then rise given the amount of selling Japanese banks would have to do. So the Fed used its repo facility created back in 2020. As the Fed stated:
In March 2020, during the “dash for cash,” central banks simultaneously sold US Treasuries
and parked the proceeds in overnight repos at the New York Fed. In response, the Fed at the
end of March offered to agree to provide overnight advances to central banks using US
Treasuries held in custody at the New York Fed as collateral at a rate above private repo rates.
Such advances would allow central banks to raise cash without forcing outright sales in an
already strained Treasury market.
This will result in a big wave of stealth-QE from the Fed above and beyond the $2 trillion already being spent this year.Ethereum spot ETFs
The Blackrock narrative on the ETH spot ETFs could move markets. Major retail platforms like Blackrock and Fidelity need a reason to sell the new spot ETFs. The view that everything will be tokenized was born several years ago when the head of the NASDAQ said within five years, all stocks will be tokenized. Blackrock and others may take the view that ETH is the platform from which everything can be tokenized. This positive change in perception could create large inflows into the ETH spot ETFs. Keep in mind that on the day the Bitcoin spot ETFs launched, Bitcoin sold off for the next few weeks due to big selling of the Grayscale GBTC from investors who were no longer locked into their investment. But then Bitcoin found its footing and staged a huge rally where it almost doubled in price.
Bitcoin spot ETFs not impactful?
The spot Bitcoin ETF adds another demand path for Bitcoin. Some major institutions are able to start buying Bitcoin according to their 1% Bitcoin mandate in the third and fourth quarter of this year. That will add to the demand pressure of Bitcoin.
That said, Bitcoin remains a deeply risk-on asset so is sensitive to interest rate probabilities which are influenced by economic data. Keep in mind that the spot ETF is but one bullish factor against a sea of other variables.
Other bullish Bitcoin events
While Bitcoin's selloff has been driven from selling by Bitcoin miners going offline as well as the selling of BTC by major entities such as Germany and Mt. Gox, the Bitcoin halving event remains a bullish event. The strongest miners tend to remain creative beneficiaries of the weak ones that go offline. Halvings are less and less influential due to the numbers but are still bullish events as they halve this particular supply variable each time. But dont try to catch a falling knife. Bitcoin will eventually find its floor, trace out its base, then offer entry points.
Declining global liquidity remains my largest concern though renewed bouts of stealth QE as discussed should help it regain its uptrend. Also know that fiat is always being created which results in its degradation over time. It is just a matter of how fast this occurs. With waves of stealth QE on the way, it seems the devaluation of fiat will continue to accelerate.