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Growth vs. Value: Skating to Where the Puck Will BeHockey legend Wayne Gretsky famously said: "Skate to where the puck is going to be, not where it has been." This sometimes applies in investing and trading. Towards what object have investors been skating, figuratively speaking? Currently, financial media, fund managers, and commentators have been emphasizing the opportunities in value over growth for several months. And for good reason: Energy, a value / cyclical sector unloved for about a decade, has outperformed every other sector this year by a huge margin. It has risen by approximately 20.5% since January 1, 2022. Even it's uptrend channel could not contain it (although it looks to be consolidating at the moment or perhaps mean-reverting). Increasingly, market participants have been "skating" towards value areas and away from growth for over a year now, as anyone who has been burned by long trades in tech / disruptive innovation knows. For example, a spread chart (also called a ratio chart) of ARKK/SPY shows just how dramatically growth has struggled. ARKK is a well-known US ETF containing high-beta stocks typically categorized as disruptive-innovation stocks, i.e., high growth names. This chart evidences just how much growth has struggled vs. the S&P 500. Notice, though, how this spread chart shows how close to major, long-term support the ratio has moved. Examples abound of high-growth names having been crushed in powerful bear markets in those names. Some of them are even top names with innovative products and services and an impressive record of earnings / sales growth: Square ( NYSE:SQ ) has declined about -68% from all-time highs, Upstart ( NASDAQ:UPST ) fell about -81% from its high to its low in late January 2022, and ( Roku ) dropped about 78% from its peaks. Even large cap tech not gone unscathed: Facebook NASDAQ:FB suffered a nearly -50% decline after a huge earnings / guidance disappointment. But in general, large-cap tech has been the exception in growth until the selloff this year. While growth / tech in general has struggled for months, large-cap tech names such as GOOGL, AAPL, MSFT, and NVDA have outperformed. Even AMZN's sideways move for about a year should be considered outperformance relative to other high-growth names as shown by the ARKK chart above: see the chart below, which is a relative chart of AMZN vs. ARKK, revealing that even with AMZN's lengthy sideways move, it has dramatically outperformed growth / tech names more generally. Markets are in constant flux. So often, just when the little people (retail traders like me) take notice of a powerful new trend or outperformance, it ends. So I'm trying to watch for where markets are moving rather than focusing on where they are. In short, is growth bottoming out relative to value? Here are a few charts to consider. 1. The main weekly chart above (also copied below) is a spread chart showing the ratio of NASDAQ:IJT (small-cap growth) vs. small cap value. Notice how close to major long-term up trendline support the ratio has moved. And the weekly ratio is also right at support at March 2021 and May-June 2021 lows. The RSI for this relative chart also shows that it's oversold to 33.65, a level that only appears in multi-month (and often multi-year) intervals. Even the two RSI lows in 1H 2021 occurred 2 months apart, but this is the exception looking back longer term. 2. Large-cap growth is right at support at a long-term uptrend line. See the weekly spread chart of the ratio between XLK/SPY. AMEX:XLK is a US ETF that is heavily weighted towards large-cap tech. 3. Equal-weighted growth vs. equal-weighted tech RYG/RPV is also very close to long-term upward trendline support. 4. Interest rates are nearing long-term downtrend channel resistance—at the upper line (the actual downtrend line). Interest rates have soared powerfully since mid-2020, and the Federal Reserve has hawkishly signaled coming rate hikes, and market participants have behaved as though rates will keep on going to the moon—by selling tech / growth, which struggle when rates rise b/c of discounting of future cash flows used to value such names. The viewpoint that rates could turn around in the near future seems radical, contrarian and unreasonable. But consider this chart below. Could rates turn around just after a large move just after millions of market participants have been flocking towards value names that outperform in rising-rate environments? Some well-known experts have already taken this view. www.cnbc.com It seems priced into the market right now that the 10-year yield could continue rising, that the interest rates could even breakout higher above long-term downtrend resistance, and that the Fed is likely behind the curve in controlling inflation. It seems consensus that value could continue to outperform long-term, and that growth could break even long-term support levels and continue to plummet. But if this is priced into the market, shouldn't one consider buying what's already priced in? Especially because maybe what is priced into the market will not last. Thinking about where the "puck is going to be" may suggest that tech / growth is making a multi-month or multi-year low or that interest rates are going to pullback in the next few months, allowing tech to thrive again.
NASDAQ:IJT
by SquishTrade
4
What Will Happen to Crypto During a Recession or Stagflation?Inflation in the US markets hit 7.9% last month - while the Federal Reserve was claiming that inflation was "transitory" all of 2021, realizing the US dollar may be in risk of systemic collapse they finally started to consider the possibility of raising interest rates (it's been near 0% for almost a decade now) -- arguably their only weapon to combat inflation at this point. (As a reference, Russia's interest rate jumped to 20%+ after their stock market collapsed after their invasion of Ukraine in late Feb.) Increased interest rates means higher interest rates on loans, which is good for savings but bad for investment since loans become more expensive to do. Experts are predicting that a recession -- possibly a global recession -- is looming in the horizon. What does this mean for crypto? Given that crypto's massive jump in 2020-2021 took most people by surprise there isn't too much reliable data out there but there's a few things we might be able to discern based on a few data points: - Crypto adoption tends to be high in countries with unstable economies; the rankings vary from study to study but adoption rates in Ukraine was high, even before the war. (The US and Russia usually in the top 10.) It's interesting to note that the inflation rate in Ukraine in 2015 was almost 50% -- which makes assets like Bitcoin and other currencies much more appealing. If the major superpowers' economies become unstable, we may start to see similar patterns emerge as a result. (Japan's inflation rate has been very low for decades and their crypto adoption rates are also very low, despite being relatively friendly to the technology itself.) www.statista.com - In terms of raw numbers, India has, by far, the highest number of people who own crypto (~100 million+) but their inflation rate has been climbing gradually in a similar pattern to the US in 2021. (With the officials telling people the same exact story as the Federal Reserve in the US last year -- "don't worry, it already peaked." 😂). In the same vein, most developed countries are in the same boat as the US right now as the disruptions on the global supply chain (due to COVID restrictions) continues to push inflation higher almost everywhere. - In the short/medium term, the proposed solution by the Federal Reserve (a marginal 0.25% interest rate increase in March) isn't very likely to make that much of a difference until the Feds start to get more aggressive with the hikes. (Which they have considered as a possibility, but are wary of announcing since they know it may trigger a downturn in the markets.) Inflation is very likely to continue for the rest of 22', in other words. - As of 20-21' lots of money has been thrown at crypto, DeFi, metaverse, and NFT projects both in business and personal deals -- many of them tied to traditional contracts in USD or fiat. (Although typically ill-advised, some people have been taking out cheap loans for crypto.) As fiat currencies become weaker, these fiat-crypto hybrid contracts are less likely to become common place, but will still make "pure" crypto deals more appealing. We might be able to estimate how much fiat money is tied to crypto assets based on market presence - BTC is the highest, by far, followed by ETH, DOGE, ADA, SHIB, XRP, DOT, SOL, etc. Coins that relied on marketing dollars to stay afloat (since it's currently only spendable in fiat money) are likely to be the most vulnerable. www.globaldata.com - During bull runs like the ones we've seen in 20-21', marketing/hype tends to reign supreme since cheap loans and rising prices tends to create a short-term market for pump-and-dump projects. During recessionary periods, however, crypto projects with more utility is likely to come out ahead. (As Vitalik Buterin says -- he "welcomes" a crypto winter so that more serious projects can finally get the attention that they deserve.) But we don't really know if a weakened USD or fiat as a whole really will lead to a "winter" -- there is also the chance that fiat money will run to crypto as a refuge, pumping up the price as a whole. Traditional finance outsizes crypto by a huge margin, after all -- all it takes is a small % of the former to affect the latter in an exponential way.
Long
by RyanTanaka
3
Bonds Test LowsBonds have smashed through relative lows in the mid 126's to find support at 126'00 which appears to be a technical and psychological level. We have added this as a technical level on the chart. ZN has been on a clear decline falling 3 handles from the 129's to the base of the 126's. The Kovach OBV is on a steady decline, but does appear to be leveling off suggesting we may find support here, or at least that the selloff may ease up. If not, the next target is 125'17. We do appear to be severely oversold and if we see a technical retracement into the bear trend we must break 126'11, where we are currently meeting resistance as confirmed by a red triangle on the KRI. After that, 126'19 and 126'28 are targets.
CBOT:ZN1!Short
by quantguy
The importance of Gold & its current price actionMany people consider gold as an inflation hedge, but the truth is that Gold in the present day is more of hedge against policy errors or catastrophic scenarios in broadly. It is more like insurance which could also appreciate in a scenario where real rates are falling. In case for whatever reason the financial system breaks, then gold is probably one of the best assets to hold, especially in physical form. Russia for example has been adding to its Gold reserves and could potentially add a lot more to it if possible, as we have seen that all these sanctions could do a lot of damage on the FX reserves it is holding abroad. So not only the conflict between Ukraine and Russia 'boosted' the price of gold due to all the issues it might cause to the financial system, but also all the uncertainty on an already stressed out system and all the potential money printing that will ensue shortly, have the potential to really take gold even higher. Gold is currently above its 2011 ATHs and the overall price action is very bullish. XAUUSD has broken above most major levels and has retested every single one of them. When the war broke out, it pumped straight to 1970 and then pulled back below the level it was before the war started. Every single breakout has been retested, as even the recent gap up after the nuclear threats was filled. 1910-1920 was the 2011 ATH and recently was resistance that turned into support, while it was also the weekly Pivot. The market bounced on it perfectly and closed the week with immense strength, right its most recent peak. Although it hasn't fully broken out yet, at least not above its GLD 2011 ATHs or generally its recent 2020 ATHs, the strength and the case for Gold is certainly here. In my next ideas I will mention why Gold isn't potentially the best play on inflation, but this doesn't mean it isn't an asset to hold regardless of how high or low inflation might be. As the final chapter of the 4th turning has begun, Gold could really reach 5000-10000 in the next 3-5 years, as breaking above this massive cup & handle pattern would be massive. 10 years in the making and it could really take gold even higher than that, as the devaluation of fiat escalates rapidly. I wouldn't say bet everything on Gold for sure, and I think in the long run Bitcoin is going to do better, while there is also still a chance we see a massive dollar spike that sends gold anywhere between 1350-1650. So be aware that even gold isn't 'riskless' in this environment. Finally some thoughts and ideas on tokenized gold, is that I find it pretty interesting and a decent bet. PAXG and XAUT had some spikes significantly higher than the actual gold price, something that has happened before too. I am using the price of PAXG on Kraken which has seen many spikes before, which could be seen as a potential way to get yield on your gold. By setting sell orders 5-10% higher than the spot price, just in case there is a spike and you are able to make a decent amount and then rebuy lower. You can even go long or short on various crypto platforms even on weekends, which makes it even easier to trade while news occur on weekends.
FX_IDC:XAUUSDLong
by BitcoinMacro
3
USDJPY Attempting a BreakoutThe price action of the USDJPY is currently attempting a breakout above the 23.6% Fibonacci retracement level at 115.665. Bullish pressure was bolstered earlier today following Fed Chair Jerome Powell's hint at a very likely rate hike by the end of the month . If the breakout is successful, the price action will re-test the previous swing peak at 116.300. If not, a minor pullback to the 38.2 per cent Fibonacci at 115.248 may follow next. The latter is about to converge with the 100-day MA (in blue) and 50-day MA (in green), making it an even stronger support. That is why it is unlikely for a deeper correction to unfold in the near future.
Long
by Trendsharks
Bonds Soar off the Russia/Ukraine ConflictBonds have soared as risk off sentiment prevails as the Ukraine conflict intensifies. Russian forces are bearing down on Kyiv, the capital of Ukraine and civilian casualties are mounting. ZN has blasted off from highs at 127'08, through 127'22, and well into the 128 handle. We have cleared 128'01, the first level in the 128's, and have just broken through 128'10. With such a strong bull impulse, it is difficult not to anticipate a pullback or sideways currection at this point. We are likely to at least range at current levels, between 128'01 and 128'11, with a ceiling at 128'24. If not, expect a retracement to 127'22. Worst case, it is certainly possible that we will retrace the entire move to 127'08 (recall that gold did this just last week).
CBOT:ZN1!
by quantguy
ARKK possibly worth a swing for relief rallyJust tossing this one out there: Cathie Wood's ARKK Innovation ETF is within 1% of completing a round-trip to its pre-pandemic highs. It's also at the bottom of a fairly major parallel channel that it's been forming since February last year. In purely technical terms, it looks poised for a bounce. This is not a long-term hold, especially with Tesla as the top holding. Valuations remain high, and Tesla is being investigated by the SEC. I also wouldn't use call options to play this. The options premiums are super expensive. I'm just thinking buy a few shares for a technical bounce, and maybe sell at the 20-day EMA. Counterintuitively, the Russia-Ukraine crisis is a possible catalyst for a bounce. Forecasters seem to think that conflict in Ukraine will make the Fed more dovish this year, with fewer rate hikes than previously expected. $ARKK has been super sensitive to interest rate expectations, so it might be bullish for the ETF if rate expectations ease a bit. One nice thing about this trade: since we're so close to channel bottom, you can put a stop loss right beneath the channel.
AMEX:ARKKLong
by ChristopherCarrollSmith
2
US 10 YEARS - CONSOLIDATION ?WEEKLY (W1) Looks like a corrective move which should, for the time being, be seen as a consolidation phase or pullback towards the triangle pattern breakout level ! Indeed, looking at the weekly picture, we can identify two important support levels, which are the following : S1 : 1.7960 (Tenkan-Sen) also roughly the 38.2% Fib ret (@ 1.7850 % of the last 1.3360 %-2.0630 % move S2 : 1.6600 (Kijun-Sen and Mid Bollinger Band) and former downtrend line resistance which became the new support Interesting to note that the 61.8% Fibonacci retracement is @ 1.6140 % which roughly coincides with the apex of the triangle pattern ! A breakout of 1.66 would put the focus on the weekly clouds support zone & 78.6 % Fib ret extension @ 1.4920 % On the upside, the triangle technical target remains @ 2.33 % and is still alive. RSI above 50, @ 65.33 LAGGING LINE far above the clouds and KS and TS DAILY (D1) Currently still above the daily Kijun-Sen @ 1.8850 Next support on a Daily basis are the following : S1 : 1.7850 % S2 : 1.7000 % s3 : 1.6140 % (bottom of the daily clouds support area) RSI above 50, @ 51.07 LAGGING LINE far above the clouds and also above both TS and KS CONCLUSION : Watch and monitor very carefully price action on shorter intraday time frames (H4, H1 and 15 minutes) to get clues which will help you to validate or invalidate the implications of the scenarios above mentioned for longer (D1 and W1 time frames) Have a nice trading week. All the best and take care IRONMAN8848 & Jean-Pierre Burki
TVC:US10Y
by Ironman8848
Gold Retraces to the low $1900'sGold rallied tremendously off the Ukraine conflict, hitting yearly highs at the top of the $1900 handle. It looked like we might make a run for $2K, but we topped out at 1977 or so, before a red triangle on the KRI confirmed resistance. After that, we retraced the entire move, spanning $100, where we finally found support at $1876. We were able to find support here, and have since recovered to $1917, where we are currently finding support between $1905 and $1917. It could go either way from here, but after such intense volatility, it is reasonable for the markets to try to find footing and establish value at current levels, between $1905 and $1917. If we retrace further, $1876 is likely to provide support. If we break out again, it is doubtful we will reclaim $1977, but $1925 or $1936 are reasonable targets.
COMEX:GC1!
by quantguy
Safehaven Inflows Benefit GoldGold has steadily rallied benefitting from safehaven inflows from the Ukraine crisis. We appeared to see some trouble with 1895, the last level of the 1800's, but another burst of momentum took us into the 1900 handle. From there, we were even able to make an attempt at higher levels still, but our level at 1917 proved to be a top for now. After that, we retraced back, and are currently meandering around 1900. We are seeing good support from 1895, but watch the vacuum zone below to 1876. If we rally again, 1917 is the level to break before we can achieve higher levels.
COMEX:GC1!Long
by quantguy
Do Rising Interest Rates Really Hurt Stocks?Lots of chatter about rising interest rates and how that will affect stocks. I see no reason to guess. Let's look at the data. The chart shows inflation (orange) US interest rates (blue) and the S&P 500. Correlation between the S&P 500 and interest rates is shown at the bottom. I notice a few things: --Stocks tend to rise slightly more often than they decline while interest rates increase. If you look at the periods where interest rates rose, more often not stocks did too. But this is pretty much a coin flip. --Sometimes interest rates move with stocks, sometimes against (correlation at bottom). --Sometimes stocks fall after the rate increases stop, other times stocks rise. Again a coin flip. This leads to the final conclusion: --Interest rates are a poor indicator for stocks. Trust the price action of the stock index, and don't get bogged down thinking about interest rates as a relevant variable. What am I missing?
SP:SPX
by CoryMitchell-CMT
4
Bonds Attempt to Establish Value Near LowsBonds have picked up from lows, retracing the vacuum zone back to resistance at 126'19, exactly as we had predicted yesterday. The Kovach OBV picked up very slightly, but nowhere near enough to suggest any serious buying momentum. We are seeing resistance from these levels, as anticipated, confirmed by a red triangle on the KRI. It seems likely that ZN may retrace the range again, and find support at 125'17, but if we continue to test higher levels, then 126'18 and 127'01 are the next targets.
CBOT:ZN1!
by quantguy
Bitcoin RSI negative divergenceHello All, Bitcoin having hard time to follow commodities and energies because it is not consumable. Bitcoin is not an inflation hedge instrument. In an inflationary environment, people would like to hedge their wealth by investing gold. Gold became a safe haven for money and seems like a smart move to allocate a portion of gold in a portfolio in inflationary environments. Bitcoin is an interesting, tempting instrument. In my opinion fighting against its value is non sense. Because the technology it offers will be the technology of future; blockchain. BUT Bitcoin can be an investment instrument but not a good instrument of payment. Think about getting paid by Bitcoin.. Bitcoin's value is so fluctuant that even one day your salary would decrease or increase by 20%. That's why Bitcoin will always have haters and lovers. Nowadays, I don't see Bitcoin revaluate to new highs because with Fed's approach to money. If Fed decides to awards dollar holders by increasing rates, we'll probably see new areas to reinvest this instrument. I decided to follow Bitcoin's price actions while approaching to Fed's meetings. Thanks and stay safe.
BITSTAMP:BTCUSDShort
by gorkemaydogan
13
Why You Should Learn To Trade Interest RatesIf you're trading this market right now you have to keep your eye on Interest Rates. Why? Interest Rates have the largest web in the market. They impact every market we trade (even crypto :) What rates are doing not only impact the markets we trade, they impact us in everyday life. In this video I go over the best way to trade interest rates and even if you're not interested in trading interest rates, I go over the best markets to keep up on your quotes to see what rates are doing. Past performance is no guarantee of future results.  Derivatives trading is not suitable for all investors. 
CBOT_MINI:2YY1!Education
by anthonycrudele
27
Inflation, bond yields, the dollar and the Fed! Macro series pt1Part 1 Hello everyone! It's been a few weeks since my last update on the markets, and this one is going to be a very special one. Will go through many different aspects of most major markets, by using both technical and fundamental analysis. It will be an in-depth analysis with lots of charts of several instruments, that have the potential to give us a clear picture of where we are and what is going right now in the global landscape. Because there are so many things I'd like to mention, I've broken the analysis down in different parts, all of which you will be able to find on the links down below. The first and most important pieces of the puzzle are the US Dollar and interest rates, as together they are one of the largest components in essentially every market as they partially determine the liquidity and demand, by ‘setting a price for money’. In 2020 many forecasters predicted that the value of the dollar would collapse and said it was dead as it had lost 10-15% of its value relative to other fiat currencies. Yet they were very wrong in 2021 as the dollar bottomed and started rising along with interest rates, despite inflation skyrocketing in the latter part of the year. At the same time many claimed that the bond market would collapse, yet even though long term US bond yields had been rising from Aug 2020 up until Mar 2021, just to barely get to pre-pandemic levels where bond yields were already really low. Then went sideways until the end of 2021, where they started rising again. During that time short term US bond yields were close to 0 and only started rising at the end of Sep 2021 as inflation started climbing fast and the market started anticipating the Fed raising rates. Therefore, as those yields were rising due to inflation going up, so did the USD which might seem counterintuitive. Why would it go up if it’s losing purchasing power? Well fiat currencies are trading against other fiat currencies and the world is heavily interconnected, so it’s a relative game and inflation wasn’t just US phenomenon. However most importantly it was clear that inflation didn’t come due to the Fed doing QE or lowering rates, but due to several other factors. To name a few 1. Government spending, 2. Credit creation during Covid, 3. Deferred loan/rent payments, 4. Wealth effect due to stocks/housing going up, 5. Supply chain issues, 6. Supply shortages due to labor shortages or businesses closing, 7. Pend up demand, 8. Higher demand for goods than services, as well as demand of new types of goods, and finally and most importantly 9. Issues in the energy sector and particularly due to the fact that many oil and natural gas wells got shut and weren’t reopened. Now you might be thinking ‘wait a second, where does QE fit into all of this?’. Unlike what most people believe about QE or low interest rates, the Fed doesn’t print money. It simply creates reserves which the banks can’t use to buy anything and low interest rates are a sign that the economy is in trouble as banks aren’t willing to lend to anyone other than big institutions. QE isn’t inflationary as it is just an asset swap and the Fed doesn’t determine anything aside from short-term rates. So, what does the Fed actually do? Essentially, they are trying to push banks to lend, yet banks refuse to do so, and in turn the Fed tries to manage expectations. It all boils down to the Fed making people believe they know what they are doing and that they are a powerful institution that can either create or fight inflation. Therefore, in the list of factors there is another one (no. 10) which is that the Fed convinced everyone that they flooded the world with cash and that affected the spending/investing habits of the people that believed them. Yet there was a market that hasn’t really believed them, and that is the bond market. The bond market keeps indicating that we are stuck in a low growth environment where inflation isn’t a long-term issue, just a short term one. It is also telling us that there is too much debt and too many problems, many of which policy makers haven’t been able to solve. Not only that, but many of the policies have been making things worse and worse, and that in 2022 it looks like inflation is probably going to slow down. Hence if markets and the data are telling us inflation isn’t going to be a major issue in 2022 and the sources of inflation are elsewhere, why will the Fed raise rates? Can it raise rates? By how much? What impact will that have on the economy? For the first question there are some pretty clear explanations. One of them is that Fed wants to raise rates is so that people keep believing in that they can control inflation and that they aren’t just there to pump the stock market. Many believe in the Fed put, which is the belief that the Fed doesn’t want to do anything to upset the markets and that if things go bad the Fed will support the stock market because it can. However, another one is that there are also many people who are upset about inflation and want someone to do something. These people demand the Fed to act, as the Fed itself claims to have the tools to fight inflation and that it created the inflation in the first place. Hence at the moment the Fed is stuck between a rock and a hard place, as markets are at ATHs, housing at ATHs, the economy is slowing down and overall is in a pretty bad place, while for most people the costs of living are up by 10-20% compared to 2 years ago. By the Fed’s own mandates and admissions, inflation above 2% is high (CPI was at 7% YoY) and their reasoning for QE + low rates has been their goal of full employment… and as we’ve reached a point where unemployment is very low and there are even labor shortages as many people haven’t gotten back to the labor force since the pandemic begun. This in turn puts pressure on wages and inflation, hence the Fed has to act based on its own ‘goals’. Yet if they act, and especially if they act quickly, the markets could crash and this could have even more implications on the economy. It is pretty clear that they have to walk a fine line, except it’s also pretty much impossible for their actions not to affect the markets which are overleveraged and are showing signs of weakness. On the one hand they need the markets to come down a bit, in order to slow down the wealth effect which affects inflation, as well as prevent excess speculation from going even further… and on the other hand they must not overdo it because the whole system could grind to a halt. Keeping all of the above in mind, it seems pretty hard for the Fed to significantly raise rates. Yesterday when Powell started answering questions, he was pretty hawkish because people aren’t taking the Fed seriously, but there is a long way between them talking about being serious and them actually doing it. Doing both QT and raising rates more than 3 times this year, something that the market seems to be expecting at the moment seems a bit farfetched. Like Alex Gurevich said on his recent appearance on ‘The Market Huddle’ podcast (and I am paraphrasing a bit), the most likely scenario for the Fed is to raise rates once. In his view they could do one and not hike again for a decade. Maybe they get two or more, but 1 is more likely than 2, and 2 are more likely than 3… and so on. He also mentioned that he thinks we in the late stages of this cycle, and I happen to agree with both views. My reasoning is that the inflationary factors mentioned earlier seem to be weakening substantially and slowly giving their place to the disinflationary/deflationary factors like supply chains issues being slowly resolved, less government spending, debt accumulated during the pandemic having to be repaid and so on. Inflation in 2021 was really high, though towards the end of the year several data points started showing that it was slowing down and in 2022 we could have 2-3% inflation or even outright deflation. To sum it all up, the Fed will start raising rates too late, as real rates have already started coming up and could go up even higher inflation starts going lower. The impact this could have on an overleveraged market is substantial, something that could force the Fed to stop raising rates and even stop its talks about reducing its balance sheet… or maybe even force them to go back into cutting rates and doing QE. Up to this point we’ve only talked about rates, but haven’t mentioned anything about the USD and how it could affect entire financial system. This is another very important factor that the Fed needs to be aware off, even if they haven’t been explicit about it recently. The USD is the global reserve currency and most of the world’s debt is denominated in USD, which means that when it goes up relative to other currencies, then debt repayments become harder especially for those who don’t earn USD. At the same time when US interest rates go up AND the USD goes up relative to other currencies, that creates immense pressure on the financial system. That’s because people/institutions have to pay more interest on their loans, while the currency they are earning and need to convert into dollars to repay their debt, is worth less and less. These two factors create some serious deflationary pressures as someone might be forced to cut their spending or even outright sell assets in order to keep up with his obligations. Of course, in a situation where the entire globe is doing well and rates go up because the economies are booming, debt is low, and it just happens that the USD is going up as it happens that the US is doing better than other countries, then the dollar going up isn’t really an issue and neither are rates. However, the dollar going up, especially along with interest rates really is an issue when the world is drowning in debt, economies aren’t doing well, markets are overleveraged and optimized to work well in a low-rate environment. Another thing to keep in mind is that the dollar going up might create a vicious loop by accelerating the sell-off in traditional markets as more and more people sell in order to meet their obligations, or take a risk off stance or to take advantage of higher interest rates or to take advantage of its rise relative to other currencies. At the end of the day the US isn’t an economy that functions in isolation and it isn’t the only one that uses or CREATES dollars. That’s something crucial that many people forget, as even if the US economy is doing great and higher rates might be appropriate for the US, the actions by the Fed could create issues in other parts of the world, which in turn could damage the US economy.
AMEX:SPY
by BitcoinMacro
2