For anyone reading the tea leaves, there were more ominous signs over the weekend that the bear market is far from over. On Sunday, FT.com published an article where the Bank for International Settlements or BIS which is “the bank for the world’s central banks”.
The BIS issued a warning in its annual report that “central banks should not be shy of inflicting short-term pain and even recessions to prevent any move to a persistently high-inflation world” according to the Financial Times. The warning by BIS is a blow to market bulls that have predicted markets may have hit a bottom in prices. The BIS statement should be an exclamation point to many market participants because it comes off the heels of Federal Reserve Chairman Jerome Powell who warned that “getting inflation under control could cause some economic pain but remains his top priority”.
With inflation being top priority at the moment the question remains, how far will the Fed go to bring inflation down at the expense of major destruction to the economy? The danger for Jerome Powell and the Federal Reserve is they risk damaging the economy without bringing down inflation.
Therein lies one of the major challenges for the Fed: their tools are designed mostly to influence the “demand side” versus the “supply side”. How do they exert their influence? By making the cost of money expensive for consumers and businesses alike via interest rate hikes and other tools such as Quantitative Tightening (QT), capital reserve for banks, etc.
The end result is the slowing down of demand for goods and services, assuming equal supply, effectively bringing down prices as businesses slash prices to attract consumers. However, what the Fed tools have little to no effect on the economy and markets is the supply side of the equation. For example, Jerome Powell and the Fed can’t tell Chinese manufacturers to open their factories despite the Chinese government imposing a strict lockdown. Nor can Jerome Powell fly over to Russia and give Vladimir Putin a “piece of his mind” and force him to order him to end the war in the Ukraine and bring Russian troops back home. Also, while the Fed can certainly print more money it can’t “print more oil” by ordering Saudi Arabia to pump more oil to bring down energy inflation.
This is why some market observers are warning we are in danger of entering a prolonged period of stagflation: i.e. where inflation runs hot but economic growth runs cold. Crypto is a macro asset so paying close attention to these developments is critical for many participants. The likelihood that crypto has hit a bottom is probably unlikely. However, that doesn’t mean the crypto market (as well as traditional markets) will not experience bear market rallies in the short-term and even periodically throughout the duration of the current bear market. Even in a bear market there are opportunities.
Disclaimer: This post is for educational purposes only. This is not an endorsement to buy or sell any digital tokens or cryptocurrencies. Please consult your financial advisor before purchasing any digital assets.
