Could impending FED rate cuts stall the crypto bull run? 🤔💹

🎉 Happy New Year’s, Crypto fam! 🚀 Welcome back to another edition of Re:crypto. We've moved on from 2023, but the market is still as dynamic as ever. 📈 Starting off 2024, we're out of the gate like riding a bucking bull. 🐂 The market shot higher on the 1st, only to have Jim Cramer spoil it for everyone by saying, “Bitcoin can’t be killed.” 😅 Additionally, a FUD report suggests that the SEC might deny the Bitcoin Spot ETFs, sending the market down as if we got bucked off that bull we were riding to start the year. 📉

Quick update on the Spot ETF: all signs still point to the ETFs likely being approved. 🤞Most analysts expect a decision by the end of this week, or possibly next week, as the SEC’s deadline for a decision is set for January 10th. If the SEC denies all applications, it doesn’t mean the hopes of a Spot Bitcoin ETF are dead; it just means it’s going to take a little longer. ⏳

There's also news floating around about the mechanism on how the ETF is created. The SEC is pushing for a cash create mechanism over an in-kind mechanism. 🔄 In-kind means you get the actual asset (in this case, Bitcoin), and cash create means it gets converted back to cash. This is seen as a clever way for the SEC or the Government to block you from keeping the Bitcoin. 💼 It's also a way for large banks like JP Morgan Chase to make lots of money processing transactions for the ETF. Black Rock and other entities filing for these ETFs have named JP Morgan as their Authorized Participant (AP), along with Jane Street and many others. An AP purchases the asset for the ETF issuing company, which is legally unable to buy it themselves.

Surprisingly, JP Morgan being listed as an AP is interesting, given CEO Jaimie Dimon's vocal dislike for the asset class. 😬 Dimon even mentioned he would ban the entire industry since the crypto industry is in direct competition with his business, doing it faster and cheaper.

Okay, enough of that! On to today's lesson. Today, I'll be going over why I’m cautious about the Federal Reserve dropping interest rates. 📉 I'll be showing you a bunch of charts and historical data, and it's my first time doing this, so I hope I don’t lose anybody. 📊💡

Todays lesson:

🕒 But first, I want to apologize for getting this out a little late this week. 🙏 This information took longer to gather than anticipated. Now, it's the consensus thought that current financial conditions are tight and have been getting tighter over the last 18 months or so. 📉 Because the Fed has gone on the most aggressive rate-hiking campaign in history to fight inflation, as you can see in the chart below. 📈 This data is from the FRED database, showing the Fed funds rate going back to the 1950s. 📊

Now, if you may have noticed, there are these grey vertical bars. 📉 These bars signify every time we have had a recession in the US economy. If you observe, they tend to follow FED rate hikes. 📈 Even more recently, after the FED starts to lower rates. 🔄 

Now, you're probably thinking, what are the reasons for this? 🤔 Why does this happen when the FED raises rates? 📈 When the FED raises rates too high, you get what's called a yield curve inversion. 🔄 That's when short-term yields are higher than long-term yields. As the chart below shows, the 10-year bond yields minus the 2-year bond yields. When the 2-year bond yields are greater than the 10-year bond yields, they invert, represented by the line on the chart going below the horizontal black line. ⬇️

Now, why is this not a good thing? 🚫 It's because it squeezes banks' margins. 💰 Banks borrow on the short end of the curve and lend at the long end of the curve. So when their margins are squeezed, they start to issue loans only to those they believe will pay them back with high certainty. 🏦 This causes liquidity to dry up and prevents banks from lending to each other, which is not good because our economy is built on debt. 💳🌐

But I want to be clear here, the yield curve inverting in itself is not where the problems are. 📉 It's when they uninvert that usually signals the start of problems. ⚠️ Mainly because you're grinding the gears in the economy, causing too much friction in the system and restricting credit. 💳 This, in turn, causes borrowing costs to go up and discretionary spending to come down. 📉 Add that to inflation, and there's not a lot of extra money flowing into businesses. 💸 This causes GDP to fall, meaning the economy is not doing well. 📉

Now, one interesting thing that I just learned about is GDI or Gross Domestic Income, where GDP is Gross Domestic Product. 🌐 Now, GDP is mostly what is reported on in the mainstream media, but GDI is never mentioned. 🤔 GDP tracks the amount of products sold, whereas GDI tracks the income earned from those products sold. 💰 Historically, it tracks GDP pretty closely, as you can see below. 📊

Looking more closely, you can see there was a divergence in 1989 leading into the 1990s recession, as shown in the chart below. 📈 You can observe GDI in red deviating below GDP in blue and staying below going into and past the recession in 1990. ⬇️📉

You see this happen again in 2000, except it flipped! GDI was above GDP going into the dot com bust. ⬆️💻📉

Then again in 2007, going into the 2008 Great Financial Crisis, this time GDI diverged from GDP lower. ⬇️📈🏦

This brings us to today, in the 4Q of 2022, where the GDI has diverged below GDP and is continuing to stay flatlined as GDP continues to climb. 📉📈 The divergence raises questions about the health of our current economic trajectory. 🤔💼

Now, what does this mean? 🤔 My interpretation of this is that businesses are getting squeezed at the margins, and they are making less money from their products or services. 💼📉 They have to sell more and more just to stay afloat but are unable to raise prices. 📈 Two factors causing the squeeze are increased borrowing costs and inflation. Inflation is starting to come down, so all that's left is higher interest rates. ⬆️💰 But we are also talking back in 2022, so the cost of goods was a lot higher than they are now. 📅 You would think that they would just raise prices, but there's also a point where the consumer will not pay the higher prices and look for cheaper options or forgo it completely. 💲🚫

Which is what the FED has been trying to do: destroy demand. 🔨 Now, the FED is saying they feel they've done enough and they're gonna pull back on rates. 📉 But what happens every time after the FED starts lowering rates after an aggressive rate hike? 🤷‍♂️

IIf you look at the chart below historically, it doesn’t end well for stocks and the economy. 📉 Bellow, you see the Wilshire 5000 total market index laid over the FED funds rate. 📊 The Wilshire 5000 index is meant to represent the total US stock market. 🇺🇸 As the chart shows, the market going down with the FED rate cuts. 📉💸

Not to mention what happens when they uninvert the yield curve while dropping rates. ⬇️ The market goes down every time, some more vicious and dramatic, but there is a correction. 📉 Even in 1998, there was an inversion of the yield curve, and though it didn't have a recession following the curve un-inverting, there was a market correction. 💹 As you can see in the above and below chart, the FED dropped rates, resulting in the market going down. 📉💸

Now, why would the FED want to cut interest rates? 🤔 If everything in the economy is fine and we are humming along with no issues—I mean, unemployment is still at all-time lows, and GDP is supposedly really strong based on the numbers—why intervene? 📈🤷‍♂️

If the consumer is strong enough to absorb higher interest rates, then there's not a problem, right? 💪 The FED actually doesn’t really know if everything is okay—that's what they want you to think. 🤔 Because they don't really know, they just follow what the bond market is telling them. 📈 As you can see below, the FED funds rate following the 2-year treasury rates up and down. 📉💸

So, now that you know the FED just follows what the yields on the 2-year treasury are, where are we at now? 🤔 So we know what they will do next. 📈 For that, we will use the 2 Year Treasury charts from CNBC. 📊

As you can see, the 2-Year Treasury Yields have been falling steadily since October. 📉💰

What does this mean for the markets, especially crypto? 🤔 I'll get to that after I show you what happens to stocks when the 2-year treasury starts to fall and the FED chases it down. 📉 Let's start with the year 2000; the 2-year rolled over and started to head lower in June of 2000. 📅

The Fed didn’t start to cut rates till November of 2000. ⏰📉

What did the markets do when the FED started cutting rates? 📉 We'll use charts from Trading View; this is the SPX chart showing the S&P 500. The S&P had peaked in September and started to roll over. 📈📉

When the FED finally cut rates in November, the S&P spiked up initially and then continued its downward trend. 📈📉 Now, I can’t specify when the FED cut rates because I don’t have that data. It would change what the market did, whether it was the beginning of November or at the end, as the market was falling up till the end of November. 📅 But let's just say it's at the end of November when the FED cut rates. 🤷‍♂️

Now let's take a look at 2007; the 2-year yields started falling in June of 2007. 📉📅

When did the FED start cutting rates? 🤔 The FED was faster on the trigger and cut rates in July of 2007. 📉🏦

What did the market do? 📉 The S&P was already selling off before bottoming when the FED cut rates in July. 📈 Before rallying to get back to all-time highs, which led to, well, you know the rest. 📈💹 The second red arrow shows what eventually happened. ⬇️

Which brings us to 2020. 📅 Now, this was a little different, given that it was influenced by a pandemic, but it still shows what happens when the FED cuts rates. 📉 The 2-year was already falling way back in December of 2018. ⬇️💼

And we were pretty much at 0% by December of 2019, at 0.2280%. ⬇️💰

The FED was cutting rates as early as July 26, 2019. 📉🏦

Then followed the 2-year down to pretty much 0% by March 2, 2020. ⬇️💰

Now, what did the market do? The S&P sold off immediately following the first rate cut in July 2019. 📉📅 In fact, the market was in free fall in December of 2018 when interest rates started to fall. ⬇️💸

The market was already in free fall by March 2020, and the FED cutting rates paused the decline momentarily. 📉⏸️ But you know what happened after that. The market completely nuked. 💥💸

Now, you're probably wondering, that's all nice and all, but what happened to crypto? 🤔 Well, that's what all of this has been leading up to. 🚀 Now, the narrative that everyone keeps saying is that the FED pivot then crypto to the Moon. 🌕 Now, I was a part of this crowd, but I'm now taking a more cautious approach to the FED's eventual pivot and rate cuts.

What did Bitcoin do the last time the FED had to cut rates in a panic? Bitcoin actually rallied when the FED started cutting back in July of 2019. 🚀💰.

But in March 2020, it held up initially, but eventually, nuked. 📉💥 So, while the initial response in July 2019 was positive for Bitcoin, the unprecedented events of March 2020 had a different impact. 📆💣

For a -58% drawdown over 7 days. 📉💔

If you minus the huge wick, then it's still -47%. 📉💔

What about Ethereum? 🤔 Ethereum rallied slightly after the FED’s March 2nd rate cut. 🚀💹

But also met the same fate as Bitcoin, giga nuking down a total of -64%. 💥📉

So, to wrap this all up. 🎁 Do I know what's going to happen? I have no clue. 🤷‍♂️ But I just wanted to present my case as to why I don’t believe that it's up only for crypto when the FED decides to lower rates and lower them drastically. 📉 My belief is there could be a run-up initially, then a massive dump when everyone realizes that everything is not okay. 😬 I know you must be wondering, wouldn’t everyone want to get into Bitcoin because the FED lowering rates is printing money. 💰 I say not necessarily, not immediately. 🚫 That's not going to be the reflex reaction. I feel the reflex reaction is a flee to safer assets like T-bills or other government bonds because this is more recognized and familiar as safe assets, maybe even gold or even cash. 💸 I know there are other analysts saying that there's $2 trillion, that's trillion with a “T,” sitting on the sidelines that is going to need a place to go. 🌐 Now, if the market is falling apart when this money needs to find a new home, I don’t think this will flow into crypto or stocks initially. But when the market bottoms and starts to rocket higher, then I can see a lot of that moving over to the crypto market. 🚀 But not if the economy goes into a major downturn, and I’m not just talking about the US; I’m talking the world economy. 🌍 Because all the central banks around the world were doing and saying the exact same things. Almost as if they are doing this on purpose and everything that they have done over the last 4 years was on purpose. 🤔 But I’ll close with this: I am cautious with the impending rate cuts from the FED. The yield curves are still inverted, and by the FED lowering rates at the short end of the curve, they will uninvert, and that's usually when things start to happen. ⚠️ Like I mentioned before, if the economy is so strong, why even lower rates in the first place? 📉 One more thing I haven’t mentioned is that interest rates are the market's voting tool to tell us what their future growth and inflation expectations of the economy are. And seeing that interest rates have been falling and continue to fall regardless of what the FED does has to be taken as a stark warning of what's to come. ⚠️ Now, I’m not saying go sell everything today; I’m just saying to set your hedges accordingly and pay close attention to what people are doing, not what they are saying. 🤓 With that, I will end it here. I know that this was a lot to take in and digest, so now crypto market news and prices this week.

Phew, there you have it, Re:crypto Fam, my analysis on why you need to stay vigilant during these uncertain times. I will be doing a special edition next week adding more to what I just presented to you today. 🚀 Along with more crypto news and market price analysis. With that, keep on getting on, and we’ll see you next time. 👋🌟