We witnessed a fast and remarkable rally in crypto and US equities after the last FED meeting when Jerome Powell reiterated that going forward they will be even more data driven as they reached neutral levels of interest rates at 2.25%-2.5% . What this means that the US subsequently hiked FED funds rate into an equilibrium point, when they neither stimulate economic activity, investments, nor they slow down economic growth , allowing the US economy to function normally, in other words economic production and demand are in balance. Add his statement together with last week reading of CPI, when US reported a slowdown in inflation, from 9.1%(June readings) to 8.5 %, below forecast of 8.7% and investors received their dose, just like drug addicts (in our case dose of optimism), hence the rally in the markets.
S&P500 closed the week up 3.26% , while Nasdaq followed closely with 3.08% gains for 5 days.
In the crypto markets we are seeing some serious gains in Ethereum as the merge approaches and altcoins, while stable coins market share are decreasing confirming the rotation of capital from stables and Bitcoin to Ethereum and alts as markets participants are more comfortable with increased risk exposure. In the image below you can see the weekly gains of altcoins that are pretty significant. Ethereum up 74.47% in the last 30 days only, and over 100% since the June 18 lows.
Clearly investors are slightly more optimistic, willing to take more risk in the markets, but the main question remains. Is this the beginning of a new bull market, or just a relief rally in a bear market that screams — Warning, exercise caution!!?? Well let’s look at couple of points at reach a conclusion together.
Going back to neutral rates and why those are keep dropping in the statements of Jerome Powell despite 40 year high inflation.
According Mohamed El-Erian, chief economic adviser to Allianz SE and a Bloomberg Opinion contributor, and Lawrence Summers American economist the Fed statements on reaching neutral levels are nothing more than ‘wishful thinking’ and the ‘zip code for neutral levels are higher’.
Summers recognized that Powell made the same statement in late-2018 of reaching neutral level at 2.25% just as now, but inflation was running below 2%. 2% it’s dramatically lower than 8.5% if I am not mistaken. See the chart below. So why Powell calling rates in line with neutral levels, same as he declared in late 2018 with inflation at 2% , when current inflation its 4x higher then the Fed funds rate. Well in my opinion they were just words to bring calm in the markets before the August holiday, and also to try ease us in into years ahead with higher inflation, where the new norm could be 4–5% yearly inflation rate, instead of 2%.
Fear & Greed Index just barely touched the neutral levels after improving slowly and gradually. Investors are still more inclined to be fearful after the recent deleveraging event and market participants failures, hence the Fear & Greed Index do not confirm the bull market and the rally could be short-lived.
The US employment situation as of July 2022.
Despite unemployment levels sitting at record lows and nonfarm payroll employment rose by 528,000 in July, one little detail could explain this employment situation and proving that labor market it’s not as strong as the FED might want us to think. See image below, out of the 528,000 jobs created -303,000 were part time jobs- therefore suggesting that many people are taking part time jobs in order to keep up with the expenses/rising prices-as business conditions worsen and working hours are less.
The number of persons employed part time for economic reasons increased by 303,000 to
3.9 million in July. This rise reflected an increase in the number of persons whose
hours were cut due to slack work or business condition
FED it’s shouting loud and clear that labor market its extremely strong with record low levels in unemployment, but labor participation rate are 1.5pp below pre-pandemic levels suggesting that people left the workforce not thinking to return ,and left for good. Weaker labor force equals slowing growth in the US economy and potentially higher wages. Clearly not the outcome of what we expect.
Another interesting table that I come across shows that things are completely changed when it comes to tourism. Some countries highlighted below reported 90% to 100% decline in their visitors arrivals in the period of Jan-Jun 2022 compared to Jan-Jun 2019. Countries include China, Thailand, Indonesia, India, US, UK, Mexico, Russia ( well, this decline come to me as unsurprising ). The slowdown in visitors arrivals across the globe could further signal an overall slowdown in global economy and reiterate the upcoming recession in many parts of the world.
To sum it up, I do believe that we are still in bear market and the decline will resume shortly in equities and crypto, probably will coincide with the start of autumn. With more turbulences ahead and a weaker global economy the opportunities will start showing themselves. Times of recession , with enough firepower on the side could produce life changing gains in the upcoming years. That’s not to say that I did not bought more crypto in the recent decline, all I am saying based on the facts, that bulls are not here yet and volatility should return. Let the shopping begin!!
Have a nice Sunday everyone!
Disclaimer: I must warn you that some ideas could be my own biased views, however, I will do my best to provide you with an objective view of the specific topic/subject. I am not a financial advisor, and all articles will have strict educational purposes only.
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