The Fed’s statements versus the market’s expectations for interest rates.
The Macro Picture
That chart above, via Jim Bianco, is probably the most important one to consider with respect to the macro picture now. His Fed statements line reflects recent comments such as that of Philadelphia Fed President Patrick Harker, quoted by WSJ reporter Nick Timiraos below.
Screen captured this since I can’t embed tweets here since Substack took on Twitter.
Some of what’s been happening recently, such as Bitcoin climbing ~80% year-to-date, doesn’t make as much sense if the Fed is going to keep rates higher for longer than the market anticipates. Former Bloomberg reporter and current TD Ameritrade lead anchor Oliver Renick, who called the Bitcoin top in 2021, points out below that its performance has been a function of liquidity, both monetary (low rates) and fiscal (its 2021 peak coincided with all that COVID relief money sloshing around).
Renick sees a chance there for Bitcoin to rise to $45k in the near term, though others think a more modest move below $37k is more likely.
How This Impacts Our Trades
If the Fed is going to keep rates higher for longer, all else equal, that will be bad for the regional banks we’ve bet against. Higher rates mean more deposit flight absent the banks raising the rates they pay on deposits, which would negatively impact their earnings.
Ultimately, it should be bad for crypto too, and the crypto company we’ve bet against, though that company’s shares got a boost recently when Bitcoin broke $30k. There are a couple of other crypto companies with lousy fundamentals that have popped higher on Bitcoin’s recent move as well. Those may be short candidates as Bitcoin starts to look like it’s hitting the top of its range.
If the Fed does blink and lower rates within the next few months, we’ll have to reconsider those trades, but I’d be surprised if they did that, for reasons I explained here. But if they do, we’ll adapt to the new reality and act accordingly.