703: Fed Pivot - How Close Is It? Crash on the Horizon
Pivot: The pivot is getting closer. The first major economy to blink was the UK around 15 October when the failed Liz Truss budget led a near meltdown of over leveraged pension funds forcing the Bank of England to start buying UK guilts to try and suppress interest rates.
Fed: But all eye are on the big daddy in the room the US Federal Reserve that controls around 25-35% of the world economy through the US dollar interest rates.
Exported Dollars: From a US centric purely selfish stand-point, the US wants to put a lid on their internal inflation. But they were the ones that exported massive quantities of the US reserve currency all around the world that stimulated the global inflation. The war between Russia and Ukraine exacerbated the inflationary situation for Europe through driving up oil and gas prices for these oil-gas importing nations. The Fed liquidity squeeze having jacked up rates and stopped printing fiat currency has put pressure on all economies around the word. The weakest are starting to buckle under the pressure of higher food and energy prices and massively increasing energy import bills.
ESG Costs: The post COVID environmental ESG costs for producing energy has skyrocketted as supply constraints on oil and gas production have driven energy prices to very high levels particularly for gas prices in Europe. Stifling investment in oil and gas, lambasting and taxing energy companies and making it very challenging for them has dramatically increased the costs of oil and gas, leading to inflation, higher interest rates and will then lead to lower house prices. There will be less GDP per capita - a less efficient overall economy.
Europe: In the next few months in Europe we are likely to see some banks starting to collapse. There could also be runs on banks like there was in 2008. Anyone with savings in the bank might find a bank holiday freezes their savings, then they get a giant haircut like Cyprus did around 2010 during the Euro debt crisis. The UK is more exposed than most because it is so exposed to the financial services sector and has little manufacturing. Any time oil prices rise to $100/bbl European countries start to slow down and go into a debt spiral with countries like Italy, Greece and Spain being particularly exposed since they import all their oil and gas.
UK Problems: The UK is in theory less vulnerable to energy prices because it produces half the oil and gas it consumes, but the UK economy in the last 20 years frankly has not been very well run so this has put pressures on banks and financial institutions particularly as our ties with mainland Europe have been eroded post Brexit. The UK is more isolated and less likely to get any financial support from our European counterparts in the post Brexit days, compared to before the Euro Referendum in 2016. The pound Sterling decline against the dollar and Euro has been marked since mid 2016 when a fast growing economy and strong global presence was curtail with years of infighting and bad feeling towards our partners from the Brexit outcome.
Pivot: The most important global macro economic event will be when the Fed decides to pivot. Meaning they pause further interest rate rises and possibly start to printing currency and/or start buying their own debt/bonds. This will then:
Send the dollar lower
Send cryptocurrency higher
Send gold and silver higher
Send oil and gas prices higher
Send stock markets higher
Send bond yields lower and bond prices higher
Send property prices higher
Send interest rates lower
At the moment, the lack of liquidity, hawkish outlook, high inflation and raising interest rates has been having the opposite effect its:
Sent the dollar higher safe haven
Sent the UK Sterling lower risky asset
Sent cryptocurrency lower high risk assets
Sent gold and silver lower despite their supposed safe haven status as liquidations occur
Sent oil and gas prices lower as less liquidity is available
Sent stock markets lower - as less liquidity is available
Sent bond yields higher and bond prices lower
Sent property prices lower
Sent interest rates higher
Ready to Jump Back In: Until it becomes a lot clearer that the pivot will actually happen, its still risky to jump into this market, because stock prices could still go down a further 30% or more particularly if there is a black swan type event like a large bank collapse, big recession or the war expands from Ukraine to other areas.
Many investors bailed out early 2022 when they saw the writing on the wall before Russia invaded Ukraine. Many others bailed out after - when they saw the interest rates start to rise. There are trillions of dollars sitting on the sidelines waiting to be invested everyone is on coiled springs waiting to jump in. As a hedge, may be it's best to get say 30% into the market, in case things skyrocket. The doomsters will say, be 100% out until its clear there is a pivot. The optimists have already got back into the market.
Another Leg Lower: Our belief is, we have another leg lower, but on a risk adjusted way, it's probably best to be partly into the market now. What we have not seen is a final capitulation event - something that turns everyone off the stock market - something that makes everyone feel depressed about their investments - a period of panic. There could be a small bear market rally waiting for a big crash end 2022 or early 2023. Once a major crash happens - and asset prices drop may be anther 20%, then the Fed will step in as our saviours - and start printing again. They will break something first, then come in as ou saviour. They always over do it on the dovish and the hawkish side - they seem to take historical or current data and never predict the awful outcomes of their policies.
Printing: But as soon as the Fed starts printing again, then stocks and crypto will skyrocket, it will be "back to the races" the City bankers say. The stock market and crypto often front run markets so by the time the recession is confirmed in many countries, stocks and crypto might already be on the rise.
Our top picks for 2023 - though not investment advice - are:
- Solana, Polygon, Ethereum and Bitcoin
- Tesla - EV cars, energy
- Lucid - EV cars - 1010 bhp monsters
- MicroStrategy - Bitcoin proxy
- Gold and silver - precious metals
- Occidental - a solid oil company
As mentioned, our belief is that the Fed are always behind the curve - they are hopeless at predicting when to make policy changes. They were far too aggressive at loosening during the start of COVID, too much money printing and staying at zero interest rates for too long, then they were far late starting to jack up rates, not fast enough, now they will be forces to over tighten - and at some point very close to now, something will break, they will be forced to pivot to prevent a full scale 1930s style depression. They may even get pressure from their trading partners to stop jacking up US rates - because this puts excessive pressure on the currencies of smaller countries and leads to rampant inflation - examples are Argentina, Turkey, Lebanon, Sri Lanka and to a less extent the UK and Eurozone. It will all become clearer in the next 8-10 weeks - watch out! The Fed is just about to mess it up royally!
We hope this special report has been helpful in framing some thoughts and investments.
Enclosed below, just for reference is an interesting cryptocurrency portfolio - our top picks:
1 SOL - Solana
2 BTC - Bitcoin
3 DOGE - Dogecoin (likely to be used by Twitter for payments)
4 ETH - largest layer 1
5 LINK - oracle database
6 UNI - decentralised exchange
7 ATOM - cross operability
8 FLOW - under prices layer 1/2
9 MATIC - Polygon - a winner in the NFT space and metaverse
10 AAVE - database
Others - more speculative
HNT - Helium - global remote wireless internet
VET - Database for supply chain
SUPER - SuperFarm gaming (high risk)
APE - NFT play
CHZ - gaming utility play for NFTs etc
ALGO - Algorand - fast growing network
INJ - Injective protocol
Others - very speculative with huge upsides
ETH2.0 - Proof of Meme network - a hard fork of Ethereum built to support meme coins that retains the ability to mine the coin (massive upside)
Pulse - Pulsechain, latest creation of Richard Hart who built Hex (likely to be available end 2022 for purchase)
MASK - possible payment system for Elon Musk's Twitter project - already up 5x in the last few days
CULT - Cult DAO - a community of crypto investors - supported by B-Root crypto investor
Magic Craft - a Web 3,0 crypt play to earn game