What’S going on everyone, my name is nicholas merton here at dated ash and today is may 16th of 2022. Well folks, i hope you’re having a fantastic day wherever you are, and in today’s video i want to spend some time to go macro. I want to get a big picture view of what the federal reserve is really doing right now, and why is it important to follow what the federal reserve is doing and how it impacts cryptocurrencies? I know a lot of you are concerned about the state of the market here, even though we’ve rebounded quite a strong amount here from the lows at 25. 500. All the way up here towards 31 000
A small dip here today, but i really want to focus on the big picture view. What do we need to know about in order to understand where cryptocurrencies might be going? We got lots to discuss in today’s video if you guys enjoyed, consider dropping a thumbs up and let’s go ahead and kick things off here now. I hope you guys will stay with me today, because we got a lot to dive into first off before we can even talk about what this is going to mean for cryptocurrency markets. We need to understand, what’s happening and why it’s happening, whether it be inflation, the federal reserve’s impact on monetary policy, all these different various topics that will lead us towards our answer, or at least a few possible outcomes as to what could happen for krypto. And then i can dive into my opinion a little bit now. Let’S go ahead and first talk about the problem here. The problem is something separate from cryptocurrencies: it is what’s going on in the global economy when it comes to the pressure on price, and that is, inflation, inflation of everyday goods and services getting more and more expensive inflation is when we’re generally seeing an increase in the Cost of our standard of living, whether that be living expenses such as our home cost of groceries transportation costs to get from work to the places we need to go back to home. All the things you can think about are getting more expensive right now and according to the cpi, in this case, or the u.s inflation rate, again all the while people will debate about this. It could be more sometimes people say it’s overstated. Overall, we’re generally seeing heightened measures here of inflation, the likes which we haven’t seen in decades. We haven’t seen this since the 1970s. This has been really two decades in the making due to mismanagement of fed policy. We’Ll talk about that a little bit here as we go throughout the video, but overall the cost of living is getting out of control here and on an annualized basis. The cost of living has generally increased by about 8.2 percent and depending on how you live or whether or not you’re buying a home or whatever it might be, maybe you’re paying rent in a certain city. It could be even heavier for you, but this is what the federal reserve and a lot of the major committees across the world are deeming is the general increase over the last year and as we can see as it takes up over time. This is the annualized rate, so inflation, which has usually remained within this two percent to kind of zero percent range here for the last few years, has now spiked up into uh really kind of volatile territory starting into parabolic territory. Here, where we can start to feel the pressure in the economy and again as emphasized this is at a 40-year high here, even though over the past month, we did see a bit of a rollback here in the annualized inflation rate, still on an annualized basis. We are hanging around that 40-year high range that we haven’t seen in multiple decades since back in the 1980s. Now, what we’ve seen here is the federal reserve stating that there will be more pain or some pain to come with inflation in the economy, because the federal reserve is in a bit of a corner here right. We understand that there’s this inflation, the economy, but we need to understand how we really got here. It has to do with the fed and federal reserve is also going to play into the end of inflation. It is going to have to effectively tame inflation. We’Ll talk about this as we go throughout the video here, the fed’s hand is being played a little bit here and the reason why is because all the while we’ve been seeing here over the past few decades, you know significant rallies in u.s equities, whether it be Uh, you know indices like the nasdaq uh, for example, the s p, 500, or even assets like bitcoin, which have made really significant rallies. At the same time, they’ve been going through pretty stark corrections here over the past half a year. You can see this here, for example, and equities really, as we started off the beginning of the year here in 2020, uh, the s p, 500 down 20 percent, the nasdaq down 31
65 and bitcoin sends back in november of 2021, going through two stark: nearly 50 corrections already after going through its 55 correction back here in may of 2021. So really bitcoin has been neutral here effectively from where it started towards the tail end of 2020. In regards to its price, and we can see that equities again fading out pretty much the same level of gains here coming back here towards the beginning of 2021.
Technology companies coming all the way back to where they were here in august of 2020 or october of 2020 right, so the more speculative, more high growth equities, starting to feel a bit of the pain here. Why is it well? It has to do with the fact here. The federal reserve is starting to cut back on quantitative easing, and, on top of that, it’s starting to raise interest rates now, first off before we even dive into the numbers talk about how severe the federal reserve is getting on reversing its course and really what all These things mean we need to first understand effectively what quantitative easing is, because this is the really big topic here along with that interest rates, do play a role, and we will talk about that. But it’s important to understand how big of a tool quantitative easing has become and it’s stimulating in this case financial assets and as some people would argue, economic growth, but i’ll go ahead and hint to some flaws about that later on so first off, let’s go ahead To the beginning of the slides here, quantitative easing is where central banks will go out towards buying financial assets, usually buying up bonds or u.s treasuries. In the case of the united states, right government, debt and asset-backed securities, things like the mortgage-backed securities that caused a lot of the pain back in 2008 increasing their price over time. So what the federal reserve is doing is they’re not just handing out money – and this is a big misconception – they’re not only giving money to commercial banks, they are doing this. They are providing liquidity at an interest rate, but on top of that they are buying off assets from other participants on the market right they are taking off effectively government debt, so governments now have cash to fund deficits, and on top of that, as well they’re buying Up from various investors, um these mortgage-backed securities and other types of toxic assets that probably have a lot of defaulting debt underneath them right. These mortgage-backed securities were packages of mortgages, people’s commitments to pay on the debt that they used to purchase their home and, as you guys probably know, if you’ve seen you know, famed films like big short, all the ones out there, that kind of helped to simplify it. A bit and explain it effectively: there were a lot of people, borrowing money to buy homes and still to this day, are doing so uh that probably aren’t likely going to pay it back at the rate that we would expect them to right and that’s again, why The fed has been buying these assets off, getting it off of the balance sheets of banks, so they’re not at risk of default. They have cash and they should go out and do the proper thing. They should go out there and lend and stimulate the economy. That’S the effective goal now all the while that is the goal here right. As we see this bond prices will increase and interest rates fall. We’Re going to talk a little bit about this and stuff overall, how there’s a core an inverse correlation when bond prices will increase right. The demand for bonds is coming. The federal reserve’s buying up all these bonds, tens of billions of dollars every month. They’Ve been doing this mainly for the past few years, interest rates will fall, and that means also the yield on those bonds. The kind of interest rate or yield you get on. Those bonds will decrease over time all right, and this has really been happening for the last few decades here right now, on top of that as well. This also for banks increases lending and investors will generally buy more assets, so banks effectively should be lending out more money. They should be doing more small business loans, more auto loans, more home mortgages, things that will again keep the credit circulating through the economy. Give people the money to buy things here today to stimulate economic growth, that they’ll pay down over time through their income through the assets that they have on their balance sheet, et cetera, and on top of this as well. This should also encourage investment in the economy. It should encourage people to buy more assets as lending grows, borrowing rates and firms for firms and households will decrease over time right and, as you guys have probably seen this. If you’ve been in the position where you thought about buying a home or anything, you probably noticed that for the last like decade, mortgage rates are incredibly cheap. Mortgage rate is what you’d effectively pay on a 15 or 30 year loan to go out and buy a property and right now, across most of the world, they’ve been and effectively cheap, but that started to change here in 2020. It started to sharply reverse back to the upside and again we’ll build on that a little bit later on. Now we understand here that, as lending is growing and as people are investing in more assets, firms and households borrow more. Why is this? Well? Because, as generally speaking, households are having higher net worth they’re able to finance the destiny and stuff they’re going to go ahead and take advantage of those lower interest rates, not to mention the higher value and their assets as a form of collateral? And go out and actually borrow more in the economy and then, finally, for more borrowing, we have higher investment and more consumption in the economy, effectively leading overall towards more economic growth. That’S the idea of quantitative easing, which is meant to bring stronger economic growth, create jobs and increase prices effectively leading towards the fed’s inflation target. Now one important thing to understand here: you might be wondering nick, so the inflation target did the fed want us to go towards eight or ten percent. No, they didn’t well effectively, that’s not what they say. They want right, and i don’t think the federal reserve really wants this. That’S just out of the question. The federal reserve is trying to target effectively two percent inflation, at least within their metric, the cpi, a moderate rate of inflation, and the reason for this is because and again people will debate about it all the time. Some people argue um that excessive inflation is good. Some moderate, in this case monetarists believe this kind of two percent principle. I think a lot of economists fit into that bubble and then there are some as well who believe deflation is really good. Some kind of austrian economist would argue that the general point is this. Overall, the federal reserve was trying to target this two percent inflation rate and, through its means of monetary policy, the federal reserve generally wants to keep at this target of its inflation target two percent. Unfortunately, the federal reserve, through use of monetary policy – all these previous steps to stimulate supposed economic growth has unfortunately gone overboard. They have printed too much money through quantitative easing. They have taken off too much government debt to fund excessive deficits. They have taken too much toxic assets and lent them out, and you know, brought out basically cash into the economy at excessive rates, the likes of which we have never seen before in history due to the previous pandemic. That happened in 2020 and just to understand the magnitude of scale of lowering interest rates and putting money into the economy. We need to look no further than the past two decades, where interest rates are the cost to borrow capital effectively and the base rate for the cost of capital has been nearly zero for the better part of the last two decades. We can see this here right overall, as we’re expecting that federal reserve rates are starting to increase here. The course is starting to change, but the biggest thing here to understand here, going back to qe is just how much we’ve expanded that balance sheet. Since the past two years since the pandemic, we have seen a roughly 73 percent increase from around a combined 15.4 trillion dollars to 26.7 trillion on the balance sheets of all major central banks. For the? U
S alone, we’ve gone from 4.2 trillion to 9 trillion dollars. We have more than doubled the u.s balance sheet, the money in circulation, the m2 supply, basically effective measure of all the money and the system. The real money in the system has gone bananas and now we’re starting to see that reflect in prices federal reserve, which was taking one course of action over the last two decades. For the better part of the last two decades is now in a pickle that it created through excessive stimulus now, one big thing as well that i want to point out here is some of you might be saying nick, i got to be honest, like you know, On my day-to-day uh, my salary hasn’t been really increasing, that much or, for example, i’m not seeing crazy economic growth. Now, it’s probably because of the fact that for the past two decades, all the while the fed did engage in quantitative easing, which i think overall. Actually, i know a lot of people would say is negative. It’S a great policy to like clean the slate for banks. It was something that was proposed by richard werner, an economist. It’S a great means to kind of build a clean slate. Unfortunately, it didn’t come with the right rules to actually encourage real economic lending. In fact, most of that money has no bounce, it can go anywhere in the world, and on top of that, it can be used for anything. You can practically think of predominantly propping up financial assets and that’s why u.s equities all the kind of assets you can think about. Even new asset classes, like crypto, have seen the kind of incredible growth they’ve seen because of the excessive low cost credit that has just been stimulating financial assets over the past few decades and that’s where the mismanagement has come in here. That’S where the fed is entirely to blame here. They have like most other central banks here, kept interest rates relatively low for the past decade and now are in a pickle where they have to rise. They have to go up over time now. A lot of you might be wondering again: how bad is it going to get here? Well, let’s go ahead and take a look here at the treasury yields. Now this again is another major topic that i want to dive into and we’ll come back to this tool here, the cme thing: i’m going to put this back over here a little bit: let’s go ahead and first talk off a little bit about bond markets. So you guys remember earlier one of the big things that the fed’s been buying over a long period of time. Now some of you might be asking a really important question. Have we been here before? Have we experienced this before? Has the fed fallen to the same time tested mistakes that it has of the past? Well, we are repeating history to a large degree, and herein lies a very important lesson to understand when it comes to the federal reserve – and it starts with this beautiful man here. Well, it doesn’t actually start per se with this man here. This man is paul volcker. He was one of the fed chairmans back in the late 70s early 80s and he was responsible for taming the excessive inflation of the 1970s one in which had gotten out of control, where the federal reserve wasn’t able to really pull the trigger and pull the hard Decision to cool down the economy now the fed had at the time yes been increasing interest rates before paul volcker had come in, but paul volcker took it to the next step. He realized that the trust in the u.s dollar and consumers were fading and that overall people were already generally concerned about the state of the economy and that it was time to do the hard thing. It was time to go about raising interest rates to be able to cool down the economy during his tenure fed raised interest rates to more than 20 percent in 1981.
An increase that necessarily not only rained in inflation but then plagued the united states with a recession afterwards, and now some people, of course didn’t like the decision. At the time i mean no one wants to be the guy who was practically responsible for spawning a one to two or three year: recession in the economy, stagnating growth for a little while, but paul volcker. By making this decision not only left the united states in the global economy, with a very moderate recession comparative to previous historic ones, but on top of that, he was able to do something much more important, regain trust in the currency, slow, the economy down enough to Where inflation would fall with it and as the economy, rebounded inflation got back to the healthy moderate target. The federal reserve wanted at the time just like they claimed they want now so as much as it’s a difficult decision, because it does drag down asset prices, it does lead to slower economic growth and possibly negative economic growth for a little while this is what is Necessary for the federal reserve to do it’s needed that we engage not only excessive quantitative easing to soften the blow in the short term, but to go ahead and engage in quantitative. Tightening and inflation is the hand that effectively presses the fed to have to do something, and we can see that here again by taking a look at the projections now right after multiple decades. Here the federal reserve and other global central banks from the bank of england to the ecb are all in a position now where they have to start raising interest rates and they are planning to continue doing so for a long period of time. We can see this here in the prediction markets. If you take a look at the cme group. This is the fedwatch tool by created by the cme group that allows people to effectively bet to some degree where the federal reserve is going to take interest rates or the base cost of capital through the federal funds rate, and with this we can start to see Over time, this time has progressed as we look at these later dates here. You know, for example, from july 27th of 2022 or any of these other metrics. We can see that the confidence is growing more and more here that we’re going to be getting a higher rate. These are in the form of basis points, so i don’t want to you know, overwhelm you guys it really. It looks much more complex than it is, but this is effectively saying that as time has progressed here, the market is more confident here at the federal funds rate rather than being zero to 25 basis. Points like it’s been for the last decade has started to grow. More confident that we are going to see 25 to 50 basis points 50 to 75 basis. Points 75 basis points to 100 basis points and to put that in like plain english, 100 basins, 100 basis points is a percentage and an economic term. So basically, the market is confident now, if we take a look at the prediction markets, that at a minimum by june of 2022 86 percent or effectively about 90 percent of the market, believes that we are going to be at a 1.25 to 1.5 percent um. A federal federal funds rate – okay – that means that the cost of capital is increasing. It’S going to be more expensive to borrow, which means that probably a lot of the speculative borrowing that’s been going on in the market will probably cool down and not to mention lenders. Will maybe be a bit more hawkish? Who knows it depends on what kind of market you’re talking about, but effectively the economy will probably slow down to some degree. Now that’s one element here: we’ve talked about the interest rates and that’s really where paul volcker stepped in, because at the time this was the only tool the fed really had to have an impact on the market, but now with quantitative easing. This completely changes the game. Quantitative easing has been the major stimulus tool for financial markets and for the global economy. It is what effectively led the us in a leading position against the uk, the ecb and a whole range of other countries, because it effectively reacted. Much quicker with quantitative easing than other countries did in removing those toxic assets and putting cash back into the hands of banks right. This effectively has been the biggest tool that the united states has had far beyond interest rates. At this point, that’s where it differs between the 1970s and being able to soften the blow and keep economic growth, and, in this case, more specifically, asset prices increasing over time now, the fed, on the other hand, is now looking to deploy quantitative tightening. They are looking to reverse the steps they have taken and to put this into perspective, just here in the month of may, the feds fomc meeting they increased month over month by 50 basis points half a percentage, the highest hike in over 22 years, and on top Of that as well, not only is, are we going to start feeling the pressure from those interest rates, but more pressure is going to come here from the reduction of balance sheet right. So these 9 trillion dollars in assets are again government treasuries or u.s debt, and on top of that, as well, it’s things like the mortgage-backed securities or mbs right. So we can see here, beginning on june 1st. The fed will let a maximum right of 447.5 billion treasury bonds and mortgage-backed securities per month, so this effectively means that for these assets, not only will there be nearly 50 billion of these assets being sold every single month on the open market. But on top of that as well, this effectively means that the fed is selling these assets for someone who wants to buy them and taking cash back onto their balance sheet effectively removing or decreasing the money supply the base money supply here. This is going to lead towards a decrease in m2, which is one of the broad measurements for the money supply. So when we take a look here, that’s not only the concern here. Right 47
5 billion that might be reasonable, but the federal reserve right now is saying that by september that cap will raise to 95 billion per month. At this rate, the federal reserve could reduce its balance sheet by roughly a trillion dollars or 11 over the course of just one year, and this is much much faster than what we saw back in 2017-2019 when the fed was already conducting quantitative tightening to some degree Trying to reduce its balance sheet before the pandemic, yet all right! So that’s why the markets are a bit spooked right now, because the fed is really getting effectively hawkish or to put in really simple terms, they’re starting to reverse course, they’re starting to get into a position where they are going to [ __, ] asset markets and Economic growth to some degree, to rein in inflation and bring confidence back to the u.s dollar. That is the end goal, because if you lose that the federal reserve knows as much as any other central bank in the world, if you lose trust and that dollar and their ability to manage monetary policy around that dollar, you’ve got a much bigger problem. On your hand, other than just eight percent inflation year over year, you’ve got an entire collapse in the monetary system and that’s happened throughout history. Many times federal reserve is no different. They have to play tango. They play a very important role in the world and if they lose sight of what they’re doing well in order to stimulate asset markets, for that matter, like they’ve, been doing for last two decades to make a select group of people who are exposed to assets very Wealthy well, they’ve got another thing coming to them. If they get too sidetracked, they realize now that affection, effectively inflation has basically pushed their hand to have to revert course, and it is going to temporarily hurt asset markets to some degree. We saw, i think back in in 20. Excuse me in the 1970s and 1980 we did see a pretty effective pullback and not only economic growth but asset markets as well. But considering this considering this big challenge, the fed has um. You know with its 11.3 trillion dollar growth or 73 growth since 2020, and the money supply uh not just for the fed, which is actually bigger than that percentage, but the global balance sheet of central banks. The question we have here is the ultimate one that i know you guys are wondering about here. What does it actually mean for crypto now? There are a whole flurry of perspectives on this, and that’s the unfortunate answer i’m going to have to give you guys today, which is that no one knows exactly what this is going to mean for the fed. I will today, though, i’ll go out and i’ll share. My personal take on it and that is that all the while crypto yes, is becoming more institutionalized. And yes, i can understand that people would be concerned that when there is a reduction in the money supply that it will probably not be favorable for crypto, i can understand where that sentiment comes from. It’S not good for equities the correlation of fed stimulus and fed tightening and how equities perform upwards or downwards is much stronger than federal reserve monetary policy to crypto and there’s a big reason for that. It’S because that the vast majority of buyers of cryptocurrencies, at least at this point and still continuing onward into the future from people dollar cost averaging and everyday people dollar cost averaging, adding a little bit to their positions here and there with money they have in their Savings from even the hedge funds, family funds and the people who really drive a lot of the major moves in crypto markets. They don’t care the corporate treasurers microstrategies. They don’t give a crap about what the federal reserve is doing. They don’t care if interest rates go up a little bit or that the monetary supply is decreasing, there’s so much money in the system, there’s so much money in the system that is looking to be allocated. Okay – and i can’t stress this enough here – that someone again like again – i use the microstrategy example when they can take out. You know, for example, a loan from a financial institution. Practically, i think, is one percent every year they took that back a couple months ago. Multi hundred million dollar loan at around one to two percent, you think if the federal funds rate increases and therefore the cost of loans, you know go from one to two percent from a microstrategy to three or five percent that they’re still not going to use that Money to buy bitcoin, i’m not saying that that’s going to be the ultimate driver of crypto long term, taking credit out to borrow the asset. That’S one part of it. My point here is that there is certainly an appetite here for cryptocurrency assets, especially for people. I think growing over time who originally held bonds or held golds and many other assets that helped to hedge against u.s equities, and this is my one big wild thesis here. I mean outside of my general argument, which is that at this point with the price decline we’ve seen in crypto, you know i’m not going to tell you guys that we’re going to vertically rebound here – i’m not here to be permabullish and yeah. Maybe we’re not going to see 150k 200k by the end of the year here, with the way that the federal reserve is moving. We really have to see what the fed monetary policy is going to be. The major point i would like to emphasize to you all is that right now we’re at a point here where the discount is favorable risk to reward is much better here at this range, so i wouldn’t say it’s time to panic, but i also want to propose One important thing all the while there has been, i suppose, a correlation that people have been pointing out between equities and crypto, and i think that that’s uh, you know it has been true here in the short term that correlation has come and gone many times, and This is again back to that point that crypto really doesn’t go with centric monetary policy. What i think we could very well see here instead – and this is the thing that really excites me – is what gold experienced back throughout the 70s. Now you guys know about the inflation. Probably was we talked about earlier back in the 70s, but during that inflationary period we also saw something really interesting. We saw gold have a absolutely exponential rally from around in this case at the time 36 dollars an ounce. All the way up here towards 876 dollars and bear in mind between these rallies, we also saw gold go through 50 corrections in price. We saw that here from january. Excuse me december of uh 1974 down here towards september 76. We saw many also small corrections as well here, where again, people probably lost confidence in it, but all in all, throughout that decade of inflation, which lasted a very long period of time, gold saw a lot of strong benefit now, if the federal reserve does reign in Monetary policy right and that’s really where paul, volcker stepped in yeah. We might see a cooldown period here for a while and we’ll have to see whether or not bitcoin would be able to ring regain ground. In this case, gold didn’t do it for a very long period of time right it was a hedging asset. I’M interested to see, though, bitcoin react in this type of monetary environment. I’M interested to see this asset class, which has had more inflows than any other asset class for gen, z and millennials, to continue growing and thriving within the sentiment of an uncertain world of federal reserve. I’M really interested to see how that’s going to play out and all the while. I don’t want to be extremely bullish at this point. It’S difficult to be bearish with the kind of decline we’ve seen in values. I know a lot of people say: nick, aren’t you bearish, because the price is declining, i get more bullish when prices go down. I like discounts and on top of that as well when blood is on the streets, when the markets have cleared out they’ve reset effectively. Even if the federal reserve continues to tighten the markets, value can be found and that’s exactly what paul volcker proved. He proved that you can tame inflation. You can feel a temporary pain, but it doesn’t have to last forever and it’s not going to drag the world down with it. In fact, it sets a new foundation of confidence so that we can start a new chapter of innovation of growth and, to be honest, a bit of speculation and investment in the economy. So that’s it for today’s video everyone. Thank you all so much for watching. I hope you enjoyed this and, if you guys did consider dropping a like it’s one of the best ways you can support the channel uh. One last thing i did want to share with you guys as well on a little bit of a separate note, is that one of my close friends – it’s not a sponsor in today’s video, but one of our long-term uh partners here on the channel ember fund, has Recently launched its equity crowdfunding campaign on republic, this is similar to platforms like we funder, which we used to raise capital for my startup back in the day and they’ve raised over 1.2 million dollars from over 784 reservations and investments. There’S about 107 days left to invest in a campaign, but what’s really cool about equity crowdfundings is that you’re actually in a sense, getting a stake in the company? So i highly recommend you guys take a look at them. They’Re one of the really cool wallets on the market – that’s growing like crazy and allows you to invest like a hedge fund in the crypto space amber fund’s a really solid platform. So if you guys want to take a look into it, learn more about the company, maybe potentially make an investment in what might be one of the next crypto companies and definitely take a link. Uh look at the link down below in the description but anyways everyone. I’Ve rambled on enough today my mouth is starting to get dry. I need to go drink some water until the next video take care. Everyone and i’ll see you on the next one. You