“Fed Watch” is a macro podcast, true to the rebellious nature of bitcoin. In each episode, we challenge traditional narratives and Bitcoin by examining current macro events around the world, with a focus on central banks and currencies.
Listen to the episode here:
In this episode, CK and I cover a lot of the current macro news. First, we update the situation in the UK gilt market. Then move on to China to cover developments since the 20th Party Congress, the real estate market and the general investment climate. Finally, we address the European energy crisis and the current storage situation.
Bitcoin Charts and Sentiment
Each week, CK and I start with a few charts featuring bitcoin and other currencies to center our macro conversation in that perspective.
During the week of October 17, 2022, the bitcoin chart was showing continued strong support in the $17,500-$18,500 range despite all the geopolitical and global economic tensions that were happening. The stability of bitcoin compared to most other assets should be noticed by people managing large pools of capital around the world.
CK and I also spoke briefly about the US stock market and its similarly stable performance. If you were to only listen to and read the mainstream financial press and never look at the charts, you could be tricked into thinking stocks were much lower, or at least falling on a daily basis. However, as it stands, the S&P 500 is above June low.
Below is my dueling dollar index chart, showing the DXY which is heavily weighted by the euro and the yen, and the broad trade-weighted dollar index which includes many more currencies based on their share of trade with the United States. Above all, this includes the Chinese yuan and the Mexican peso.
As you can see, the trade-weighted dollar performed better during the initial COVID-19 crash, but lagged the euro-heavy DXY. This means that the strength of the dollar has become widespread over the past two weeks.
The last currency chart we analyze is the Japanese yen, which is collapsing against the dollar, reaching 150 yen per dollar. In the show, I mention that this is an example of the current effects of the dollar on East Asian currencies.
UK Gilt Recap and Credit Suisse
Granted, CK and I haven’t watched the UK crisis as closely as other things, so we take this opportunity to recap the timeline of what’s happened so far.
The Bank of England (BoE) announced an intervention on September 28, after the long-term gilt market sold off around 2% to 4.5% in a matter of weeks. On previous shows I mentioned the importance of the end of the third quarter for financial stress, which is well known, but for some reason the BoE decided to start quantitative tightening (QT) a week before the end of the quarter.
On Oct. 3, the BoE adjusted its intervention size to up to £10 billion per day, and an end date for the program of Oct. 14. Most economic commentators did not think it would be possible to end it so quickly and in such a telegraphed manner. . They turned out to be wrong, because the “no quantitative easing” program ended on schedule. The latest is that the BoE will resume QT attempts on November 1.
We also talked about the interesting coincidence of emergency swap lines between the Federal Reserve and the Swiss National Bank (SNB) that took place at the height of the BoE’s troubles. I speculated that this swap line could have served as an obscure bailout of these troubled financial institutions in London, routed through the SNB.
The crisis seems under control for the moment, but the damage may have been done. In these episodes of financial crisis, confidence is shattered and despite the end of the acute panic, the market is moved to a more fragile state of mind going forward. This can lead to the reappearance of the crisis after a few months.
The Chinese Economy and the 20th Party Congress
I didn’t pull any quotes for Xi Jinping’s two-hour keynote broadcast. I provided a link to full transcript and I encourage people to read it for themselves. It is telling to see the rhetoric, devotion to Marxist-Leninist communism and hubris of authoritarian central planners.
BlackRock’s words are important because they represent what big capital pools think of China. From their article, we learn that Chinese export volumes are expected to decline by 6% this year and next year, although in nominal dollars they will increase by 3%. The authors also note the horrendous demographic situation in China and say it is preventing the domestic growth needed to counter the effect of shrinking exports. In a country with massive debt and demographic problems, this is not a recipe for economic growth.
“Recession is now looming in the US, UK and Europe. But this time, China won’t come to his or anyone else’s rescue.
Michael Pettis, a senior fellow at the Carnegie Endowment and professor of finance at Peking University’s Guanghua School of Management, seems to agree with the direction of the Chinese economy in the medium term. His tweet thread exposes the hopeless situation facing the Ministry of Finance in China.
The finance ministry said state-backed entities were strictly prohibited from buying land by going into debt. Pettis agrees with this ban because “local governments [reversing] the decline in income from the sale of land by creating SPVs to buy land [as] a way for them to borrow money and pretend that the proceeds were in fact income from the sale of land.
Pettis, however, emphasizes the same no-win scenario facing the Treasury as BlackRock’s comments. Namely, that Beijing has no room to stimulate. They crack down, but offer no help.
“The Ministry of Finance prevented them from simulating income without addressing the reasons why they had to do so.”
“Beijing must know how difficult the circumstances local governments are facing, and yet do little to help. I think we are probably seeing the beginning of what over the next few years will be a very contentious relationship between local governments and Beijing.
This doesn’t bode well for Beijing and Xi, especially as US rhetoric, sanctions on chipmaking and Taiwan’s weaponization accelerate. There is a real existential threat to the emergence of the Chinese Communist Party.
European energy without crisis?
We have had Andreas Steno on the show a few weeks ago, because I wanted to hear his sober analysis of the European energy crisis. He was the only analyst I saw push back the panic narrative.
He’s back as a tweet thread this week and on the show, I quickly read the highlights. They are:
- Natural gas storage is nearly full in Europe well ahead of schedule.
- Energy prices are rapidly returning to normal.
- There is a huge backlog of liquid natural gas vessels off the coast of Europe waiting to be unloaded.
What struck me about this analysis was how much it reminded me of the oil futures crash of April 2020. Back then, oil reserves were full and tankers were prowling worldwide, also full. There was simply no place to take delivery of the futures contracts, so holders had to sell at any price, causing a flash crash to zero.
Could we see the same in Europe this month? Not quite yet, but it’s at least a possibility. What a turn of events in the world of clowns. Massive record highs at zero price being a possibility within months.
This is a guest post by Ansel Lindner. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.