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The market’s response to “hawkish” comments by Fed Chair Powell at the annual Jackson Hole Symposium reminds investors that “Fedspeak” can be “perceived” in a variety of ways.
Key Takeaways:
- Participants viewed Fed Chair Powell’s Jackson Hole speech as “hawkish,” driving markets lower on Friday as he reiterated his strong stance in combatting four-decade high inflation
- While the market now prices in “higher for longer” policy rates through 2023, the speech given by Powell was nothing new in comparison to prior comments
- The US Government illustrates its continued willingness to spend with plans for a new student-debt relief program; bitcoin finds a well-needed catalyst
- We discuss growing government spending and compare bitcoin’s supply growth to that of US M2
THE BIRD'S EYE VIEW
The widely anticipated Jackson Hole Symposium did not disappoint investors looking for volatility, with much of the week a “sideshow” in preparation for Fed Chair Powell’s Friday morning “main event” presentation to global central bankers and market participants around the world.
In a short and succinct eight-minute speech, Chair Powell was direct in his and the Fed’s intention to combat four-decade high inflation, saying “we must keep at it until the job is done.”
This gave bears, traders, and skeptics a catalyst to sell risk-assets after the strong bounce from the mid-June lows and “panic period.”
As expected, crypto “maintained character,” and faced the brunt of macro selling pressure. On Friday alone, bitcoin declined -4.6% and ether lost -8.9% while the S&P 500 and the Nasdaq Composite fell -3.4% and -3.9%. Bitcoin and ether closed the week at $19,989 and $1,483, respectively.
But the comments made by Fed Chair Powell are “nothing new” when compared to both his and other Fed member’s recent statements. Since pivoting from “transitory,” Fed Chair Powell has reiterated numerous times his intention to reduce inflation.
Most recently in the July FOMC meeting, Powell claimed, “we are highly attentive to inflation risks and determined to take the measures necessary to return inflation to our 2% longer run goal.” He also iterated that the Committee “anticipate[s] that ongoing increases… will be appropriate.”
So, what changed that led to a rollover nearly immediately after Powell’s Jackson Hole speech on Friday morning? Well, a different “perception” and an opportunity for a “trader’s trade.”
With the growing narrative that a “slowing economy” will lead to a “Fed-pivot,” many added exposure to risk-assets in preparation of “less tight than expected” financial conditions.
And while this outcome certainly has the potential to occur, Powell’s “keep at it” comment was an easy catalyst for near term downside pressure, particularly in the notoriously-slow weeks of late August.
Now, peak policy expectations have moved back to 3.8% for the February/March 2023 period, with the expected cut priced in for November rather than September:
While last week’s events remind investors how tied risk assets are to the path and process of normalization, it’s important to remember that volatility is not unusual as participants digest various ebbs and flows around policy expectations that occur on a week-to-week and even day-to-day basis.
Decades and decades of market history has illustrated that “this too shall pass” and that long-term investors are often rewarded for maintaining conviction through times of uncertainty. Last week, we discussed “recency bias,” the ability for perception to change quickly, and attractive valuations for long-term investors as reasons to practice patience.
This week, we discuss a catalyst in the student-loan relief program (spend, spend, spend) and update our bitcoin supply increase versus that of US M2.
SPEND, SPEND, SPEND
Following the $430 billion “Inflation Reduction Act” signed on August 16th, the US administration now seeks to provide student-loan debt relief between $10,000 and $20,000 per federal borrower.
As we often discuss, a rapidly growing “willingness to spend” is a catalyst for bitcoin, given:
- The impact on money supply versus bitcoin’s hard-coded scarcity
- The impact on fiscal deficit, which decreases the attractiveness of the dollar
- The impact of adoption from populism, in which “half of the country” often does not agree with the “what, where, and why” of these packages passed by party-line votes (we also point out bitcoin was created during the taxpayer corporate bailouts in 2009)
Even further, the US administration appears to believe political gain is worth the risk of further price inflation ($10,000 less to pay on student loans = $10,000 more to spend).
These types of decisions strengthen the argument for an alternative and complementary store of value away from the US dollar.
BITCOIN SUPPLY VS. M2 SUPPLY
Perhaps a better way to understand the significance of bitcoin’s hard-coded, fixed supply structure is a comparison against the US’s M2 money supply, which includes cash, checking, savings, money-market, and other time deposits.
Key drivers of growth in US fiat supply include expansionary fiscal policy, quantitative easing, lower interest rates, and changes to reserve ratios, all of which are ultimately subject to the decisions made by policymakers.
On the other hand, bitcoin’s circulating supply is driven by the “halving,” or the scheduled and immutable 50% reduction in new issuance every four years.
This hard-coded supply structure of bitcoin leads to a meaningful difference in supply growth than that of M2. Since the beginning of 2020:
- US M2 supply has risen 41.7%
- Bitcoin’s supply has risen just 5.5%
As time progresses, it’s likely a simple, objective, hard-coded supply structure becomes increasingly attractive to the uncertain and subjective supply of fiat currency.
Click here to download full report. As always, please reach out with any questions or comments.
Stay tuned,
Joseph Orsini, CFA, CMT
Vice President of Research
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