Market Commentary
Market Commentary: Perceptions
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
August 31, 2022

Click here to download full report.

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

DISCLOSURES
Investment advisory and management services are provided by Eaglebrook Advisors, Inc., a registered investment advisor. Information presented is for educational purposes only. Past performance is no indication of future results. Please see our Form ADV Disclosures and Privacy Policy in our website.
Price Volatility of Digital Assets – A principal risk in trading Digital Assets is the rapid fluctuation of market price. High price volatility undermines Digital Assets’ role as a medium of exchange as consumers or retailers are much less likely to accept them as a form of payment. The value of client portfolios relates in part to the value of the Digital Assets held in the client portfolio and fluctuations in the price of Digital Assets could adversely affect the value of a client’s portfolio. There is no guarantee that a client will be able to achieve a better than average market price for Digital Assets or will purchase Digital Assets at the most favorable price available. The price of Digital Assets achieved by a client may be affected generally by a wide variety of complex and difficult to predict factors such as Digital Asset supply and demand; rewards and transaction fees for the recording of transactions on the blockchain; availability and access to Digital Asset service providers (such as payment processors), exchanges, miners or other Digital Asset users and market participants; perceived or actual Digital Asset network or Digital Asset security vulnerability; inflation levels; fiscal policy; interest rates; and political, natural and economic events.
Digital Asset Service Providers – Several companies and financial institutions provide services related to the buying, selling, payment processing and storing of virtual currency (i.e., banks, accountants, exchanges, digital wallet providers, and payment processors). However, there is no assurance that the virtual currency market, or the service providers necessary to accommodate it, will continue to support Digital Assets, continue in existence or grow. Further, there is no assurance that the availability of and access to virtual currency service providers will not be negatively affected by government regulation or supply and demand of Digital Assets. Accordingly, companies or financial institutions that currently support virtual currency may not do so in the future.
Custody of Digital Assets – Under the Advisers Act, SEC registered investment advisers are required to hold securities with “qualified custodians,” among other requirements. Certain Digital Assets may be deemed to be securities. Currently, many of the companies providing Digital Assets custodial services fall outside of the SEC’s definition of “qualified custodian”, and many long-standing, prominent qualified custodians do not provide custodial services for Digital Assets or otherwise provide such services only with respect to a limited number of actively traded Digital Assets. Accordingly, clients may use non- qualified custodians to hold all or a portion of their Digital Assets.
Government Oversight of Digital Assets – The regulatory schemes—both foreign and domestic—possibly affecting Digital Assets or a Digital Asset network may not be fully developed and subject to change. It is possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, policies or rules directly or indirectly affecting a Digital Asset network, generally, or restricting the right to acquire, own, hold, sell, convert, trade, or use Digital Assets, or to exchange Digital Assets for either fiat currency or other virtual currency. It is also possible that government authorities may take direct or indirect investigative or prosecutorial action related to, among other things, the use, ownership or transfer of Digital Assets, resulting in a change to its value or to the development of a Digital Asset.

About Eaglebrook Advisors
Eaglebrook is a tech-driven investment manager specializing in bitcoin and digital assets. The firm offers various Bitcoin and Digital Asset SMAs serving financial advisors, registered investment advisors (RIAs), family offices, and institutions. Eaglebrook is backed by wealth management executives and institutions.
For more information, please contact us at +1 (202) 798-1880 or send an email to contact@eaglebrookadvisors.com.