Macro & Markets: Fed Tightening and Crypto Deleveraging
Here are some of the most salient macro and crypto developments as of late. Including some you’re probably not aware of.
The state of inflation: current and forward looking
CPI still above 8%. Majority of increase comes from energy costs. However the Fed can’t take more oil out of the ground.
The directionality of inflation:
One of the most leading of leading indicators; freight shipping by sea, is seeing consistent declines in costs to move freight/containers:
Eurodollar curve remains inverted and deepening. Disagreeing with degree and persistence of inflation.
Same for US Treasury yield curves. A clear indicator of recession and a rejection of the degree of Fed hawkishness. Long bonds are a product of GDP growth + inflation, and are not dictated by FFR targets.
QT began this month. A reminder that Fed balance sheet “tightening” means allowing <$50B to expire (not selling bonds, but simply letting issues roll off) a month. An absence of buying is what is considered tightening.
If the caps are exceeded, the Fed will actually buy bonds (QE) while tightening. The amount allowed to expire each month is slated to increase in September.
Major credit events ongoing in crypto:
- 3AC likely blew up
- Celsius is insolvent, rumored to have hired restructuring lawyers
What happens next
Inflation directionality, not absolute value, likely guides our near-term movement. Meaning if the CPI comes in at 7% next month, that’s still high, but it shows a directional decline and that inflation is under control, something the bond market is indicating. Whether that’s next month or 3 months, etc. from now is up for speculation. “Transitory” in macro terms should always have been understood as a multiyear event; complex adaptive systems do not materially change month-to-month.
The issues in crypto are somewhat unique to the space lately, though are downstream of a horrendous macro environment. We are seeing the type of liquidations and credit events you’d expect from a vicious bear market that probably isn’t completely done flushing out excess leverage (something we’re not seeing in TradFi at the moment). Terrible. But if I were to have painted this horrible macro picture to you 6 months ago and then said “with things as bad as they are, several hedge funds will get wiped out, some CEX lenders will be insolvent, and a major crypto project or two will go to zero?” do you think you would have been surprised? Meaning, if you remove the emotions we’re all experiencing right now and look at what’s happening analytically, this is about what you’d expect. Deleveraging cycles are painful.
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