Turning the corner on rates and inflation
The Fed’s next rate hike meeting is on December 14th. More likely than not they will raise interest rates by another 50bp from 4% to 4.5%. This continues the fastest rate hike in modern history from .25% to +4% in less than 12 months. The next inflation report is on December 13th, just before the rate hike decision. CPI and rate hikes are the main drivers of markets. Fortunately, we’re getting close to the end of the rate hike cycle. Futures markets expect two more .25% hikes on February 1st and March 22nd. The policy by the Fed is to hike too much and cut rates later when and if needed.
Historically, there has been a lot of fear around persistently low rates. When rates are low, you can’t cut them to stimulate the economy. At 4%, there’s a lot of room to cut rates if needed. As long as inflation continues to decline, we’re on track to reach the end of our inflation issues and the end of rate hikes. In the meantime we’re turning the corner on many substantial trends. The rate hikes are ending, inflation is trending down and the USD dollar trend is finally reversing with the Euro and British pound increasing for the first time in over a year. Many earnings reports cited the strength of the US dollar as a reason for lower than expected international earnings. In a period where there’s general fear about lower earnings overall, a falling dollar is welcome support. It’s not going to be a smooth ride and there will be several disappointing data points along the way regarding inflation. In the meantime, the trend has firmly flipped toward fewer hikes and falling inflation which is good news for everyone.
Picking up the pieces – FTX Fallout
I’m certain by now you’ve read extensively about the failures of FTX, it’s hedge fund Alameda, and founders Sam Bankman-Fried and Caroline Ellison. How did we get here? No one really knows all of the details because the entire sage is so outrageous and messy that it’s hard to believe. Sam siphoned customer deposits into political donations, $36 million to Democratic leaning groups, 2nd only to Soros. He also used billions of customer funds to invest in various crypto assets, crypto ventures, venture funds including Sequoia. Notable among the investments was a 30% stake in SkyBridge, the firm that helped promote FTX fundraising. I suppose because those recipients did not knowingly accept stolen funds, they don’t have to give it back. The coverage of this event is odd and Sam’s twitter is unreadable. In short, Sam is definitely going to jail. It’s just a matter of sorting out which of the specific laws were violated to get to this point.
The damage to crypto is significant and the leverage contagion continues to spread. Genesis, owned by Digital Currency Group, is facing solvency issues and may need to be bailed out. Genesis was considered the highest quality counterparty in crypto measured by the quality of its institutional partnerships with many leading major traditional banks. Gemini Earn was paused as a result, the Winklevoss product that allows you to earn a yield on digital assets. This will takes months to unwind and the fallout is going to affect many businesses and individuals who were indirectly exposed through underlying counterparties. It’s surprising the crypto markets haven’t fallen further in the past week, but I suppose the news from the CPI prints last week was “good” enough to provide some balance and support. We’ll know in the following weeks if more failures and bankruptcies are coming.