The Kings Of Bad Market Conditions

In this short read, we will talk about something not many talk about, but plays a HUGE role in affecting market price movements during bad economic times - The Federal Reserve. Let's dive in.

Welcome back to The Art of Crypto, in this 2-part series we will dive into:

1. What is the Federal Reserve and why is everybody talking about them?

2. Why the Fed’s actions are more important than any other time in 30 years?

3. How do we take advantage of this knowledge to make us some money?

What is The Federal Reserve?

Everybody talks about them, and in recent times, the amount of times the word “Fed” has been thrown around has been, rampant, to say the least.

So what is this Fed?

To put it simply, they are the central bank of the USA. And central banks are like the father of all banks. They control the money supply (yes, they print the money). They call the shots on how banks operate. They control how much loans banks are able to give out etc.

Their primary job is to control monetary policy. And they tend to prioritise keeping the economy stable, maximising jobs, and controlling interest rates. The third one is the one that is of particular interest to us as traders.

But before we do, let’s talk inflation

Unless you have been living under a rock over the last 2 years, you should’ve already heard something about how 80% of all U.S. Dollars have been printed in just the last 2 years.

And that’s really, really significant.

You don’t just print that much money in such a short span of time and expect everything to be fine afterwards.

At the time of writing this (July 2022), we are just starting to see the aftereffects of this rampant money printing in the form of exponentially rising consumer prices - in levels we have not seen in 50 years, or ever.

I mean, just take a look at this ShadowStats Consumer Price Index chart. We haven’t been this high on inflation since 1982!

(By the way I made a full video 6 months ago predicting inflation would hit all-time high numbers, ShadowStats was a tool I used to get it right. Watch it here, you will learn a lot)

Wheat - Highest Prices in 50 Years

Crude Oil - Highest Prices in 10 Years

Coffee, everyone’s favourite caffeinated companion - Near All-Time High Levels (my money is betting on it actually breaking ATHs within this decade due to multiple factors, not financial advice.)

So… what does inflation have to do with interest rates?

The Federal Reserve aims to keep inflation at around 2% per year.

Having overly high inflation ruins the markets and the economy.

Having overly high deflation arguably ruins the markets and the economy even more than high inflation.

So far, we are just starting to see the effects of high inflation on the economy. And if you are wondering, yes, I do think it will get worse from here on out, before it gets better.

See, the reason I dove so deeply into inflation is because controlling the interest rates is one of the most potent tools the Fed has at their disposal to maintain inflation at a tame 2% per year.

When interest rates go up, it becomes more expensive to borrow money from banks. And that’s key.

The thing is, the markets - and subsequently the economy - is built on borrowed money.

And no, I am not simply talking about crypto. Every single financial market out there in the world, has valuations as high as they are because they are built on debt.

If you buy a house fully with cash, one-shot, you’d be considered an idiot.

Similarly, when companies are investing into stocks, bonds, and other equities, they would be considered stupid if they just cash bought that too.

Instead, what they tend to do is take loans, put down some collateral (usually company assets), and now they have a bunch of free magic money to invest into these equities to get even more richer, so that they can borrow a bunch more free magic money.

“But AOC, what do you mean by free magic money? If you borrow money, won’t there be interest"?”

Exactly. It’s free because the interest rates for the better part of the last decade have been practically 0%.

So, going back to interest rates, do you notice that recently, at the right-most section of that chart, interest rates seem to be going up?

That’s because they are.

1 month ago during the FOMC Meeting in June 2022, the Fed announced an interest rate hike of 75 basis points, the biggest rate hike since 1994.

And just a month ago, in May 2022, they raised interest rates by 50 basis points, the largest rate hike since the year 2000.

This hard spike in interest rates are a net negative for all equities and risk-on assets, such as crypto and stocks.

When interest rates are high, the strength of the dollar rises.

When the strength of the dollar rises against foreign currencies, people are more incentivised to convert foreign currencies into dollars.

But we don’t care about that. What we really care about is when the dollar gains strength, assets lose strength.

Bitcoin/USD, when USD loses strength, Bitcoin goes up in strength. When USD gains strength, what happens then?

Below is a side-by-side example of how risk-on assets are correlated with the strength of the dollar.

For the past 8 months or so, the equity markets haven’t been doing too hot. Stocks, crypto, you name it, they have mostly been losing market cap. At the same time, guess what DXY has been doing.

Understanding the DXY and interest rates and the current stance / near future stance of the Fed is a powerful tool to add to your arsenal when it comes to doing macroeconomic predictions, or even just for positioning your portfolio in the right direction for when the tides start to turn, hopefully this has been a good introduction for you.

To not overwhelm you with too much information at once, we will talk about why all of this matters to you as a trader in the next issue of this 2-part series, so make sure you are subscribed to be notified of this as soon as possible.

In the meantime, if you haven’t already joined the best trading community out there yet, you’re gonna want to do so. And make sure you shoot any feedback you might have in the comments section, I am new to writing newsletters so I will be reading every single comment out there.

Hope you enjoyed this, see you in the next one.

- AOC