“HODLing Nomatter What”?. I cannot understand the “any selling is weak hands” argument. Why not spend a little more time paying attention to the economy in the short-term, so you can make proactive decisions about your investments?
Here’s a bit of reality for all you genius apes
The fed meeting is tomorrow and its going to be a .75 basis point hike. First time since 1994. Some of this is already baked into markets (I’m assuming you’ve realized by now that your stocks are down almost 10% and crypto is down 30% since Friday), but there is always more room to drop and more pain to come.
A lot more
When JP pulls a switcheroo from .5 to .75 a mere 36 hours before the Fed meeting, you had better bed your ass that he’ll open up the doors for more hikes at .75. And he should. A CPI at 8.6 is bonkers with a base funds rate of 1.5%. It’s borderline economic catastrophe. Since the invention of the dollar, rate hikes have only successfully brought down inflation once they got within 2.5% of the inflation rate. Get your calculator out bc that means if the inflation rate were to stay at 8.7 (yea right) it would take 6 more rate hikes to get us in the functional range. When he says that “we are now considering .75 rate hikes in July and September, possibly higher” you had better believe people are going to trade whatever they can for cold hard cash.
And that’s not all
You’ve probably heard of Quantitative “Easing”. That’s how the Fed “prints” money into existence. They create the money on a magic computer and use it to purchase treasuries and mortgage-backed securities (those bundles of mortgages you heard Christian Bale and Steve Carrell talking so much about in The Big Short). The Fed bought 3 boatloads of this stuff in 2008 (these purchases are referred to as the “bailouts”), and up to now they’ve got about $8,500,000,000,000 worth. That’s trillion, with a T.
Now we get to play a new game. Quantitative “Tightening”
Starting tomorrow (Wednesday for anyone late to the party), the Fed will sell $45,000,000,000 in assets onto the open market. That’s going to be a whole lot of pressure on markets to stay up and we all know people aren’t exactly buying-hand-over-fist right now. Their purpose is to bring markets down. That, by definition, is fighting inflation. Remember: price up = bad. Price down = good.
But the QT fun doesn’t end there. The Fed is going to sell another $45 billion in assets in July, and another $45B in August. Then, they will increase the rate to $95 BILLION EVERY MONTH starting in September. At that rate of monthly selling they won’t run out of MBS for 7.5 years.
Let’s talk about those mortgage-backed securities for a second. Those bundles of thousands of mortgages we call MBS start out when you buy a house. Or when your cousin buys a condo to rent on Airbnb. Remember when you finally closed on your house and 2 days later you received a letter saying that your loan was purchased by another lender? “Underwriting” is your lender making sure there is a buyer ready and willing to buy this loan the moment you close on the property. That’s why you get the notice right away.
As you were figuring out to whom you should make your mortgage payment that new lender was bundling your loan with many others to sell yet again to a bigger bank. The bundle grows each time and at some point they refer to them as MBS, and for some reason they are considered much more secure than individual mortgages. They are given ratings like A, BB, CCC, etc. Picture Ryan Gosling playing jenga. Now when the biggest MBS customer not only stops buying but starts dumping MBS onto the market, you can imagine the demand for these bundles of joy will shift.
Soon smaller banks can’t sell to bigger banks as easily as before. And eventually not at all. This past Friday the market for MBS actually hit “zero bids” for the first time since 2008 (you might have seen a tweet from the actual Michael Burry). As loans become harder to sell, will also become harder to write. And we know what that will do to the housing market. Remember: price down = good.
Now you’re getting it
Lastly, because my legs are asleep, you need to understand that most of the money that came into crypto since 2017 was not from people here on reddit. Many of them do not share your diamond hands conviction, and their crypto investment doesn’t represent an “inflation hedge”. It represents the riskiest thing they’ve ever done with their money. Ever. Big risk = big reward. And when both the stock market and the housing market get tumultuous, risk assest get sold first. That is what you are starting to see. An almost perfect correlation between crypto and the Nasdaq, just where the swings in crypto gains and losses are exaggerated.
Unfortunately we are probably one or two cycles away from certain cryptos being seen and used like the scarce resource inflation hedge that they really are.
So here you are, with all this new knowledge and a bag of Shitcoin Potpourri. And there is a train coming tomorrow that will last until at least through September.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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