Powell’s Game Is Just Getting Started
Filtered: July 10 – July 14
Welcome to a new weekly issue we call, Filtered.
If you’ve been following Espresso regularly, you’ve likely noticed that we’re starting to ramp up our content on other platforms. So we thought we’d help our readers out by giving you some of the highlights.
You can consider this your weekly round-up of top insights from our analysts, filtered down to serve you better.
And if you’ve missed any of our content this week, whether it’s in essay, podcast, or video form, you can find links to it at the bottom.
Without further ado, let’s get into today’s Filtered.
If you’re Jerome Powell right now, you might be tempted to take a victory lap.
The latest inflation numbers arrived on Wednesday. And by all appearances, Powell looks like he’s close to accomplishing his goal of reining in prices.
Based on readings from the Consumer Price Index (CPI), which keeps track of a basket of goods and services to measure inflation, prices rose 0.2% in June. But more importantly, they climbed just 3% over the past 12 months. That’s the smallest increase since March 2021.
It isn’t quite the 2% annual figure that Powell and the Federal Reserve tout as their target for inflation. But it seems they’re headed in the right direction.
So is it time to pop the champagne and chill on the rate hikes?
Well...
If you’re a regular reader of Espresso, you may remember our analyst TD’s “Three-Wave Inflation” theory. Basically, during the last cycle of high inflation in the 1970s and early ’80s, it wasn’t a straight line up and down. There were two “lulls” where inflation subsided for a bit before rising again.
And that period bears some similarities to our present day (you can see why by reading the entire piece here.)
So partly because of that, our theory is that Powell likely doesn’t want to take his foot off the gas. He knows the inflation beast may be wounded, but it’s not slain yet.
But now, he has to battle the headlines and tweets that say it is.
That’s why on the latest Alpha Bites podcast that recorded the day before the news hit, I talked about how Powell’s next mission is to find a new narrative:
And so the headline news is gonna be like, wow, we've really combated inflation, things have looked good...So, how is [Powell] going to go ahead and navigate the next few weeks when he wants to go ahead possibly and raise rates to combat inflation? He's going to have to find a new narrative. And so...it feels like he's going to start to set the tone of something. Specifically what that is, I'm not sure, but it's something to take note of in the weeks to come.
All eyes are on the next FOMC meeting July 25-26, when we’ll get the next rate decision from the Fed. But if you want to learn a bit more about what to expect, I dove a bit deeper into recent inflation figures on our latest episode, which you can listen to here.
Meanwhile, while we ponder whether the Fed will cut rates soon… Bitcoin has a “rate cut” of its own coming up, in the form of the next halving.
While it’s not until next April, now’s the time to start positioning to play certain narratives...and that’s why independent analyst Ray is diving deeper into a topic he touched on last episode: Bitcoin mining companies.
Here’s why he thinks the sector is worth looking at:
Bitcoin mining stocks I believe are a great investment right now, because they trade in tandem with Bitcoin’s price and have outperformed it.
We all have this narrative that with the halving, Bitcoin’s price is going to go up. Thus, Bitcoin mining stocks should go up. If you look at the charts and look back two or three years, you see that is the case. I'm sure they're overextended right now. And sure, pre-halving, post-halving, we expect volatility in Bitcoin’s price. That should also be reflected through Bitcoin mining stocks, making some opportunities for investment...
But I think the goal for a smart investor is to look at which mining companies are using renewables or have the lowest cost of production, and their revenues kind of eclipse the debt that they have. And then look at future pullbacks in Bitcoin’s price and in mining prices as a potential opportunity to build a position.
On this week’s podcast, Ray discussed more of what he’s looking for in miners, and also identified one which he believes has a big advantage by using renewable energy (disclaimer: none of this is investment advice). Again, you can listen to the whole episode here, or on Apple Podcasts or Spotify.
Of course, looking at Bitcoin miners involves trying to predict where Bitcoin itself might head next. So you’ll want to check out our Monday Espresso, where our favorite janitor J.J. analyzed a phenomenon known as “price gaps.”
Essentially, because crypto is 24/7 while TradFi doesn’t operate on the weekends, price gaps occasionally form in the Chicago Mercantile Exchange (CME), Bitcoin’s futures market, when there are big weekend moves in price. And over time, Bitcoin tends to retrace toward these gaps and refill them.
Right now, there remains one rather large gap that hasn’t been filled yet – and it’s tied to an infamous crypto, per J.J.:
Smaller gaps, ranging a couple of hundred dollars in either direction, are common and tend to be filled within a few days’ time – meaning the price eventually reverts to the level of the previous Friday close at some point during the following week.
However, there have been rare instances of extreme price movements during the CME's off hours in which price did not immediately return to the previous range….
The reason for me bringing up these past gaps, and the market's tendency to fill them, is that there remains one more notable CME gap to the upside, which is left over from the start of the LUNA debacle last May.
In the piece, J.J. explained why this scenario could be useful in predicting some short-term moves should BTC break out to the upside.
(He also unleashed some alpha on the potential fight between Elon Musk and Mark Zuckerberg on the podcast this week. Apparently, J.J.’s trained with associates of the martial artist currently training Musk. Keep that in mind next time you’re thinking of picking a fight with him on Twitter.)
And finally, amid all the BlackRocks, CPIs, legislation, and other bullish news, I decided to throttle your hopium tanks and serve up a dose of reality in this week’s Blend...and remind us to always take the long view with this asset class, especially if you’re a builder:
Right now, if the current pace of funding for 2023 continues, it will equate to a 64% downtick in private funding deals from 2022… And that’s a big “if.”
Plus, if we use Bitcoin’s halving as a gauge for when we hit new all-time highs, that probably wouldn’t happen until Q4 2024.
Depressing as hell, ain’t it? That’s another year of building amid a market as dry as the Sahara.
This is the unfortunate reality of the market we sit in. There needs to be market euphoria unfolding for the capital to flow back in as it was prior.
This week’s Blend comes with a slightly more bitter taste than usual. But it’s not all doom and gloom. I also covered how Ethereum avoided a crucial mistake that plunged Arweave into the doldrums… and talked about the big problem that centralized exchanges (CEXes) are finally working toward solving.
As always, you can find links to all the content we published this week below – along with our Tweet of the Week.
That’s all from me this week. We’ll see you again on Monday. Enjoy the weekend.
Your Pulse on Crypto,
Ben Lilly
Espresso:
Alpha Bites:
Tweet of the Week:
Alpha does not need your home address.
