The odds that the bulls have built a case on false expectations has increased quite a bit after reading the latest minutes from the US Federal Reserve (the Fed).. Those who think the possibility of a recession is off the table are probably claiming victory prematurely. Because the (much desired) “soft landing” is not guaranteed. Still possible. But definitely not a guarantee. The argument is simple. We have made a lot of progress in the fight against inflation. However, this war is not over yet. Like it or not, surely, we will have more increases in interest from the Fed in the coming meetings. That is to say, the expectation that we will have a turn in monetary policy, at this point, is quite premature.
The US job market is too tight. Which drives up prices thanks to high labor costs. This is particularly true for the service sector. We must remember that this is a highly labor-dependent sector. So, hehe victories obtained in the field of energy and other areas are somewhat overshadowed by the setbacks in the services sector.
However, the objective is 2% year-on-year inflation. And, to achieve this objective, the falls in prices in a couple of sectors are not enough. More widespread falls are required. One might come to think that inflation will continue to decline in a linear and progressive manner from now on. However, If we go into the details, it is not very difficult to recognize the complexity of the situation. Yes, the price of a barrel of oil has gone down a bit. But how far can it go down? And the other items? In other words, the advances obtained (so far) have been registered in the most volatile sectors. Sooner or later, we will run into a wall. And to break through this wall will suddenly require more aggressiveness from the Fed.
During the first quarter of 2023, the market has largely chosen to ignore this reality. Conveniently, the market has been betting on the most favorable scenario. The optimistic narrative has sparked a change of sentiment. And this change of sentiment has generated rallies bullish. However, that enthusiasm at the beginning of the year is not except for exaggeration and wishful thinking. It is highly unlikely that, in such a complex and uncertain context, this bullish wave will continue indefinitely. It would not be too foolish to anticipate a sharp correction.
Most expect a 0.25% increase, to between 4.75% and 5%, at the March 22 meeting. Apparently, the 0.50% and 0.75% increases are behind us and we are back to the traditional 0.25% increase. However, whether it will be necessary to go above 5% remains to be seen. The market, at this point, assumes that 5% (or very close to 5%) will be the maximum. However, that remains to be seen. It all depends on the data. If, for some reason, the Fed is forced to go well above that level, a correction will be inevitable. because heValuations are currently being based on the most favorable scenario. And the best-case scenario may not be the final scenario.
What is Bitcoin? Well, Bitcoin is code on a computer network. It is a series of letters and numbers in a database. What happens is that that code is used as a currency exchange fee. In other words, the code represents an exchange parity. It is an abstraction that, for a group of people, symbolizes a monetary value. So, its price cannot be infinite or totally independent, because it depends closely on the demographic, monetary, social, political and cultural reality of the participants.
The truth is that the appropriate narrative in certain conditions does have the power to produce increases for days, weeks or months. However, only the enthusiasm of the buyers is not enough to maintain a high price. Sooner or later, reality imposes its limits. In other words, it is not very sensible to assume that the price of Bitcoin can rise indefinitely in such unfavorable macroeconomic conditions. With a Fed still in the process of raising borrowing costs, the start of a new boom speculative. It is not a call to pessimism. Actually, it is a call to good sense.
Valuations cannot be made without an analysis of the monetary context. In times of uncertainty, volatility is normal. Because doubt generates ups and downs. The price goes down. And the price goes up. Because the market is discovering the price. However, a definitive change in trend is something very different. What happened in 2017? What happened in 2020? What was the narrative?
In both cases, the bullish spirit was fed by the supposed arrival of institutional capital. The arrival of the institutions. And risk appetite was very high due to extremely easy monetary policy. Can the price of Bitcoin continue to increase? Of course. However, It is not very realistic to expect a recovery like the previous ones under such different monetary conditions. As simple as that. Here is my approach.
Retailers can raise the price, but up to a certain point. The crypto market is infected with optimism on Wall Street. Obviously right now we have a strong correlation with Nasdaq and the S&P 500. Bitcoin goes up. Because everything else is also going up due to the optimistic narrative that has invaded investors during this first quarter of the year. I am referring specifically to the narrative that presents a battle against inflation practically won and a turnaround in monetary terms sooner rather than later. mI fear that this narrative has been built on extremely fragile ground. C.Any setback can cause disappointment. What will surely have as a result a painful correction.
The current optimistic narrative is based on assumptions that may or may not be true. These are very different circumstances to previous bullish periods. During recent bullish periods, the Fed was behind the boom speculative with strong injections of liquidity. What is intended now is to create a boom similar speculative with a Fed against it. Will it be possible?
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