The labor market in the United States is historically very tight with many employers competing for a limited supply of workers. This is driving up wages, despite economic uncertainties for the coming year. These salary increases are not bad news as such. Nevertheless, it becomes an inflationary pressure by not going hand in hand with the growth of the economy. That, therefore, complicates the fight against inflation quite a bit. In other words, the demand is still very strong. And that adds a little more weight to the work of the US Federal Reserve.
The US economy added 263,000 jobs in November. According to the latest report, the growth of the labor market has slowed down a bit during the second half of the year. However, it is still exceeding the pre-pandemic pace. That overheating is still a thorn in the shoe. The service sector, in particular, is very tight. The matter goes like this. Wage inflation adds demand. And that demand exerts inflationary pressure. Which means that there is a need to withdraw more liquidity from the system to lower demand. And, in this way, try to lower inflation.
Everything seems to indicate that the Federal Reserve will have no choice but to raise rates by 0.5% at its next meeting. And every day the probability that they will be forced to rise above 5% in the first half of 2023 increases more and more. Suddenly, the increases of 0.75% were in the past. But that does not mean that this war is over. We have not yet seen much of the pain that we must feel in order to bring inflation down to the target. We are in the early stages of a road that promises to be long, painful and bumpy.
Why is the market so concerned with anticipating the actions of the Federal Reserve? Good because Monetary policy is essential when making valuations. How “cheap” or “expensive” an asset is depends largely on monetary policy. The investor always buys with an expectation. The basic idea is to buy “low” today to sell “high” tomorrow. What requires a comparative study between the present and the future of three variables. I mean supply, demand and money. What’s the price? A number that arises from supply, demand and money.
We well know that liquidity injections increase demand. And the demand generates increases in the markets. On the other hand, the withdrawal of liquidity lowers demand. And that generates falls in the markets. In this case, the Federal Reserve is a change agent for the capital markets. But that is its great relevance when it comes to making forecasts. Anticipating tomorrow’s monetary policy relative to today’s policy helps us price an asset.
If the investor’s goal is to buy “cheap” today to sell “high” tomorrow, the most sensible thing to do when making a forecast is to make projections of tomorrow’s demand in relation to today’s demand. And, in this process, we can make the decisions. Is it bought? For Sale? Expected?
The naive investor often makes the mistake of thinking of any price drop as a discount.. And that happens, because you think more about the past than about the future. It is assumed that an asset is “cheap” for the simple fact that its price has dropped a lot. Mistake. A buying opportunity does not automatically arise after a dip. Because that fall may be the first of many to come. So, buying that drop can become an “expensive” and premature purchase. Many of the people who bought BTC this year, for example, made this mistake. The buying opportunity arises at the beginning of a recovery. And how do we identify a recovery? Anticipating the demand.
All purchases must be made with the expectation of an increase in future demand. Where will the buyers come from? Where will the liquidity come from? Without that signal, buying the dip is jumping into the abyss.
Many people of faith decide to buy without further reflection. They buy motivated by an inveterate optimism that follows them through thick and thin. They do not forecast before buying. So that? The forecast is always bullish. Bitcoin is going up! Yes or yes. As simple as that. Like an unstoppable force of nature. If the price falls, it doesn’t matter. “The price does not matter.” The important thing is freedom. If there are losses (realized or not), it doesn’t matter either. “They are thinking long term.” Here we are talking about a very common attitude among idiosyncratic buyers. But eIn this case, Bitcoin is more of an identity or a pseudo-political movement than an investment instrument. The subjective and emotional predominates much more than the financial.
Of course, unrealized losses are also losses. First, they remind us that we paid a lot for an asset that is currently trading at a better price. Second, time is money. Ill-timed buying means we have to wait longer for the recovery. And, while waiting, we are losing opportunities. In other words, “long-term investment” does not mean a license to buy recklessly.
Now, let’s talk about the future. Let’s pick the first semester of next year. Will there be more demand than today? We study credit costs, Fed purchases, liquidity, the dollar, productivity, income, consumption patterns, geopolitics, sentiment, and demographics. What are the expectations? What are the projections?
As for the coming months, a change in monetary policy by the Federal Reserve is not visualized. Apparently, that long-awaited twist is still a long way off. In his last interview, Jerome Powell, head of the Federal Reserve, maintained a tough tone. And, surely, in the next meeting, it will be a repetition of the same. It all depends on the information. Certain. But, for now, it could be assumed that we will have an increase of 0.5%, considering the last labor report. It is not 0.75%. So, in a certain way, there is some softness. However, 0.5% is not a small thing. The target of 2% inflation per year is still a long way off. And, for next year, we will feel the impact of the tightening measures more.
Many in this space are already declaring a bottom and announcing the start of the bullish cycle. And this is done after drawing lines on a graph. Just like that, remembering past glories, without taking into account the new context. Personally, I think that the chicks are being counted before they hatch. And the demand? Where will the buyers come from? And the liquidity? Questions for reflection.
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