Dec 14, 2023

Bitcoin (BTC) briefly broke above the $43,000 level in the last 24 hours, as the Federal Reserve signaled interest rate cuts for next year.

Video transcript

Bitcoin popped above 43,000 very briefly after the Federal Reserve held its benchmark, fed funds rate steady for the third consecutive time. Joining us now to discuss is new edge wealth senior portfolio strategist and Principal Ben Emmons. Welcome back, Ben. Good morning Lawrence. Good to be back. Glad to see you. So, uh you know, we, we had the fed, keep its rates steady. But the real excitement happened afterwards when Fed chair, Jerome Powell spoke to the press spoke to everybody gave out a statement. Let's let's go over that because that seemed to really change the tone if you will about how the fed or it sounds as if the Fed might be changing its approach with inflation. Uh go in a little bit on that there. Tell us a little bit more about what Powell said and why it matters. Yeah, it was, I think very historic Lawrence because, you know, two weeks ago, he was at the Spelman College doing the speech and he in that speech on the record pushed back on speculation of rate cuts, you know, simply saying like this is premature and we're still much in the, in the stage here thinking of sufficiently restrictive policy to get inflation under control. But that first part of, of restrictive policy remained a bit in the press conference too. But when he went on, he said that, you know, they basically were discussing rate cuts at the FO MC meeting. They were also discussing that they should cut well before the inflation reaches 2%. And they were growing more confident in that inflation is going to get to that target. And then last year, he said also that the fat sugar rates, otherwise they would be too late if they get, if they wait too long and inflation reaches closer to 2% and then the count rate, it would be too late. So that's what we would call a pivot. And then that's that you, if you first say that you're going to not cut rates and then you're saying you're openly discussing rate cuts and that was the major change. I think that is why markets reacted so strongly seeing yields declining sharply, dollar weaker equity markets up, commodity markets up. So this is a very classic historic moment for markets where FED chair says like we do X but we actually are discussing why and this is the pivot and it changes a bunch of things we're seeing. For instance, this idea that the, the Fed might have conquered inflation without causing a recession and that it's even looking as you mentioned before to cutting rates. It looks like it's gonna be probably three rate cuts, uh, at least 75 basis points. Correct. Yeah, it's at least 75. That's in the forecast. That was a change too because before in September they only a forecast of 50 basis points. And you're right, like the, the, the fed feels comfortable to say that they can cut rates because they're getting close to their objectives. You know, both employment and inflation moving in the trajectory that they are forecasting. And therefore this recession isn't happening really because they kept rates long enough restrictive that they can, they can now start lowering them again next year. Now, some of this has been out there before that the New York fed Williams started that discussion and uh fed Governor Waller came about later and really infused that buzz around his rate cut. But ultimately that the fed puts it back into the, into the top block with more rate cuts. And then talking about that, they're open to rate cuts in the discussion that gives the market a lot of fuel to pricing even more. I think what will happen now. And this was the other interesting question at the press conference is about, you know, we're in an election year, right? And cutting rates in election year may be politically sensitive. Of course, Paul said that we're gonna do what's, what's the writing for the economy? Uh They're getting a forecast, right? So they can cut rates but then you get this term called front loading. And one of the reporters asked him about that, he stayed politically neutral, but he didn't dismiss and didn't push back on that either. So the market is taking this as a cue to say, you're not only going to cut rates, but you may be front loading them too and, and by front loading them, you mean allowing it to kind of go into detail by what that, what that means and, and it's, and tie it in to the, the election and, and what Powell might be trying to do here potentially or the fed rather. Yeah, if you go back in time. So it's starting in March of 2022 when they did the first rate hike the following month, the the term front loading came really quickly that narrative because they recognized inflation was running away from them going up too quickly. And so they started ratcheting up the rate during that summer of 2022. And board was really out with that term. We have to front load policy. We have to hike more quicker, faster to get a restrictive rate and put pressure on inflation. Now, it's the opposite situation. And so if inflation is moving now faster than what they had anticipating, they have to do also this front loading of, of rate cuts because otherwise they may undershoot the inflation target. Ironically, after all the inflation that we have, we may not get a potential undershoot of the inflation target. And so in a political year, like next year, I think the two dynamics there, Lawrence one. Yeah, you do. What's right for the economy, right? Because if you get inflation, it gets too low, it cannot be a good thing either for the economy. So you cut rates. Secondly, it probably has something to do with the election if you're cutting right in front of the presidential election, that probably is not a very good thing to do. So that gives you some reason to do it sooner. So I think if you summarize it all together, you say front loading means in this context, they're gonna start lightly cutting rates by either in March or May and may do that with, with an increment of of 50 basis points instead of 25 and then maybe do it out of 20 or 25 in the summer. And that it means that front loading, the easing, meaning all those rates that they forecast are coming sooner in the year than, than rather than later. Well, you kind of answered the, the question I was going to ask you about, you know, before this recent move, Goldman Sachs said they were predicting two rate cuts for next year. Now this morning, we're hearing some analysts say uh three, where do you think we're going to land? Yeah. So the market is very extended now, right? And, and, and the economist jump on board with the market because they're looking at this and is getting off the message from power. So I think what I come down to is that the fed will probably meet at least three rate cuts that are priced in but potentially one more thereafter. Because back in June, in that forecast, they had 100 base points of cuts originally forecasted in, in their, in their outlook. I think that's where they ultimately land at 100 basis points. And I think this is probably, you know, also the, the the best middle of the road solution for this inflation rate as it starts declining, that they don't want this inflation rate to decline too fast and then they're too late. So I think 100 basis points is likely next year. So of course, our viewers are interested in crypto. How does let's tie this back into crypto because of course, Bitcoin is a risk on asset at least for now. Uh How do we, how should traders invest now in crypto? Should they invest? What, how, how should they approach crypto with this sort of pet fed pivot? Yeah, if you think of, of crypto and, and I'm gonna put a little bit maybe in the commodity space, all commodities are sensitive to interest rates, whether that's gold and metals or, or energy crypto is in that, in that similar sort of vein, it's very sensitive to interest rates and that has to do with just, I think money in itself, it also has to do with that. People connect Bitcoin with an alternative currency and that's always related to interest rates. So I think as rates go down, crypto prices go up as do gold prices go up as silver as it, as en energy going up as we speak. The other side of that, of course, is that you have the dollar which now start to weaken and if the fed does deliver 100 basis points of cuts, then the dollar will be weaker against most major currencies. And I think that too lifts crypto to a higher level. Lastly, I think it's also about financing in itself. So anything that you, you, you need to finance money with, you get a lower interest on that you can put into risky assets like crypto that will benefit that I think too that if you, you know the, the, the pending ETF for Bitcoin spot Bitcoin probably is boosted by this idea too, a lower rate environment is beneficial for a spot. Bitcoin ETF. I think so that I think all leads to this idea of that. Yeah, crypto reacts to interest rates quite sensitively and we could probably see, you know, maybe go back to 50 60,000 on Bitcoin. All right. And Ben, we can't stop talking about the spot, Bitcoin ETF here on the show and in the industry, uh JP Morgan recently said that if a spot Bitcoin ETF is approved, it's unlikely to spur major gains. That's, of course, the opposite of what a lot of the asset managers who have skin in the game are saying. And a lot of industry watchers. What do you think? Yeah, I think it's, it's coming, it's really, it's almost here if you will. Right. Like, there's been such a back and forth on between the SEC and, and the industry and the SEC is also recognizing that that Bitcoin and crypto is a real financial asset and people want to trade it, they want to transact in it, they want to use it, they want to have it as part of their portfolio. So it always has been about finding the right framework around an asset like crypto in order then to have ETF S based on Spot Bitcoin to really be available to the general public. So I think it's about here, there's some speculation when exactly I don't have insight on that. It's myself, but that it makes sense because we already seen, I believe spot Coin Bit Bitcoin, ETF S in Canada and have worked there to an extent that to that extent, it can work here too, it can work anywhere, right? It's just a matter of having the right framework of regulation around this, around Bitcoin, how it has to be, you know, operating just the same way as it would be for equity or bounty TF And I think this is where we, we're heading. So II I would say within the next year this, this Bitcoin ETF will be here. Do you think the price will rally on an approval or do you, do you think it's already priced in it? It could still rally more because once you have an actual ETF and the info start to come into that and we know that Bitcoin is a, is a basically a limited currency, right? It's limited supply. Yeah, then you're getting more buying. So it, it should drive up the price. How far? I don't know, but I definitely think it, it will underpin the price and it is therefore not fully priced. In. On the other hand, Bitcoin ETF will start trading kind of like a commodity ETF like I think of God as a gold ETF people buy it and trade it and go in and out. So you also get people who show it obviously and, and you get some flows. But I think initially to the to the run up of the actual launch, those those issuers think Blackrock think a lot of big issuers would have to accumulate Bitcoin in order to back it, right? So that's, I think why the price gets driven up. All right, Ben, we are going to have to leave it there. Thank you very much for joining us this morning. It's always a pleasure having you on the show. Thank you. It's great to be here. That was new edge wealth. Senior portfolio strategist and Principal Ben Emmons.

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