Last Friday in my closing monologue on Market on Close, I outlined the deep bear case for bitcoin. It’s straightforward: rising interest rates should be King Crypto’s Achilles heel. Policy tightening from the Federal Reserve is exactly what crypto thought leaders have told us could never happen, and it’s happening.
Coiners have been selling a story of central bank profligacy and ineptitude that is now being very precisely disproven as we speak. Fed Chair Jerome Powell is choosing to fight inflation at a more aggressive pace than just about anyone thought he would – or, in the case of bitcoiners, thought he could.
As a result, the U.S. dollar is surging to the highest levels since the Covid crisis began. Telling the classic bitcoin story today amounts to telling something just short of a lie.
As I said in my segment Friday, it looks to me like bitcoin is poised for a protracted decline. The logical flipside to this analysis is that if bitcoin is able to make a new record in a tightening monetary environment such as the one we’re in right now, then my assessment of bitcoin’s dependency on the Central Bank CPF +0.8% narrative is clearly wrong, and perhaps the asset has truly transcended into something more sustainable than a giant speculative bubble.
For that lingering bull case, look to President Biden’s address on Tuesday, in which he justified the need for his Build Back Better plan by pointing out that stock prices dropped when Senator Manchin said he wasn’t on board with the White House agenda this past weekend.
This is very dangerous logic that could refresh bitcoin’s narrative about a never-ending cycle of government spending that is more concerned with inflating asset prices than preserving economic stability.
Using the most expensive stock market in history as an arbiter of what is good and true is like asking a drunk driver what the speed limit is. It’s a particularly backwards approach when we have ample evidence that the stock market over the past year has in many moments reacted negatively to events that are economically positive.
Traders often use the phrase “bad is good” in describing the stock market’s reaction to positive economic news because of the implication that a strong economy means less stimulus. It’s not a meme – investors have been piling into the safety of Treasuries as the economy recovers because there is fear that the Fed’s tapering of support could crimp the economy.
Unprecedented amounts of stimulus last year helped push stock prices to even higher valuations than the dot-com bubble and American wealth is more attached to risky investments like crypto than anything in recent history.
It is asinine to think prices should only be allowed to move in one direction. Policymakers should be focused on disentangling asset prices from the economy, not crafting policy around what makes them go up the most. The more unsustainably expensive the market gets, the more its volatility will be generally unpredictable and detached from reason. It should not be the guidepost for what the economy needs.
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