The News Block #31 (04/02/24)
Bitcoin Up Seven Months Straight, Inflation “Victory” Proving Elusive, BlackRock CEO Worried About Lack of Hope, Federal Judge Rules Against Bitcoin Bank Custodia
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Asset Prices Soar on Potential Rate Cuts
Bitcoin closed the month of March up nearly 15%, marking its seventh straight month in the green. Bitcoin has only had a streak like this once before – way back in 2012.
The S&P 500 is also on a streak. It’s been positive for 5 consecutive months, and it’s only the second time it’s accomplished this in the last century.
In addition, gold is up six of the last seven months and recently jumped to another all-time high.
So asset prices across the board are rallying – Why?
Many are attributing this to a recent shift in messaging from the Federal Reserve that officials plan to cut interest rates despite inflation remaining elevated.
The Fed’s preferred inflation metric – Core PCE – which excludes food and energy prices –- remains high – and if the current trend continues, 2024 is on pace to see a Core PCE rate of 3.5% – higher than the Fed’s target of 2%.
There are still underlying inflationary pressures present in the economy. If you are a Bitcoiner, you’ve probably heard forecasts of ‘sticky inflation’ and ‘structurally higher inflation’ from many analysts who appear to have made the right call.
Meanwhile, when you do include things like energy prices, the inflation picture gets even more dire. The Wall Street Journal recently reported that gasoline prices are rising faster than usual this year, up nearly 30%.
People are starting to feel it at the gas pump once again.
However, despite signs that inflation is nowhere close to being defeated, the Fed is talking about cutting rates. Historically, the Fed cuts rates in response to an economic contraction or decline in asset prices to spur inflation and jumpstart the economy out of a recessionary downturn. But today, GDP growth is running hot, inflation is elevated, and the unemployment rate remains at historic lows. The risk is that cutting rates will only add fuel to the fire.
This has led to some confusion on Wall Street. Why now?
A tweet from former Treasury Secretary Larry Summers captured the sentiment:
Personally, I’m not sure why Summers is so confused here. Things start to make more sense when you realize that the Fed isn’t really in the driver’s seat…the Treasury is.
The Fed can’t keep rates this high because we need to keep issuing more debt but can’t afford too high of interest expenses, although they do a good job pretending we can. Without more debt and government spending, the highly indebted system we have today would unravel into a deflationary bust.
A recent chart from Bank of America highlighted the predicament our government finds itself in. It showed that if rates stayed where they are right now, interest payments on the debt alone would rise to $1.6 trillion by the end of the year!
In other words, the Fed is being forced to justify cutting rates because officials have to make it less expensive for the government to issue more debt to keep the system afloat. The outcome? Asset prices will balloon, and inflation will not go anywhere anytime soon.
Bitcoin and gold are both sniffing out this reality. Bitcoin and gold are often described as the last two functioning alarms in the system – signals to the rest of the market that the current policies being implemented are unsustainable and reckless.
For the last seven months, the Bitcoin and gold alarms have been blaring and are sending a warning to the rest of the market – be prepared. The spending will continue, and along with it, inflation. As Lyn Alden often tweets…nothing stops this train.
BlackRock CEO Larry Fink Worried About Lack of Hope
Some people may look at inflation running at 3% rather than 2% as not a big deal. It’s just one percent!
But when you consider how much faster the dollar loses its buying power at 3% compared to 2%, then the impact becomes clearer.
At a constant 2% inflation rate, the dollar loses 50% of its buying power in 35 years. At 3%, that number drops to 23 years.
When people work, they are compensated in dollars. Those dollars represent the time and effort spent to earn them. So when they try to make the argument that 3% is not that big of a change, just think of it as 12 years being stolen from everyone.
It’s no wonder that young Americans, who are less likely to own assets to protect themselves against inflation, are increasingly feeling like there is no hope.
BlackRock CEO and Chairman Larry Fink recently wrote in his annual Chairman’s Letter to Investors that 4-in-10 young Americans say it’s “hard to have hope for the world.”
He called this the most concerning data point he had come across in all his 50 years of working in finance.
Fink made a bold statement that hope has been our nation’s greatest economic asset and is a pillar of the American Dream, which I completely agree with. But how can people have hope when they are just treading water and can barely keep up with the cost of living?
Young people are increasingly saying they have no hope of being able to afford what once was very achievable for older generations. Everyone can tell something is broken, and something is wrong, but they can only identify the symptoms and not the cause.
The cause is that our money is broken. Workers can’t reliably save for the future without taking on a tremendous amount of debt and risk.
So I agree with Larry Fink that the loss of hope is extremely concerning, but here’s where I disagree with him. He said in the same letter that he doesn’t know what the solution is. I do – and the millions of Bitcoiners out there do too.
The solution is to fix the money and give people a reliable way to save for the future that is immune to government manipulation and debasement.
Bitcoin is a way for young people to escape a future where the money they earn continuously loses value as government spending steals their time.
This is why Bitcoin offers something younger generations desperately need: hope.
Lessons from History: They Will Choose to Print
With the government and Federal Reserve staring down the barrel of the sovereign debt crisis they created, those in charge are faced with a decision. Do we preserve the system by printing money to finance deficits and risk inflation getting out of control? Or do we risk trying to borrow money organically from other sources, which could cause a sharp rise in interest rates and result in an economic crisis as the debt bubble pops?
I’m currently reading a book called “The Lords of Finance: The Bankers Who Broke the World,” and I’m reminded of a passage that was also recently included in Luke Gromen’s newsletter.
It talks about a similar dilemma faced by Rudolf Von Havenstein, the central bank president of Weimar Germany, during its hyperinflationary period. It reads:
“The dilemma was ‘whether one wished to stop the inflation and trigger the revolution,’ or continue to print money. Loyal servant of the state that he was, Von Havenstein had no wish to destroy the last vestiges of the old order.”
The events of Weimar Germany show that when faced with a choice to print money to save the system or stop inflation, historically, central bankers always choose the former.
Maybe this realization is one reason why Edward Snowden recently posted the tweet below from Jack Dorsey from 2021.
Federal Judge Rules Against Custodia Bank
Speaking of the old order – a Wyoming-based federal judge ruled last week in favor of the Fed when it determined that the digital asset bank Custodia Bank is not entitled to a Fed Master Account.
Basically, the judge ruled that it was ultimately up to the Fed to decide who gets and doesn’t get a Master Account.
A Fed Master Account allows a bank to have direct access to the Fed and is pivotal for a bank to operate in the traditional payment system.
You may recall from early 2023 that the Federal Reserve Board denied Custodia’s application in part because the central bank saw Custodia as wanting to create more connections between the tradfi world and the crypto industry, saying, “Given the speculative and volatile nature of the crypto-asset ecosystem, the Board does not believe that this business model is consistent with the purposes of the Federal Reserve Act.”
The Fed Board also wasn’t keen on the idea of Custodia holding Bitcoin on its balance sheet, stating that no banks were allowed to do this today, nor was it a big fan of its plan to issue a stablecoin called Avits.
A spokesperson from Custodia told Fox Business, “Challenging the Fed’s strong-arm tactics has always been an uphill battle, but Custodia Bank remains committed to our vision of creating a safe, tech-enabled bank. We are reviewing the Court’s decision and all of our options, including appeal.”
Custodia tried to play by the rules and go in the front door by knocking, but the Fed denied its application anyway. The Fed clearly isn’t ready to treat a bank that’s focused on Bitcoin, holds Bitcoin on its balance sheet, or issues its own stablecoin to customers like the other too-big-to-fail banks it works with.
The Fed can only delay the integration of Bitcoin into the traditional financial system. However, as the last few years have shown us, the merging of these two worlds only appears to be accelerating.
Until next week, keep stacking.
- N₿
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Andy Schectman is the President and Owner of Miles Franklin, an investment company specializing in precious metals that Andy founded with his father in 1989. Miles Franklin recently surpassed $10 billion in sales. Prior to starting his company, Andy became a Licensed Financial Planner, specializing in Swiss Franc Investments and alternative investments. To invest in gold, silver, and precious metals from Miles Franklin, email info@milesfranklin.com and mention Natalie sent you
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