Former Fed Vice-Chairman and current Princeton Economics Professor Alan Blinder wrote an op-ed in the WSJ today.
🧵on why I disagree with him.
Bottom line, the Fed will cut rates in September, but they should not.
And Blinder's "degen" argument that the Fed needs to boost markets because a 20% gain in six months apparently is not enough is a dangerous reason to advocate for cuts.
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Blinder ...
It’s now a foregone conclusion that the Federal Open Market Committee’s next interest-rate move will be down. The little inflation scare in February and March proved to be a blip, likely caused by faulty seasonal adjustment. But when will rate cutting begin?wsj.com/articles/the-f…
2/5
Blinder argues that "faulty" seasonal adjustments caused the big February and March inflation readings.
If this is the case, and we are open to this idea, there must be an offset.
Seasonal adjustments are zero-sum. For every month that overstates inflation, another month has to understate it.
The chart below shows month-over-month CPI. We highlighted the summer months in red.
All of these (red) months were the low points of the year. So, could these be faulty seasonal adjustments as well? Could the 0.1% and -.01% in May and June be the year’s low point, like the previous three summers?
This would prove to be problematic for rate cutting.
3/5
Blinder also said ...
Money is tight right now. With inflation in the 2.5% to 3% range, depending on how you measure it, the current federal-funds rate of 5.25% to 5.5% leaves the real interest rate—the interest rate adjusted for inflation—around 2.5% to 3%. The Fed is squeezing the economy, though certainly not suffocating it. Eventually, rates must come down. But when?
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Here is a chart of what Blinder is describing
Former NY Fed President Bill Dudley is out with an opinion piece arguing.
I’ve long been in the “higher for longer” camp, insisting that the US Federal Reserve must hold short-term interest rates at the current level or higher to get inflation under control.
The facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policy-making meeting.
More from Dudley:
Most troubling, the three-month average unemployment rate is up 0.43 percentage point from its low point in the prior 12 months — very close to the 0.5 threshold that, as identified by the Sahm Rule, has invariably signaled a U.S. recession.
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🧵on the issues this piece brings up.
tl:dr
Dudley's main "facts change" data point is the Sahm Rule is close to flashing a recession warning.
The problem is when millions of unemployed migrants flood into the country; the unemployment rate will rise.
Is this rise telling us the country’s demographics are changing, or is the economy slowing into a potential recession?
This question needs to be answered before economists like Dudley demand monetary policy adhere to the Sahm Rule.
The Sahm Rule is now driving all economic decisions.
Former Federal Reserve Economist @Claudia_Sahm developed it, and it has a good track record for predicting recessions.
It is close to triggering a recession warning (bottom panel).
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Definition:
Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its three-month average low during the previous 12 months.
3/10
The top panel of the Sahm Rule chart above shows that the unemployment rate has increased over the last year. However, as the following chart shows, company hiring has not weakened significantly over the last year—not enough to warn of a recession like the one the Sahm Rule is close to triggering.
The U.S. economy should not be at risk of recession warnings when it is creating 177,000 jobs monthly.
The most interesting question going into next week is whether the US economy is picking up.
Did it start with the release of the June data?
Is this going to frustrate a September rate cut?
🧵
Consider ....
Here is the Bloomberg Surprise Index. It bottomed on July 5, the nonfarm payroll release date. Since then, it has been trending higher. The move higher over the last five days (one business week) has been the biggest since September 2021 (bottom panel).
Bloomberg smooths this index with a six-month "decaying" moving average. This means the below-zero index, signifying worse-than-expected economic data, is an artifact of weaker data earlier this year. The recent surge in the last week is this Index dropping that older "decayed" data for new stronger data releases over the past several days.
2/7
The Atlanta Fed GDPnow bottomed on July 4, the day before payrolls. It was at 1.55%. Currently (July 19) it is at 2.73%.
So, all the data released this month, for June, have surged this estimate of Q2 2024 GDP by over 1.2% in just a couple of weeks.
3/7
Lastly, the Dallas Fed has a "Weekly Economic Index" (WEI) that is indexed to GDP.
It uses ten daily or weekly indicators to estimate GDP each week.
Since the 10 Spot ETFs started trading on January 11, they have collectively generated $14.6 billion in net new money. They peaked near $16 billion last month.
Collectively, these ETFs are the most successful ETF launches in history.
The problem might be they are successful for ETF providers but maybe not as much for BTC holders.
A 🧵to explain.
2/9
As I noted last month, most of this "new" ETF money was on-chain coins moved to regulated brokerage accounts that bought the BTC ETFs.
Of the peak inflows near $16 billion into BTC ETFs, only ~$3 billion was really "new" money into the BTC ecosystem.
The lack of a rally showed that the "new" money in the entire BTC ecosystem was small (~$3 billion). Despite all the bullish talk and "here come the boomers" proclamations, BTC peaked in March at $74k.
The BTC bulls were correct that near $16 billion of "new" money into the ecosystem should have pushed BTC to >$100k. However, it was not near $16 billion as most ETF flows came from on-chain accounts and not new fiat entering for the first time.
Further supporting this are the fears surrounding Mt. Gox liquidations. A total of $7.6 billion of BTC (140k BTC) is getting transferred. If $7.6 billion is hitting the price this much, and only a small portion will be liquidated for fiat, then near $16 billion of new BTC ETF money, if this was the case, should have skyrocketed the BTC price.
Breaking news Saturday night ... just as Biden arrives at the Hamptons fundraiser.
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President Joe Biden is expected to discuss the future of his re-election campaign with family at Camp David on Sunday, following a nationally televised debate Thursday that left many fellow Democrats worried about his ability to beat former President Donald Trump in November, according to five people familiar with the matter.
For now, about 80% of bitcoin ETF purchases have likely been coming from “self-directed investors who have made their own allocation, often through an online brokerage account."
The following chart shows that the average size of a Spot BTC ETF trade (blue) is just $14.6k, far less than any other ETFs that are very popular with Tradfi ... and about one-tenth the size of a SPY trade.
This is exactly what you'd expect if they buyer is retail Degens.
3/4
In other words, the chart above is consistent with BlackRock's statement that Tradfi is largely not playing. This blue line will go up when they start to play, which they are not doing now.
For now, the Spot BTC ETF buyer is a retail Degen, and as explained below, most of them came from on-chain accounts to a regulated brokerage account.