The Financial World is Still Not Out of the Woods

April 14, 2023

The Financial World is Still Not Out of the Woods

In this week’s report

  • The Fed's economic position is not favorable
  • Bitcoin's state remains shaky
  • China and the new BRICS Currency
  • The constant talks of War hold finance hostage

The Fed's Position

Federal Reserve documents released on Wednesday revealed that the U.S. banking crisis could trigger a mild recession later this year, according to staff economists.

While the Vice Chair for Supervision, Michael Barr, said the banking sector is “sound and resilient,” the Fed still expects the economy to suffer. The staff projected GDP growth of only 0.4% for all of 2023, indicating a pullback in the year.

This comes after Silicon Valley Bank, the 17th largest institution in the U.S., collapsed following a run on deposits.

Despite the banking crisis, the Fed increased the benchmark borrowing rate by 0.25 percentage point, the ninth increase over the past year.

This brought the fed funds rate to a target range of 4.75%-5%, its highest level since late 2007. However, several policymakers questioned whether to hold rates steady as they watched to see how the crisis unfolded.

Officials noted that the Fed expects lending to tighten and credit conditions to deteriorate, despite the emergency lending facilities created to ensure that banks can continue operations.

The Fed is looking for inflation to slow sharply next year, reflecting the effects of less projected tightness in product and labor markets. There was concern over broader economic conditions remaining high, particularly in light of the banking problems.

Bitcoin's Price Action Amidst Uncertainty

Bitcoin's performance is currently linked to the Fed pause rally, where equities and other risk assets respond positively to the Fed's decision to stop increasing the rate hike.

However, when economic deterioration occurs, and the Fed cuts its policy interest rates, bitcoin will suffer a decline. Bitcoin's high sensitivity to market movements is due to its low liquidity profile and excessive leverage in futures, swaps, and options compared to other assets.

As economic data deteriorates, risk assets are still bid up under the assumption that the Fed's reaction will be easy policy, but when credit stress hits the economy, risk-taking evaporates from the market, and risk assets fall.

When this deflationary bust occurs, how bitcoin will behave depends on how much of the current market structure is driven by leverage or buy spot buying.

When the Fed cuts rates, risk assets do not rally but instead decline. Bitcoin's low liquidity profile and excessive leverage make it more sensitive to the booms and busts of market cycles.

When the bust comes after a sullen economy and Fed rate cuts, bitcoin's price will decline, but it will be less of a factor as bitcoin beefs up its liquidity profile over time.

Essentially, we are currently seeing a rally, but this rally may not last much longer. Especially as it faces long term resistance at 30 000 - 32 000.

Bitcoin/USD 1W Chart (TradingView)

BRICS & Global Powers

The BRICS countries are setting themselves up as an alternative to existing international financial and political forums, according to Günther Maihold, deputy director of the German Institute for International and Security Affairs.

Brazil, Russia, India, China, and South Africa are trying to position themselves as representatives of the Global South, providing "an alternative model to the G7."

In 2014, with $50 billion in seed money, the BRICS nations launched the New Development Bank as an alternative to the World Bank and the International Monetary Fund. The BRICS bank is open to new members. In 2021, Egypt, the United Arab Emirates, Uruguay, and Bangladesh took up shares.

However, the most recent economic developments in BRICS member states have little to do with the initial myths upon which the group was founded.

Of the five members, only China has achieved sustained and extensive growth since then. China's GDP grew from $6 trillion in 2010 to nearly $18 trillion in 2021, while the economies in Brazil, South Africa, and Russia stagnated. India's GDP grew from $1.7 trillion to $3.1 trillion but was outpaced by China's growth.

Moreover, since the start of the Russian war in Ukraine, the BRICS countries have only distanced themselves further from the West. Neither India, Brazil, South Africa, nor China is taking part in sanctions against Russia.

This has become increasingly clear with near-historic levels of trade between India and Russia, or in Brazil's dependence on Russian fertilizer.

As a result, some European and US policymakers worry that the BRICS may become less an economic club of rising powers seeking to influence global growth and development and more a political one defined by their authoritarian nationalism.

In our, rather bipolar world, China is likely to emerge as the new global superpower, causing America to crash.

This prediction is based on the fact that America has been in decline since the 1970s, with rising income inequality, declining social mobility, and political polarization. China, on the other hand, has been growing rapidly, thanks to its economic reforms and the Communist Party's long-term planning.

The Chinese government has invested heavily in infrastructure, education, and technology, while the American government has cut taxes and reduced spending.

China has also been expanding its influence around the world through its Belt and Road Initiative, while America has been retreating from global leadership.

Although, many major analysts, including myself, might argue china is also not particularly in a great position as of now, despite proof to the contrary.

The current battle for global power is one over which analysts including myself have no clear perspective, wherefore I will not espouse to further speculation here (except what has already been said).


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China & Taiwan tensions remain high

The tension between China and Taiwan has escalated after China conducted military exercises simulating strikes on Taiwan.

Taiwan’s Foreign Minister, Joseph Wu, warned that Beijing’s actions seem to indicate that they are preparing for war against Taiwan, and condemned their military threat. The exercises included the launch of jets from the Chinese navy aircraft carrier Shandong in the Pacific Ocean east of Taiwan.

China claims that Taiwan is its territory and has expressed ambitions to “reunify” with the island, by force if necessary.

The United States has expressed its commitment to defend Taiwan militarily if China attacks, and Taiwan has asked France for clarification regarding its position on the issue. The tension has been brewing for a while, as Chinese military exercises around Taiwan also occurred last August

I might argue that the ongoing geopolitical tension between China and Taiwan is a major source of global uncertainty that creates market risk for investors.

This tension has led to an increase in military exercises and rhetoric from both sides, indicating the possibility of war. Such a war could have devastating consequences for the region and beyond, including economic instability and disruptions to global trade.

As a result, investors may continue to take positions that carry significant risk as they attempt to capitalize on market opportunities, despite the potential consequences.

Moreover, the constant conversation about the possible war and the war in Ukraine can be seen as a major cause for tension and global uncertainty, which leaks into the financial market and therefore makes most investors continue to take a risk of position.

The situation creates a feedback loop in which market activity reinforces political tensions, and political tensions further exacerbate market risk.

It is crucial for governments to take actions to de-escalate the situation and reduce uncertainty to avoid the potential economic and political fallout.