SVET Markets Weekly Update (September 18–22, 2023)
On week 38, the Fed kept its rate unchanged and its rhetoric hawkish, disappointing traders and leading to the Nasdaq’s downfall while BTC barely held above 26K.
On Monday, The NAHB Index fell to its lowest level in five months, and the Nasdaq traded close to its opening as traders hesitated to make stakes before the Federal Reserve’s next interest rate decision due on Wednesday (a pause is expected at 5.25% — 5.5%). Tesla declined, while Apple increased on strong demand for iPhone 15 Pro handsets. Bitcoin rose on optimism that the FOMC will pause. Other news: One-third of all cryptocurrency hacks are made in North Korea.
Housing market sentiment declined in September to a five-month low, as builders and consumers became less confident due to high mortgage rates. The NAHB Index fell to 45, and the indexes for current single-family home sales and prospective buyers also decreased.
This is a clear sign that high mortgage rates are taking a toll on builder confidence and consumer demand. As a result, a growing number of buyers are electing to defer a home purchase until long-term rates move lower.
Getting rid of red tapes, and allowing market forces to work will allow builders to increase the housing supply. This is the best remedy to ease the nation’s housing affordability crisis and curb shelter inflation.
When there is more supply of housing there will be more competition among sellers to attract buyers. Of course, there are other factors that contribute to the housing affordability crisis, such as rising incomes and low interest rates. However, increasing the supply of housing is one of the most important things that can be done to make housing more affordable for everyone.
North Korean government-backed hackers have stolen over $340 million (~30%) in cryptocurrency this year from crypto exchanges and dapps (Chainalysis).
One-third of all crypto-related crimes are associated with repressive regimes that governments cannot influence, despite their best efforts. At the same time, the SEC accuses all of us of being criminals without a hint of proof. This is a beautiful system of governance!
On Tuesday, Housing starts dropped sharply while the Nasdaq went sideways as investors awaited the Fed’s rate decision. Amazon fell but Apple gained after positive iPhone outlooks. Bitcoin stalled on rate uncertainty. Other news: Coinbase found that one in five adults in the United States is holding crypto.
Building permits in the US increased by 6.9% in August 2023, the highest in 10 months. This beat market expectations and was driven by a surge in multi-family permits. Permits grew in all regions of the country.
At the same time, Housing starts in August fell 11.3% from July to a seasonally adjusted annual rate of 1.28 million units. This is the lowest level since August 2020. The decline was driven by a 26.3% drop in multifamily starts, while single-family starts fell 4.3%. Despite the monthly decline, single-family starts are still 2.4% higher than a year ago.
In August, building permits in the United States experienced an increase, while housing starts declined. Why?
The rise in building permits suggests that new construction remained supported by a dearth of homes on the market. However, the decline in housing starts could be attributed to a resurgence in mortgage rates, which weighed on the demand for housing.
So, developers and builders might think in different time frames. Developers may be optimistic about the long-term outlook for the housing market. The housing market has been cooling in recent months, but some developers may still be optimistic about the long-term outlook. They may believe that the current slowdown is temporary and that the housing market will rebound in the future.
Here are some other reasons why building permits increased in August while housing starts declined:
There is a lag between building permits and housing starts. Building permits are issued when a developer has received approval to build a new home. Housing starts are counted when construction on a new home begins. It can take several weeks or even months for construction to begin after a building permit is issued. This is because developers need to secure financing and complete other tasks before they can start building.
Developers may be trying to get ahead of rising costs. The cost of building materials and labor has been rising steadily in recent months. Developers may be trying to get ahead of these rising costs by obtaining building permits now, even if they don’t plan to start construction immediately.
52 million cryptocurrency holders in US (1 in 5 adults) are concentrated in nine states: Arizona, California, Georgia, Illinois, New Hampshire, Nevada, Ohio, Pennsylvania and Wisconsin;
Nine in ten Americans, or 87%, believe the financial system needs to change;
51% of Americans believe America’s financial system does not operate fairly for everyone
14% of Americans said they were optimistic about the future of the financial system.
52 million cryptocurrency holders in the US represent a growing community. In fact, if these holders were to form their own country, it would be the 28th most populous in the world, ahead of Spain and South Korea.
This is a significant number of people who are interested in and invested in cryptocurrency. It is also a diverse group, with crypto holders coming from all walks of life. This suggests that cryptocurrency is not just a passing fad, but a real and growing movement.
On the other hand, SEC represents a few aging individuals, including Gary Gensler a couple of other “policymakers” (mostly 70–80 years old). The fact that SEC is still winning against us is simply means that the whole system of state governance is inadequate to the new technological age.
OECD Economic Outlook from September:
World’s GDP growth at 3% in 2023 (vs 2.7% seen in June) and 2.7% in 2024 (vs 2.9%);
US economy grow is 2.2% in 2023 and 1.3% in 2024;
Eurozone is seen rising 0.6% in 2023 and 1.1% in 2024;
China is expanding 5.1% in 2023 and 4.6% in 2024;
Inflation is projected to remain above central bank objectives in most economies.
FYI: The Organisation for Economic Co-operation and Development (OECD) is an international economic organisation with 38 member countries, founded in 1948 to stimulate economic progress and world trade.
Global economic growth is expected by OECD to slow as the Federal Reserve and other central banks raise interest rates to combat inflation. This tighter monetary policy is already having an impact, with business and consumer confidence declining and the rebound in China fading. The risks to the global economy remain skewed to the downside, with the biggest threats being uncertainty about how quickly and effectively monetary policy will bring down inflation, as well as a sharper-than-expected slowdown in China.
On Wednesday, Fed holds the rate but hinted at keeping it higher for longer. The Nasdaq reacted by correcting sharply as traders’ mood changed again from anticipatory to moderately negative. Bitcoin hovered slightly above 27K as bulls lacked positive signals to continue pushing it further. Other news: The SEC updated the 1940s Name Rule, and the GOP keep pushing against CBDCs.
Fed kept the rate unchanged at 5.25%-5.5% (at a 22-year high) as was anticipated by most analysts. Other takes from the FOMC meeting:
Fed see the rate at 5.6% this year and at 5.1% in 2024 (higher than in the June’s forecast — 4.6%)
2023 and 2024 GDP growth are seen higher: 2.1% vs June’s 1% and (1.5% vs 1.1%;
PCE inflation was revised to 3.3% (vs 3.2%) but was kept at 2.5% for 2024;
The core 2023 inflation is expected lower (3.7% vs 3.9%) and unchanged for 2024 (at 2.6%);
The 2023 unemployment rate is projected lower at 3.8% (vs 4.1%) and 4.1% (vs 4.5%) in 2024.
Overall, Fed members’ sentiment is clearly shifting towards keeping interest rates higher for longer, despite declining inflation, provided that the economy continues to perform well.
SEC updated the Name Rule (clause within the Investment Company Act of 1940). It now applies to more funds, including those active in crypto. This means that funds must invest their money in a way that is consistent with their names, as understood by the average investor.
The House Financial Services Committee has advanced a bill that would prevent the Federal Reserve from issuing a central bank digital currency (CBDC) directly to individuals. The bill, introduced by Rep. Tom Emmer (R-Minn.), would also prohibit the Fed from indirectly issuing a CBDC through an intermediary.
Dirty Garry, after his public humiliation following the XRP ruling, appears to be withdrawing from his front-row seat, where he has actively suppressed innovation in the country. His seat is now taken by his henchmen, who do not hesitate to directly threaten anyone involved in the crypto industry with persecution. Meanwhile, some lawmakers continue their attempt to stop or at least delay the CBDC 1984 madness from happening. Ergo, the system of government must be changed ASAP by drastically reducing the power of executioners and bureaucrats.
UK inflation slowed to 6.7% in August from 6.8% in July, beating expectations of 7.0%. This was the lowest rate since February 2022, driven by slower food inflation and lower accommodation costs. Core inflation, which excludes volatile items like energy and food, fell to 6.2%, the lowest since March.
The UK has one of the highest inflation rates in Europe due to high food and energy costs. The fact that UK inflation is slowing down is significant, as it indicates an overall improving situation with food and energy shortages in the EU. This is likely due to entrepreneurs adapting to the new geopolitical situation by finding new suppliers and developing new technologies. The slowing of inflation in the UK is a good sign for the European economy as a whole, as it suggests that the region is starting to recover from the shocks of the war and the “quarantine”.
On Thursday, Unemployment claims declined, suggesting a strong labor market and further rate hikes. Treasuries responded with new highs, and the Nasdaq fell sharply to its lowest level in five weeks, led by rate-sensitive tech shares. Amazon, Broadcom, and Cisco shares decreased on corporate news. BTC plunged below 26.4K as bears used macroeconomic negativity to strengthen their positions. Other news: The WSJ reported that crypto firms are leaving the country en masse.
Unemployment claims fell to 201,000 last week, the lowest level since late January and well below expectations. At the same time, the Philadelphia Fed Manufacturing Index fell to -13.5 in September, down from 12 in August. This is worse than expected and suggests a contraction in manufacturing activity. However, firms are still raising prices and future indexes improved, suggesting some optimism for growth over the next six months. Markets reacted by Treasury rising sharply, with the 10-year yield nearly touching 4.5%, its highest level since 2007 and the 2-year note approaching its highest level (5.2%) since November 2000.
Employment situation is a lagging indicator and it usually starts to notably worsen when recession is already on the way. In contrast, despite occasional spikes, manufacturing activity in one of the country’s largest and most economically active regions continues to deteriorate, which is a clear sign of an upcoming economic downturn. However, most recent unemployment data suggests that the Fed may still have some political ammunition left to argue that its policies are not harming the economy, and it is likely that the FOMC will continue to raise rates further. Traders reacted accordingly and loaded up with Treasuries selling tech sector.
Wall Street Journal reported that crypto firms are leaving the US due to SEC crackdowns. Companies are being forced to develop growth plans overseas, and MakerDAO has blocked US-based users. Three companies focusing on overseas growth are Ryze Labs, Zodia Markets, and Ripple Labs.
We may be standing at the dawn of a new era in cryptocurrency markets, in which a small portion of our community will be in direct confrontation with US and EU regulations due to their perceived unfairness and general stupidity. The rest of the crypto market will be dominated by giant banks, which will cut off the vast majority of users from crypto by introducing expensive, “fully compliant” centralized protocols that mimic DeFi but are insecure and simply represent a continuation of their existing outdated trading systems.
The Bank of England paused interest rate hikes at 5.25% on September 21st, citing recent data suggesting that the impact of previous hikes is taking effect and expectations that inflation will decline. Policymakers remain committed to tightening policy further if necessary.
The BoE rate halt, following the European Central Bank’s (ECB) pause, is another confirmation that policymakers are starting to consider a change in their rate-hiking programs due to the continued deterioration of global economies and slowing inflation. However, the Fed’s decisions will still have a decisive impact on global financial markets.
On Friday, the Purchasing Managers Index stalled, indicating slowing business activity. The Nasdaq continued its downward trajectory, with bears attempting to test a critical support zone at 13.2K-13.0K. BTC traded sideways slightly above 26.5K, with players closely following macroeconomic data, anticipating more bearish catalysts. Other news: Coinbase’s USD 25 billion or more BTC holdings revealed.
Business activity remained largely unchanged in September for the second month in a row, signaling the weakest economic growth since February. The S&P Global Flash US PMI Composite Output Index edged down to 50.1 in September from 50.2 in August. A reading above 50 indicates economic expansion, while a reading below 50 indicates contraction.
Companies have enough inventory of raw materials and finished goods, and demand remains low, so they are buying less from suppliers. Instead of buying more inputs, companies are using up their existing inventory, which has led to better supplier performance. At the same time, companies need to hold less inventory of finished goods, so they are reducing their post-production inventories at the second-fastest pace since November 2021. Companies are hiring more people, but the pace of hiring is accelerating. The cost of inputs is increasing rapidly, especially fuel costs, but the price of output is increasing only slightly.
In other words, the economy is slowing down, and companies are adjusting their operations accordingly. They are buying less from suppliers, using up their existing inventory, and reducing their inventories of finished goods. They are also hiring more people, but the pace of hiring is slowing down. The cost of inputs is increasing rapidly, but the price of output is increasing only slightly.
Cryptocurrency intelligence firm Arkham Intel has discovered that Coinbase, the leading US-based cryptocurrency exchange, holds $25 billion worth of Bitcoin, or nearly 5% of the total supply. This makes Coinbase one of the largest holders of Bitcoin in the world.
Despite the mantra of decentralization that we all preach, the tendency is clear: over time, any type of asset — decentralized or not — becomes overconcentrated in the hands of a few. This is likely to continue for many years to come, at least until humanity changes its ways and starts to be driven by reason rather than emotional outbursts or muscle memory.
From this perspective, having a variety of tokens and coins is essential to preventing a monopoly on asset ownership. This thesis certainly clashes with the Austrian School’s teachings on the perils of inflation and the need for “hard money.” However, the reality is that the economy exists to serve people, not vice versa. In this sense, inflation can be seen as a remedy for human weaknesses of character.
After a week of central bank meetings, on Week 39 investors will turn their attention to macroeconomic data releases in the United States, Europe, and Japan. Key data releases include the PCE Price Index, personal income and spending data, durable goods orders, GDP growth rate, and housing data in the US; inflation rates and business and consumer confidence surveys in Europe; and industrial production, retail sales, and unemployment rate in Japan.