Thank you for joining me for my first weekly review where we can look at what I predicted and how certain major news events occurred over this past week.
We will be reviewing the predictions from This Post which were made on Sunday 12/5.
There are no advertisements or paid links in this post.
Table of Contents
Mindfulness And our Limitations
Brief Global FX events
Australian Interest Rates
Canadian Interest Rates
US CPI
US Bond Auctions
Conclusion and Whats up Next
1. Mindfulness And Our Limitations
Before we get started, we need to talk about something. No matter what is going on, it’s very important that we are mindful of who I am, and who you are. I can’t tell you who you are, but I can tell you how to approach the concept of who you are. I am mostly self-taught, and that comes with a lot of upsides and downsides. When you read my thoughts, you should be mindful of the Pros and Cons of my informal experience and be sure to pay attention to other sources with more formal education and formal experience to get a well-rounded outlook.
As an example, most self-taught people do not know what they don’t know because they missed out on the benefits that a mentor can provide. Knowing the limits of your knowledge is crucial. There are certain lessons that you can only learn by making a horrible mistake, or being told about it by someone else who has. Most self-taught people are always on the edge of disaster because they have only had success and have not yet had the kind of mistake that can end them entirely. If you do not have the benefit of a mentor to talk you through the kind of mistakes that only experience can teach, I recommend you read or listen to the following audiobook, this book is called “What I Learned Losing a Million Dollars.” The most important thing it provides is perspective about how things that you have never seen before and never contemplated can always occur. This is a weak point of many entrepreneurial types. We often don’t realize our own limitations, and it’s why successful entrepreneurs build strong teams around them of people who know all the things that they don’t. One of the lessons I have had to learn the hard way is the following.
Just Because Something is inevitable does not mean it is imminent.
You will see me repeat this phrase often, a good mentor should teach you this. You can have the most fundamentally sound technical trade, but if you do not understand this, you can end up having your patience worn down. This is depicted well in the movie the Big Short. Keep in mind, the movie is taking dramatic license and was probably written by someone with little real world experience in the trading sphere. Most movies and TV shows, IMO are bad because movie writers are generally young and inexperienced and can’t capture any of the nuance or details that make a scene feel real and lived in to the people that have already lived in it. In the following scene, Michael Burry finds the trade of the century, and enters WAY too early, and gets worn down by how long the market took to actually move in his favor and he had to spend a lot of money to hold his position. Christian Bale has always been a very physical actor, and you can almost see the mental weight his emotions are putting on him.
You don’t need me to tell you what the right trade is, its obvious. You can buy crypto or land with your eyes closed and wake up from your coma 20 years from now smelling like roses. Thats the right trade. And if you have the temperament to buy and forget, you’ll end up just fine. But what I am doing is identifying the right times to buy so that we have to sit through the least amount of pain possible. I firmly believe that managing your financial emotions is more important than making sound fundamental and technical analysis. Bad emotions can ruin a good trade, and good emotions can save a bad trade. The best way to manage your emotions is to end up feeling like Michael Burry on the floor in this movie scene for as little time as possible, or hopefully never.
Now, lets get started.
2. Brief Global FX Events
Australian Interest Rates
As I stated at the start of the week, the Royal Bank of Australia decided to go with absolutely no surprises and did not raise interest rates. In the Governor’s speech, Lowe further doubled down by stating that no rate increases will occur next year either. If you trade any Aussie pairs, this will likely lead to a continued slow bleed of value out of the Australian dollar. Their central bank is in the same horrible position as the US Federal Reserve, and is unwilling to raise rates in order to protect a wealth effect they created. If they raise rates, housing prices will fall, they are unwilling to let that happen, so they will let inflation run high in Australia.
Canadian Interest Rates
On Sunday I had stated that if the Bank Of Canada enacted a more hawkish tone during their statement after their decision that we could see USDCAD take one last swipe at 1.3 to allow for a mid-term leveraged short entry. That didn’t happen as the Bank of Canada took a more doveish tone and did not make it clear that any rate hike was imminent just yet.
For those looking for a decent swing trade to play the US macro over the next 2-3 months, a USDCAD short entry around 1.3 would still prove to be ideal, but it does not seem like it’s going to be imminent just yet.
3. US CPI
In my predictions for CPI (Consumer Price Index) and how the market would treat it, I stated the following. “If the current trend of CPI increasing continues (which it likely will), then we will see this outside pressure continuing… I suspect that this release will be traded by the market as if its indicative of a US rate hike incoming. Which means the markets will go further long USD.” I also gave an example of what a “buy the rumor, sell the fact” event typically looks like using the ETH chart. That pattern repeated, and when year over year CPI came out at 6.8%, higher than last months 6.2%, the markets acted more or less as I predicted. As can be seen below on the 1 hour Ethereum chart.
There was a general bearish trend heading into the news, brief buying ahead of the CPI print, and a sharp sell-off this morning upon the news that brought price back into the existing trend. This is called a whipsaw and was explained on Sunday. Typically, this sort of pattern should be avoided on high leverage, and can present a potential scalp entry upon the news release with high leverage. You do not want to hold leverage heading into the news release, that’s a good way to lose money unless you get lucky. It is much easier to scalp the news release instead.
Long term CPI, this is what you need to know beyond what was already explained on Sunday. Inflation is not transitory, the broad assumption within the market is that sustained high inflation will force the Federal Reserve to start raising interest rates. They can’t do this of course, until they stop printing money to buy treasuries. But as explained in the over-view post, they can’t do that either, and we will start talking about that in the next section about the bond auctions. But just know for now that as long as inflation prints high, the markets will trade it as if its bullish for the dollar.
Sounds wild right? The data says the Dollar is getting weaker, but in the financial markets, the Dollar gets bought up and actually gets stronger. So what we will be watching, and my outlook for the future few months is for most counter-inflationary assets to continue dipping in price until the Fed runs into that wall where the treasury bond auctions are concerned. That means most assets will be on sale for a good DCA over the next 2-3 months. If you are trying to leverage long on crypto or stocks, you will probably struggle with any position you hold longer than a few days. If you have a spot position (no leverage), I wouldn’t sell it. If you have stablecoins in a money market in crypto DeFi, I would let it sit and collect interest with the expectation that you can do so for the next 2-3 months. Similarly, if you have stablecoins minted in DeFi against crypto assets, I would consider your leverage and potentially paying back some of that stablecoin debt.
There will come another bottom when the Fed has to admit that their current plan to decrease money printing on a monthly basis cannot be sustained with the current government deficits and interest rates. When that bottom comes, you want to make sure that you have some dry powder to buy with, and that you are also prepared to buy into the strength as the assets start going up after this. This is the best time to buy to manage your own emotions. You want to buy and instantly be in profit and have the assets keep running. Good emotions, and winning trades breed more good emotions and more winning trades.
4. Bond Auctions
The following bond auctions occurred this past week, and we are going to assess the health of each auction. Consider this week as a baseline, we will be tracking performance moving forward from here.
Please remember that the Federal Reserve does not directly purchase treasury bonds during these auctions. They instead promise to buy $80 Billion of Treasury bonds each month. So large financial institutions know that they can bid into these auctions and turn back around and sell them to the Federal Reserve for easy profit. If you can make 0.2% in a week, that’s 10% a year if you can do it every week. If you are doing that with a couple billion, its essentially free money. This is how the printed money flows to the wealthy first. Its not a free market. But as we covered in the Sunday post at the start of this week, the Fed is currently buying $80B in treasuries a month, and will decrease that amount by $10B a month. As this decrease occurs you can absolutely bet that a concurrent decrease in bids for treasury bonds will follow alongside that decrease. Without a guarantee that the Fed will buy treasuries each week, the banks won’t come to the auctions, and if they do, they will bid for much lower prices (higher interest rates) to make it worth while for them.
Now, to start this session. You can generate and download the reports from the treasury HERE (note: many “financial guides” charge $100 a month for this data that the gov. gives you for free at this link), the “competitive PDFs” are what you want. In the interest of your sanity, and making this readable. I am simply going to put that information into a spreadsheet and make a nice tidy graph for everyone starting with this week and moving forward. Also be aware that the federal government is slow to publish data and sometimes lets auctions drag past their schedule. Most of the time, this data will simply not be available on Friday and we will often be looking at data that is mostly 1 week behind. As is the case this week, where the government has only shared the data for Mondays 3 month auction.
Below are the interest rates for those same auctions. This data is usually shared when the auction resolves so we have all of that data for the past week.
As weeks pass and we can see these numbers moving in real time, I expect two trends to emerge as a result of the Federal Reserve decreasing liquidity in these markets. The Bid to cover ratios will start trending down. The interest rates will start trending up. As stated earlier, the US government cannot handle that, its mathematically not possible. They will reach their breaking point and that point will coincide with the short term high for the US Dollar, and concurrently short term lows for all counter-inflationary assets. I know I keep saying that in time once you get into the flow of things you will start to understand and have an intuitive feel for how these markets affect the stock, comex, forex, and crypto markets that were built on top of these markets. Without having a basic understanding of what the bond markets are doing, you can’t realistically trade the markets that lay on top of them without just blindly getting lucky, or having an intuition that is reading other signals that pull from the Treasury Bond Markets. Since the US is still nominally the global reserve currency, its treasury markets have an outsize affect on every globally traded market and it is the current financial center of the world to watch in terms of how its lending markets affect the global money markets and commodity markets. The 2008 crash was felt in so many places for this very reason, and similarly, the coming melt up of assets will be felt world-wide.
This section is a bit sleepy so far, but will become the most important section as the weeks continue.
5. Conclusion and What’s Next
For those who just skimmed and wanted to know what the conclusions of this week are. CPI is still running high, and the markets will trade it as if high inflation means higher interest rates are coming from the Fed. Don’t fight this trend. Don’t try to leverage against the US dollar. If you have spot exposure, hold it, if you have leveraged exposure, be wary of it. If you are in cash equivalents, now is not the time to be rushing out of them, we will probably have a few months where this narrative is able to hold. As we track the bond auctions I will be able to provide info about whether or not this narrative is breaking. As we stated in the intro, just because something is inevitable, does not mean it is imminent. As such, we will be taking this one week at a time. If you want to just buy and forget, then absolutely, buy crypto, land, whatever counter-inflationary it is, and don’t look at it, go do something else for a few years and come back to significant gains. But if you are a more active trader and want a good entry, follow these Friday posts, as we get closer and the narrative starts to fall apart, we’ll see it here before the markets see it and we’ll know which week the bottom is put in and when it is time to be getting long.
I had originally intended to review the US Congressional Crypto hearing here, but its getting late and I want to get this out before its not officially Friday here anymore (lol too late). Within the next few days, I will put out a post specifically on the Congressional Crypto hearing and my thoughts on what was said. Other than that, please look out for my post on Sunday before the Tokyo trading desks open with my outlook for next week.