Price weakness after Powell effect – what happens next? • News • onvista

The fundamentals remain positive

Even though the financial markets have been characterized by uncertainty in recent months, Bitcoin continues to follow its cyclical patterns with impressive accuracy. The classic seasonal summer slump coincides with the usual period of weakness lasting several months after a halving has been reached.

The fundamental situation, which provides the scope for a corresponding setup, speaks for a renewed increase in performance from the fourth quarter and thus a continued cyclical market movement. The main driver for the rally in the markets and especially for the Bitcoin price remains liquidity. And this is already in its next monetary policy upcycle. While interest rates have already been lowered again worldwide and China, among others, has returned to monetary easing mode, a lot of additional liquidity is already flowing into the markets again via US sources – triggered by the central bank policy of the USA.

simpler

Buy Bitcoins – How to start trading Bitcoin safely and quickly12.01.2022 · 14:49 Clock · onvista

Last Friday, US Federal Reserve Chairman Gerome Powell gave the green light to the further development of the monetary policy-based liquidity cycle by de facto confirming the start of the Federal Reserve's next phase of interest rate cuts from the next interest rate meeting in September. In his speech at the Jackson Hole Economic Symposium, he made corresponding statements that the time for interest rate cuts has now come because inflation is moving in the right direction and the Fed can now concentrate fully on not allowing the US labor market to cool down too much. In his speech, Powell emphasized that the Fed would do everything it could to prevent a further rise in unemployment. He made it clear that a further cooling of the labor market was not desired.

Is there really nothing standing in the way of the bull run anymore?

Central bankers and many analysts are currently painting an overly optimistic picture. Inflation is falling, the labor market is cooling down but remains fundamentally strong and a “soft landing” seems to be achievable. As an investor, however, you should not let these statements blind you and, as always, keep several scenarios in mind as options.

It is quite possible that the Fed has initially managed to strike a balance between fighting inflation and maintaining the strength of the US labor market at the same time – but history clearly speaks against the Federal Reserve's success rate. The diagram below shows that in recent decades a significant increase in the unemployment rate has always been accompanied by a recession (shown in gray).

Source: fred.stlouisfed.org

It therefore remains to be seen whether the economy has not yet entered a recession. Monetary policy instruments such as interest rate changes have a long delay and are a very indirect instrument. Once the economy and/or inflation move in one direction, it takes a long time before another change of direction can take place. A second scenario alongside the soft landing is definitely the danger that a recession will shake the USA and take a corresponding toll on the financial markets.

Another problem is the distorted data situation, which is now making it increasingly difficult to really assess the true state of the markets and the economy. The most recent downward revision of the labor market data from the US Department of Labor and Economics shows this: the creation of new jobs between March 2023 and March 2024 was revised downwards by over 800,000 jobs last week, thus initially providing a much weaker picture of the economy.

Added to this is the distortion in the value of stocks due to the ongoing expansion of the money supply. In nominal terms, stocks are rising – but measured in real purchasing power, there is significantly less growth. One could argue that part of the US economy has been in recession since 2022 – especially smaller, medium-sized companies – while the stock markets present a distorted economic picture due to the high concentration of capital in a few large tech stocks.

In the first and second quarters of 2022, the US had already experienced a contraction in gross domestic product, thus meeting the classic definition of a recession. In this case, too, US authorities had distorted the data by changing the definitions of a recession. The dreaded recession has long since penetrated many sectors of the economy. The crucial question is whether it will spread and take a corresponding toll on the markets, or whether the worst is already behind us and an economic recovery – supported by interest rate cuts – can stimulate the broader market.

Regardless of which scenario ends up being closest to the truth, one thing is clear: the expansion of the money supply will continue due to the monetary easing that is now underway and the already loose fiscal policy of the USA. Crises will be answered with an increase in this. This provides the scope for further inflation, but also for further rising asset prices, especially Bitcoin, as the expansion of the money supply will further inflate the value of these assets.

Think about it!

The US election and the Federal Reserve's policies are currently the focus of the financial markets. However, a more significant event for the markets is coming up at the turn of the year and could significantly influence the further course of this bull run. You can find out more about this in the new video edition by Decentralist.