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Commodities

A Macroeconomic Overview Using Chart Analysis

An in-depth look at various currencies and their charts as well as observations on energy commodity prices and how they’re affected by world events.

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An in-depth look at various currencies and their charts as well as observations on energy commodity prices and how they’re affected by world events.

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In this episode of the “Fed Watch” podcast, we focus on important macro charts. We cover bitcoin’s chart, currencies like the dollar, the euro, the Hong Kong dollar, and gold as well as energy commodities. We didn’t have time to get to all the charts I prepared, because the live show has time constraints. I will attempt to get a second part out this week to cover the rest of my commodity charts, as well as supply chains and shipping costs. You can find the slide deck of charts here.

Other topics covered in today’s episode include President Joe Biden and Federal Reserve Chair Jerome Powell’s meeting yesterday, where I try to flesh out the importance of this Wall Street (Powell) versus globalists (Biden) showdown, and we get into a couple of things from Davos last week, particularly the Kissinger comments about Ukraine.

“Fed Watch” is the macro podcast for Bitcoiners. Each episode we discuss current events in macro from across the globe with an emphasis on central banks and currency matters.

Currencies

The first currency we talk about is bitcoin. I discuss the recent pop in price on Memorial Day, and how it is simultaneous with a growing bullish divergence in the indicators.

However, I also go back in time to roughly one year ago, when there was a very similar situation. In June 2021, there was a bullish divergence in these two indicators and a breakout of a descending wedge. That move was a fake out, cut short by the Grayscale (GBTC) unlock wave in July. The current situation is similar on the chart, but not similar in the fundamentals. I just wanted to point out a previous example where a breakout like this week failed.

I make an effort to dislodge the “bitcoin rise equals dollar collapse” false narrative here. The dollar and bitcoin can rise together due to deflationary pressures pushing people to cash and away from counterparty risk.

Next up is the dollar. On the live stream, I show the following chart and discuss how we could be headed for a new higher range on the dollar. Perhaps we see another five to seven years of the dollar index (DXY) in a range of 100-110, kind of like how it jumped into the 90-100 range in 2015.

Dollar index chart with technical analysis (source)

For many who don’t like DXY because it is too narrow (euro 57.6%, yen 13.6% and pound 11.9%), I provide a chart of the trade-weighted dollar that includes 30-plus currencies including the Chinese yuan and Mexican peso.

In the below chart, we see the same consolidation beginning, but the high that the dollar achieved (excluding the COVID-19 crash highs) is a new high. I think this symbolizes a stair-step function higher for the trade-weighted dollar as well.

Trade-weighted dollar with 30-plus currencies (Source)

Remember, a strong dollar is the Fed failing and it also provides massive stress to the rest of the world’s economy.

The euro is nearly the inverse of the DXY. It also shows a recent breakout, but in this case downward. If the dollar rally is to consolidate before heading higher, the euro is going to consolidate before heading lower. One thing is for sure, the euro has broken its two-decade support trend line and it’s in big trouble of crashing much lower.

Chart of the euro versus the U.S. dollar exhibiting a downward breakout (source)

The next two charts are of the Hong Kong dollar versus the U.S. dollar. There is a peg in place that is plainly obvious on the first chart: It is a range between 7.75 and 7.85. Recently, the exchange rate has raced to the top of this pegged range, signaling massive dollar pressure in the Asian economies like China, Hong Kong, Taiwan, Japan and South Korea. The dollar squeeze rapidly started this year.

Monthly chart of the Hong Kong dollar versus the U.S. dollar (source)

The second chart of the Hong Kong dollar is a close up of the daily timeframe. The peg was defended successfully this time, by the authorities selling U.S. dollars and buying Hong Kong dollars, but the big question is do they have enough reserves to continue defending this peg for the rest of the year, like they did in 2018?

Daily chart of the Hong Kong dollar versus the U.S. dollar (source)

The Hong Kong authorities publish their reserve data, so we can get a clue to the severity of their predicament. At the end of April 2022, prior to the peg experiencing its greatest pressure, their reserves stood at $465.7 billion, $16 billion less than March.

The last currency we look at is partly a currency and partly a commodity: gold. It has been hard being a gold bug for the last 11 years. Currently, the gold price is below the 2011 high of $1,920, sitting at $1,840 at the time of recording. Imagine, holding gold for 11 years and losing money despite the narrative of money printing. Your choice at that point would be either abandon your faulty inflation dogma or go crazy on conspiracy theories. That sums up the gold community at this point, in my opinion.

Gold spot price April 2021 through May 2022 (source)

Energy Commodities

Moving onto commodities, on this episode, I only have a chance to cover two charts. The first is Brent crude (U.K. crude price in orange) and West Texas Intermediate (WTI) crude (U.S. crude price in blue). They often are extremely correlated, with a slight premium on European Brent.

I wanted to cover this chart today, because of the headlines about the sixth round of EU sanctions on Russian oil; it is an absolute joke. As you can see on the chart, the orange line actually drops on the day the theatrical sanctions were announced.

Brent crude and WTI crude oil prices (source)

My thesis for oil prices is as follows: Global demand is collapsing faster than oil supply. Recent elevated prices starting in March 2022 are due to the conflict in Russia and Ukraine causing market uncertainty. Oil is very overbought. The price of oil will begin to fall soon, lowering prices and consumer price index (CPI), and coinciding with a growth slowdown. This is not a stagflation scenario, it is a deflationary depression scenario after a temporary spike in prices.

Natural gas futures in Europe support my conclusion. They have been radically elevated, far above rational market fundamentals apart from sanctions on Russia. Russia has refused to be affected by successive rounds of sanctions, and the chart is telling us that these price levels are mainly due to people’s worries, not market fundamentals. Once those worries go away (when the end of the Ukraine situation becomes more clear), prices will adjust downward quickly.

European natural gas futures (source)

That does it for this week. Thanks to the readers and listeners. If you enjoy this content please subscribe, review and share!

This is a guest post by Ansel Lindner. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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Bonds

Fed reverse repo reaches $2.3T, but what does it mean for crypto investors?

Investors avoid risk assets during a crisis, but excessive cash sitting in financial institutions could also be good for the cryptocurrencies.

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Investors avoid risk assets during a crisis, but excessive cash sitting in financial institutions could also be good for the cryptocurrencies.

The U.S. Federal Reserve (FED) recently initiated an attempt to reduce its $8.9 trillion balance sheet by halting billions of dollars worth of treasuries and bond purchases. The measures were implemented in June 2022 and coincided with the total crypto market capitalization falling below $1.2 trillion, the lowest level seen since January 2021. 

A similar movement happened to the Russell 2000, which reached 1,650 points on June 16, levels unseen since November 2020. Since this drop, the index has gained 16.5%, while the total crypto market capitalization has not been able to reclaim the $1.2 trillion level.

This apparent disconnection between crypto and stock markets has caused investors to question whether the Federal Reserve’s growing balance sheet could lead to a longer than expected crypto winter.

The FED will do whatever it takes to combat inflation

To subdue the economic downturn caused by restrictive government-imposed measures during the Covid-19 pandemic, the Federal Reserve added $4.7 trillion to bonds and mortgage-backed securities from January 2020 to February 2022.

The unexpected result of these efforts was 40-year high inflation and in June, U.S. consumer prices jumped by 9.1% versus 2021. On July 13, President Joe Biden said that the June inflation data was "unacceptably high." Furthermore, Federal Reserve chair Jerome Powell stated on July 27:

“It is essential that we bring inflation down to our 2 percent goal if we are to have a sustained period of strong labor market conditions that benefit all.”

That is the core reason the central bank is withdrawing its stimulus activities at an unprecedented speed.

Financial institutions have a cash abundance issue

A "repurchase agreement," or repo, is a short-term transaction with a repurchase guarantee. Similar to a collateralized loan, a borrower sells securities in exchange for an overnight funding rate under this contractual arrangement.

In a "reverse repo," market participants lend cash to the U.S. Federal Reserve in exchange for U.S. Treasuries and agency-backed securities. The lending side comprises hedge funds, financial institutions and pension funds.

If these money managers are unwilling to allocate capital to lending products or even offer credit to their counterparties, then having so much cash at disposal is not inherently positive because they must provide returns to depositors.

Federal Reserve overnight reverse repurchase agreements, USD. Source: St. Louis FED

On July 29, the Federal Reserve's Overnight Reverse Repo Facility hit $2.3 trillion, nearing its all-time high. However, holding this much cash in short-term fixed income assets will cause investors to bleed in the long term considering the current high inflation. One thing that is possible is that this excessive liquidity will eventually move into risk markets and assets.

While the record-high demand for parking cash might signal a lack of trust in counterparty credit or even a sluggish economy, for risk assets, there is the possibility of increased inflow.

Sure, if one thinks the economy will tank, cryptocurrencies and volatile assets are the last places on earth to seek shelter. However, at some point, these investors will not take further losses by relying on short-term debt instruments that do not cover inflation.

Think of the Reverse Repo as a "safety tax," a loss someone is willing to incur for the lowest risk possible — the Federal Reserve. At some point, investors will either regain confidence in the economy, which positively impacts risk assets or they will no longer accept returns below the inflation level.

In short, all this cash is waiting on the sidelines for an entry point, whether real estate, bonds, equities, currencies, commodities or crypto. Unless runaway inflation magically goes away, a portion of this $2.3 trillion will eventually flow to other assets.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Economics

US Shale Defy Calls To Boost Output As They Funnel Profits To Shareholders

US Shale Defy Calls To Boost Output As They Funnel Profits To Shareholders

US shale is still acting with restraint in terms of production…

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US Shale Defy Calls To Boost Output As They Funnel Profits To Shareholders

US shale is still acting with restraint in terms of production growth despite President Biden's calls to increase supplies to squash energy prices that were driven up due to soaring demand, decarbonization efforts, lack of refinery capacity, limited spare capacity, and, of course, geopolitical uncertainty surrounding Russia's invasion of Ukraine. 

ConocoPhillips, Pioneer Natural Resources, and Devon Energy recorded soaring profits in the second quarter, though many of these top shale oil and gas producers were reluctant to boost capital spending to increase output despite elevated prices for crude, according to Financial Times

Executives of these companies are under pressure from Wall Street to return record profits in the form of dividends and share buybacks to investors rather than increasing capital expenditures to boost production. It comes after years of burning cash and issuing equity to survive the multiple boom-bust cycles that paralyzed the shale industry. 

Then there was the chaos of slumping crude oil demand in the virus pandemic lockdowns, and WTI plunged below $0 per barrel for the first time. US shale drillers have rearranged their priorities from exceptional growth rates to stable rates that attempt to prevent another dark winter. The capital that would typically be deployed for drilling is being rerouted to shareholders:

"Unless we have shareholders that come in and say, look, we absolutely — we do not like these big dividends. We do not like your share repurchase program. We want you to go back to a growth model," Rick Muncrief, chief executive of Devon Energy, a top shale producer, told investors. "Until we see that, I see no reason to change our strategy." 

Other shale executives reiterated Muncrief's message as they all remain defiant to the Biden administration's request to increase production. In response, Biden and other western politicians have slammed shale companies' decision not to increase output. 

According to the Energy Information Administration, US crude production is around 12.1 million barrels a day. Production levels remain 800,000b/d from the pre-coronavirus pandemic highs. 

Occidental Petroleum is another shale company concentrating on debt repayments and cleaning up its balance sheet than expanding production. 

"We don't feel the need to grow production," said the company's chief executive Vicki Hollub. "We feel like one of the best values right now is an investment in our own stock." Warren Buffett's Berkshire Hathaway has bought a 20% stake in the company, helping equity value to double over the past year. 

"This year has marked a reversal in the shale industry's fortunes after hefty losses during the pandemic, although fears of a recession have once again cast a cloud over its prospects," FT said. 

Shale also has another problem: its inability to raise production due to bottlenecks in the industry. 

Last month, Halliburton Co.'s CEO Jeff Miller warned oilfield equipment market is so tight that oil explorers are limited to the amount of production they can bring online. 

Miller said oil companies don't have enough fracking equipment for newly leased wells this year. He said diesel-powered and electric equipment are in short supply, "making it almost impossible to add incremental capacity this year." 

similar message was conveyed by Exxon Mobil, whose CEO said that global oil markets might remain tight for another three to five years primarily because of a lack of investment since the pandemic began.

"Availability of frac fleets is one of main bottlenecks impeding oil and natural as production growth for the next 18 months," Robert Drummond, chief executive officer of fracking firm NexTier Oilfield Solutions, recently told Reuters

... this bottleneck is due to several years of divestment and decarbonization -- making the days of shale roaring back to life over for now.   

So shale execs funnel profits back to shareholders instead of boosting production -- and even if they were to increase output, there are severe bottlenecks in the equipment space that inhibits bringing on new rigs. 

Making matters worse for the Biden administration, OPEC+ only increased production last week by a measly 100k barrel per day in output for September - considerably less than the 300-400k increase expected by many. This means OPEC+ has limited spare capacity, so crude prices should stay elevated overall. 

Tyler Durden Mon, 08/08/2022 - 12:15

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Economics

Previewing July CPI: good news and bad news about gas, housing, and vehicle prices

  – by New Deal democratWhile July’s consumer inflation is likely to be less intense than in recent months, I don’t see it coming back down to more…

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 - by New Deal democrat

While July’s consumer inflation is likely to be less intense than in recent months, I don’t see it coming back down to more “normal” levels. The good news is gas; the bad news is vehicles and housing.


To begin with, gas prices have fallen about 25% from their peak at the end of June to this past weekend. To get to their “real” price, I divide by average hourly wages of nonsupervisory workers. Here’s what that looks like, with the peak of June 2008 set at 100:



In June of this year, gas prices divided by average hourly nonsupervisory wages were 79.8% of their peak. By the end of July, that had fallen to 73.5%. This is more typical of the 2005-07 period, and also the 2010-14 period of the “oil choke collar,” where gas prices backed off every time they hit a threshold that threatened to cause a consumer recession. It looks like that has happened again.

Turning to the CPI, in usual times, the price of gas is the biggest component of CPI volatility. And that is likely to be the case with this Wednesday’s report as well. My rule of thumb is to take the change in the price of gas, and divide it by about 16, and add .15% for normal background “core” inflation, to figure the most likely monthly inflation reading.  Here’s what that looked in the 10 years before the pandemic:



Now here is the past 2+ years since the onset of the pandemic:



If this were “normal” times, gas would drag July consumer prices down by roughly 0.5%. Add in the background “core” inflation, and I’d expect a reading of -0.3% or -0.4%.

But these aren’t normal times, and the biggest culprit is housing inflation. A number of times in the past year I’ve run YoY% comparisons of the FHFA and Case Shiller house price indexes vs. Owners’ Equivalent Rent, the official CPI measure. Below I’ve instead used month over month changes to show how house prices have gradually fed into owners’ equivalent rent in the past two years:



Additionally, let me re-up this graph from Bill McBride, showing that measures of apartment lease inflation have a similar issue:



Since rents are typically increased only once a year for each tenant, it takes a full year for rent increases to filter through to the total metric.

For July, owners’ equivalent rent is likely to clock it at about +0.7%, and since it is almost 1/3rd of the entire CPI index, this is going to dwarf the impact of lower gas prices.

Finally, because of microchip production issues out of China, vehicle prices have also been a significant component of inflation, as shown in the YoY graph below:



But unfortunately in the past few months there’s been no sign of further deceleration in the monthly readings:



This suggests that increases in vehicle prices are likely to persist.

So, while I expect July inflation to back off from its most recent 1%+ monthly increase, an increase in the 0.5%-0.9% ballpark seems likely.

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