Panic and Chaos Ensue After Shockingly Low October CPI

This print was no surprise if you are thinking about this market correctly. Bitcoin seemingly left behind hides very bullish technical consolidation.

Topics for today:

• CPI causes market mayhem!

• Bitcoin won’t be left behind in this rally

CPI Causes Chaos

Markets were completely caught off guard by the October CPI. The forecast for the headline print was 0.1%, but most people were surprised because they do not pay attention to the forecasts and are totally bought into the inflation narrative. When the release dropped at 0% (rounded down, actual was 0.044%), markets were shocked.

I’ve never bought into the inflation narrative. I have been consistent for the last couple of months, and for years on the Fed Watch podcast prior, saying inflation would not continue to accelerate. High CPI was not caused primarily by money printing, and therefore, the economy had to slow due to high prices, resulting in an up-and-then-down transitory behavior.

Just as CPI was released, stocks jumped, while yields and the dollar dumped. Bitcoin was left out of this initial reaction, but we will get to that in the next section.

Back on September 27, we pointed out several widely believed paradoxes, which cannot be true. The first paradox precisely describes why CPI surprised so many to the downside. We said it was impossible to be “heading into a severe recession and going to suffer an inflationary doom loop at the same time.” Stagflation like that only occurs in the beginning of the credit bubble, like the 1970s. Recessions at this stage of the global credit bubble are characterized by deflationary dominance, falling interest rates, and rising value of safe haven assets. We explicitly predicted market trends would climax around this time, yields would turn lower and stocks would rise. 

The reason a downside miss on CPI surprised so many is because people refuse to part with their disproven assumptions of how the system works. Real measures of money printing have been negative for a while; declining lending volumes, tightening lending standards, and falling demand from borrowers. 

There are two key takeaways from the October CPI. First, All Items less Shelter was negative, and the shelter component itself dropped from 0.6% to 0.3%. The shelter component is calculated differently in many places internationally. The Euro Area, for example, uses the net acquisition approach for their CPI, but a payments approach for monetary policy. The way the U.S. Bureau of Labor and Statistics calculates it for CPI results in a huge lag. Therefore, All Items less Shelter is a sound proxy for near-future CPI and we should expect CPI to print around zero for the next few months.

Source: FRED

The second key takeaway is that recession odds are now near 100%. Fed Funds Futures instantly priced in no rate hike for December, and since that is the last possibility for a hike, we can confidently say the Fed is done. Expectations for the first cut have moved up in the curve, from June 2024 to now May 2024. Since most crises center around the end of Q1 and Q3, it looks increasingly like the end of Q1 2024 is going to be a major event. That will also mark the one-year point for the one-year loans from the Bank Term Funding Program (BTFP) used to bailout banks last March. 

Source: Investing.com

This puts the Federal Reserve in a very awkward position. Some people unironically claimed the market chaos was the Fed losing control, not realizing the Fed was never in control in the first place. Yields never were listening to the Fed, else they’d be above the Fed Funds policy range. 

As yields fall on the way into recession, the Fed’s choice is now: Do they leave policy where it is and look powerless, or do they follow and try to build a dovish narrative? It must be embarrassing for them with yields falling away from the policy range. 

Fed Chair Powell’s actions in 2019 give us a hint. Back then, he sympathetically cut as a slow down became obvious, cautiously cutting rates 3 times in the second half of 2019. Expect him to do the same this time. His 2019 efforts were ended abruptly by COVID. This time, it could be war with Iran or some other nefarious event. 

Why Bitcoin Didn’t Rally With Stocks

Bitcoin has been highly correlated to the stock market since 2016, and people often point to this to lump bitcoin in with risk assets. The problem with that is the stock market as a whole, is not really a risk asset. The bottom 90% of stocks are risk assets, but the top 10% are safe havens.

The reason bitcoin had a small dip yesterday, while other correlated assets spiked, is because bitcoin had already spiked. It was a leading indicator and reached extreme overbought conditions by Oct 24. I spoke about this on my Market Protons on Bitcoin & Markets last week. Technically, bitcoin had to consolidate to let conditions cool off. Zero damage was done to the price structure. In fact, the small move that broke the last line of structural resistance should effectively negate that resistance for this coming push. 

All signs are GO. Bitcoin is prepped technically for a possible ETF approval this Friday, as the last window prior to January is closing. On the chart below, I add in the Ichimoku Cloud with extended settings (h/t @CarpeNoctum) showing the target at the flat top of the cloud, $42,000. That level is a return to the mean as you see it aligns with the 50% retracement level as well. Bitcoin has always hit the Golden Pocket (61.8% - 66.6% retracement) prior to the halving. That will take the price to $48,000.

If you’d like to learn more about how stocks, bonds and bitcoin should behave as we approach a recession next year, please see our previous post Top Recession Trades. Nothing has changed since then. We see a new All-Time-High for the stock market and bitcoin in the coming months, as well as, lower yields on Treasuries. 

Honorable Mention

I wanted to highlight this and give credit where credit is due. Bill Ackman nailed this call to the day. Back on Oct 23, at 9:45 am ET he tweeted, “We covered our bond short.” Since then, the 10-year yield has taken a decided turn down. In this case, bond prices fall as yields rise, so he closed at the exact top of this trade.