Back to Zero
The ECB raised its key interest rate to 0%. The market is now pricing a full-blown recession at the end of the year and interest rate cuts in Q1 2023. Yet, markets are rising.
“We cannot solve our problems with the same thinking we used when we created them.”
Albert Einstein.
This week, Nobel prize winner Paul Krugman admitted his inflation call was completely wrong. For years he had advocated for high budget deficits and that inflation wouldn’t be a problem. It turns out that printing trillions of dollars of money does create inflation. Who would have thought? Interestingly, it’s not the first time Krugman got money wrong. He has been predicting Bitcoin’s collapse since it was worth $7. Even with the recent correction, he could have made a 3,000x return if he had bought some BTC instead of criticizing it in 2011 without understanding it.
The news this week in the macro world was the first rate hike by the European Central Bank (ECB) in eleven years. It rose its interest rate benchmark by 0.50%, from -0.50% to… 0.00%. Meanwhile, in June inflation reached 8.6% in the eurozone. It’s unclear how a 0.00% interest rate is supposed to help fight inflation.
One of the reasons why the ECB is unable to hike more is that Europe is already heading to a recession.
While Germany had been the engine of Europe’s economy for the last decade, it is now in trouble after getting its energy policy wrong. But it’s deeper than that. Germany had over-optimized its economy for efficiency, but in the process, it sacrificed resiliency.
Somehow, the ECB President, Christine Lagarde said on Thursday she didn’t see a recession in the horizon. The very next day, the German economy was already shrinking.
Banks are also anticipating a recession and have been tightening their lending standards and cutting back their lending to businesses.
But it’s not just Europe that is slowing down, all signs are pointing to a massive slowdown in the US too. This thread from Raoul Pal shows how all indicators are currently flashing red.
What to do in this environment? Stick to your plan and go back to fundamentals. You cannot time the market, so don’t try.
Markets are always forward-looking, they usually bottom out before the economy, and start rallying 6 to 9 months before the actual economic recovery. The thread below illustrates the most important principles of investing in just 15 tweets. These 15 tweets can save you a lot of time and money, so I highly recommend looking at them.
If you want something even shorter, watch the video below. All the financial advice you will ever need in a 60-second video. John Goodman at his best.
After months of bloodbath and the collapse of multiple crypto-focused companies, the crypto market seems to have bottomed out. The turning point was the final liquidation of Three Arrows Capital (3AC) in mid-June. 3AC was the largest crypto hedge fund, and it turns out it was the single largest borrower of the ecosystem.
More than 200,000 BTC had to be liquidated in days, when liquidity was already low. The full extent of the deleveraging that happened was not known until recently. Now it’s much clearer why the crypto market tanked as much as it did. The thread below provides useful details on the entities that liquidated their BTC holdings.
Details on the collapse of 3AC are now emerging, and they are mind-blowing. The Wolf of Wall Street was a small player next to these guys. There will be a movie or a book about this. See the thread below with juicy details on the implosion of 3AC.
The whereabouts of the two founders of 3AC are unknown, but they still gave an interview to Bloomberg. See link below in the tweet.
Links to my favorite podcast episodes of the week
Bankless | Scariest Macro Setup In 20+ Years | Luke Gromen (global macro economy)
The Scoop | Ethereum will define web3’s ‘benchmark interest rate’ post-merge, according to Raoul Paul (crypto, Ethereum)
What Bitcoin Did with Peter McCormack | Everything You Know About the Economy is Wrong with Jeff Snider (Eurodollar system)