As Coronavirus developments continued to expand throughout the weekend, the Federal Reserve made a surprise announcement Sunday night. Instead of waiting for their scheduled meeting in 3 days, the Fed announced that they would be slashing interest rates to 0% , and implementing “quantitative easing” in the form of $700 billion. Markets hesitated as futures got halted due to falling -5% and triggering a “limit down.” Bitcoin price remains level the last 24HR after a tough session last week.
Federal Reserve Quantitative Easing
Sunday night the Fed announced that they would be reducing rates to zero and implementing quantitative easing. They will accomplish this by purchasing $500 billion in treasury securities and $200 billion in agency mortgage backed securities. This move comes shortly after the Fed injected $1 + trillion into the financial systems last week. With on-going developments around Coronavirus, Oil, treasury yields and company debt, there’s a liquidity crisis in the financial systems. Last week the markets saw treasury yields ( preferably the 10 year ) get crushed as investors were heading towards the exit gates. The Fed hopes to stimulate the economy by lowering rates, but they’re simply running out of options. As rates approach 0%, investor sentiment is dwindling. The Fed has been reducing interest rates for years to stimulate the economy and mitigate risks involving the outstanding deficit.
Many would argue that the debt outstanding is unsustainable and will be virtually impossible for the government to pay back. With this being said, the only option the Fed has had for years is to reduce the interest rates in order to avoid insolvency. As rates now approach 0%, the Fed is beginning to create money from “thin air.” This is essentially the only way the Federal Reserve can keep rates artificially low. As the Fed continues to inject more “new money” in the financial system, they must buy up bonds which is exactly what they announced on Sunday.
Investors Beginning To Understand Implications
Last week the stock market sold-off hard following the announcement by the Fed to inject $1 + trillion into the financial systems. Following the announcement by the Fed tonight, world futures plummeted as they hit a “limit down” which essentially shuts down futures for the night ( falling -5% ). The market is starting to understand the bubble being created by the Federal Reserve. Once the market starts to reject quantitative easing, that’s how a currency crisis starts. What is the value of the dollar if it can continue to be inflated and printed out of thin air? The Fed is pinned to the wall because increasing rates or implementing negative rates could have detrimental results in the economic environment right now.
Corporations Took Out Debt For Years
Interest rates have been low for a long time now. During this time, corporations took out massive debt at ultra low rates. As time progressed, the issue of repayment surfaced. Even in low interest rate environments, corporations were not paying down the debt. This has been a catalyst for recessions back in 2002 and 2008. The chart below assesses corporations in the manufacturing sector. Corporations are now sitting on $80 billion + in short-term debt that will mature in less than a year. This level of debt hasn’t been amassed since the 2002 recession. The Federal Reserve sees this issue and they’re trying to mitigate the risk at all cost by reducing rates. The major issue right now is Coronavirus. The virus was unexpected and it could mean life vs death for some of these companies. With most large entities restricting operations, this will obviously put pressure on cash flow.
Bitcoin Price - Crucial Times As Well
As mentioned in a report last night, Bitcoin mining is now in jeopardy with the recent price action. With Bitcoin shedding nearly -40% in value last week, it’s making it virtually impossible for miners to hit their break-even costs to operate the network. Unlike traditional money being inflationary ( Fed can print when needed ), Bitcoin is essentially deflationary ( set amount available ). With Bitcoins deflationary model, its upcoming event in May called “halving” will be a mechanism put in play to further reduce its supply. When this happens, miner rewards also shrink. This is why miners depend on price so much. If Bitcoin price is below their break-even operation cost, it won’t make sense to operate. In the report last night, we mentioned that Bitcoin needs to rally nearly +184% to be operating at the break-even cost for miners by May.
Bitcoin Price Should Be Thriving Right Now
As the Fed runs out of options other than printing additional fiat to keep rates artificially low, this is what many would argue Bitcoin was created for. Bitcoins fixed supply structure allows it to operate in the same capacity of gold in the form of “store of value.” Bitcoin has been a great market hedge historically but has failed to do so recently. The Coronavirus has shaken both traditional and digital asset markets. With countries basically becoming ghost towns, it's something that people have never witnessed. As we mentioned in a previous report, last week investors were selling assets that were liquid. With the strong liquidity behind Bitcoin, it could very well be the reason it failed to hedge the last couple weeks. Even Gold has had a very difficult time gaining traction right now. With the high amounts of uncertainties on a global scale, investors are selling anything liquid. This is why banks are running into a “liquidity crisis.”
Safe Haven Assets Not Hedging
Both Bitcoin and Gold have failed to hedge traditional market turmoil. The strong correlation between the 3 started back in October 2019. Since October, all 3 assets have trended in the same direction. This is extremely rare, especially for Gold which has been the go-to asset for market turmoil. Visionary Financial is still under the impression that Bitcoin is way too young to label as a “safe haven asset,” but it’s definitely been a great hedge to traditional stock markets the last 8+ years, and still remains one of the best performing asset classes investors have ever seen.
Time will tell if Bitcoin price can change sentiment. As discussed above, it will be crucial for Bitcoin to approach miner break-even costs. Even though Bitcoin could technically handle a good chunk of miners jumping ship, it’s still a mechanism that could hurt many fundamentals that investors look at such as hash rate and other network measures.
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