Economists debate what caused inflation. One of the main culprits: the Federal Reserve.
Why? Because the Fed bought the securities of the Ministry of Finance that allowed the government to increase spending.
This is more than an academic argument.
If the Fed has caused inflation – and I agree that it has – its fight against inflation will have a negative effect on economy and the markets.
The Fed’s fault is explained
To see the Fed’s impact on the markets, I plotted the money supply, Bitcoin (center of chart below) and the correlation coefficient between the two at the bottom.
The vertical line continued in April 2020, when the Fed’s monetary stimulus was in full force. The monetary supply is presented as the monetary base, which includes money kept in banks plus the cash in circulation.
The Fed changed the rise and fall of Crypto
A correlation coefficient is a statistical measure of the relationship between two data series.
The correlation coefficients range from 1 to negative 1:
- Perfect positive correlation: A correlation coefficient of 1 means that the two variables always move in the same direction.
- Perfect Negative Correlation: A negative correlation coefficient of 1, meaning that the two variables always move in the opposite direction.
- A correlation of 0 Indicates that the relationship between the two variables is random.
We would never expect perfect correlation in the financial markets. But correlations above 0.6 or below negative 0.6 are important.
The correlation between Bitcoin and the money supply is 0.62.
During the pandemic, the correlation changed. Before, it was negative.
Pandemic stimulus spending changed that. Many people have become speculators.
Their buying drove up the prices.
What this says about the rise and fall of Crypto
Now the Fed is reducing the money supply.
The high correlation tells us that Bitcoin may fall in this environment…
Which is also true for stocks with high correlations to the money supply.
This chart shows that the Fed has created bubbles, and is busy deflating them.
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Michael CarrHe is the editor of Masters of True Options, One Trade, accuracy gains andmarket leaders. He teaches technical analysis and quantitative technical analysis at the New York Financial Institute. Follow him on Twitter@MichaelCarrGuru.
One Chart Explains Crypto’s Rise and Fall … and What’s Next Source link One Chart Explains Crypto’s Rise and Fall … and What’s Next