Edition #114
Tapering Has Arrived, Stocks at All-Time Highs, Bitcoin's Global Hash Rate
Hey everyone!
As a brief reminder, I’m currently running a 10% discount for premium subscriptions, which will be effective for a rolling 12-month period. A premium membership will give you access to an additional 9 reports per month, which I explained in detail in this post. At a high level, you’ll get watchlists of the top stocks on my radar (weekly), updates on my equity market outlook (weekly), and updates on my personal portfolio & allocations (monthly). Be sure to reach out if you have any questions about the membership. The discount will be in effect until 11/7/21 and will be the last one that I run before Christmas!
Economy:
The long-awaited announcement of the Federal Reserve’s tapering has arrived! I think it’s important to mention that I had previously been on record multiple times saying that I thought the Fed would wait to begin the taper process no sooner than Q1 2022, so I think the intellectually honest thing to do is admit that I was wrong in this estimation. The tapering process is officially beginning this month, of which the current amount of at least $120Bn/month in asset purchases will be trimmed by $15Bn/month. Below is the full section of yesterday’s press release where the Fed discussed the taper process:
It’s important to note that this is the guidance that the Federal Reserve is giving the market right now, and could certainly be subject to change in the event that economic conditions (such as inflation and the labor market) materially change. As the level of asset purchases trends towards zero, the expectation is for the tapering process to be completed in mid-2022, with the eventual “liftoff” (rate hiking) process beginning in Q3 or Q4 2022. Again, that could certainly be subject to change based on the economic environment. The nature of the press release & Jerome Powell’s press conference were very bland, lacking any new perspectives or market-moving information aside from the official taper announcement.
The chart below provides an excellent long-term perspective of the magnitude of the Fed’s monetary policy over the past 18 months, with the federal funds rate at 0%-0.25% and the size of Fed’s balance sheet hitting a new ATH every month for the past 18 months.
It’s worth noting that the Fed’s taper process will still cause the size of their balance sheet to rise, but simply at a reduced rate. The taper is merely a deceleration in the magnitude of their monetary stimulus. The Fed isn’t pumping the brakes, they’re merely taking some pressure off the gas pedal. I reiterate my bullish outlook on equities and U.S. asset prices during this taper window.
Stock Market:
On June 22nd, I shared the following chart about the Russell 2000 in Edition #30:
In that publication, I highlighted that price had notoriously rebounded after retesting the 55 day exponential moving average (EMA), as shown by the teal line. I thought that price would continue to respond positively to this key level & would soon go on to produce new all-time highs. I suppose “soon” is subjective, because it certainly took longer than I anticipated. Over the past 3+ months since that post, the small-cap index has continued to move within the important consolidation range that I highlighted in this post above, fluctuating between the two grey zones and rising along the lower-bound of the white trendline.
Finally, after 9+ months of sideways choppiness, the Russell 2000 has achieved a breakout to new ATH’s! I’ve time-stamped the post above with the vertical blue line to clearly show how price has moved since that post on 6/22/21.
As I said, it’s been an extremely choppy environment for small-cap stocks, making the majority of 2021 a rough environment for active managers & traders. However, this decisive breakout that we witnessed yesterday could imply that the market is ready to begin the next leg higher in the bull market. Keep in mind that the Russell 2000 was able to produce such a strong move amidst the Fed’s tapering announcement, implying that investors still have extremely strong demand for small-cap stocks in an environment where monetary stimulus will decrease. Very interesting!
I’m certainly intrigued to see how the index performs, but I wouldn’t be surprised to see the upper-bound of the consolidation range (either the red level or the top grey level) act as support in the future if we experience another market consolidation over the next 1-2 months. Either way, this is an extremely bullish sign & I expect to see the small-cap index (and other U.S. indexes) make new all-time highs through the remainder of the year.
Cryptocurrency:
Over the course of this newsletter, I’ve taken several opportunities to provide updates on Bitcoin’s total hash rate capacity (aka the compute power of the BTC network). While the current hash rate capacity now exceeds 150 quintillion calculations per second, I saw a phenomenal graph from Bloomberg showing where that mining capacity is sourced geographically.
Considering that China had previously been responsible for more than 75% of Bitcoin’s hash power, it’s amazing to see that they currently account for 0%. In my opinion, this will go down as one of the largest geopolitical blunders of my lifetime. It’s essentially equivalent to a hypothetical situation where the United States would have banned automobiles in the early 1900’s because the horse & carriage was a viable solution for individual transportation. In a different light, it’s equivalent to the U.S. banning internet in the 1980’s.
It’s extremely encouraging to see that the miner migration out of China has produced an increased capacity in the United States. In the U.S., miners are significantly less dependent on sourcing their energy from coal and instead turn towards solar, wind, and other forms of renewable energy. The Bitcoin Mining Council, a group of independent Bitcoin miners in North America, produce quarterly reports on their operations in order to improve transparency and information about Bitcoin mining. In their most recent report, ending in the month of October, 57.7% of their energy mix was sourced from renewable energy! The numbers continue to improve as well, gaining more than 3 percentage points from the prior quarterly report.
Overall, the computational power of the Bitcoin network continues to recover from the migration out of China, with energy being sourced at an increasing rate from sustainable forms of energy. That’s a win-win for Bitcoin.
Talk soon,
Caleb Franzen