Fed Torn On The Effects Of The Tax Cut; Altcoins Pick Up Crypto Slack

Bitcoin Stops Rallying But Altcoins Pick Up The Slack

Bitcoin hasn’t made a new high since the peak at $19,600 3 weeks ago. The latest price is $15,000. However, the altcoins have been exploding in the past few days. This has led the total market cap of all the cryptocurrencies to reach $763 billion. Bitcoin’s dominance has fallen to a record low in the past few days. At last check, the dominance is 33.4%. This bubble is becoming relevant to the global economy. It’s about to pass Apple’s size. Comparing a stock’s market cap with cryptocurrencies, isn’t apples to apples (no pun intended), but I’m not using it as a valuation metric. I’m using it as a measuring stick to see how big of an impact a crash would have on the markets and the economy.

The chart below shows the effects a bitcoin wipe out could have on various economies. As you can see, Russia, Nigeria, and New Zealand would be the most hurt by a crash in bitcoin. New charts need to be made on what the impact a crash in Ripple and Ethereum would be. The speed at which these coins increase in value make charts become irrelevant quickly. To me, the increases in the smaller currencies, makes it seem like retail investors are falling for pump and dump schemes. There are differences between them, but when it comes to currency speculation, price is everything.

I am reinforcing the concept that saying a collapse at these prices wouldn’t affect the economy and markets is pointless. The analysis that needs to be done is what would happen if they went up 10 fold from here and then crashed? Most people in finance don’t want to consider this because they can’t even believe the prices have gotten this high. The end of bubbles is when the velocity of the increase peaks. This means if it continues on this uptrend, unimaginable gains are not only possible, they are likely. The crash from that point will affect the economy. I also think it’s reasonable to wonder how much consumer spending from millennials was augmented by this rally in the 2nd half of 2017.

FOMC Minutes Show Debate About The Tax Cuts

The Minutes for the FOMC meetings in December in which the Fed raised rates 25 basis points was released on Wednesday. The discussion among Fed officials is important to study because Jerome Powell is set to take office soon. It will be interesting to see if his presence sways the Fed in a certain direction. One of the most contentious discussions was about tax cuts. The meetings occurred before the tax plan was passed. Even after it has been passed, there seems to be a similar amount of uncertainty about its effects. The good news for Powell is his first meeting is on March 21st, so there should be a consensus as to how it will affect the economy by then. I will be researching what individual firms say on their conference calls when earnings season starts later this month. FactSet will probably release an aggregate analysis on what firms say on conference calls about their plans for the additional cash from the tax cut.

There are some on the FOMC who think the tax cut windfall will go mostly towards buybacks and dividends, while others think it will help consumer spending and business investment. The chart below shows one example of a forecast for the GDP impact of the tax cut. As you can see, the 0.5% growth added to 2018 GDP makes it potentially the fastest growth year of this expansion. It’s remarkable to see the economy expected to peak after it becomes the 2nd longest expansion since 1854. That just shows how weird the timing of the tax cut is. It will also improve growth when it becomes the longest expansion in 2019.

There wasn’t much of an effect on the odds for rate hikes as a result of the Minutes. The chance of 4 or more hikes is 14.1%. The reason I mention that is because there has been an increase in speculation about 4 rate hikes in the media because of the improvement in the financial conditions. If the conditions stay the way they are, I think 4 rate hikes are likely, but I wonder how long such risk taking can go on with a turn towards hawkishness occurring at the major global central banks.

The FOMC debated two of my favorite topics which are equity valuations and the yield curve. The Fed said "In light of elevated asset valuations and low financial market volatility, a couple of participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability." We don’t know what the low volatility means because it’s such a rare occurrence. The VIX has never been this low for this long. There have been previous times where Yellen has expressed concerns about how high stocks have gone. They have only gotten more expensive since then as the Shiller PE is at 32.91. The all-time peak is 44.19. Being early to call out excessive speculation reminds me of when Fed Chair Greenspan called out ‘irrational exuberance’ in 1996. Stocks rallied a few years after that call before peaking.

On the yield curve, the Fed said "They generally agreed that the current degree of flatness of the yield curve was not unusual by historical standards. However, several participants thought that it would be important to continue to monitor the slope of the yield curve." I agree with the Fed’s assessment of the yield curve because the yield curve is forecasting a recession in a few years, meaning it’s nothing to worry about now. While I agree with the opinion, I’m nervous that the Fed is saying this because it means the Fed will have no problem causing an inversion in the next few quarters. 4 hikes would most certainly cause an inversion. It’s weird to hear only some participants think it’s important to monitor the slope of the curve. I would think everyone at the Fed monitors the curve every day.