I have been watching the bank news this week with grim satisfaction. People are discovering counterparty risk, the inherent flaw with fractional reserve banking, the corruption and skewed incentives throughout traditional finance, and the chaos caused by centrally planned interest rates. In short, the bank failures of the last weeks have confirmed my biases that broken financial systems would crumble and governments would print money to keep it all going.
But confirmation bias is sneaky. It blinds our analysis and shows us the world we want to see rather than how it is. That’s why I found this tweet from Markets & Mayhem so interesting. My bias is that high rates finally broke something (i.e., banks), and now the Fed will have to lower rates and provide QE as the situation becomes more critical. Lowering rates could allow for a sustained rally in asset prices. Many also agree with my stance, as traders are already pricing 100bps of rate cuts in the next year.
But Markets & Mayhem takes the opposite stance. They point out that the Fed’s new lending window is shoring up bank liquidity enough that the Fed can continue to raise rates and tighten. Continued rate increases and tightening would be a headwind to recent price action and may cool the rally. However, if the rally in BTC is due to bank solvency fears and people wanting to hold assets with no counterparty risk, then high rates and tightening may only do a little to slow it down.
We will find out next week if Markets & Mayhem is correct. But their opinion is plausible and one that readers should consider. I am not saying he is correct, but FOMC next week is critical to watch as the inflation fight might still need to be over. This tweet provided a great reality check to me that there is still a lot of uncertainty in the market, at least in the near term.