The Breakdown - The Dreaded Federal Reserve Taper Is Coming

Episode Date: September 24, 2021

Today on “The Breakdown,” NLW examines the upcoming Federal Reserve winding down, or taper, of its support for the markets. This includes scaling back its bond-buying programs, a process that could begin as early as next month and conclude the middle of next year. Plus, the Fed may raise interest rates before the end of 2022. Additionally, on the Brief, he covers: A $50 million fundraise for a former ConsenSys exec A new social token focused accelerator  Invesco and Galaxy team on crypto ETFs  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Andrew Harrer/Bloomberg/Getty Images, modified by CoinDesk.

Projections released at the end of the meeting show that half of the 18 Fed officials expect to raise interest rates by the end of next year, 2022. In June, by contrast, only seven thought that. Most thought that it was going to be 2023 at least. The broad sense in markets is that Fed officials are finally catching up to what everyone has been saying, which is that inflation is not transitory,

but, in fact, something that could be more persistent. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, September 23rd. And today, we are talking about the Fed taper. Ooh. First up, however, let's do the brief.

Let's kick off the brief with some funding news. A former executive from Consensus, Kavita Gupta has closed their first venture round a $50 million fund. The fund's mandate is to back startups in the institutional decentralized finance, blockchain-based gaming, and NFT spaces. It's called Delta Blockchain Fund, and here's what Gupta had to say about it. Delta Blockchain Fund is a strategic partner for outstanding founders building products to scale and support a decentralized world irrespective of their chain solution. We truly believe that the future will be on multi-chain, and we want to support various cross-bridging scalable multi-chain solution and DAPs on them. So why is this notable?

Well, frankly, there are far too few funds run by women, in tech and crypto, of course. This may not always be a popular opinion, but frankly, every different experience we have shapes how we see the world. And having investors from every type of background means more types of companies, including unexpected ones, from different types of founders, are going to get funding. That means more entrepreneurial bites at the Apple, and I am here for it. Speaking of funds, Seed Club is a crypto accelerator, so think of a Y-combinator style, offering mentorship and education and resources in exchange for 3% of a project's token, so they take tokens instead of equity. There are some pretty interesting projects in their latest cohort.

We've got Pussy Riot, the Russian Music Group slash Art Collective, that is always at the bleeding edge of giving the middle finger to power. We've got a socially conscious crypto media brand. We've got one of my favorite music blogs of all-time tiny mixtapes, which actually shuddered last year and is now trying something new, a different blockchain-based system. There is also an ex-bloomberg reporter, Matt Lacing, who is working on something called Tinseldow, which will hunt for, quote, crypto-based stories and characters to develop into feature films and opportunities. So this is basically someone who's trying to be a bridge between the crypto industry and all of the crazy characters that we have here and the wider world of movie, TV, film, etc.

The common thread here is that all of these projects in some way incorporate social and community tokens. This is something that has been discussed for many years, and I've seen a bit of a resurgence in that conversation. On sort of a gut level, I feel similarly about social or community tokens as a due to NFTs in the sense that the market of people who don't care about them or think that they're dumb basically don't matter at all when it comes to the question of whether or not they'll be successful. So what I mean by that is in the context of NFTs, it doesn't matter if 95% of the world thinks that Cryptopunks are stupid. If 5% of the world does, those 5% of the world have a lot of money, and those 5% of the world are the people that other Cryptopunks owners are

trying to impress or have status with, then all that matters for that market is the 5%. Similarly, the question with social and community tokens is do the folks in that community find them actually valuable? Are they an important part of the community experience? Do they function as the currency or equity in that community that they are intended to have? That's going to be entirely up to the communities for which those social tokens are supposed to be a tool for. So far, I would argue that we haven't really seen a clear, dead hit. product market fit example of a community that does. But of course, we're still really early, and these crypto-native communities in the Dow space feel to me to be much more likely candidates

than just trying to map a social or community token onto a traditional social network, which is the type of project that we saw previously. Third and finally on the brief today, the ETF hustle continues. Gary Gensler may not want to approve an ETF, but boy, that doesn't mean that he's not going to get a hell of a lot of applications. Invesco is an investment giant. This is a company whose ETF and index business has doubled in size to 471 billion, that's what be, over the last three years. Investco is now teaming up with Mike Novograt's Galaxy Digital to develop a range of crypto-linked ETF products, as they put it, a quote, comprehensive suite of physically backed digital asset ETFs. John Hoffman, their head of America's,

and index strategies said Investco has a long history of using ETFs to democratize investor access to disruptive, innovative asset classes. Now, through our partnership with Market Leader Galaxy Digital, we are able to incorporate their expertise of blockchain technology, digital assets, and cryptocurrency into our product capabilities. Of course, their success is not going to be based strictly on market demand. It's going to be based on regulatory tides and what will be allowed. The question is, can they pull it off? Only time will tell. This podcast is sponsored by NIDIG, a firm that's making Bitcoin accessible to banking customers on Main Street and Wall Street alike, as part of their mission to bring Bitcoin to the people. Find out more at NIDIG.com slash NLW. That's NYDIG forward slash NLW.

With that, let's shift to our main discussion. It is taper time, baby. First, let's give the story of the quote-unquote taper, and specifically let's talk about the taper tantrum. So this happened post-great financial crisis. The world was wrestling itself back to its feet. We had seen hitherto unimagined involvement from central banks in the economy. It was 2013, five years later. Ben Bernacki, the Fed chair at the time, announced that at some point the Fed would start to reduce bond purchases. Now, this seems kind of obvious. The Fed had been purchasing an extraordinary amount of bonds ever since the crisis happened, and at that time the Fed had tripled its balance sheet from $1 trillion to a quaint $3 trillion, quaint in the context of where we are now. But still, this

announcement that the Fed would at some point in the future reduce bond purchases came as a huge shock, I guess, to the market. The Fed leaving the bond market meant reduced demand, meant reduced bond prices, meant bond prices would fall, so investors sold bonds immediately to avoid those future declines in prices. Keep in mind, no actual bond selling happened, and it's not like Bernacki gave a date, especially a date that was close or anything like that. He just mentioned that it was a possibility in the future. This became sort of synonymous with and one of the clearest indicators of the addiction of markets to fed money. People at the time were worried that the stock market was going to follow, but then Bernacki just pumped another $1.5 trillion in by 2015, so it didn't. That brings us to this year,

And there's been a really interesting macro story that I've articulated a number of different times, but effectively, for the first call it, six to nine months of this year, there was implicitly an argument between the Fed and the markets. The Fed was saying, we're going to keep rates low, we're going to keep the pedal to the medal on bond purchases for the foreseeable future. Markets in the meantime were saying, yeah, but we have a vaccine coming, and then we have a vaccine here. Markets seem to be heating back up. The economy seems to be coming back online. And frankly, were seeing a lot of signs of inflation. Of course, that's when the Fed started talking about the transitory nature of inflation and dislocations around supply chains and things just taking

a little time to resolve and that they weren't worried about inflation because, again, transitory, transitory, transitory, but effectively to sum up the TLDR around this argument was that the Fed said they were going to keep rates where they were and bond purchases as they were for the foreseeable future, while markets said we don't believe that you're going to be able to. It's worth noting that the biggest point I think of disagreement is that this particular Fed has been aggressive and clear about how strongly it feels its unemployment mandate to get unemployment down to really pre-pandemic levels. They effectively were saying that they were willing to let inflation run hot if it meant that

they could get more people employed. Anyway, the net of all this is that for a lot of year, the word from Powell was that we're not even talking about talking about tapering. But then, you started to see those big inflation numbers printed. A couple of sessions ago at the FOMC meeting, the Fed Open Markets Committee meeting, it was, we're talking about talking about tapering. Then last month, Powell said that most officials thought they had actually met their inflation progress test hurdle for tapering asset purchases, but that employment shortfalls were still

a problem. So now, finally, we're actually talking about tapering. So what came out of yesterday's Fed Open Markets Committee meeting? First, Powell put the markets on notice that bond purchase. could be tapered as early as the next scheduled meeting, which is November 2nd and 3rd. Second, while Powell didn't commit to a timeline for how quickly the tapering would happen, he intimated that a gradual process that ended towards the middle of next year would likely be appropriate. So what else did the Fed say or indicate about its involvement in markets?

Well, projections released at the end of the meeting show that half of the 18 Fed officials expect to raise interest rates by the end of next year, 2022. In June, by contrast, only seven thought that. Most thought that it was going to be 2023 at least. The broad sense in markets is that Fed officials are finally catching up to what everyone has been saying, which is that inflation is not transitory, but, in fact, something that could be more persistent. So, what might a rate raise look at? Half of officials expect interest rates need to rise 1% by the end of 20203, with another three quarters of a percent raise in 2024. There were a couple other notes. quotable projections from the Fed meeting. The projection of the 2021 GDP dropped from 7% in June

to 5.9% at this meeting. The unemployment rate is expected to be 4.8% higher than June's projections. Personal consumption expenditures, which is the Fed's preferred inflation measure, were now 4.2% versus 3.4% in June. Now, what else did Powell talk about? Well, after the FOMC meeting, he did a virtual press conference. He was asked about the debt ceiling, but before we discuss what Powell said there, I think Bitcoiner Mike Alfred had a fair point on this on Twitter that's worth sharing. Stop spreading the false narrative that there is such a thing as a debt ceiling in a fiat-powered fiscal and monetary regime. The debt ceiling is political theater. There is no connection with physical reality. That connection was lost years ago when most of the world's

currencies became completely unbacked. To be clear, I'm not just speaking to politicians and other government officials. I'm also speaking to journalists and editors who willingly play along with the rod and actively perpetuate this bold-faced lie. There is no such thing as a debt ceiling. However, here's what Powell said. Quote, it's just very important that the debt ceiling be raised in a timely fashion so that the United States can pay its bills when and as they come do. The failure to do that is something that could result in severe damage to the economy and to financial markets and it's just not something we should contemplate. No one should assume the Fed or anyone else can fully protect the markets or the economy in the event of a failure.

Really, though, I still think that Mike is closer to right and that it's all theater. However, I'm paying attention to the show in case it has implications for the infrastructure bill and what ultimately gets passed there. Given that that is such a major focus, that's where the legislation is right now, and that the debt-sealing debate also involves Democrats and Republicans horse trading, it seems like it could be the infrastructure bill is a place that compromises land. All right, one other thing that Powell talked about is an update on CBDCs. Remember that they had a report that was supposed to come out,

at the beginning of the summer. MIT was going to give their designs with the Boston Fed in conjunction, but then it got moved to September and then it got moved to, uh, soon? Question mark. Powell said, we think it's really important that the central bank maintain a stable currency and payment system for the public's benefit. That's one of our jobs. There's extensive private innovation, a lot of which is taking place outside the regulatory perimeter. Where the public's money is concerned, we need to make sure that the appropriate regulatory protections are in place. And today, there really are not in some cases. So no real update on timing for CBDCs, but interesting that it keeps coming up as a question. As you can tell, we are in the midst of something of a macro shift where

yes, there are still concerns about Delta, but more or less, where you see the Fed heading is a tapered world. How the markets will react when that actually comes, what problems or dislocations it might actually cause. We will see, but for sure it's going to set a context for this industry among others. For now, guys, I hope you're having a great day. I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.