We’ve got a big week ahead.
The US Federal Reserve meets mid-week. Another interest rate rise is a shoe-in. The big question for the market is what the Fed will say about the expected pace of further interest rate rises into 2018.
There’s little reason to think the Fed will hold off. The US economic expansion is gathering pace. Notably, the labour market is very strong, as the Wall Street Journal reports:
‘The U.S. economy is hitting milestones not seen in more than a decade, marked by robust hiring that has led to low unemployment and a sustained pickup in output.
‘Labor Department data Friday showed nonfarm payrolls rose a seasonally adjusted 228,000 in November — the record 86th straight month of expansion — after a 244,000 gain in October. Steady hiring has in turn driven the unemployment rate down to 4.1% for two straight months, holding at a 17-year low.’
Despite the prolonged employment surge, wage inflation is still relatively low at around 2.5% per annum. The inflation rate has actually softened so far in 2017. This means there is no urgency to raise rates in quick succession.
No wonder the market continues to hit new all-time highs every other day!
It’s well known that the market ‘hates uncertainty’. Despite that being an idiotic statement — the future is inherently uncertain — right now market conditions ‘feel’ more certain than they have in a long time.
That is, you have coordinated global economic growth now. Even Europe and Japan have joined in. Manufacturing plants are humming around the world. The US labour market is strong, and interest rates remain ‘accommodating’ to say the least.
Where’s the uncertainty?
North Korea is still a risk, and the Middle East is still a potential powder keg. But no one is really focusing on that now. It’s not a part of the news cycle, or a part of the investor mindset.
The fact that there is little perceived uncertainty should be a worry. When the perception of uncertainty is low, there is a lot of optimism in stock prices.
And when there is a lot of optimism in stock prices, there is a greater risk of things going wrong.
That may sound like a strange statement. But’s it’s just the way stock markets work.
When things are good, and everyone knows that everyone knows things are good, it’s all in the price.
You need things to get even better for prices to keep rising!
This wouldn’t be too big a deal if this was happening at the start of a new economic cycle. But it’s occurring in the eighth year of an expansion. The current bull market is one of the longest on record.
That means you should be wary as we head into 2018.
But not as wary as bitcoin investors!
Bitcoin futures started trading yesterday morning on an exchange run by Cboe Global Markets Inc. The larger CME Group will launch its own bitcoin futures trading next week.
How will this impact the market?
I have no idea, of course. But bear with me while I take a guess.
Futures are a derivative of the real thing. They create additional supply. And they allow investors and speculators to obtain this additional supply for a fraction of the cost of the real thing. That is, futures provide leverage.
The introduction of bitcoin futures could go either way. In the short term, it could drive the price even higher as speculators go for leveraged gains.
But longer term (which in bitcoin world means a few weeks…or maybe even days) the impact could be negative.
One of the justifications for bitcoin’s amazing run this year is its scarcity. It has a finite supply. The futures market changes that. Derivatives create an infinite amount of supply.
The creation of a bitcoin futures market will potentially bring the speculators out of the ‘real’ bitcoin market. This could lead to a price collapse.
Don’t forget, one of the reasons behind gold’s enduring use as a monetary asset is its scarcity. But the gold futures market means there is much more supply of gold than there really is.
This is what modern financial markets do. They create supply to meet excess demand. Right now there is a huge demand for bitcoin. So exchanges, sniffing out a money making opportunity, realise the answer is to create more supply.
While this is great for the exchange, it might not be so good for bitcoin prices. I mean, how much more stretched can prices become? Everything in the chart below screams ‘blow off top’.
Now, I thought that at US$7,500 too, so what would I know?
Perhaps this latest ramp-up is buying on the expectation that futures trading will continue to push prices higher? If that’s the case, watch the market’s reaction when future’s trading starts.
Price volatility is about to pick up big-time.
Editor, Crisis & Opportunity