Insights & Advice


Fed puts markets on notice while crypto crashes

It had to happen at some point with economic growth spiking as high as it has, and inflation beginning to creep up.  Investors should have expected the Fed to think about a change in policy. This week, we had our first mention of the dreaded “T” word.

T is for taper and in the minutes of the Fed’s April FOMC meeting released on Wednesday, the entire financial community jumped on just one phrase: “it might be appropriate at some point” to consider tapering asset purchases if the economy shows “rapid progress.” In other words, the Fed is signaling that they are beginning to think about thinking about tightening monetary policies sometime in the future.

The rest of the statement was all about assuring markets that the time was not quite yet. But, true to their word, the Fed, which has said in the past that they would give the financial markets plenty of advance notice before any policy changes would be announced, is doing just that. Consider this as your first notice.

I was somewhat surprised that the markets took this first monetary shot across the bow in stride, but investors seemed to have bigger fish to fry. This week’s crypto crash took many by surprise even though it had been expected and overdue.

The decline saw 50% plus moves downward in the digital currency class. By the end of the week, most crypto currencies had bounced back above their week’s lows.  I think this space will take several weeks to really heal.

In a one-two bunch on Thursday, the U.S. Treasury called for new, stricter cryptocurrency compliance with the Internal Revenue Service (IRS). The government’s proposal would require any transfer worth $10,000 of crypto currencies or more to be reported to the IRS. I am sure that is going to put a crimp in those global ransom wear hackers, not to mention the huge drug syndicates that are also suspected of using the currencies to wash money.

Some technical analysts argue we have not yet seen the lows. Bitcoin dropped to $30,000 and Ethereum below $2,000. In my opinion, we could easily see further downside. My own line in the sand for holding Bitcoin is around $33,000. Under that, and I would be gone.

The plunge of crypto currencies also overwhelmed the “risk-on” feeling among investors and pushed the S&P 500 Index back down to test its 50-day moving average (DMA) for the second time in two weeks. This is the kind of market action I have warned readers to expect throughout the remainder of the month and possibly into June.

On the commodity front, energy, copper, wood, and most of the agricultural commodities have been pulling back. Profit-taking (after enormous runs this year) was to be expected. Given the continued decline in the dollar, I still think commodities, industrials, financials, and materials are the place to be.

In my column yesterday, “Gold Regains its Mojo,” I pointed out that gold has been lagging other commodities for some time. The combination of low interest rates, a declining dollar, and the sell-off in crypto currencies leaves the door open for another look at gold.  It appears to me that both gold and silver could be due for a second-half period of catch-up. However, precious metals, like Bitcoin and other digital currencies, are aggressive investments. Only those who are willing to incur substantial losses should consider investing. As for the markets, expect continue turbulence ahead.

Any mention of specific securities or investments is for illustrative purposes only.  Adviser’s clients may or may not hold the securities discussed in their portfolios.  Adviser makes no representations that any of the securities discussed have been or will be profitable.

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