The Important Business of the Federal Reserve (and web3)
Hi everyone. My name is Kayla. Welcome to my channel. Are you talking about the stock market and the economy amongst other things? This is not in everything that you need to know. PS, this is talking about the federal reserve, talking about web three, the interconnectedness between the two and how they're both telling a narrative.
The end goal is just to talk about what the federal reserve is doing, why they're doing what they're doing. However three slash crypto fits into that narrative. Why the markets are responding the way that they're responding and maybe a little bit of outlook for the months ahead. the fed came out last week and they were like, Hey, we're going to be zoom in, or we're going to be zoom in really fast and we're going to shrink the balance sheet faster than expected. maybe even four rate hikes. Some quantitative tightening a lot faster than the market expected.
For context. It was back in June. The fed was like, we don't see us raising rates anytime in 2022. And now we're getting to the point where they're talking about raising rates four times.
there's been a huge accelerant and monetary policy and a huge accelerant and how markets see that. And what markets see for their future. that's what we're going to talk about.
So getting right into it, there's a really good quote from EO Wilson that says the real problem of humanity is the following. We have paleolithic emotions, medieval institutions and God-like technology, and it is strategically dangerous and is now approaching a point of crisis overall. basically he's like, everybody's really emotional and you need to chill out a little bit. And I think this is true.
the federal reserve in web three are basically telling us narratives. So they're both like, Hey, one day, this thing will happen, but you should believe in it right now because. It's going to happen one day might as well get in front of the train markets are forward looking, but they often price back to current expectations. and this is because we largely live in a world based on narratives in the financial system. There's a lot of different narratives out there.
So deflation versus inflation, scaling versus security versus de-centralization and crypto that trilemma, Investing versus stock-picking optimism versus pessimism. Everything kind of boils down to a reason of being like, why are we doing what we're doing? And in a bull run, it's a lot easier to have a reason of being B your valuation in a bear market. It's kind of like, okay, we do need to see some cash flows, but when everything goes up, all you need to do is say, it'll go up forever. And then people will give you money. Like that's, that's kind of the thesis of A lot of different crypto companies, a lot of different tech companies right now is that, Hey, just give us some time and we'll figure this out.
narratives have a few core components. They have narrative creation, narrative interpretation, narrative resistance, and the narrative disruption. Everything starts off in accretion phase where it's like, okay, we're going to invent this thing. Now we're going to start talking about this thing now, what does it mean? And what. And then it's interpreted, and it usually faces an element of resistance because that's what humans do is be versus things that happen. then it gets disrupted eventually on a very long timeframe because eventually that thing no longer works.
as an example, think of web two. So that's companies like Facebook, WordPress, et cetera. So companies that are like, you know, 2005 to now, ish, I guess kind of lose I'm old school. those companies were founded on this idea of, you know, get everyone connected, And slowly that narrative evolved into these tech conglomerates that are basically harvesting our souls for data. they're selling those datas to advertising agencies and making billions off of it.
And we don't see a penny of it. Now, the disruption of the narrative is that web three is going to come in and sort of. Disrupt that profit seeking model that a lot of people think these web do companies have.
So that's kind of the narrative process of web two Just like web to the fed and web three, have their own respective narratives. The fed has this very important narrative, probably the most, one of the most important narratives in the world, unfortunately, or fortunately, however you want to look at it Where they have made themselves seemingly indispensable to the broader narrative of market, go up. people oftentimes conflate market go up with the fed, printing money, whatever, with that meme that it's inaccurate.
we have three has a narrative that is meant to be an alternative to this very central. The system of central banking, but for right now, from a flow perspective, the two are definitely intertwined. what the fed does impacts crypto because the fed impacts everything to a certain extent. so these are their stories. So the federal reserve the fed has, and I've talked a lot about them. I've talked a lot about the fed on this channel.
But this is a story of the federal reserve. So the fed has two main words, price, stability, and maximum employment managing inflation. So price stability is a political hot potato midterms are coming out. People are like what? We don't want inflation. We want people to vote for us. fed you better get it together.
And so the fed manages this dual mandate through monetary policy, open market operations discount rate, et cetera, basically, in order to expand the economy, they say, Hey banks go lend in order to contract or strict to they say, Hey banks chilly. Dolan and new money and that's monetary policy to a certain extent, and that works fine. And it works well until things don't work well and they don't work fine. the problem with us as well. We've not had normal monetary policy since pre great financial crisis.
The fed tried to normalize during 2016 to 2019, but things ended up getting. Spooky during September, 2019, cause the repo market freaked out. the feds swooped in, they were like, don't worry, we'll save you. And normalization stopped because the fed, the repo market was like enough. so the fed had to stop everything. They stopped normalizing and then COVID happened and, March of 2020, and the fed was literally a market floor during that time.
Everything they could, came in guns, a blazing to provide support to the markets. Oil prices were negative. It was a bizarre time. I was sitting on a credit desk during that time listening in.
And it was. Uh, crazy. Like it was just you don't think that prices could go negative. And so the fed swooped in, they fixed everything up and now they've probably fixed things a little bit too. Well, because we have inflation. Right.
We have major inflation. They were very accommodative asset prices were like, oh yeah, we see fed and things, but up right. And the thing is that we're now in a sort of pandemic, but the numbers of the fed has to worry about. getting back to that dual mandate of price, stability, and maximum employment, they have to worry about what those numbers are doing. And right now they're saying, Hey, fed, we're a little bit spicy or a little bit hot.
we have CPI print on Wednesday and I'll be back to talk about that. But, That's hot, right? Like inflation has been hot and unemployment was printed below 4% and that's really low. that's kind of like when you're like, all right, this labor market's pretty freaking tight and all markets are really spicy. And so the auto response that the fed has to have when things look this quote, unquote normal, or this quote unquote hot, right.
Because they have to tighten and taper that the lift off and run off. So they have to raise rates. They have to shrink the balance sheet.
They have to do quantitative tightening, basically the opposite of what they did during March of 2020. so this gets into the idea of narrative interpretation. What happens if the fed doesn't do quantitative tightening, What will the fed do? If we enter another recession, like what tools do they have left? Inflation has become a political football. we have midterms coming up.
We can have inflation during midterms, but also we can have a stock market that's going down. So the fed is in between at least at a rock and a hard place. If they don't respond like a financial implosion could happen, but if they do respond, a financial implosion could happen. you just have these extreme takes on either side, but the fed ultimately has to remain credible.
People have to believe in the fed or else. None of this works. if people are like, okay, fabric, you're going to raise rates. Like nobody cares. That is totally counterintuitive to any monetary policy working ever.
Because part of the reason it works is because people believe it's going to happen. The fed has not raised rates yet, but the market's like, don't worry, we'll price it in. you have to have an element of credibility, which is what the fed is seeking right now. they probably will seek through quantitative tightening is maintaining that credibility.
That's really the only way that their story works and based on the December FOMC minutes, the fed is saying, Hey, we're going to be faster. We're going to raise rates in March and shrink that balance sheet right down. Like we're going to do it all. And the market's like, whoa, okay.
You're pretty serious about that. Like we see you now yields are responding. And to be fair, like I said, a little bit earlier, the fed has decided to normalize pretty quickly moving from not raising rates in 2022 to, you know, potentially four rate hikes and a shrinking balance sheet. Real rates have risen substantially, which puts pressure on valuations, which also puts pressure on crypto assets because those are seen as risk assets by most institutional investors.
basically the narrative is, you know, if you're a high flyer, it's a bad time when. Rising and a portion of this is like I said, fed signaling and abling reputation protection March will be when the fed likely raises rates. Shrinking balance sheet will probably happen in July. and this isn't 2019 anymore.
So the fed has a standing repo facility to prevent 2019 from happening. So it's kind of like full steam ahead. If the fed wants to do it, as long as the market doesn't freak out, as long as politics don't get in the way. And that's the narrative resistant.
Yeah. the biggest question is, will it work? What if the fed raising rates doesn't fix inflation? Because this inflation is primarily through supply chains. It's supply side inflation compounded by shutdowns, labor problems, outsize, consumer demand, and raising rates. Isn't going to be clear in any port, so it's not going to be getting boats out into the water. So what if the.
Isn't really recovered. and people can't actually get jobs And the fed pushes a bunch of people out of the jobs market. And then the other side of that is what do we have deflation? We've got an aging population. People are not having babies. Tech could make a large portion. We've been saying this for years, tech had meant you make a large portion of bleeper obsolete.
what if the neutral rate? the point where monetary policy is neutral. It's neither accommodative or restrictive, What if we meet that point sooner than expected? Right now it's expected to be two and a half percent, a little bit ways to go before we get there. But what if we meet that point, that neutral rate where monetary policy is neutral, faster than expected, That could also create some friction on this whole equation because the fed the fed would have to hike less. it's basically a giant experiment there are countless other scenarios that you have to think about. even worse variants of COVID events, vaccine mandates putting pressure on the supply chain, consumers, B BNP, selling themselves into credit card debt. Oil stock piles and the problem of spare capacity.
in the manufacturing sector, not recovering, like there's all these different things that you have to take into consideration. honestly, I feel bad for kind of like simplifying the narrative down to inflation bad, do QT. but that's kind of like how you have to simplify it down to there's a lot more nuance beyond. But the fed has become inflation firefighters just because inflation has become so politicized. It's not that they don't care about maximum employment and we are seeing improvements, but it's like, you know, we got to take care of this current situation of inflation because that's pretty political. And, uh, people don't like watching their food prices increase.
So the fed has to engage in quantitative tightening because inflation is here. And if all of a sudden inflation isn't here and we'll see a little bit more on Wednesday. And the fed is expecting inflation to go down to like two and a half percent at the end of next year. So they're expecting this stuff to move pretty fast, if inflation kind of goes away, the fed has a little bit more room to not move as quickly, but the polls, the political Istation, the political was. inflation the politicalization of inflation.
See that one, three times fast might be too loud for them to avoid because markets are. it's balancing a different narratives and this gets into the story of web three. So web three is different than web three. There's a lot of people out there building web three, and there's a lot of people out there building web three amazing people who I think are so brilliant. And there's an element of web three.
That's pumped up by influencers, pumped up by NFT Shoals. It's a lot of. See that part of it. And then there's the other side of it where these really brilliant people are like, here's how we can actually democratize access to wealth. And unfortunately in all systems, there's an element of calibration.
So you have a little bit of both. And it's really pasta on the wall right now, where everyone's trying out different things. You're seeing things failure, seeing things succeed, in the, in the narrative creation of web three, There's the ethos of protect owned benefit, where those who have historically not been able to participate in the upside of different things. Now have the chance to benefit from that through tokenization, through new platforms, through new incentives.
And that's permeated by this idea of collective effervescence, where it's like, oh, if you'll hold it up, I'll hold all. And it's kind of this community gathering around these different crypto assets. And we're like, okay, you know, we're going to do this together. We're going to be a community together and allows those. speculators become users.
those who create on the platform who actually make the platforms worthwhile, ended up benefiting from the platform doing well. like the Fed's dual mandate, the mandate of web three seems to be protected data, own data and benefit from data. you maintain your own access and usage your, the central authority of your data and you benefit from your data. So you make money on things. So it's really just about doling out the upside, everybody. it was just good who doesn't want to benefit from the work that they do.
As Barney Frank once said, Government is simply the name of things that we choose to do together. there's a lot of nuance to that, but this, the idea in web 3d is that there's a way for people to participate in the economics of the networks that we belong to and benefit from doing things together from the upside of things. Just as much as quote unquote, big tech. And then narrative interpretation. this is the problem.
People see people buying pictures of the monkeys for millions of dollars. NFT. Digital abstractions of value. Like it's a pointer to the assets, not the asset themselves.
It's really about what it represents. But when you have people speculating on monkey pictures, it's just hard. It's just hard.
And you know, it's, it's, it's, it's their prerogative, but it's just hard to be like, this is the future. And you got people, you know, gambling on board apes. It doesn't feel good cause it's opulence. it's like, wow. I, you know, I'm struggling to meet your rent every month and you're spending millions of dollars on a monkey picture.
And I think that's what a lot of people feel and see is like, it's just like, this is gross. unfortunately that's what a lot of people see about web three rather than an industry that could potentially democratize wealth and access. the narrative of what, what web three could be, which could probably be net beneficial. I think for most people gets disrupted, It could be perceived as equitable and cooperative and you know, accessible, but it's not.
also what three is like a big abstract, like it's not really here yet. It could be here one day. It's kind of here. We're appreciating a structure.
markets are calibrating, so shit coins are calibration. Ponzi forks are calibration. One could even argue that and tried by GameStop. Was it calibration? How far can markets go? How far can you push this stuff? how much will the market take? this gets into narrative disruption. So how much can the market dig? several people have written pieces recently on their own experiences in web three. Moxie Marlin spike, who is the founder of signal dove into web three and has outlaid all his different thoughts on it.
he basically was like, it's still inherently centralized it, consolidates around platforms. And the tech underlying, it might not be as solid as people think it is, but it's still like, So, this is what he said, looking at it through the lens of these small projects though. I can easily see why so many people find the web three ecosystem.
So neat. I don't think it's on a trajectory to deliver us from centralized platforms. I don't think it will fundamentally change our relationship to technology.
And I think the privacy story is already below par for the internet, but I also understand why nerds like me are excited to build around it. Vitalik? Who's the co-founder of Ethereum. Rutan response. Moxie's critiques in the second half of the post, strike me as having a correct criticism of the current state of the ecosystem, but there are missing where the blockchain ecosystem is going. I see no technical reason why the future needs to look like the status quo today, Like, I hear you Moxie, but one day, which is true. Like that's just everything in life.
Like I hear you, but one day, and he pointed out that people are building, there's active research around it, all these different things that are actually happening in the space that are enabling it to grow the way that users would expect it to. and so that's what the fed does. That's what $3. There's a lot of narrative of one day. This is going to be the thing.
I think there's like a broader problem with the narrative of society where we have this asset certification of everything. there's a group suggesting that we tokenize litigation outcomes. So you can bet on whether or not a court case is going to go well, Yikes, right. Like, Ooh, it's a way for people to fund their core cases. I get it, I get it.
Like I get it, I get it. The things are expensive, what, we don't need to speculate on everything maybe. that's just society though, right? Like that is just the way that we are wired. As we love to speculate it's human nature. that is capital S society. And we get pretty frustrated by the current state of affairs, especially now.
You know, it's like, will I ever own a house? No. and often lotto is the only way out, or it feels that way. you might as well gamble on check goings. You might as well gamble and EMC and GME. You might as well gamble on litigation outcomes because that's hope that's the problem. the quote earlier from EO Wilson, we don't really know how to process our emotions.
especially in the context of things like the future. Basically you play games all the time. We're speculative creatures. We like to make bets.
We like to seek social cohesion and community, and we also like cheat codes, right? And the world feels increasingly tilted towards get rich, get richer, and you have to find G codes in order to kind of play catch up in crypto slash rod three, GME AMC. It's facts. Those are all cheat codes.
Those are all dollars. I fast money, dollar sign. You have to make your own games. As Ian banks wrote in the player of games, all reality is a game physics at its most fundamental.
The very fabric of our universe results directly from the interaction of certain, fairly simple results in chance, the scene description, maybe applied to the best, most elegant and both intellectually and aesthetically satisfying. Okay. One of the reasons that stock's Gilbert narrative has stuck around for so long is because people feel like they're in a massive role playing game gathering, battalions plan, a bank run, maybe become a millionaire, even a billionaire. Why not play? but what RPG games fail to teach you is that there is no alpha in copy paste. you can run around all you want, but there is not a lot of benefit to just doing what everybody else is doing. but you do get a little bit hope, right? Cause you kind of have a little bit of a community.
What else is there besides choosing to believe in something better? And sometimes a shitcoin is something better. things become ultimately a function of emotion and narrative and this is the story of the fed in web three. so now the fed and web three are trying to convince people of the future that might exist. So you should believe in it now because it might exist with.
so the fed has been accommodative over the past couple of years, which has enabled a lot of market go up once the fed pulls back and engages in restrictive monetary policy, all of those refilling dollars will be a little bit freaked out. We won't see as many dollars circulating around. That'll put pressure on risk assets, put pressure on their valuations.
Institutional investors see crypto as a risk asset. that's going to suffer probably as well. If this keeps on playing out as expected, it hasn't blossomed into that digital gold narrative yet. when the market becomes a risk averse, risk assets, logically suffer.
So it will be interesting to see if the crypto narrative evolves into a place to preserve wealth and decouples from equities. So the bond market is already responding to what's going on. The realization that the fed is serious this time. And that means that the stock market. And crypto we'll have to catch up a dry up of liquidity is pretty bad for most things.
Investors have started to de-risk eliminate exposure, but the question is, will the market keep on responding? Like this will the market be like, all right, we see you fed, but we still believe in these massive evaluations, even though it puts pressure on the actual TCF models, who knows. Right. I don't tell them Ricky will respond. It'll depend if it's early 2018 style, or perhaps the lightening Mick tightening fed will result in even more of a risk off.
So we will have to see. And then I think another important point here is a story of energy. Narrative is always disrupted by reality. So I spoke a lot about Kazakhstan last week on this channel, those first series of protests that were sparked by a. Control left on LPG, those protests were a result of much more than that rate.
So it was a result of, the rich getting richer of any equal access to opportunity corruption, et cetera. But it was sparked by a small shift and energy access. And I don't think it's great to extrapolate from that, but I do think it could serve as a potential example and is important to pay attention to because we have tenuous energy access. Right now, we have an energy crisis in Europe. we have geopolitical relations that are not solid, and we have this relationship of natural gas to fertilizer, to food prices.
All of this stuff is interconnected. Energy is. Basically or none of how we do things like you need energy to produce food. energy is the base of everything in crypto, the proof of work consensus mechanism, which is what Bitcoin and Ethereum currently both use relies on energy, you know, Kazakhstan, they shut down the internet, the hash rate on Bitcoin jobs, 12%. You're only as decentralized as your access to the grid. And a lot of the inflation that we've experienced over the past year.
Good. And because of energy prices, because oil, because under production, under investment, lack of spirit capacity, and that gets up into the supply chain, higher gas prices, higher production prices, higher prices for consumers, everything reverts back to energy. And that's the disruptive variable for all narratives. So where do our stories meet hollering, where, you know, our stories mean what I've described throughout this piece is reflexivity.
So narrative shaping reality, George Soros are perceptions impacting fundamentals, distorted views can influence the situation to which they relate because philosophy is lead to inappropriate actions because we live in a world where things like GME and AMC can happen, where they can go from bankrupt to the moon. We board apps sell for millions as Massari road of NFTs. Attention is finite. The internet is fast. We're tribal creatures driven by mimetic desire. all we want is the thing that everyone else wants.
It's medics. It might not be you, but it's. The human as Morgan household wrote in his recent piece, the most important variable was the stories people told and the emotions they suddenly stumbled upon. And bear markets narratives tend to get a bit blurry.
Short-term thinking, which is already pretty short term, tends to take hold even more. maybe one day gets pressed in a bit lower and actual cash flows get priced a little bit higher when money dries up the vision does need to be crystal clear meme. This cannot be the only thing dragging you along. And this is a great paper called manias. And mommy says they outlined how the meme here has start-up, but it applies broadly dies.
The cycle of a startup might look like this. Somebody has a crazy idea. They oversell this idea to investors and the combination of investor money and talent makes ideal, seem a little. Achievable, but it's so crazy idea.
And then on that track record, they raise even more money and they hire even better people. And over time, either reality converges and the truth, catches up to them. Or they continue to exaggerate and then they implode. So those are kind of like the two paths you can either keep the meme going or you implode. There's no other option. everything reaches a breaking point.
Eventually the fed might be an accelerant to that as they bring more reality to the narrative going go down, the fed might skew the equilibrium, make it. So prices have to show more of what is actually happening, which results in the feedback loop of fear, sell, sell more. Both the fed and web three are trying to convince us of a future that might happen. Hope is really hard to value. And I think that is a four on crypto slash web three. The knowledge that the world can be better, it's very hard to assign valuation metrics to people who truly believe in a better future.
The underlying narrative of hope is always going to be tarnished by reality. That's literally what growing up is, right? There's a great quote. The only hope is in the creation of alternative values, alternative realities, the only hope is in daring to re dream one's place in the world. A beautiful act of imagination and a sustained act of self becoming, which is to say that in some way or.
We breach and confound the accepted frontiers of things. I think that's a crypto is doing what three, it's breaching the frontiers of things. I think the space could be that, will it be that I'm not sure if you have a bunch of very rich people who decide that this world is for them and not the rest of the world, that'll, I think ruin a lot of different things, but if they, if they decide, you know, equitable access.
I think the thesis is there. Those are my final thoughts. Yeah, I'm moving over the next week. So, uh, I'm going to try my best to sort of remain on the loose schedule obviously you can find me on Tik TOK, Instagram on my sub stack and, uh, Twitter.
This piece is written on sub stacks. If you want to go check that out, share like comment, subscribe. Let me know your thoughts. I'd be really curious to hear what other people are kind of thinking of this crypto web three sustainability debate.
Anyway, um, I will be back, Wednesday, ideally for the CPI print. but yeah, I'll talk to anybody.
2022-01-13 06:40
