Some time ago, Trump requested Fannie Mae and Freddie Mac to purchase 200 billion housing bonds. This news clearly represents an injection of liquidity. The US stock market and cryptocurrency should rise, but we found that both the US stock market and Bitcoin continue to decline. What is the reason behind this?! Is it good or bad for the cryptocurrency market? To understand the rise and fall, one must know the logic behind it.
First, we need to understand where this 200 billion comes from. During the 2008 financial crisis, which coincided with the birth of Bitcoin, these two companies went bankrupt and were taken over by the US government. Then, the US real estate bull market began, and these two companies made a lot of money. This 200 billion is what they earned, originally set aside to cope with potential risks that might arise later. Now, it has been used by Trump through an executive order.
What we used to call balance sheet expansion was the Federal Reserve buying U.S. Treasury bonds to increase the dollar supply in the market, or printing more dollars to increase the money supply. This time, the 200 billion is not the Fed's doing, but it has increased market liquidity. We can temporarily call it shadow liquidity. Consider the U.S. Department of Defense investing in rare earth companies, or entering into partnerships with Intel, etc., which will create this kind of shadow liquidity in the future. This is outside the Federal Reserve's jurisdiction but indeed increases market liquidity, that is, increases the money supply.
Here lies a very serious problem: the independence of the Federal Reserve is directly undermined. You, Powell, refuse to lower rates, right? You won't expand the balance sheet, right? I, Trump, have ways to increase liquidity. Once this precedent is established, it becomes the case that Trump's executive orders can increase liquidity without the need for the Federal Reserve. This situation is extremely severe and will inevitably cause global financial turmoil and chaos in monetary policy. Previous economic data and regulatory methods gradually lose effectiveness. In this case, the financial sector or capital will first choose to hedge, not buying U.S. Treasury bonds or stocks, but opting for gold and silver, which are universally recognized hard currencies that cannot be manipulated by Trump. This also explains why gold keeps rising while the dollar and U.S. Treasury bonds are falling.
The consequence of the 200 billion buying housing mortgage-backed securities is that mortgage rates will decrease. The principle is the same as the trading model of U.S. Treasury bonds. The U.S. mortgage rate is the bank's benchmark rate plus the intermediary rate (mortgage-backed securities). Trump poured in 200 billion to buy the bonds, which is equivalent to cutting out the intermediaries, leading to a drop in rates. There is a rule in the financial industry: the more intense the administrative intervention, the stronger the rebound. In a short time, rates drop, and as the real estate sector, which has the highest proportion of U.S. CPI inflation, sees prices rise, the Federal Reserve has struggled to suppress inflation through interest rate hikes and balance sheet reduction, only to face a rebound afterward. At this time, the Federal Reserve may be forced to raise rates (not yet). To achieve his goals and create prosperity, Trump can lower home loan rates through administrative means, as well as car loans and even U.S. Treasury bond rates. This consequence is serious; the Federal Reserve's control may fail, impacting the global economy and monetary policy.
However, Trump will not be so foolish as to leave his voters in dire straits. The deeper reason may very well be that Trump wants inflation to rise, using it to offset the pressure that the Federal Reserve's interest rates impose on 3.6 billion in U.S. Treasury bonds, and to dilute the burden of U.S. Treasury debt and repayment pressure through continuous administrative easing.
The outcome of this scenario is that in the future, as executive orders gradually undermine the Federal Reserve, the financial market will experience a period of chaos. At this time, gold will rise; gold has already shifted from being a store of value to an asset that appreciates against Trump's monetary easing. Other financial products will decline, including Bitcoin, and once this period passes, Trump will continuously inject liquidity to create momentum for the midterm elections, leading to a new round of profit and increase in U.S. stocks and Bitcoin.
As investors in the cryptocurrency space, we need to seize the opportunity during the downturn, and then wait for Trump to create momentum through further monetary easing to profit from the subsequent rise. We should plan ahead and prepare for a significant drop, then get on board and wait to reap the rewards.