 Hello everyone and welcome. This is episode 70 of the Market Maker podcast. This is Piers Curran. Today we're changing it up a lineup. I'm actually joined by my co-founder Will DeLucey because Anthony Chung, breaking news, Anthony Chung has just had his second baby or his wife, Basma. I think he's got a decent excuse for not being on the pod this week but I just want to say Anthony will be listening because I just want to say massive congratulations to Anthony and Basma and his family. So fantastic news but yes it does mean you're not going to get your weekly dose of Anthony Chung I'm afraid but we do have Will DeLucey stepping into the fray so I'll come on to you to sec Will because as normal there is a running theme and it's happened again when Anthony Chung goes away the whole world collapses and yet again so let me roll off some stats for you in the week that Anthony Chung decided to step off the desk. It's definitely connected this so what's happened well obviously the big news is the Fed they hyped rates by the largest amount in a single meeting since 1994 by raising interest rates by 0.75% or otherwise known as 75 basis points. Outside of that and we're obviously going to drill down into that in a lot of detail other stuff doesn't even make the top of the list the ECB convened an emergency meeting on Wednesday that was just six days after their interest rate setting meeting that was scheduled last week kind of almost unprecedented this so we'll talk about why I'll briefly cover why and what they've decided and it definitely kind of harks back to the dark days of the Eurozone debt crisis that will you'll remember very well but in terms of market moves this week well the S&P has continued to fall through the floor and as I speak is down around the 3700 area that means it's now officially in bear market territory it's down 23% now from the November high the NASDAQ is now down 32% from the November high the dollar has been punching its way higher all week and now back to versus the Euro back down testing the 104 handle this is the lower the year against the pound it has made new loads for the year and trading down around the 121 handle at the moment and that's an 18 month flow and you know what we're not far off levels now back to levels we saw in the aftermath of the Brexit vote down back in 2016 and then perhaps the biggest moves from a sort of percentage point of view this week is in the crypto space bitcoin down well roughly about 33% just this week that puts it down 50% on the year and 70% down from the November highs and of course other crypto coins just yeah huge downside pressure this week the crypto miners have been kind of wearing a lot of pain so we'll kind of delve into all of this in the pod but look let's start with the Fed and well just get your initial take will they obviously hiked rates by 0.75% and maybe if I just give the stats and then I'll be keen to get your thoughts on you know if you think they've made the right call here and then we can discuss in detail how markets responded but just here are the kind of the stats they raised rates by 0.75% you'll remember that just sort of last week we were pretty much 100% pricing in just a 0.5% hike but they've hiked by 0.75% because of the much higher than expected inflation print that we had on Friday so this takes the Fed funds rate now up to a range of 1.5 to 1.75% the Fed operate a bit differently to most central banks in that they don't have a like a single interest rate they have a range which is 0.25% wide this as I said was the biggest single hike since 1994 they also they said in their statement they anticipate that ongoing increases in the target range will be appropriate at the meeting yesterday there was only one dissenter from the FOMC committee and that was Esther George and George actually preferred just the 0.5% hike not surprising George is the Uber dove on that committee but otherwise every other person on the committee stepped up to that 0.75 range Powell added because there was a press conference afterwards of course and he added that an increase of either 0.5 or 0.75 percentage points would likely was likely at the central bank's next meeting which will come at the end of July although he did say he did not expect adjustments of that magnitude to become common so what do you reckon of all of that lot and explain that to me the last thing that you said there is he does not expect rate rises of that magnitude to become common that comment came about well within about a 10 minute window of the other comment that they anticipate ongoing interest rate increases will be appropriate which the market took as 0.75 to come so it looks perfect central bank fodder for people out there who might be new to watching central bank conferences sometimes it's almost as if their task is to equally weigh their statements and sentiments so it's to avoid really creating too much volatility so hence why you had the S&P actually first lower then higher then lower then higher again and then actually this morning I think everyone's been able to reflect on this and say well okay they're saying that no bumper or you know it's not going to be jumbo rate rises will not be common but I don't know I mean for sure by opening up the casket to 0.75 they can do 0.75 again and again and I think the best thing I saw in the FT was was the change in the interest rate expectations going forward the Fed top one that's been actually just to me shows how wrong they were even going back to December you know still holding on to that transitory it's not me it's you transitory will come down I mean I think I think they've been sorely wrong footed and and in order to maintain credibility the Fed have to be more aggressive now they have to continue and I think the next rate this isn't the last 0.75 that you see okay with the CPI at 8.6 percent and the thing about inflation is remember inflation is is just a belief right it's do people believe the prices are going higher and and yes you've got the food and the energy driving it but if you start to now see this come through in a wage price spiral then it can really you know can create some some some pain so more to come I think now they're probably doing the right thing I think if they were dovish in this statement I think they would have some real problems this summer yeah so they needed to show a bit of strength and look it's happening what we pretty much have been flagging for for a while these equity prices couldn't have been stood this I think the tough tough thing for an investor though Piers and maybe you can ask this is where do you put your money now because it's not in bonds it's not in equities it's not in crypto good luck with that one yeah where you invested and why well so that's the the the biggest question of them all isn't it it's very very very difficult I mean the pretty much the only thing that's gone up is the dollar and it has gone up by a lot I mean I was really off the euro dollar and the kind of dollar against the sterling against the yen by the way the dollar yen's testing the 2002 high so it's literally the highest it's been for 20 years and that's perfect sort of I guess case study for that you know the biggest force on exchange rates which is interest rate differentials or monetary policy differential and obviously the Fed now uber hawkish and the Japanese still kind of definitely lagging but before my answer yeah okay go on sorry a question yeah where where to invest your money I'm gonna what can I add some numbers because you made a really important point and that was about interest rate expectations going forwards and how the federal reserve communicate to us how you know where they expect their own interest rate levels to be in the future and they use what they call their dot plot matrix and so for those of you not quite familiar with that I'll try and simplify it basically each quarter each member of the federal reserve committee plot a dot on a chart and their dot is to represent where they as an individual on that committee where they expect interest rates to be at the end of 2022 where they expect rates to be at the end of 23 where at the end of 24 and then something called where where do you think rates will be in the longer run okay which is where you think you know where's this where's the top of this cycle and where will that kind of natural kind of rate level settle down to and you said quite rightly and it's there's a great graphic in the FT today I will if you get anyone who's got a subscription to the FT it's the it's the first article on the homepage just go to that it's about the 0.75 rate height scroll about halfway down and they've got a great graphic which shows you how the feds own sort of forecasts have changed in the last sort of 12 months and as you said it's so it's the it's the biggest hawkish pivot I've ever seen and so to put some numbers on it so if you go back to the September meeting September 2021 so nine months ago the fed themselves were forecasting that interest rates at the end of 2022 would be zero right no change by December of 2021 they updated it of course join that that quarter four of last year that inflation thing it changed from being don't worry guys this inflation uptick it's transitory it's temporary it's going to go back down don't worry about it and it moved from that stance to the end of the year to oh hang on a minute it's not kind of going down like we expected maybe it's not transitory and so they started to say look we're going to probably have to start hiking so in December their forecast for the end of 2022 was rates to be 0.75 percent okay then you go to March right so March 2022 now the meeting in March they updated their dot plot again and now of course inflation is really taking hold and they upgraded and they said right by the end of 2022 we expect interest rates to be at 1.75 percent that's what they said in March they've just hit 1.75 percent so in the meeting yesterday the dot plot they've now taken their rate expectations for year end up to 3.25 percent so just if I summarize in nine months they've gone from an expectation that rates will be zero at the end of this year to now 3.25 now that right there that perfectly explains what I mean when I say that's the most aggressive hawkish pivot I've ever seen and definitely explains all that's happening in markets yeah I mean to me it's just a huge admission that they were wrong and I think they need to be held held onto account here the Fed chart I know that you're talking about in the FT I really like because it moves but actually I'd like to see a chart over time once all of this is over is what the Fed told us would happen and what actually happened and hold them to account because it really is like I mean you know as well you know running a business we make forecasts and we're held to account on those forecasts you can't or the Fed are doing is changing that forecast oh no I haven't got a minute I need to change that forecast again and they should be held to account for that so I do think I do think the you know obviously I mean that goes all the way back to 2020 20 trillion dollars plus being created both monetary policy and fiscal policy in a response to covid more liquidity upon more liquidity and then the the the Russian crisis making a perfect storm with the scenario but you know you can't create a tidal wave of money and not have to deal with the outcome at some point and but it went on for longer than we thought right because I mean you and me we were trading back in 2010 2011 do you remember when gold went to $2100 and 2011 because as a result of quantitative one and two everyone was saying oh this could this could create some price pressures actually and it didn't materialize for another 11 years right this is the the challenge with markets you know they can behavior shifts so fast and if the market the amount of liquidity in financial markets in the central bank experiment we've been talking about it for years but it hasn't been a problem because no one's looked at it as a problem and this is what I find so interesting about the behavior of markets in history not just now you know everything's fine until it's not and then behavior changes almost like a jackedge and that's what's happening now and this is why I think the the Fed do have a challenge because inflation is now in the system it's in everybody's beliefs and that will be the trend you haven't answered the what to invest in yet and I understand that you were you know very political of you but let's let's go back to that so so what do you invest in now well before I answer that I'm just basically I'm so to answer that you got to now think right well what's coming next right well so what what is the outlook and I was just trying to figure this out right because if they now tell us by the end of this year rates will be at 3.25 percent I was just trying to figure out what does that mean because there's four meetings left this year okay 27th of July 21st of September 2nd of November 14th of December there's only four meetings left okay we've got rates at between 1.5 and 1.75 percent now let's say they do another 0.75 in July which all the all the big banks have now got kind of locked in that's Goldman's forecasts and Powell pretty much said that's going to happen right so assume that happens okay that would take rates up to 2.25 percent okay that means they got another 1 percent to do over the final three meetings September November December and it it might be that it's 0.5 September 0.5 November and then leave it at that or maybe 0.25 in November 0.25 in December so you know I think I do personally think that we are right at the this meeting yesterday on the one in July will be the kind of peak hawk peak hawkishness you like right and then well they the Fed hope that's the case obviously we need to see that and feed through on the inflation side and enable the Fed to just take their foot off the gas a little bit but actually quite rightly say the Fed got it big time wrong last year and who's to say they're not big time wrong now just in the opposite direction they underestimated inflation in 2021 are they just overestimating it now I mean I know the CPI print wouldn't suggest they're overestimating it but you know I think where do I think markets go from here I think there is still more downside between now and the next meeting and I can't describe how important the next inflation data is out of the US and that'll be mid-July and we'll get the inflation print for the month of June and that I mean I mean it's big anyway but that that now becomes the next big line in the sand and you know it is and are you going to have to wait for it before making any big calls on what markets do next you're going to have to sit on your hands and wait I mean you need that data I think before you can start to really look forwards with confidence with a strategy I think that's why there's so many so much uncertainty in the markets and if you look at how the equities moved I was actually speaking to really interesting hedge fund yesterday so we've had a number of candidates well obviously we help students all over the world secure roles and there's a hedge fund called Quadrature which is really a technology led automated trading firm they're in Lead and Hall building in London it's the most amazing offices I have ever seen super super cool hedge fund they've got a ski shaling they've got games rooms they've got I mean whatever you want in the top floors of the newest building in London phenomenal but I was there because someone that did our training program 10 years ago Yusuf Ali is now their head of equity analysts and really running the execution desk there so interesting to see how well how well it's done and he was saying look we're at a time now as a hedge fund and they're doing really well in this environment but they're saying they're going back 60 to 100 years to look at data and correlation to try and find historical patterns where you've had rapidly growing inflation hawkish central bank but after a period of a supply and demand shock so interestingly enough you're saying well actually if you look at 1945 to 1950 after the Second World War and I saw the FT was talking about this and he goes in some ways that was quite similar because you've had reduced demand over a long period and then suddenly the floodgates open but in that response to that inflation repressor actually the central bank was able to manage the situation quite well so slowly move interest rates higher and it was all relatively orderly whereas obviously in the 70s you know the opposite was true but what wasn't the case in the 40s the big difference he was saying is we're entering this environment now with phenomenally high asset prices obviously in 1945 we've just had two world wars and and and it was it was very different whereas we've just had here you know 12 years of relentless asset price appreciation we had negative interest rates for the first time you had the european central bank not only buying government bonds buying corporate bonds of random companies everywhere you had helicopter money where central banks have literally been depositing money in people's accounts and saying please spend it so we've never seen anything like it and he was saying for their data mining for their models it's actually really interesting how far back you have to try and go before you've seen an environment like this and i think that's why there's are still going to be a huge amount of uncertainty in the markets it's from here peers i think it gets really interesting and those automated trading companies i mean they're poised well but some some are suffering some hedge funds are really suffering trying to predict the global macro impact here i think one of the reasons why you've almost successfully dodged my question twice now is um it's hard to predict i mean you know the correlation between assets is so strange so so groundbreaking and i think you could have a global macro view now but within one week you'd have to change it yeah yeah peak uncertainty and i guess my biggest worry just back to the Fed are they right are they wrong again i guess what i worry about is the inflation pressures are well as far as i can see at the moment are mostly on the supply side you know so it's the you know it's the ukraine conflict that that's led to commodity pricing spiking that's supply side and then you know obviously supply chain problems with china you know zero covid tolerance and so on i mean that's against supply side so i mean i know wages are rising and i guess that's your even you pointed to that big worry is that wages rising then lead that's what is a supply side problem to become then a demand driven problem and then that's where inflation can take i think but hasn't the demand driven problem already happened yeah it's almost like the reverse way around here which is what's so unusual so that's what i think though so i guess my point is if it's a supply side situation rate hikes aren't going to solve it no no so aren't we literally going to have the worst of both worlds here where inflation is high because of the supply side and the Fed hike aggressively thinking they can somehow have an impact but well i think it's more interesting than that i think you're saying such a good point here i i think they know and you've got the bank of england but just a few minutes anyway yeah um i think they know as central banks raising interest rates here won't change supply side inflation but you know what they've got no choice they have to have to do it even though it's probably the wrong thing to do if they don't do it they then lose credibility and if they lose if this is the big one for me if people if faith in central banks dissipates i mean forget 28 2008 or whatever we've seen i mean is it because because they are so fundamental now i mean it used to be that they just decided on interest rates up or down but now they are the backstop scaffolding and support of every single asset job product out there i mean they really are endemic in the system and um yeah so they have to raise rates they've got no choice even though it's probably the wrong thing to do so talking about central bank um credibility then let's let's just move on to the ECB because quite amazing i think and it's kind of gone a bit under the radar given how dominant this fed story is but the ECB had a meeting last week and that's their scheduled meeting all right banks these banks they have a meeting every six weeks it's all scheduled in we know exactly when the dates are for the whole year and it's all nice and proper and the ECB met last week and you know they they went along the hawkish path as well and they said look we're going to start to raise rates next time i.e. in July and we're going to look to obviously also wind back our QE program right and so you know kind of as expected um but then literally six days later the ECB call an emergency meeting and we're like what it's not like 2011 here what's going on and actually what happened since last meeting was Italian and Spanish bond yields had started to rise because there's a little bit of concern that if the ECB pretty much well certainly the very biggest buyer in town of these bonds for well ever since what was it 2015 i think they rolled out their QE program for the last seven years the ECB has been since Mario Draghi's whatever it takes absolutely what a ledge um so the ECB is saying look we're we've bought enough we're going to stop and of course obviously what happens there well so yields of prices go down and yields go up right as the biggest buyer in town announces that they're out of here um and the issue is that the Italian and Spanish yields rose to an eight year high and briefly the Italian yield 10-year yield i'm talking about now went above 4% so on Tuesday it closed at 4.18% so we can get a return with some investment somewhere absolutely finally um but it's dropped back a little bit now to 3.78 but it's just it just kind of flashed on the radar and the ECB going oh all right we best perhaps try and get in front of this so they had a meeting um and then the idea was they were going to speed up work on a new policy tool that they're calling the new anti-fragmentation instrument um and basically I think the plan to start with they're going to stop buying bonds but they're going to continue to reinvest any bonds that mature that money they'll reinvest and I think what they're going to do is um that that reinvestment will be geared more towards the more fragile um eurozone economies so basically they're going to try and prop up the prices of the Italian and the Spanish and the Portuguese debt um rather than buying German for example just to try and you know make sure those kind of and it's Italy of course that has huge amounts of debt and if their yields properly spiked like they did in 2011 um but they spiked to over 8% in 2011 might but we literally thought the whole eurozone was going to collapse but do you remember back then and perhaps some of the listeners obviously weren't weren't weren't here back then but we would always look at the spread between Italian yields and German yields or Spanish yields and German yields and when that spread would widen actually concern over the eurozone would would would heighten and then when the spread's narrowed then actually it would become much more secure for the eurozone so yeah following those spreads is is crucial but I think what you just described from the ECB shows just how difficult the situation all central banks are in now because they've spent the last 13 years being the scaffolding of the financial system what used to happen do you remember I used to when when teaching about this piece I sort of imagined someone holding a toddler and then letting go and then the toddler wobbles and they grab it again right that's what central bank that's just what the ECB have just done yeah they try to let go and then they quickly grab it and I think what we're going to have here is another lesson with central banks trying to let go again trying and then grab they I mean but but the difference now is you've got inflation over the last 13 years they used to be able to do that I mean you remember 2011 right where Jean-Claude Trichet hiked interest rates twice before before that was reversed immediately and and everything reduced again but they could do that because there's no inflation the problem now is the central banks are going to try and step away try and let go and the US bond market by the way is it the even bigger bear in the room here with you know the amount of money that that's not going to be reinvested and things are going to go wrong and so they're going to try and step back in but every time they step back in inflation continues interesting times we haven't even talked about crypto yet talking about volatility let's do it um yeah so look back back to 20 000 for bitcoin that's the sort of target everybody was was looking at I shared with I shared with um our trainees actually the video that I did with Tim Duggan in December 2020 which was all about bitcoin approaching 20 000 from the bottom right yeah yeah and how this time it looked like this will continue to stay above 20 000 and we will we might move higher to 30 000 or I think my biggest prediction was 40 to 50 000 and bitcoin as you know went to 70 000 um so yeah I mean it was it was a it's been a great time for crypto assets but again it's it's behavioral now and you need to know that everybody else is now you know full on excited about being long um these cryptocurrencies and and the atmosphere out there just isn't saying that you know the atmosphere out there is how low can this go and if we do break 10 20 sorry then it's 10 yeah obviously is the next um big round number um to to to focus on and it's strange as we as you know we're developing our own blockchain sin to help people know all about the technology behind it I think it's so interesting but I do think the value of a coin whether it's doggie coin chainlink or uniswap it is quite right you know I mean it it really is just purely behavioral because obviously it's behavioral um so I think it I think it's tough and I think it's tough for most people now I was reading in the FT the average person has now lost my like bitcoin is below where the average person has bought and I'm sure well can I ask you I mean I'm sure a lot of listeners perhaps will be have some kind of bitcoin or other crypto exposure um what would you do now I mean obviously you can look at the technicals and you said 20 000 on bitcoin such a massive level it was the 2017 high and then well it's held for now just right what I was going to ask from a psychology point of view you know if you're listening to this and your your crypto accounts just taken an absolute battering and maybe it's the first time that you've been in a position where you know your trade is is losing a lot of money what would you that's mindset there's a really good question there's a couple of ways to to manage this and I've done this myself with different sort of trades whether it's in gold or or when I'm you know when we're trading bonds full time much more aggressively you've got to decide now what you're going to do so here hear me out you've really got to decide now and almost write down and commit to what you're going to do you can't rely on yourself to do the right thing at the right time because all of the behavioral problems get in there always it going down there's all maybe not maybe maybe next time my outlook would be like this it depends if you're short-term or long-term holder right if you believe in bitcoin with every nerve and sinew of your body then just don't look at it again for the next 10 years close everything down and move on right because you're fundamentally if that's your view then then you should be looking at the price anyway but if you don't want to lose money here then this is what I would suggest you've got the level at 20 000 okay and that is a really important level if we break below that level and then on on a proper break I mean we go from 20 000 let's say down to 19 and a half and and we don't immediately reverse it so you know if we stay below 20 000 for a few days I would suggest you pre-committed to taking your position off just take it off right it's below a really significant level take it off if it helps you can just put a stop in the issue is you'll find it just be prepared if you put a stop in you know what's going to happen it will go down and hit your stop and then go back up because that's life um but you need to be okay with that you need to already know that I'm going to put my stop and if it goes below 20 000 I'll get out sod's law it'll probably rally back higher but you have to be okay with that because the risk of it not going back up is too high psychologically you can say to yourself if we're below 20 000 I'm not interested just as simple as that and get out then if in the future we get above 20 000 and then odd not even we might even go down to 10 5000 but you don't care because you're not long anymore right but then in the future if you then start to see genuine real demand we start pushing back above these important levels there's real momentum behind it you can pre-commit to getting back in so you can say right I'm getting out at 20 000 and I'm going to be watching for a while and if we go down below 10 000 or 5000 you come off but you can say okay now I've now this I believe this selloff has happened if we break back above one of these key levels with real conviction then I'll get back in and that's it so I think for me if you're if you're holding it 20 000 is key I think you need to look at saying committing to getting out if there's a significant break lower below that key level but always knowing but look in three months in six months I can get back in and what tends to happen with this type of thing you know as soon as you get got out you'll be watching it like a hawk should I have done it should I have I done the right thing have I not have I done that and you'll torture yourself and you'll go through that whole process so again I think preparing for that knowing that's what you'll do is is fine um but the because otherwise your only other option is just to continue holding it no matter what um well that's it very wise words hopefully the listeners will take some of that on board so let's kind of wrap it there I will just say because we're recording this Thursday midday so the Bank of England have just announced they are raising rates they've just gone with a 25 basis point another 25 basis point hike so that takes UK rates to 1.25 percent two members of the NPC Haskell man and a guy called Saunders both opted for a 50 basis point hike but the other seven members voted for 25 basis points so they've gone with the majority so another hike from the UK there but look we will wrap it up thanks very much for your very interesting insights will and be safe out there guys markets are definitely super dangerous though everything's still on its lows and making new lows so um we'll see how things wind up into the weekend but take care of that guys and all the best thanks a lot bye bye