🎙️ Looming Halving

Billionaire philanthropist MacKenzie Scott is on another giving spree.

👏 The latest: She’s giving $640 million to 361 small nonprofits “working to improve access to foundational resources in their communities.”

Scott, 53, is worth about $35 billion. She’s given away roughly $16.5 billion from the fortune she came into after divorcing Amazon founder Jeff Bezos.

“There are lots of resources each of us can pull from our safes to share with others,” she has said. “And something greater rises up every time we give.”

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Big questions about the Fed’s balance sheet

• The latest on Bitcoin’s wild moves

This, and more, in just 5 minutes to read.

Chart of the Day

In The News

❓ The Fed & Big Questions Around Its Balance Sheet

Well, that was pretty straightforward. Federal Reserve chair Jerome Powell and Co. held interest rates steady, said they could still cut rates three times this year, and noted that hotter-than-expected inflation readings “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%.”

• Powell declined to provide a time frame for any cuts, saying the Fed could begin dialing back policy restraint "at some point this year."
  

• The stock market loved hearing that, as the S&P 500 and Nasdaq jumped to fresh records, while bitcoin bounced back from a recent slump (more below). 

Okay, but how about that balance sheet? It’s worth monitoring how much more policymakers can shrink the Fed’s $7.5 trillion portfolio of assets before cracks emerge. 

Every month since 2022, the Fed has let up to $60 billion in Treasuries and up to $35 billion in agency-backed mortgage bonds mature and roll off its balance sheet, aka quantitative tightening. But it can’t do that forever. 

• So, key questions remain: How and why will officials slow down this pace of “runoff?” What will the central bank’s balance sheet end up shaping up like?
  

• By wrapping up its QT program, the Fed hopes to avoid the market disruption that past episodes of QT have inflicted. In 2018, the last time the Fed meaningfully shrunk its balance sheet, a lot of government borrowing and a corporate tax led to a shortage of bank reserves in late 2019, prompting a five-fold jump in a critical lending rate and a spike in the federal funds rate — not the type of troubles you want to see in the “plumbing of the financial system.” 

Why it matters:

In line with plans to ease monetary policy by cutting rates, policymakers and Fed officials have begun saying it’s time. 

That is, time to plan a slowdown of the QT-driven balance sheet unwind. And, as Bloomberg reports: “Officials are also watching for any signs of market stress. So far there haven’t been many, but bouts of volatility at the end of November and December did drive the Secured Overnight Financing Rate — a key benchmark tied to the repo market — to all-time highs.”

In other words, so far, so good, but the Fed doesn’t want to push its luck with an extended QT program similar to its (expected) approach to proactively cutting interest rates.

• Still, it’s difficult for anyone to know when “QT” tapering will start. Forecasts are all over the place and range from May to September, which doesn’t help. The decision depends heavily on when the Fed decides to lower interest rates. 

Bottom line: Whenever the QT slowdown begins, some policymakers and analysts say, the Fed may continue unwinding its balance sheet at a slowing pace well into 2025. But that’ll depend on the financial system continuing to have “enough liquidity.”

Read more

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😮‍💨 Bitcoin Cools Down After Hitting All-Time Highs

Let’s check in on bitcoin — a statement that will surely excite some readers and annoy others.

This handy website showcases bitcoin’s resilience, finding that on 476 occasions, a “notable” source has declared bitcoin is or will soon be worthless, which probably understates things. But Bitcoin isn’t going anywhere.

After hitting a record $73,000 last week, bitcoin is showing off its infamous volatility again. This time, it’s moving in the opposite direction, falling to ~$64,000.

Why the pullback? After moving nearly 70% higher in three months, a breather is expected as waves of investors seek to lock in profits by selling, evidenced by a jump in bitcoin ETF outflows.

According to the Financial Times, net outflows from the 11 recently approved bitcoin ETFs in the past two days have hit roughly $500 million. Yet, Grayscale accounted for over $1 billion of the withdrawals.

• Of course, Grayscale’s experience is unique; the firm, for years, has held a monopoly on enabling U.S. investors to access bitcoin via their brokerage accounts. When a spat of new ETFs earlier this year eroded that dominance, Grayscale converted its bitcoin trust to a more efficient ETF but clung to high management fees (1.5% annually, several times higher than its peers).
  

• As a result, in the past few months, investors have largely fled Grayscale’s bitcoin fund to either switch to rivals with lower fees or cut their position to secure profits after hitting all-time highs.

Why it matters:

Despite the Grayscale exodus, the bitcoin ETFs approved in January look like a huge hit with both Wall Street and Main Street.

Blackrock’s bitcoin ETF promptly became the fastest ETF in history to reach $10 billion in assets.

What comes next? Despite the gains already, long-time bitcoin bulls largely think this year’s rally remains in the early-to-mid stages if history is any guide.

• That optimism is connected to the new ETF products channeling billions of new money into the asset class and the upcoming “Halving,” which cuts the algorithmic supply of freshly minted bitcoin in half every four years.

Looming Halving: This cryptographically ensured scarcity underpins bitcoin’s comparisons to gold and other finite monetary assets.

It also intuitively supports the idea that bitcoin’s price goes on major runs every four years, coinciding with a dropoff in supply despite approximately the same or even growing demand for bitcoin (juiced up this time by new ETFs).

• Whether these halving events are priced in, though, is the subject of tireless. debates. about. efficient markets.

Read more

More Headlines

🤖 Jensen Huang: ‘AI computing ramp’ is only beginning and will last years

💬 The downsides of a $7 trillion economic boost tied to immigration

💰 Intel will get $8.5 billion in CHIPS Act funding to boost plants in four states

🤔 The big wealth gap between union and nonunion workers

🌱 Court pauses SEC climate disclosure rules until 2026

💴 Yen carry trade tempts investors despite Bank of Japan rate hikes

Quick Poll

Yesterday, we asked: Rather than pay real estate agents a percent of your home sale, would you rather pay realtors a flat fee or hourly rate?

— On team yes: “The model isn’t driven by market conditions but rather an outdated structure. This will bring some much-needed innovation to the industry.” Another: “We’ve been conditioned to think that 6% should be standard. Why?”

— Added another free-market supporter: “I believe in letting the market do its thing. Some might charge a percentage, some a flat free, and some by the hour. The good agents will be successful and it will likely weed out those not serious in building their business.”

— On the team “no,” a reader pointed out that “realtors work hard for their money, just like every other working profession.”

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