Dear Friends

As the latest U.S. inflation report remained stubbornly high, the S&P 500 plunged more than 5% in a week on fears that the Fed would have to continue its restrictive stance for longer.

Sure enough, two weeks later, the Fed raised rates for a third time by 0.75%, maintaining the fastest pace of rate hikes since the 1980s. Moreover, Fed Chair Powell confirmed he would maintain the pace, hinting at 2-3 more rate hikes of 0.50-0.75% by mid-2023. It is clear that the Fed is serious about fighting inflation, even at the risk of a market downturn.

Isn’t that incredible: at the beginning of the year, the yield on 2-year U.S. Treasury bonds was
0.8%, and now it has reached 4.2%! This could also point to longer-term equity weakness, as investors could “park” their money risk-free at a 4% interest rate for a year until the choppy global economic outlook becomes clearer.

Inflation aside, the U.S. real economy is not doing too badly. With nearly two job openings for every job seeker, the strength of the labor market has continued to drive consumer spending. As long as consumers are getting their paychecks, they don’t seem to care about the violent turmoil in the stock markets.

At the end of September, equity markets ended the third consecutive quarter with losses (last seen in 2009) and were down across the board: Nasdaq -10.5%, S&P 500 -9.3%, 20-year bonds
-8.4%, gold -2.9%, and Bitcoin -3.1%.

Our strategies were more stable again, but still suffered some losses: Universal -0.9% and Progressive -1.1%, while CryptoMax posted a small gain of +1.7%.

While the dollar gained strength with the interest rate hikes pushing the USD index up 17.2% year-to-date, other currencies experienced further periods of weakness.

The UK in particular hit the headlines after new Prime Minister Liz Truss announced the country’s biggest tax cut since 1972 after just three weeks in office. The controversial move forced the Bank of England to turn its interest rate policy on its head and launch a £65 billion bond buyback program to prevent mass insolvency in the pension fund sector. As a result, investors sold U.K. bonds, and the pound plunged to an all-time low of $1.036.

Meanwhile, the Bank of Japan said it would maintain its cautious monetary policy despite higher interest rates around the world, sending the yen to a 24-year low of $0.689/100¥. The Japanese government was then forced to initiate an emergency purchase of yen to stabilize the plunge – the first government ” Yentervention” since 1998.

In the eurozone, the ECB also raised interest rates by 0.75% – the biggest move since 1999 – in an attempt to bring down record high inflation of over 9% at the expense of economic growth. Faced with a historic low in consumer confidence and a gloomy economic outlook, the euro plunged below parity ending the month at $0.98.

Meanwhile, Putin threatens the West with nuclear war, mobilizes 300’000 reservists, and annexes Ukrainian regions. Ukraine, in turn, officially applies for NATO membership, and U.S. President Biden promptly declares that the U.S. will defend “every single inch” of NATO territory…

We are truly moving through uncharted economic and political territory. But despite market downturns triggered by unfortunate monetary policy experiments and escalating geopolitical tensions, history teaches us that this too shall pass and that markets will eventually recover.

And history also teaches us that investors who follow a clear strategy and stick to it do better in the long run.

Stay happy, healthy and wealthy!

Omar

P.S.: Let me leave you with at least one piece of good news: On September 15, Ethereum, the second largest cryptocurrency after Bitcoin, went “green” by replacing its energy-intensive approach with a lightweight proof-of-stake (PoS) algorithm, slashing 99.9% of its energy consumption.

Previously, the system required about 74 TWh of electricity per year, which was about 1.25 times the consumption of Switzerland. And now it requires less than the municipality of Steinhausen (population 10,300) to provide the entire world with financial transactions at the speed of light. And since the Ethereum Foundation is based in Zug, we might claim that Switzerland just reduced its global electricity footprint by over 55%… 😉

In the new Ethereum version, the built-in inflation has also been significantly reduced from 3.81% to 0.22% per year. A change that might have a positive impact on the price in the long run, as Bitcoin’s inflation rate is still at 1.8%.