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Trading and the Power of Expectations (including your own)

For Bitvo by Tristram Waye | Sep 22, 2022

Power of expectations - Trading and the Power of Expectations (including your own)Power of expectations and some broad elements that may impact your trading

The deeper you get into the trading arena, the more you will notice the power of expectations.  Expectations shape pricing and the moves in response to news and events.  They shape how market participants reflexively respond and reposition which further influences prices and policies.  And that means that expectations affect your trading decisions.

The Fed and the economic data:  We will be focused on the US because the Federal Reserve can be considered the world’s central bank.   These reports give some insight into the economic conditions taking place. Some of these have a lag. Others are more recent. And there are other reports that give more granular insights into business conditions and numerous other metrics. 

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  • These data points have varying relevance and importance based on circumstances in the real world. So one data point might be a focal point in one period and of little relevance in another. And, of course, there are seasonal trends in many data points.
  • Right now, there is a focus on inflation. Inflation management falls to the Federal Reserve through its labor and price stability mandate. The Fed has various monetary tools at its disposal to do this. The most obvious is the use of interest rates.
  • The Fed relies on various data points to make decisions around the level of rates. And they have models and theories to make predictions about what they see happening.
  • Professional investors attempt to anticipate what the Fed will do by reading the economic tea leaves. These predictions by investors form a consensus number, AKA, what is expected. Outliers from this consensus or expected number are sometimes called whisper numbers.
  • If you go to and scroll down the page about halfway, you will see the economic releases for the day. Here you can see the prior number, the expected number, and the actual number for the data points.

Consume Price Index (CPI)   The CPI number comes from the US Bureau of Labor Statistics.

  • The CPI number represents a basket of goods and services that a typical consumer buys. The report is like a poll of goods and services. Each month the CPI is measured for these various goods, and the report is compiled and released.
  • The changes in prices are considered a measure of inflation in the economy. And when you put several reports together, you can see trends and changes in trends.

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  • One of the criticisms of the report is that the methodologies have been changed previously, so it doesn’t represent the real change taking place.
  • Another is that it isn’t a realistic gauge of prices real people experience. It is often believed that prices are typically much higher than reported.
  • Inflationary environment
    • Over the last two years, previously unimaginable levels of liquidity were created. I believe the figure is a 65% YoY increase in money supply in two years. The St. Louis Fed has a chart to show you just how dramatic this has been.
    • One explanation for this liquidity change is the pandemic conditions.  Now the increase in M1 also accompanies gargantuan spending by congress. The result is an explosion of money in the system. This liquidity is widely believed to be the primary driver of inflation.
    • The other driver of inflation is supply chain issues, particularly in energy.
    • And then there was a conflict in Eurasia that took this supply chain problem in energy and made it worse.
    • Add to this a nuanced labor problem. Recent actuarial reports for group life policyholders and the recent uptick in disability seem to suggest something is happening to working-age people. The NFIB small business survey indicates a labor problem in terms of quality for many businesses. And that’s in spite of numerous layoffs. Put it all together, and the competition for skilled labor is fierce.

Labour and Energy:  Now, this isn’t the only number that matters. There is also the producer Price Index (PPI) which measures input prices for businesses.  There are unemployment claims, continuing claims, and the “jobs number” to measure employment trends. There are also various reports from each Federal Reserve banking region. And there are weekly EIA oil numbers that come out every Wednesday that shape energy prices.

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  • For most businesses, their two biggest inputs are labor and energy. Changes in labor and energy prices eventually flow through to the consumer in the form of higher prices.
  • It can also appear through shrinkflation, where the thing you usually buy is the same price, but you get less of it.
  • For consumers, there are a variety of demands on their income, many of which are included in the CPI.
  • And all of this is part of a system where the Fed has an inflation target of 2%. Why 2%? Part of the target is that 2% encourages capital flows. Meaning, that with an ongoing loss of purchasing power, the system is designed to encourage investment to overcome this deficit.

Understand expectations (including your own)

The path ahead requires an understanding of the role bitcoin and different parts of crypto play in the current worldwide asset mix. And that means understanding how trading is being influenced by other forces in the wider economic matrix.  One of these forces is expectations and how they are shaped.

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  • And as you look around, you will see that every article, every piece of news, content, narrative, and evaluation of market action shapes expectations. Which is why this is so important to consider.
  • Moving ahead the narratives will be changing. There are many catalysts ahead that are much more significant than the CPI number. And in each case, lots of pundits, journalists, influences, and chatterers will be working hard to shape expectations.
  • And knowing what the expectations are, and when the catalysts are due, can help you manage risk effectively in a chaotic environment.
  • All of which will create significant trading opportunities.

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