Welcome to the weekly mailbag edition of The Daily Cut.
It’s where we run our analysts’ responses to the questions you’ve been sending in.
So if you have a burning question for Teeka Tiwari, Jeff Brown, Nomi Prins, or anyone else on the team, shoot us an email at [email protected].
Last month, America’s central bank jacked up rates by three quarters of a percentage point. That’s the steepest jump since 1994.
And the bank’s boss, Jay Powell, says he’s open to another three-quarter-point hike when the Fed meets again this month.
The goal is to choke off spending by making borrowing more expensive.
The Fed is also employing quantitative tightening (QT). It’s the process of winding down quantitative easing (QE), the bank’s stimulus program. The Fed hopes QT will cool off record inflation.
But how does this work? And what does it mean for your wealth?
For insight, we turn to Nomi Prins.
She’s an expert on how central banks affect the economy and markets.
Twenty years ago, she quit a seven-figure job at Goldman Sachs (GS). Now, she helps ordinary investors profit using the wealth-building strategies she learned on Wall Street.
She does that by tracking the flow of the trillions of dollars in stimulus governments and their central banks have created.
This helps her pinpoint the best investment ideas to protect and grow your wealth – even as markets gyrate wildly like they’re doing now.
Nomi is also a best-selling author. She’s written two books that expose the influence central bankers have over our lives – All the Presidents’ Bankers and Collusion: How Central Bankers Rigged the World.
Today, one of her readers wants to know more about how Fed policy works.
Reader question: Hi, Nomi. Thank you for your insightful articles at [your daily e-letter,] Inside Wall Street With Nomi Prins. I also follow and value your Distortion Report advisory.
The Fed prints money or creates bank reserves while it does QE. What is the difference between the two? And how do they affect the monetary influence over the economy?
Now, the Fed is doing QT. I am confused about how it destroys the money, credit, or bank reserves.
I am sure many other readers are also confused about this and would sincerely appreciate your in-depth explanation.
– Baku P.
Nomi’s response: Hi, Baku. Thank you for writing in.
The Fed doesn’t print money. The Bureau of Engraving and Printing prints U.S. dollar bills – aka Federal Reserve notes. And the U.S. Mint is responsible for coinage.
But the Fed does electronically create dollars in the form of bank reserves.
Commercial banks have two types of accounts with the Fed. They have reserve accounts to settle transactions with other banks. And they have securities accounts, where they hold Treasury bonds.
When the Fed does QE, it buys Treasurys from commercial banks (debits their securities accounts) and credits their reserve accounts by an equal amount.
Since the financial crisis of 2008, the Fed has used QE to buy nearly $9 trillion in Treasurys.
Commercial banks use their reserves to back lending to hedge funds, private equity funds, or other speculators. This helps explain why the S&P 500 is up more than 350% since the Fed’s first QE program in 2008.
QT is the opposite of QE. The Fed sells Treasury bonds back to commercial banks (credits their securities accounts) and debits their reserve accounts by the same amount. Even though it balances on paper, this shrinks the money supply.
Right now, the Fed is just letting the bonds it has on its books “roll off” when they mature. So commercial banks don’t have to buy them back.
The Fed knows that tightening too fast would hurt stocks too much. And the stock market is the Fed’s ultimate master.
If stocks continue to tank, it’s only a matter of time before the Fed starts to lower rates and do more QE.
Next, we turn to the crypto market and a question about bitcoin miners.
As you probably know, the crypto market has been crashing hard.
Bitcoin (BTC) has fallen 68% since its November high. And Ethereum (ETH), the world’s second-most valuable crypto asset, is down 74% from its high.
Bitcoin mining stocks have fallen even further.
The average loss for the bitcoin mining stocks that colleague Teeka Tiwari has recommended is a gut-wrenching 76%.
Bitcoin miners provide computing power to secure the bitcoin network. In return, they get newly minted bitcoin.
That’s why Teeka is so bullish on them over the long run. As he’s been telling his readers…
As demand for bitcoin from credit card rewards, an influx of millennials’ capital, and even central bank buying goes up… we’ll see prices rise again. This will lift profits for bitcoin miners.
But one reader has a question about the long-term profitability of miners.
Bitcoin has a hard cap of 21 million total coins. When we reach that cap, the rewards miners get in the form of newly minted bitcoin will dry up…
Reader question: Once every bitcoin is mined, what will happen to mining companies?
They all seem to be investing millions in mining rigs [warehouses full of high-powered computers] when the mining will finish within the next few years.
– David M.
For an answer, we turned to Teeka analyst Michael Gross. He just published a deep dive on what’s going on in bitcoin miners for Palm Beach Infinity subscribers. (Infinity members can catch it in full here.)
Michael’s response: Thank you for writing in, David. Those are great questions.
New supply of bitcoin gets cut in half roughly every four years in a process known as the halving.
Right now, 328,500 new bitcoin enter circulation each year. After the next halving, in 2024, that’ll drop to 164,250 new bitcoin a year.
This process goes until the last bitcoin is mined in 2140. That’s 118 years from now. So we don’t have to worry about bitcoin mining ending in our lifetimes.
But after each halving, the block reward halves. It’s the reward miners get for each new block – or group of transactions – they verify and add to the bitcoin blockchain.
So over time, miners will earn less and less per block. But bitcoin’s price will rise as demand increases and new supply of bitcoin drops. That means the fiat value of miners’ bitcoin rewards will likely be significantly higher than it is today.
What will happen in 118 years, when every bitcoin has been issued?
The business model of mining will have to change.
Bitcoin miner revenue is made up of two parts – block rewards and transaction fees.
Transaction fees are how miners get paid once the block rewards end.
Transaction fees are based on the size of the transaction and how fast the person doing the transacting wants their crypto added to the blockchain. Currently, transaction fees account for about 1% of miners’ revenues.
After 2140, we’ll still need miners to verify each new block of transactions and add them to the blockchain. But mining revenue will come solely from transaction fees.
As bitcoin adoption grows over time, demand to transact on the network will also grow. Fees will rise to compensate miners because they can confirm only a certain number of transactions every 10 minutes.
The more transactions there are in the future, the more transactors will have to pay if they want them confirmed in the same amount of time.
Bottom line: Teeka and I expect miners will still be around and making money even after block rewards end in 2140.
We wrap up today with good news from subscribers of trading wizard Larry Benedict. At his Opportunistic Trader advisory, he’s given them the chance to make a nearly 149% return on his trading recommendations so far this year.
In yesterday’s Cut, Larry revealed how he’s able to book massive wins for his readers – even in the most bearish markets.
Today, we’re giving the floor to some Larry readers who got in touch to thank him for his guidance…
Reader comment: Happy to let you know we are making money. Thanks for helping us reach our financial goals and freedom.
– Raj K.
Reader comment: I am new to investing, but I’m soaking up all the knowledge I can. I am really enjoying your analysis and newsletters. Thank you for providing this education to those of us who are following closely during these uncertain times.
– Barbara S.
Reader comment: Your information is always clear, precise, and to the point. I appreciate your updates. They are refreshing and useful. Thank you.
– Sally B.
That’s all for this week’s mailbag.
If you have a question for anyone on the Legacy team, be sure to send it to [email protected].
Have a great weekend.
Regards,
 |
Chris Lowe
July 8, 2022