Fall typically brings to mind the transition from the warmth of summer to the crispness of fall. The leaves change from green to a spectacular collage of color in the east. Moisture satiates the parched vegetation in the west and prepares the mountains for snow.
Fall represents a series of transitions in markets as well. Energy markets transition from the driving season to heating. And various energy storage facilities are filled in anticipation of winter.
The energy switch has special significance this year. There is also a hawkish Federal Reserve in an unusual inflation environment driven in part by energy. There is also a key midterm election in the United States with numerous implications. And there are also international events that will contribute to the unpredictability in 2022.
When you put all of these together, you get a series of potentially explosive catalysts.
Catalysts are events that can change the direction of markets and assets. These events will add volatility, sudden changes, and the potential for whipsaw trading action.
And the fall of 2022 brings together more major catalysts than usual into one potentially wild season.
Now, just for clarity, this piece is not suggesting whether you should act on these events or how you should. Nor should anything here be interpreted as political commentary or trading advice. The purpose here is to open up your thinking around events as opportunities and explore how you might integrate those into your own approach.
Because, if you can see these upheavals as opportunities, you can gain in lots of different ways.
The international catalyst
Energy markets have cooled slightly from recent highs, although they continue to be elevated in North America. In Europe, the situation is altogether different. Persistent and skyward prices are crushing the economies in Europe as they destroy consumers and business owners.
If you’ve seen some of the power bills on Twitter, they seem unreal. One café with a bill that went from 10,000 pounds a year to 55,000. A manufacturer in Italy where the energy bill has gone from 10,000 euros a month to, wait for it, 100,000 euros a month!
Many bills seem to have an extra zero added to them year over year.
This is the byproduct of decades of policy decisions and sanctions on Russia for the conflict in Ukraine. With the winter ahead, people in Europe are bracing for the worst. And this situation seems unlikely to improve, meaning higher prices and economic devastation.
Then there is the potential humanitarian outcome which is unspeakable.
And there is no way to anticipate how governments might respond to the chaos that ensues.
This is a gigantic potential headline issue that will have a dramatic impact on all markets, including crypto.
Hurricanes and energy as catalysts
Fall also includes the hurricane season in the Gulf of Mexico. This can vary from year to year, but every once in a while, we get a big one. Hurricane season can exacerbate energy market dynamics in a variety of ways.
Natural gas from the Gulf can be shut down as platforms are abandoned for safety. These dynamics can also affect electricity prices derived from natural gas. Electricity prices shape all kinds of market dynamics wherever they occur. And any crypto mining operations that are situated where these pricing dynamics are occurring will face some challenges.
And on the coast of the Gulf, from Louisiana to Texas, there are numerous energy processing and shipping facilities. These can be shut in during massive storms. The result can be temporary energy shortages of refined products like gasoline, diesel and heating oil. And if the damage is significant, disruptions can extend painful shortages and lead to higher prices.
In normal times this would be a problem. But this year, it would take on a much greater degree of significance.
All of the existing energy issues across the world have been significant contributors to inflation.
The Fed catalyst
Now the Fed has been busy trying to get in front of the formerly transient, modest, going to go away, now persistent inflation.
So the Fed is trying to bring down inflation by raising rates, which has led to rapid adjustments in expectations and activity.
The University of Michigan consumer sentiment has dropped quickly as consumers are reminded of 2020. They’ve already had practice, so this change is easier to embrace and more quickly achieved.
The labor market continues to suffer from a lack of qualified people, according to the small business survey. And for some reason, numerous people remain out of the workforce, or so it seems. This is adding pressure to wages on the upside.
Supply chain problems persist and will require investment and time to adjust. And these investments are now facing an increasing cost of capital.
The markets are looking for a pivot in policy. But the Jackson Hole speeches threw cold water on that idea, at least for now. And if you watched the markets, including crypto, you could see the volatility in full force as expectations were adjusted.
Now the Fed has another problem aside from inflation and the risk of a recession.
They are doing this right into a crucial short-term catalyst, the midterm election.
The midterm election catalyst
Every election, you will hear that it’s the most important election ever. This one does look relatively significant given current economic and geopolitical conditions.
The Central Bank does not want to be seen as influencing an election in any way. So they have a problem. It begs the question if they will pause rate increases into the election or not. And how will the markets respond if they do this?
Every election cycle, leading right up until after the vote, can have huge whipsaw-like moves.
These moves are driven by forces trying to influence the outcomes on multiple fronts. There are always numerous negative “surprises” in the final weeks of a campaign designed to shape what voters do. Surprises can have dramatic impacts on market movement if they affect candidates with perceived special significance.
A sweep for one side or the other may result in changes in various powerful committees. These include committees that could impact the regulatory direction for crypto.
Crypto has a large lobbying presence in Washington for a reason. This is an important form of hedging to protect their and your interests. If more crypto-friendly members of congress are elected, this can have a significant positive effect on the industry and participants.
The health catalyst
The fall also represents the start of the annual cold and flu season. Before 2020, this was a non-event for most. But in 2020, we were delivered a surprise.
For the last two and half years, populations in western countries have been conditioned around the fear of a virus. Fear has resulted in draconian policies from shutting down businesses, restricting movement, and extraordinary medical countermeasures.
People have come to expect to be under siege starting in the fall. The severity of the season cannot be known. Nor can the reaction of officials. And given the numerous court proceedings and evolving evidence, the course of action officials might pursue as a result is also less than certain.
This element has the potential to shape market activity as well. In 2020, the market was surprised, triggering numerous liquidations. At the time, leverage was relatively new to crypto, and the results were significant. It is unlikely that there will be a repeat of that extreme, but markets are driven by emotion, so anything is possible.
And another season of uncertain health circumstances and persistent coverage by the media can drive emotions that seep into any market.
Catalysts are your opportunities
This year and this season will be flooded with catalysts that will shape emotion.
Every source of information in front of you will be pushing and exploiting those emotions for ad dollars, clicks, views, and votes.
And you will have to bring your skills of discernment to the table every day for the next few months.
In the meantime, there are various things you can do to get prepared for these markets.
One is to keep some dry powder ready to deploy.
Another is to adjust your mindset around volatility as opportunity.
And I’ll repeat this for emphasis. You will have to be much more discerning about what you read and how you interpret it. There will be a tsunami of information, most of it to knock you and everyone else off track. Being able to read between the lines will be a very valuable skill this season. And that means being aware of how various headlines and stories are designed to drive your internal emotions and dialogue.
It’s also a good time to review your trading rules which are valuable in times like these.
And you will have to embrace uncertainty and keep an open mind around potentially chaotic activity.
All right. You ready?
Pound it out.
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