The Warsh Effect & The $1.7B Exit

Volatility has returned with a vengeance. Last week, the markets were whipped by a perfect storm: the nomination of Kevin Warsh as the next Fed Chair, a blow-off top in precious metals, and a liquidity drain in the crypto markets. Bitcoin broke below the critical $80,000 support, and sentiment has cratered back to levels we haven't seen in months.

The mainstream media is blaming everything from the government shutdown to the Spy Sheikh probe. But at Freedom Capital, we look at the data, not the headlines. The reality is simpler: Liquidity is thin, leverage is high, and inflation is proving sticky.

We are currently seeing air pockets in price action, where bids simply evaporate. In this edition, we break down why the macro environment has shifted, why the smart money is exiting, and exactly how we are positioning for the turbulence ahead.

The Macro Lens 🏦

The narrative shifted this week from soft landing to sticky inflation and hawkish pivots. Here is the data that matters:

The Warsh Nomination

President Trump has nominated Kevin Warsh as the next Fed Chair. The market reaction was immediate and volatile. Why? Warsh is viewed as an inflation hawk who historically prioritizes fighting inflation over employment stimulus. While he is a vocal critic of the Fed's bloated balance sheet (which he wants to shrink), he is also pro-Bitcoin. The market is currently confused: will he tighten rates to kill inflation, or cut them to aid the Treasury? The immediate reaction was a bounce in the Dollar and a retracement in yields.

Wholesale Inflation is Heating Up

The data does not support a rate cut. The US Producer Price Index (PPI) rose 0.5% MoM & 3% YoY (higher than the expected 2.9%). Core PPI jumped 0.7% MoM & 3.3% YoY much higher than the 2.9% forecast. This signals that inflation is sticky and accelerating. If Warsh is true to his history, this data gives him the ammunition to keep rates higher for longer.

Liquidity & The Dollar

Fed Balance Sheet: Reduced by ~$53B last month. While they expanded slightly last week ($3B), the net trend (for the past month) is tightening (meaning they removed liquidity from the system).
TGA (Treasury General Account): Expanded by $53B due to tax season. This effectively pulls liquidity out of the financial system.
Global Tightening: The ECB reduced its balance sheet by ~€2.2B, and the BOJ tightened by ~¥462B. The global liquidity tide is going out or at least decelerating.

Geopolitics

Gold experienced a historic blow-off top followed by a sharp retracement. Historically, when gold rips this high, this fast, major geopolitical events follow. With US/Iran tensions rising and the EU/India concluding a massive free-trade deal to reduce reliance on the US dollar, the de-dollarization trend is accelerating.

The Digital Frontier ₿

The crypto market is currently suffering from a crisis of interest, not fundamentals. The infrastructure is being built, but the liquidity is gone.

Market Health & Flows

Extreme Fear: The Fear & Greed Index has plummeted to 14 (Extreme Fear).
Massive Outflows: Digital asset products saw $1.7B in weekly outflows. This flips year-to-date flows to a net outflow. Investor capital is de-risking.
ETF Bleeding: Bitcoin ETFs saw ~$1.5B in outflows last week alone. Ethereum ETFs lost ~$327M.

Technicals & Air Pockets

Bitcoin dropped to the $74,500. This drop was exacerbated by low liquidity and high leverage, creating air pockets where price moves dramatically due to a lack of order book depth. But despite the nasty drawdowns and the record year that precious metals and other assets had, these assets are still catching up to Bitcoin's performance since before the launch of BlackRock ETF

The Silver Lining:

Valuation: The market is ~45% undervalued according to logarithmic regression models.
MVRV Z-Score: Currently at 0.71, approaching historical buy zone territory.
Liquidations: A cumulative $4.55B of long liquidations triggered the sharp 15% price drawdown in Bitcoin

The Freedom Capital Take

Synthesizing the macro tightening and the crypto outflows, the verdict is clear: We are Risk-Off.

The combination of sticky inflation (PPI), a potentially hawkish Fed Chair (Warsh), and massive outflows ($1.7B) creates a hostile environment for risk assets in the short term. The Air Pockets in liquidity mean that downside or upside volatility can happen instantly. While long-term metrics suggest Bitcoin is undervalued, momentum is currently bearish.

If this cycle plays out the same way as all previous cycles, we expect the bear trend to potentially last until October 2026, however the drawdown and the length of this bear trend might be weaker and shorter than before due to institutional adoption and pro regulation in the US.

Inside the Portfolio 🔒

The following insights are from our Portfolio Strategies Models.

While the Extreme Fear index usually signals a buying opportunity, our proprietary models suggest the bottom is not yet in. We are not catching the falling knife

We are maintaining a high percentage of Dry Powder (Cash).
We are holding our core position in BTC (but only because we are hedged)
We are utilizing a specific hedging strategy that is currently protecting the portfolio's biggest position from the majority of this downside volatility.

We are watching two specific on-chain signals to deploy our cash. Want to know exactly when we pull the trigger?

[Upgrade to our Portfolio strategies to Unlock the Full Portfolio positioning]

The Sovereign Tip

Yield = Risk

In markets like this, you will see guaranteed high yields offered on stablecoins or obscure DeFi protocols to attract liquidity. Run.

When liquidity is this thin, the ability to exit a position becomes the primary risk. It doesn't matter if you are earning 20% APY if the underlying asset drops 30% in an hour because there were no buyers in the order book. In a Risk-Off environment, return of capital is more important than return on capital.

That’s a wrap. I hope you found it valuable.

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Disclaimer: Freedom Capital DA provides educational content and market research only. This is not financial, legal, or tax advice. We do not take into account your personal financial situation. Investing in digital assets involves high risk. Always consult with a licensed professional before making financial decisions.

Disclosure: I hold some of the assets mentioned in this newsletter.

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