Podcast Summary
Macroeconomic situation quiets down, raising questions about inflation, stocks, and the Fed: David from Coinbase discusses the quiet macroeconomic landscape, questioning if the economic downturn has passed or is being delayed, and the correlation between crypto and stocks, yield, and dollar at highs. Listeners are encouraged to join the bankless community for easier crypto navigation and benefits.
The macroeconomic situation, which was a hot topic in 2022, has become relatively quiet, leaving some wondering if we've already experienced the economic downturn or if it's just being delayed. Our guest, David, a head of research from Coinbase, will be joining us to discuss this topic further. The silence in the macroeconomic landscape raises questions about the state of inflation, high equities, the Fed's upcoming meeting, and the correlation between crypto and stocks, yield, and dollar at all-time highs. The hosts also encourage listeners to consider becoming bankless citizens, which comes with benefits such as an ad-free premium RSS feed, access to the token hub and airdrop hunter, and the ability to claim on-chain assets. These tools aim to make navigating the world of crypto easier and more fluid, along with joining the bankless community on Discord and participating in live events.
Understanding Macro Economics is Key to Crypto Investments: Considering macroeconomic factors can help inform crypto investments and provide insights into future trends. Understanding crypto as part of a larger financial network can enhance our comprehension of macroeconomics.
Macroeconomic factors are crucial to understanding the crypto market and making informed investment decisions. Macro economics is about predicting future trends and includes variables like bond yields, regulations, and the overall financial system. Crypto is becoming a relevant macro player, and understanding macro can help us learn from the past and build a better financial system. David, the guest on the show, emphasized the importance of considering macro factors when making investments in crypto. He also highlighted that crypto is part of a larger financial network and that understanding it can help us understand macroeconomics better. The conversation touched upon topics like the impact of bond yields on asset valuation, the regulatory conversation surrounding Bitcoin ETFs, and the creation of a new financial system. Kraken, Arbitrum, and TOKU were also mentioned as resources for understanding and navigating the crypto market and building projects in the space.
Historical indicators not always reliable for predicting recessions: The future economic landscape is uncertain, and traditional indicators like the yield curve inversion don't always signal an upcoming recession
While the economy may seem stable with low unemployment and high job openings, historical indicators like the yield curve inversion are not reliable predictors of recessions and their timing. Additionally, traditional relationships between economic factors, such as the Fed hiking rates and a weakening economy, are not holding true. Macro analyst David Duong emphasizes that we don't have a crystal ball and that the future is uncertain. The yield curve inversion, while historically a sign of an upcoming recession, does not guarantee one, and the lack of predictability in current economic conditions makes it challenging for analysts to make definitive statements.
Understanding Macroeconomic Analysis and its Role in Financial Markets: Macro analysis helps make informed investment decisions by interpreting complex economic trends and variables, connecting the dots between data points and economic indicators, and examining the role of government fiscal policy in shaping economic conditions.
Despite the uncertainty surrounding economic predictions and the limitations of historical data, macroeconomic analysis remains an essential part of understanding financial markets and making informed investment decisions. Macro analysts and economists strive to make sense of complex economic trends and variables by telling a story that connects the dots between different data points and economic indicators. While no one can predict the future with certainty, macro analysis provides valuable insights into potential outcomes and helps investors navigate the ever-changing economic landscape. One important aspect of this analysis is understanding the role of government fiscal policy and its impact on economic conditions. Since the Silicon Valley banking crisis, significant fiscal spending has shaped the economic narrative, and examining this trend can offer valuable insights into current and future market conditions. Ultimately, macro analysis is about making educated guesses based on available data and understanding the potential implications of various economic scenarios.
US Economy's Exceptional Performance in 2023: Government Spending and Labor Productivity: The US economy's strong performance in 2023 is due to substantial government spending and a significant labor productivity increase. However, the end of government stimulus in Q1 2024 could lead to a potential recession.
The US economy's exceptional performance in 2023 can be attributed to two main factors: substantial government spending and a significant labor productivity increase. The US government's spending, totaling over $2 trillion from various acts like the Infrastructure Act and the Inflation Reduction Act, has been an exogenous force in the economy. However, this stimulus may be coming to an end by Q1 2024, which could potentially lead to a recession. This prediction is based on the assumption that the government spending has been a significant contributor to the US economy's current state. Another factor is the large labor productivity spike during the pandemic, which helped offset the decline in productivity when many workers were remote. The US's ability to spend its way out of economic challenges is unique among countries, making it an economic standout during a time when other economies, such as Europe and China, are struggling with stagflation and deflation. The upcoming 2024 US election could add complexity to this economic situation, as traditionally, more spending during an election year is desired. However, the potential end of government stimulus could lead to economic challenges, including a potential recession.
A shift in mindset and unique economic circumstances allow the US to outspend its competitors: The US, as the issuer of the world's reserve currency, can print money and inject it into the economy, giving it a significant advantage in fiscal firepower during economic downturns
The US economy's exceptionalism with regard to its spending power can be attributed to both a shift in mindset and the country's unique economic circumstances. Prior to the pandemic, the conventional wisdom held that governments should only spend what they have raised through taxes or borrowing. However, the onset of the pandemic led to a paradigm shift, with many calling for unrestrained spending to stimulate the economy. The US, as the issuer of the world's reserve currency, has the ability to print money and inject it into the economy, giving it a significant advantage over other countries in terms of fiscal firepower. This change in thinking, coupled with the US's unique economic circumstances, has allowed the country to outspend its competitors during a time when many are facing their own economic challenges.
US government's debt buying power: The US government's ability to issue debt and print money as the global reserve currency allows for significant fiscal interventions, but potential future buyers may decrease, forcing the Fed to buy debt and possibly reversing quantitative tightening to easing.
The US government's ability to issue debt and print money as the global reserve currency has given it significant power for fiscal interventions. However, the concern is who will buy this debt in the future as buyers like Japan, the largest buyer of US Treasury bonds, may decrease. This could potentially force the Fed to buy the debt themselves, which could lead to a reversal of quantitative tightening to quantitative easing. The absence of fiscal intervention could have led to a slow-moving economic downturn, but instead, it may have spread out the recession over a longer period, resulting in a soft landing. The ultimate impact of fiscal intervention on the economy is a topic of debate, with some arguing it only delays the recession while others believe it softens the landing.
Factors fueling US housing market despite economic uncertainty: The US housing market remains resilient due to low mortgages, supply constraints, and pandemic-induced home improvement spending, but high treasury yields and the Fed's actions could impact the economy in the future
Despite higher mortgage rates and economic uncertainty, the US housing market has not slowed down significantly due to various factors such as existing low mortgages, supply constraints, and pandemic-induced home improvement spending. However, high treasury yields and the Federal Reserve's efforts to keep inflation in check are contributing to higher bond yields, which could impact the economy in the future. The Fed's procyclical government spending and increased borrowing are also adding pressure to yields. Other factors like convexity hedging by investors are also contributing to the upward trend in yields. Overall, the global economy is being influenced by these trends, particularly the high treasury yields which serve as the epicenter of the economy.
Experts agree on long-term stability of real interest rates: Experts predict stable real interest rates, making cash an attractive investment due to liquidity and potential yield, despite short-term bond yield debates.
Despite differing opinions on the near-term direction of bond yields, experts agree that real interest rates, which account for inflation, are likely to remain stable in the long run. Cash, long disparaged in crypto circles, is being seen as an attractive asset class due to its liquidity and potential yield, making it a viable option for investors. Ray Dalio's recent stance on cash being back and no longer trash reflects this shift in perspective. However, it's important to note that the value of cash can change with inflation rates and economic conditions.
Opportunity cost of holding cash is lower than historical equity risk premium: In the current economic climate, holding cash offers a real return above inflation, making it an attractive option for some investors, with an opportunity cost of around 2-3% compared to the historical equity risk premium of 1%.
In the current economic climate, holding cash has become an attractive option due to its low opportunity cost. With inflation rates decreasing and cash offering a real return above it, some investors are finding it hard to justify investing in other assets with higher risk and lower returns. The speaker emphasizes that the opportunity cost of holding cash is currently around 2-3%, which is lower than the historical equity risk premium of 1 percentage point. This means that doing nothing and holding cash is currently a more profitable option for some investors. However, it's important to note that this perspective may not apply to everyone, as individual financial situations and risk tolerances vary. Ultimately, understanding the opportunity cost of different investment options is crucial for making informed decisions about where to allocate your resources. In the second half of the episode, the discussion will cover topics such as the upcoming Fed meeting, consumer behavior, and the high equity market to gain a better understanding of the current state of risk assets.
New developments in crypto and equities markets: Crypto evolves with low fees, mobile wallets, and NFTs while equities stay high due to growth expectations and foreign investment, but rising bond yields may impact equity prices.
The crypto world continues to evolve with new developments, such as Celo's low gas fees and the ability to pay with ERC 20 tokens, as well as Uniswap's new mobile wallet that allows for easy trading, NFT display, and Web 3 exploration. Meanwhile, the equities market remains high, despite a recent dip, due to growth expectations and the attractiveness of the US stock market to foreign investors. However, the rising 10-year yield has some investors concerned about the potential impact on equity prices. The historical relationship between bond yields and equity performance is not always clear, and it remains to be seen how the current trend will play out. In the crypto space, community involvement is key with protocols like Celo, while in the equities market, growth expectations and global economic conditions continue to drive prices.
Crypto and stocks correlation is low but still influential: Despite low correlation, crypto and stocks tend to move in the same direction with less pronounced impact due to unique crypto factors, but a potential pivot from the Fed could bring them back in sync.
The correlation between crypto and equity markets has been low recently, but this doesn't necessarily mean that crypto prices don't follow stock prices or have no directional impact. In fact, crypto still tends to move in the same direction as stocks, but the magnitude of the impact may be less pronounced. This is due to idiosyncratic factors unique to crypto, such as the banking crisis and the approval of Bitcoin spot ETFs, which have helped put a floor under crypto performance. Additionally, the low correlation doesn't necessarily mean that crypto prices won't reverse direction and move in sync with stocks again. This could happen once the Fed pivots to an easier monetary policy, which could benefit both crypto and stocks. Another factor to consider is the resumption of student loan payments, which is leading to rising defaults and delinquencies. While this may not be a hugely negative detriment to the economy on its own, it could add to the overall economic uncertainty.
Micro-level issues and potential recession in early 2024: Underemployment, stagnant wages, and upcoming economic events could lead to a significant recession in early 2024, potentially causing the Federal Reserve to reevaluate monetary policy and interest rates.
Despite the consensus view of a soft landing and avoiding a recession, there are micro-level issues such as underemployment, stagnant wages, and upcoming economic events like student loan repayments that could contribute to a recession in the early 2024. The potential recession could be significant in depth and length, and if it occurs, it would likely result in the Federal Reserve reevaluating its monetary policy and interest rates. The economy's current state, with high inflation and slowing growth, sets the stage for a potential recession. However, it's important to note that this is a non-consensus view, and many economists believe the economy will continue to recover without entering a recession.
Expectations for Q4 2023 and Q1 2024: Speaker expects Q4 2023 to have strong crypto and possibly stock performance, but Q1 2024 could be murky due to fiscal stimulus ending and potential economic downturn. Fed may start cutting interest rates in Q2 2024 to combat recession signs, despite inflation concerns.
The speaker has a more certain outlook for the fourth quarter of 2023, expecting strong performance in crypto and possibly stocks. However, the first quarter of 2024 is expected to be murky due to the ending of fiscal stimulus and potential economic downturn. The speaker believes the Federal Reserve may start cutting interest rates in the second quarter of 2024, as the economy could be showing signs of a recession. Despite the Fed's primary goal of targeting inflation, the speaker suggests that the Fed's focus on employment and other concerns may lead to rate cuts, as cyclical inflation, which is tied to the business cycle, has already peaked. The speaker also emphasizes that Fed Chairman Jerome Powell holds significant influence over the Federal Open Market Committee and the Fed's monetary policy decisions.
Complex and Contradictory Macro Economy: In a complex macroeconomic environment, risk-on assets like crypto could still perform well despite a mild recession, but regulatory situations and market expectations play a significant role. Volatility is expected to be high, with major events potentially happening towards the end of 2023.
The current macroeconomic environment is complex and seemingly contradictory due to unprecedented circumstances caused by the COVID-19 pandemic and fiscal stimulus. The Fed's monetary policy, with a dovish bias but hawkish rhetoric, adds another layer of complexity. In the scenario of a mild recession in 2024 Q1 and Q2, risk-on assets like crypto could still perform well, but regulatory situations and market expectations play a significant role. The volatility of the crypto market in 2024 is expected to be high, with some major events potentially happening towards the end of 2023. The Kobe SE letter's observation of stock market decline, rising oil prices, increasing interest rates, falling gold prices, and contrasting trends in housing and commercial real estate markets further illustrates the unusual nature of the current macroeconomic landscape. Ultimately, the drying up of artificial stimulus in early 2024 is predicted to bring more clarity to the situation.
Understanding Economic Changes Amidst COVID-19: COVID-19's impact on the economy brings new challenges for interpreting data and understanding implications for asset classes. Factors like labor market shifts, fiscal spending, and AI trends require context. US economy discussed, but trends global. Crypto and cash seen as potentially attractive, but come with risks.
The COVID-19 pandemic and its aftermath have led to unexpected economic outcomes, including significant changes in the labor market and increased fiscal spending. These factors, along with emerging trends like artificial intelligence, are creating new challenges for interpreting economic data and understanding their implications for asset classes and investing. The speakers emphasized the importance of considering these factors in the context of the pandemic's ongoing impact on our lives. While the discussion focused on the US economy, these trends are global in scope. As always, none of the information provided should be considered financial advice. Crypto and cash were mentioned as potentially attractive assets in the current economic climate, but they come with risks. The speakers encouraged listeners to approach investing in the crypto space with caution and to stay informed about the latest economic developments.
