The recession that never arrived: TBL Weekly #114
Good morning Readers! Welcome to TBL Weekly #114 — grab a coffee, and let’s dive in.
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Weekly Macro-Monitor
Weekly Analysis
Bitcoin and S&P 500 correlation remains one of the highest cross-asset correlations in our matrix. The relationship between these two asset classes sits at the center of our framework, making any interpretations of macro factors on risk a daily critical exercise. Today, we’ll look for a recession that was supposed to unleash QE and fiscal stimulus but never arrived as promised.
Our quantitative analyst Augustine asked Nik some questions about the week’s action.
Quant Question #1: We got a hotter-than-expected print on inflation last week. Looking at its dual mandate, it appears the Fed is keeping both unemployment and inflation low. Is it accomplishing a soft landing for the economy?
Jerome Powell hasn't succeeded at the soft landing yet. The lagged effects of tight policy and higher interest rates take time to manifest in the economy, which is a key factor in TBL’s current outlook. We don’t see the recession today, but we aren’t about to eliminate the risk of one occurring.
The fiscal dominance thesis, which is credited to Lyn Alden, explains how large deficits can prevent economic slowdown through stimulus. This has been a blind spot in previous analyses and is now incorporated into our framework.
The consumer is still in a good place, able to withstand higher interest rates due to relatively low indebtedness. However, a negative outlook on the economy persists due to the expected lagged effects of monetary policy, despite current strong GDP and consumer spending.
The influence of fiscal policy, particularly large deficits, has been significant in preventing an economic slowdown. When Treasury bills are issued due to deficits, they expand the commercial banking sector's balance sheet, contributing to overall system growth.
Understanding both fiscal and monetary influences on the economy is crucial. The interplay between these factors creates a complex environment where traditional recession indicators may not align with current economic conditions.
Quant Question #2: Should we be worried about the uptick in inflation since June?
Yes, there's cause for concern about an uptick in inflation because inflation hasn't been fully killed. Inflation can only die when price cuts happen, which requires killing consumer demand, and the Fed hasn't achieved this yet.
Inflation going above 4% without another large fiscal package is unlikely. The range between 3.3% to 3.7% inflation is less concerning but could impact the path of policy rates and asset prices.
Consumers are still buying, which means inflation can't fully die. Prices would need to go down to kill inflation, which won't happen while companies can still find consumers willing to pay.
The political landscape, including the potential outcomes of the US election, could impact future fiscal policy and inflation trends. However, without a big fiscal package, inflation surpassing 4% seems improbable.
The Fed's current approach of cutting rates appears to be a response to anticipated slowdowns and potential increases in unemployment, rather than a reaction to current inflation levels.
Quant Question #3: Do higher rates cause a higher demand for USD? Do investors sell Treasuries and then use the proceeds to buy dollar-based assets (hence the strength in dollars)?
It's not about selling Treasuries and reinvesting in dollars. As rates go up, marginal investors step away, causing rates to drift up until they find buyers at higher yields.
Higher yields attract investors out of other currencies and into the dollar, following interest rate parity. The stronger dollar is a danger for the global economy, which is partly why the Fed is trying to lower rates.
There's a potential "Trump trade" involving selling Treasuries and buying stocks, based on higher growth expectations and lower tax outlook. This dynamic is contributing to current market movements.
The dollar's strength is a risk for the global economy. The Fed's rate-cutting intentions are partly aimed at preventing excessive dollar strengthening, as the rest of the world is also cutting rates.
Our technical analysis focuses on key levels and trend lines rather than complex indicators. The current yield movements appear to be a retest of previous support levels, which will be crucial for confirming or challenging the economic outlook.
Quant Question #4: We had a huge uptick in MOVE (bond volatility) last week, the largest since March 2023. Against the typical market reaction, the S&P 500 did not decline much this time despite the huge uptick. Why did this happen? Does it have to do with the US election?
Yes, in part, there's an election trade going on, with Trump getting priced in. There's also a shift in correlation between yields and stocks, indicating a regime change in market behavior.
Investors are selling the 10-year Treasury and buying stocks, betting on higher forward growth. The liquidity wave expected from monetary policy and potential fiscal packages is supporting stock prices despite higher bond volatility.
TBL Liquidity, which includes bond volatility as a significant component, is falling. However, stocks are not following this drop, suggesting that the bond volatility component might be too pronounced in our current model.
Market makers' ability to provide liquidity is influenced by factors like the yield curve shape and funding costs. Un-inversion of the yield curve could relieve pressure on the financial system, potentially reducing volatility.
Bitcoin's price action is consolidating between $50k and $70k, and its correlation with stocks remains strong, though it can periodically break down.
Quant Question #5: Where is the recession everyone keeps calling for?
The recession hasn't happened yet because there hasn't been a significant hit to consumer spending or employment. A negative economic outlook persists due to the lagged effects of monetary policy on interest-rate sensitive sectors like housing, but it’s taking a lot of time for a slowdown to occur. Our outlook remains, but we realize more and more that the counter forces to higher rates are very strong.
A recession will be evident when there's a need for a large fiscal package to address spiking unemployment. The yield curve, while no longer deeply inverted, is still relatively flat, indicating low growth expectations.
The housing sector will likely be a key driver of the economic slowdown. Higher interest rates make marginal projects unprofitable, potentially leading to a ripple effect on employment and consumer spending.
Absence of a recession so far is attributed to a fading influence of previous fiscal stimulus and a lack of demand for a new large-scale fiscal package (nobody is calling their representatives today and asking for widespread unemployment assistance). The next significant fiscal intervention will likely occur only when economic conditions deteriorate significantly.
A risk to the recessionary outlook is the possibility of a rapid reduction in interest rates, which could reignite "animal spirits" in the market and potentially save sectors like housing, leading to a soft landing scenario.
Here’s our global macroeconomic update from Friday in which Nik provides in-depth answers to each one of these questions.
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In case you missed it: TBL on YouTube
The Hidden Forces Driving Bitcoin’s Price: A Global Macro Masterclass
In this episode Nik walks through our global macro report, Mean Median Mode, and examines the dynamic relationship between interest rates, bond volatility, stock markets, and Bitcoin’s price movements. Nik also discusses how interest rates impact bitcoin, how bond volatility affects global markets, and the correlation between stocks and bitcoin.
If you don’t have 50 minutes to spare, here are some of the key insights:
The video aims to teach viewers about global macroeconomic factors driving Bitcoin's price which is influenced by global adoption factors in the long term, but by macroeconomic factors in the short term.
The Bitcoin Layer uses a metric called "TBL Liquidity" to analyze market movements, and focuses on asset-side liquidity in the banking system, particularly government bonds held by banks and central banks.
The ability of banks to create money using their collateral (Treasury securities) is a key driver of financial asset prices. The video explains the relationship between TBL Liquidity, the S&P 500, and bitcoin prices.
On-chain metrics, like realized price and MVRV (Market Value to Realized Value), are discussed as indicators of bitcoin's market health and potential price movements.
Interest rates are important because they affect the value of bank-held assets and influence money creation. Bond volatility (measured by the MOVE index) is a crucial factor in the TBL Liquidity model.
We examine current interest rate trends, the yield curve, and Federal Reserve policy expectations. Money markets are analyzed for their impact on the Fed's balance sheet and overall liquidity.
Economic indicators like ISM Manufacturing and Services indices are used to gauge economic health and potential Fed actions. The labor market's current state is discussed, with implications for future Fed policy decisions.
HBO’s Bitcoin Documentary: Bombshell or Blunder?
In this video, Nik explores HBO documentary Electric Money: The Bitcoin Mystery and its take on Bitcoin’s evolution and influence. He also discusses the documentary’s focus on unmasking Satoshi, its explanation of Bitcoin’s mechanics, and perspective on the Blocksize Wars. Nik also discusses Adam Back’s role, Blockstream’s portrayal, and where the film misses on important topics like money and banking.
If you don’t have 27 minutes to spare, here are some of the key insights:
The documentary attempts to reveal Peter Todd as Satoshi Nakamoto which feels awkward and unnecessary, but its presentation of Bitcoin's mechanics and blockchain visualization is generally well-done and suitable for beginners.
Adam Back is heavily featured in the film, and it explores the connection between Blockstream and Satoshi Nakamoto, suggesting Blockstream's role in maintaining Bitcoin's original vision.
The portrayal of non-Bitcoin cryptocurrencies, especially Ethereum, is largely negative in the film; however, it overuses the term "shitcoin," applying it too broadly.
The film falls short in its explanation of Central Bank Digital Currencies (CBDCs) and the banking system, and doesn't adequately explain Bitcoin mining or address recent research on Bitcoin's environmental impact.
Electric Money’s focus on Satoshi's identity detracts from more important aspects of Bitcoin's purpose and potential.
Countdown to Trump: Expert Breaks Down the Global Power Shift
Nik joined geopolitical analyst Jacob Shapiro to explore the potential global impact of Donald Trump’s return to the White House in 2024. Jacob discusses how a second term could reshape key conflicts in the Middle East and Eastern Europe. The two also discuss Trump’s potential approach to the Red Sea crisis, global trade, and foreign policy with China, Russia, and NATO allies.
If you don’t have 26 minutes to spare, here are some of the key insights:
Donald Trump is currently leading Kamala Harris in prediction markets, with Pennsylvania polling at 56-57% in his favor, which could be the decisive state in determining the 2024 presidential election.
If elected, Trump has proposed implementing a 60% tariff on Chinese imports and a 10% tariff on imports from all other countries, representing a significant shift in US trade policy.
The Red Sea shipping route has been effectively closed since December 2023, as the US Navy has been unable to successfully counter Houthi threats, though oil prices have remained stable due to global oversupply.
Israel's covert operation using compromised electronic devices, specifically pagers and walkie-talkies, has exposed significant vulnerabilities in global supply chain security systems. Security experts are expressing growing concern about the potential for similar supply chain infiltration tactics being used to target food supplies, medical equipment, and other critical infrastructure.
China's recent economic stimulus measures, including direct payments to citizens and new stock market investment facilities, have been assessed as insufficient to address the country's fundamental economic challenges.
Chinese investors continue to demonstrate a strong cultural preference for real estate investments over stock market participation, though specific sectors such as solar energy, battery technology, and semiconductors are showing promising growth potential.
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TBL on Substack
Every week, we bring you our global events recap TBL Thinks. This week we covered the HBO documentary “Electric Money” and its focus on uncovering Satoshi’s identity, why mortgage rates haven’t gone down even with the Fed’s moves on interest rates, and how the European luxury goods industry is linked to the Chinese housing market.
Check out TBL Thinks here:
What TBL Pro Is Reading
This week we debuted a new signal section, where you can find TBL’s overall sentiment for each factor that we analyze, in our weekly quantitative report Mean, Median, Mode — which summarizes bitcoin price analysis and global macro narratives to position investors and bitcoin watchers with the data that matters.
Nik also published his weekly letter “Trump back to White House, implications for bitcoin and markets” and discusses the likelihood of Trump returning to the White House but more importantly, what his return would mea for the financial markets, including Treasuries, stocks, and bitcoin.
Read more by going TBL Pro.
Next Week with Nik
The bond market will be closed on Monday, followed by a week of essentially no major economic releases. Retail sales will help guide us on the economy, but we’re expecting another print demonstrating a healthy balance sheet for the consumer. A strong consumer means a strong GDP, and a strong GDP will delay any prospect of recession and fiscal package by many moons. More interesting than any reading on the consumer will be how yields react once they near the 4.25% area, and how the dollar’s strength feeds back into other financial markets. We’ll be here for it all.
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Unchained empowers you to fully control your Bitcoin with a collaborative multisig vault, where you hold two of three keys and benefit from a dedicated Bitcoin security partner. Purchase bitcoin directly into your cold storage vault and eliminate exchange risks with Unchained's Trading Desk.
Unchained also offers the best IRA product in the industry, allowing you to easily roll over old 401(k)s or IRAs into Bitcoin while keeping control of your keys.
Don’t pay more taxes than you need to. Use code TBL for $100 off when you create an account.