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Bitcoin Market Intelligence - Issue #9

Jan Wüstenfeld
Jan Wüstenfeld
Hey everyone,
In the previous issue, I have written about consumer price inflation, monetary inflation and how that relates to bitcoin.
I provide an outlook on the Fed’s monetary policy in this issue.
Since mid-July, bitcoin’s price has made some positive moves. While the price has given away some of the gains over the last week, the price is still up roughly 9% since the local bottom on July 12.
Following this, I have seen more and more people calling this the bottom and Twitter sentiment flipping bullish, and some calling for a pause of the Fed in monetary tightening now that a recession looms over the US economy.
Is this shift in sentiment warranted? Is the Fed going to pause?
In the following, I will explain why my answer to both is no, provide my thoughts on why the bear market is not over and why we might even see new lows in the coming weeks or months.
Summary:
According to defintion of two negative consecutive quarters of GDP growth US likely in recession
but labor market tight and consumer spending solid
US adminsitration in support of Fed fighting inflation
no reason for Fed to pause or pivot
bear market not over for bitcoin
potential for further downside
Is the bottom in and the bear market over?
Can I rule out that this was it and that we are entering a new bull market? No. But I don’t think that this is a likely scenario.
While I can’t rule out that the bottom is in, I do not believe bitcoin is out of the woods yet, that financial assets will remain in bear market territory in the near-term, and that we are possibly going to see new lows for bitcoin’s price.
I am bullish on Bitcoin long term, but I think it is important to keep expectations in check.
The June year-over-year inflation numbers for the US came in hotter than expected on July 13 at 9.1 percent (expected 8.8 percent). That is the largest increase since November 1981. That alone is reason enough for the Fed to continue to tighten monetary conditions.
While the rate hike tomorrow (Wednesday, 2 p.m. ET) is expected to be another 75bps hike, a 100bps hike is not off the table following these high inflation numbers.
We are seeing some cracks in the US economy. For instance, the GDP growth for Q2 for the US is expected to come in negative on July 28, and the Atlanta Fed is forecasting a GDP growth of -1.6 percent for Q2. A standard definition of a recession is two consecutive quarters of negative GDP growth. So going by that, the US would be in a recession as Q1 has also been negative.
Graph 1: GDP Estimate for 20220 (Source: Atlanta Fed)
Graph 1: GDP Estimate for 20220 (Source: Atlanta Fed)
Yes, two consecutive quarters of negative GDP growth are problematic, but the labour market remains strong as unemployment remains at record lows.
Graph 2: Unemployment Rate (Source: FRED)
Graph 2: Unemployment Rate (Source: FRED)
The strong labour market is one of the reasons why Treasury Secretary Yanet Yellen stated on NBC’s Meet the Press that she does not think the US economy is in a recession. Moreover, she said that the White House will go by the “National Bureau of Economic Research that looks at a broad range of data in deciding whether or not there is a recession”.
This has sparked an outrage on Twitter that the White House would be changing the definition of a recession to fit their views and narratives. I do not think this is fair; after all, economists have no consensus on when to call a recession.
Also, the definition of two consecutive quarters of negative GDP growth is a definition that only accounts for that one factor and does not consider multiple economic indicators such as employment. So from a neutral standpoint, one can argue that it might not be a good indicator in determining a recession in every scenario.
But, irrespective of which recession definition you prefer and what your opinion is about the White House not calling it a recession if GDP growth is coming in negative this week for Q2, I think the statements made by Yanet Yellen during that interview are more interesting:
Well, look, the economy is slowing down. Last year it grew very rapidly at about 5.5%, and that succeeded in putting people back to work who had lost their jobs during the pandemic. The labor market is now extremely strong. Even just during the last three months, job gains averaged 375,000. This is not an economy that’s in recession. 
She further states that:
Consumer spending remains solid. It’s continuing to grow. Output, industrial output has grown in five of the six most recent months. Credit quality remains very strong. household balance sheets are generally in good shape.
The current administration’s view is that of a strong economy, an economy that can stomach further tightening by the Fed.
Yellen goes on and says:
But inflation is way too high. And, you know, the Fed is charged with putting in place policies that will bring inflation down and I expect them to be successful. The Administration, for its part, is supplementing those Fed policies with things we can do.
If anything, these statements are giving the green light to the Fed for further tightening measures in its attempt to bring inflation down and it sounds like the administration supports them doing so.
The Fed has two mandates:
  1. Price Stability (inflation at the rate of 2 percent)
  2. Maximum Sustainable Employment (unemployment at around 4.1 percent)
While number two is fulfilled (unemployment is currently at 3.6 percent), they fail entirely to meet number one. This means there is ample room for unemployment to rise while they attempt to achieve goal one.
Caleb Franzen has posted a great thread on what it would mean for financial assets if the US enters a recession and unemployment increases due to the Fed fighting inflation or for other reasons. Rising unemployment is inversely related to asset prices, as he explains.
If the Fed achieves its goal of decreasing inflation via rising unemployment and demand destruction in the short term, this is not positive for financial assets and thus neither bitcoin.
Particularly as unemployment numbers still have ample room to rise before they reach levels above those the Fed targets.
Whether this will push prices lower, as the data in the thread suggests or will just keep prices from rising remains to be seen.
Caleb Franzen
If we enter a recession to combat inflation, there will likely be a material rise in unemployment.

Here's the YoY % change in U-6 total unemployed vs the Nasdaq, showing an inverse correlation leading into & during recessions.

Rising U-6 hasn't happened yet & is still negative. https://t.co/qnZcU5mQUR
Ultimately this may lead to a Fed pivot or a pause, but before that happens, we have yet to see economic indicators worsen significantly.
The Fed has to balance the mandate of price stability and unemployment. As only the unemployment goal is currently met, the Fed will, in my opinion, continue to tighten.
Record inflation at 9.1 percent leaves the Fed no choice but to tighten if they want to keep the credibility they have left, particularly as long as the labour market remains tight and other economic variables strong.
In this scenario, a downturn in GDP in two consecutive quarters is not enough for the Fed to pause or reverse monetary tightening.
We may see a pivot or pause of the Fed in the future due to inflation coming down and/or a deterioration of economic conditions. However, the timing of this depends on how fast these two factors change over time.
This can already be at the end of Q3, in Q4 or next year, depending on how fast the factors change.
To get an idea when it might be, particularly monitor changes in unemployment numbers, inflation, whether the National Bureau of Economic Research declares a recession and whether there is a shift in the tone of central bankers and politicians.
While in the background, Bitcoin adoption might be growing, and as much as it is exciting to see bitcoin being up, it is important to keep expectations in check and not let your emotions drive your view.
Despite my short-term sceptical view, my medium to long-term positive outlook for Bitcoin remains unchanged.
As I have been saying in the previous issue:
Three things are certain in life:
  1. Death
  2. Taxes
  3. And ever-increasing monetary intervention by central banks
Stay safe out there! Don’t trust! Verify! Make up your own opinion and consider multiple sources. 
Jan Wüstenfeld
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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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Jan Wüstenfeld
Jan Wüstenfeld @JanWues

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