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Growth slowdown to economic contraction
In today’s issue we present a comprehensive overview of the ever-changing global macroeconomic environment, and conclude with its implications for bitcoin.
“The pace of US economic growth slowed sharply in June, with deteriorating forward-looking indicators setting the scene for an economic contraction in the third quarter.” –Chris Williamson, chief business economist at S&P Global Market Intelligence
Measured in new sales orders, input costs, employment, work backlog and business confidence, PMI (Purchasing Managers’ Index) survey data serves as a timely and leading indicator for assessing economic health. The latest PMI reading this morning came in at an extremely ugly 52, below expectations of 56. The slowdown in manufacturing can be attributed to a sharp rise in energy and commodity costs, with rates rising at a record pace.
Data shows first contraction in new orders since July 2020, fastest pace of new export order contraction since June 2020, slowing inflation in input prices, slowing employment gains and lowest business confidence since comparable 2012 data. It’s not just in the United States. Families in the UK and Eurozone are also struggling under the weight of inflation and we will likely see this continue to show a hit to both earnings and growth as the business cycle turns.
dollar short squeeze
This dynamic is exacerbated by the enormous amount of dollar debt that exists outside the United States’ domestic economy (due to the dollar’s world reserve currency position), which has led to a global economic slowdown and a stronger dollar (relative to other currencies). come in hand. Hand.
This dynamic (a stronger dollar) has intensified due to a slowdown in economic activity in the United States, partly due to both a rising energy price as well as monetary tightening caused by the Federal Reserve’s response to inflationary pressures. . ,
a possible turning point
Future rate cuts and early signs of a reversal of monetary tightening will be where we expect bitcoin to once again outperform. This, we expect, will be due to the market’s realization that there is no substitute for permanent monetary expansion in the fiat currency system, and that the characteristics of an absolutely scarce monetary asset are extremely desirable over the long term. Similarly, we expect the dollar to continue to strengthen relative to financial assets unless there is a policy pivot and a resurgence of monetary easing.
connection to bitcoin
As the business cycle turns, riskier assets (obviously including bitcoin) have taken a hit. While equities and bonds are subject to falling valuations due to rising discount rates, bitcoin has no cash flow or dividends, why is it acting similarly?
While the correlation is by no means causal, a slowing economy and lackluster growth have shown to correlate well with bitcoin’s monetization cycle. While there are a lot of exogenous factors, this relationship, especially as bitcoin grows in size and liquidity, is one that we do not consider to be fake. With increasing business activity and economic growth meaning more money in consumers’ pockets, which means more inflows into financial markets, the nascent bitcoin is getting the most out of inflows due to its past (and current) size and liquidity profile.
The latest data we’ve highlighted above explains why the worst is yet to come. Some data suggests we are on the cusp of a global recession today, while other data points to a protracted recession right around the corner.
Although we see bitcoin as a beneficiary of the results, it is not unaffected by the macro business and the growth cycle that lies ahead of us, which is far from over. With market capitalization only a small fraction of the total global asset, it moves with broad cycles like any other asset. This, along with many of the other reasons we mentioned, leads us to believe the bottom is not there yet.