Hi Investors! After giving an upbeat assessment of the US economy last week I wanted to look at the counter argument this week, does the ominous jobs data of late look bad? And when will I know that my crypto thesis is dead - I share my over-arching reasoning in brief form.

Welcome back to another week of Market Movers, where I summarise the top headlines that attracted my attention this week to keep you up to speed with the markets and give you some light reading for the weekend.

As usual, lets start with a look at the general markets, followed by the digital asset space.

Don't forget to check out the Risk On Investor resources page for access to the growing selection of calculators, tools and video guides to help you become a better investor. There is also more content posted frequently on the YouTube channel to keep you informed and entertained - you can also read back on previous newsletters if you're a new joiner to the investor club

Have a great weekend

Chaz (RiskOnInvestor.com)

Disclaimer - The opinions of the author in this newsletter should not be taken as financial advice. Any mention of investment products is not a recommendation to buy.

If you are looking for financial advice, please seek the services of an industry professional and do your own research.

Capital is at risk when investing

Major Market Indices

US Inflation Print Comes in Cold

If we didn't need any more confirmation that inflation appears to no longer be a concern in the US, Wednesday's print came in at 2.5% YoY, dropping from 2.9% in July.

​Last week I gave the case why this print could come in with a nice drop, but I was only estimating a 0.3% fall.

Good news?

Yes. I think this now brings everyone's attention back the the climax of the last few years - can the Fed thread the needle, and lower rates in time to save the US from recession, or have they kept them too high for too long?

The case for a recession in the US

Last week I struck an optimistic tone suggesting that most indicators are pointing towards to the US economy looking fairly healthy, no longer exceptional, as it did at the turn of the year, but still far from recessionary.

But why does this all matter?

If you have investments, including pensions then you are reliant on the performance of the stock market to generate returns to live off in old age, or fund your next big holiday(!) and like it or not, the US markets make up the lion's share of global public equity markets.

So let's explore the opposite - what evidence is pointing towards a US recession on the horizon?

Jobs Data

Workers are the lifeblood of any economy, they get things made and built.

Now inflation worries have subdued, the next thing being looked at is employment and there are some worrying signs.

Firstly, non-farm payrolls in the US is released every month. This is new jobs added to the economy and excludes farming, the military and a few other niche sectors.

You can see that prior to COVID somewhere around the 180k ballpark was average, but in the last 5 months, 4 readings have been considerably below this average. This suggests that the economy is slowing because new jobs aren't being created, and if we look back further to 2021 to try and remove some of the COVID influence we can see that it is only recently the non-farm payroll data has started looking shaky.

Now clearly this has to be caveated - for the last few years the US has been adding significantly more NFP jobs than it was before the pandemic, so this could possibly just be a lull after the economy was blazing hot on the COVID rebound?

But historically an uptick in unemployment - remember the population is expanding so the US has to keep adding jobs at a faster rate than population growth to shrink unemployment - has been a precursor to a technical recession.

Looking at the below US chart of historical unemployment you'll note that the rates are at very low levels, but it has ticked up recently - again, this is getting people twitchy because as you can see from the grey bands, a recession typically follows an uptick in unemployment.

Another widely used measure is the JOLTS data. This measures the number of job openings against the number of unemployed people. This measure has been falling for almost two years now.

But once again, zooming out shows that the levels we were at in 2021/2022 were far above historical norms, and even with the consistent falling JOLTS data for 2 years we're still well above where the labour market was prior to COVID.

Consumer Strength

So jobs are looking a little soft at the moment,. what about the consumer?

In my opinion the best way to judge this is by comments made by c-suite executives at some of the largest companies in the US and payment processors. They can see all the data in near real-time, and helpfully, discuss it at earnings calls.

So what is the general feeling at the moment?

The last week of the month being very poor for sales in a weak period suggests to me that many consumers are struggling to keep money back to cover the month. In other words, prices have risen and wages haven't, leading to less disposable income, less disposable income is bad for growth.

Shoppers who usually shop at higher end brands are trading down for cheaper alternatives, another sign that the consumer is feeling the pinch

Yield Curve

Finally, whilst not a direct measure the yield curve is often used as a good benchmark to assessing the market's views.

The yield curve looks at the difference in yields between a short dated US treasury (typically the 3 month or 2 year) and a longer dated treasury, typically the 10 year.

In a healthy market environment investors will be paid a premium (higher yield) for owning longer dated debt. This is due to time risk, if you're buying a 10 year treasury (assuming you don't sell on the secondary market) then you have locked that capital away for 10 years so there is an opportunity cost.

But recently short term dated debt has been paying a higher yield, this meant that the 2yr - 10yr value was negative and this can be plotted, see the chart below

What you'll notice is that typically after the yield inverts (goes negative) and the re-inverts (goes back positive) a recession follows in ~12 months.

The 2-10 curve has recently returned positive after a long period of being negative, in other words, the bond market is screaming that short term yields should be dropping (Fed should be cutting rates), and generally the central bank cuts rates when the economy is struggling, not growing, which is ominous.

Conclusions

I hold a slightly contrarian view with this - I think the US will either avoid a recession, or it will be similar to the very shallow recession the UK experienced at the end of 2023 into 2024.

Why do I think that?

As I highlighted last week, in the immediate term the economy is bouncing along pretty well and I generally think that most of the data we are seeing currently looking negative can be explained by the pandemic rebound and return to normal.

After the pandemic there was huge pent up demand which was released into the economy, we are only just seeing the inflationary aspects die down, in much the same way, to me it feels like we are returning to normal in the economy, there will be periods when the job market isn't as strong, does it have to lead to recession - not in my opinion.

We are at a very unusual time, the Federal reserve had to hike interest rates into a poor economy to fight inflation, this is usually the opposite of what happens so we have some fairly unusual circumstances.

Call me too optimistic but I don't see data to suggest that we are going to have a heavy recession in the immediate future.

​I have said in the past that I think if the economic cycles continue as they have been we could see a slow down in 2025/26, but that could still be 12-24 months away yet, and if we have the slowdown sooner it could negate the later business cycle altogether.

Now, of course, I don't have a crystal ball, and do tend to be overly optimistic so take that opinion with a grain of salt!

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Digital Assets

When Will I Consider my Crypto Thesis Dead?

If you've watched some of my YouTube videos or been a subscriber to this newsletter for a while you might have noticed I've been a bit down on crypto recently - why is that?

I think it's simply psychology, after a fantastic start to the year, I've had to sit on my hands for a few months now. And that's totally normal!

But it doesn't make me any less impatient!

In the last couple of newsletters I've shared my 'Dead Crypto Thesis' which looked at how much of the measurable activity on chain is bot driven. I think that this is somewhat inevitable as technology allows automation of much of our lives, and blockchain will help that along, but I realise it may have come across very negative.

My thesis for buying exposure to crypto broadly goes as follows:

1. Adoption rates are increasing in terms of active users, value locked on chains and robustness as measured by network security (Fundamental reason)
2. Liquidity has been tight over the last year which traditionally has stunted risk on assets and that doesn't seem to have stopped the growth of crypto, this suggests to me strong tailwinds (Fundamental reason)
3. Growing mainstream adoption for Bitcoin and Ethereum as assets with the introduction of spot based ETFs in the US and EU. This creates a new pipeline for capital to enter (and leave!) the market (Fundamental reason)
4. Increase in tokenisation of assets with Ethereum. The ECB has issued debt on Ethereum and many payment processors are exploring using Ethereum as the rails for their businesses. This is more robust than current tech networks and inn my opinion could be the future (Fundamental reason)
5. Crypto's best marketing tool is price. If we get a perfect storm of strong sentiment and price rises it creates a positive feedback loop for more price increases (Purely speculative reason)

So when does this reasoning no longer become appropriate to hold crypto?

It's difficult to say as these aren't necessarily measurable reasons (my own fault).

As far as adoption goes - this appears to still be increasing. The network fundamentals in terms of security is still growing for both Ethereum and Bitcoin cementing their places as the top crypto assets.

Liquidity should begin to loosen with rate cuts in the US markets expected to start arriving next week. This will be a drawn out process and could take 12-24 months to play out depending how quickly the Fed and other central banks feel they need to cut, so this will stay in play for a while.

ETF adoption has been mixed. I would say that Bitcoin has had stellar interest, but Ethereum less so. It may be the complexity in comparison to Bitcoin which has subdued interest but I think the lack of interest in ETH ETFs will make ETF issuers think twice about adding to their crypto line up for now. I made some predictions about ETH ETFs. My base case was $5b net inflows over 6 months after a slow start. We've certainly had the slow start, so we'll have to wait and see in the next 4 months if it picks up to get anywhere near my targets, at the moment it doesn't look that likely.

Tokenisation is still a rapidly growing business on blockchains, excluding stablecoins it doubled in the last two years and there are no signs of showing a slowdown

So what about the final factor - the price increases reinforcing price increases and interest? Well, that's certainly looking the weakest leg of the stool at the moment.

Whilst this is a very shallow drawdown compared to what has historically happened in crypto markets, watching the S&P500 rise 15% YTD while the much more volatile Bitcoin is only up 29%YTD feels like a bad trade off so far in terms of volatility adjusted risk.

Based on the above, it's really another 6-12 months before most of these thesis points can start having numbers attached to them and being validated or not, but for now most are still looking positive and I just have to ride out the volatility.

[DISCLOSURE - Chaz holds $MSTR, $RIOT, in an ISA and $wStETH and $GALA in unsheltered positions]

Latest from the YouTube Channel

I mentioned earlier in the newsletter that I had been getting impatient, when that happens I like to find a project to occupy myself and recently that has been active short term trading, notably with forex.

I've made a video documenting what I've done so far and it covers a lot of the basics if you're new to foreign exchange markets - watch here​

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Have a great weekend!

Chaz

P.S - Want to work with me? Reach out by replying to this email and lets chat