Hi Investors! In this weeks newsletter I want to look at the ending of the US inflation saga which is starting to creep up on us and I revisit some musing last week's newsletter about the 'dead crypto thesis'

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.

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Have a great weekend

Chaz (RiskOnInvestor.com)

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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

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All Eyes Are on the 11th

Central banking shouldn't be a gripping tail of "transitory" twists and turns, but the ongoing soap opera appears to be drawing to a close and we're building up to the finale - recession or no recession?

On the 11th September markets will get the first CPI print after the central banker party in Jackson hole (holiday snaps in last weeks newsletter) where the undisputed central banker head, Jerome Powell, delivered a strong statement that it was time for interest rates to start falling.

So what can we expect?

Headline inflation (not core) is running at about 2.9% in the US currently and has been stuck at about that range for a while, but markets have hope this month.

August 2023 which will drop out of the 12 month rolling average when the next round of data is released was a hot print. 0.4% month on month (0.5% if seasonally adjusted). To put that into context, for the Feds 2% target we would expect month on month data to be around 0.1-0.2%

In other words, if we get a print in that range we could shave 0.2-0.3% off the headline rate which I think many market participants would be relieved at.

But this is a double edged sword.

Looking further ahead we can see there are a few distinct bands of inflation which I've highlighted.

We had another fairly high reading in September before softening rates in Q4 and another spike in the new year.

In other words we could see something similar to what's happening in the UK, inflation fell, and is now expected to have a slight uptick before softening again.

Another potential reason why we should see inflation continue to soften is the falling money supply as measured by M2.

As a very simple analogy, if an economy was made up of two people, each with 1 apple in assets and there was £2 in the economy, we could value the goods in the economy at £1 each (£2 = 2 apples) but if more money is injected into the economy and the number of apples doesn't change, the value is money terms of the apples now rises, for example £4 = 2 apples means each apple is now worth £2.

Picture the same thing on the scale of an entire economy.

The chart above is what some people point towards to explain the inflation spike we had, a massive growth in the money supply during 2020, then about 6 months later we start to see inflation ticking up as the money injection starts to revalue everything.

I've highlighted in the red box a period of money supply shrinkage.

M2 supply shrinkage is very unusual and something the US hasn't seen since the 1930's, but does it really have any predictive power? If we look back further, it does indeed seem that M2 supply increase is a pre-cursor to a spike in inflation - typically 6-12 months later which I've indicated with some arrows.

This lines up with exactly what we've seen recently.

Now correlation doesn't equal causation, there were many other factors at play recently but it might be something we can lean on as evidence.

So returning to our original chart showing M2 supply going negative (shrinking) it could indicate that we're going to start seeing some negative pressure on inflation prints, and if that is indeed the case, we could see a rapid return to 'normal' inflation. Indeed if you strip out problem child 'shelter' the US has been bouncing around under 2% headline inflation for a while now

​About 6 months ago I had my rant about the shelter component of inflation measurement and suggested it could take a year to fall back in line. The rate of decrease has actually slowed which means it could take longer than the I originally thought. In other words, headline CPI will continue to grind down, but potentially a bit slower than expected.

So what about the more concerning area of the Fed's mandate - full employment.

This is where the alarm bells are starting to sound.

When the economy slows down, workers get laid off as companies compress costs and scale back.

This is an uncanny predictor of recessions (shown in grey below)

But recessions aren't usually called until after the event

To declare a recession you need to see 2 quarters of negative GDP data.

But currently the US seems to be chugging along nicely despite the jobless rate starting to tick upwards.

Rather than looking back at lagging indicators such as the above, what about predictive indicators?

The Atlanta Fed have their own predictive tool known as 'FedNow' which tries to predict the quarter on quarter GDP data

Which is currently running about 2% prediction for the next quarter of data. But how accurate is this?

As you would expect, the closer we get to the release date, the more accurate it becomes, and once we reach about 1 month out it's pretty good.

The next release date is October 30th for Q3 data so we're still in an area with large potential error, but for the data to be negative it would have to be a long way out.

So we can probably make the assumption that this quarter's data will show growth.

Takeaways

Phew - we've covered a lot there, but what do I take away from it?

The US is looking in good shape. My base case is still a soft landing. The economy is doing well, inflation is coming down and stabilising, jobless rates are still low despite the recent uptick and the Fed has indicated it will begin loosening policy.

The biggest risk is a sudden deterioration of the economy. Q4 will give us the best indication as it is traditionally a great time for retail, so if we see poor data around Christmas when it gets released in 2025 that would be an indicator that the US consumer is weak and a slow down is on the cards.

Having said that, today is non-farm payroll date in the US. I personally don't pay a huge amount of attention to the headline number as it often gets revised after the announcement but it will be a good indicator about if the job market is continuing to soften, in which case it lends some weight towards the soft landing being at risk.

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Dead crypto thesis - Part 2

Last week I introduced the beginnings of the dead crypto thesis (read here) and I had a couple of responses to that newsletter with some further data so I thought I would share it along with some counter data to my own argument.

If you didn't read last week, I was expressing my concern that a lot of the data people are relying on to judge the growth of crypto is based on poor data, especially the daily active users data.

So what else has been bought to my attention?

Stablecoins

Stablecoins are often cited as the killer use case for crypto so far and broadly fit under the decentralised finance bracket of innovations, but is it all it's cut out to be?

Visa has actually started a dashboard to track stablecoin data and it one of the best sources of cross chain data at the moment, a couple of stats catch my eye:

​About 90% of stablecoin volume is related to bots. Visa doesn't state what they consider to be bots. For example are automated trading strategies considered bots? This broadly aligns with my views from the last newsletter about a lot of on-chain activity being 'fake' in terms of there not being a human sitting at the other end of the keyboard.

But it gets more interesting, earlier this year there was an explosion in stablecoin usage, particularly on Solana and using USDC which seem to be settling back down at the moment

This usage coincides with the rise of pump.fun on Solana almost perfectly. For the uninitiated, pump.fun is a website that lets you create your own meme coins cheaply and easily.

Which to me indicates that a lot of the recent volume increase is just people messing around with meme coins - a glorified online casino is not really a strong usecase for crypto.

Interest is still low

Remember NFT's? A promising piece of tech (ticketmaster is slowly adopting) that was hi-jacked by jpeg images of monkeys - turns out it drove some people to become interested in crypto, but interest worldwide is still low by bull market cycle peak terms

But will it ever return?

I'm currently struggling to see what will catalyse further adoption.

• Meme-coin trading? Too niche.
• Decentralised social networks? Not sure, feels like it has matured well but word isn't getting out
• Blockchain gaming? Possibly but again I'm struggling to see any marketing go mainstream
• Tokenisation of assets? This will be a slow moving area but seems to be getting traction, not really going to attract the retail crowd though

What does this mean?

I've mentioned in this newsletter before that I'm not convinced about the reasoning for the 4 year cycles Bitcoin, and therefore the rest of the market, seems to go through. Is it money supply? Or does it actually have something to do with the halvening event? If it is to do with halvening, then this cycle is behaving differently to previous cycles

If you are a believer in the 4 year cycles then this is the worst period and it looks uncannily like the last cycle, just slightly behind - see the two red boxes I've drawn (green is last cycle, red is this cycle). If you ignore the COVID drop in the last cycle it trended sideways for 18 months

What about some indicators?

There are literally hundreds of indicators people use to try and predict Bitcoin, here are a couple giving conflicting opinions for you to think about

MVRV suggests this wasn't the main event in the cycle, however CBBI suggests it might have been

In 2019/20 Bitcoin went through a very similar sideways trend period, this was broken by COVID so we'll never know how it would have played out

If you're curious about the timeframes to breakout of these downtrends

If we sit in this range for the same time there is another month to go, alternatively it it really is a translated later copy of the last cycle, there could still be another 12 months of sideways movement.

I have mentioned before that I have been getting twitchy that no new fundamental use-cases seem to be developing or that the existing ones aren't really progressing and without those it feels like a poor outlook for crypto, but for now I'm not convinced that it was the peak, and if it was, I can afford to lose out- hopefully this didn't all sound too doom and gloom!

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

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Have a great weekend!

Chaz

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