The BLS released the latest consumer price inflation readings yesterday and it wasn’t pretty. Headline CPI came in at 8.2% year-on-year and Core CPI at 6.6%. Each of these figures exceeded expectations. This is concerning because the Federal Reserve has raised interest rate of 75 basis points at a time throughout the summer months and should do so again in a few weeks:
It is the central bank’s hope that this next hike will be the one that accomplishes what others have failed to accomplish; namely, to reflect a significant reduction in consumer price inflation data. The response to August’s CPI reading was a sell-off in broad risky markets that sent stocks, metals and crypto tumbling. This sell-off was the market seemingly coming to terms with the idea that the Fed could not justify a rate hike pivot at the last FOMC meeting. Given this, it stands to reason that yesterday’s higher than expected CPI reading would have prompted the same response, but that didn’t happen.
Despite giving back some of its gains from yesterday’s pop, Bitcoin (BTC-USD) is still ahead of where it was before Thursday’s 8:30 CPI reading. This raises the question of whether the top crypto by market capitalization is indeed an inflation hedge after all. Bitcoin has seen many narrative changes over the past few years:
- It’s a medium of exchange
- It’s digital gold (hedge against inflation)
- It’s energy
For the most part, each of these stories is probably nonsense, but I think there is one that could carry some weight. If we accept that the market is looking to the future, it is not unreasonable to give Bitcoin credit for being at the forefront of high CPI readings over the past year and half.
This is the year-over-year change of Bitcoin with that of the CPI. Due to the extremes we see in bitcoin shifts, I placed the BTC shift on a second y-axis. If Bitcoin is indeed an inflation hedge due to the fixed supply, I think that would indicate that it has weathered the high inflation of the last year and a half.
It is possible that Bitcoin is purely a speculative jewel with no use, no intrinsic value and no future. I disagree with each of these assumptions. But it’s also possible that Bitcoin actually serves as an inflation hedge when we take a much broader view of its history. Although we don’t necessarily see it right now, Bitcoin has been claimed dead after the bubble burst several times, but it’s still here and every cycle so far has brought a high and a low.
This brings us to the key questions: why is Bitcoin still holding $19,000 when the macro environment suggests it should have fallen further yesterday?
Also, why is Bitcoin behaving more like gold than stocks over the past month? I think it’s reasonable to ask if Bitcoin is starting to anticipate a change in policy.
Fed pivot? I think so
Over the past few weeks, we have started to see more indications from global institutions that pressure will be put on the Fed to stop raising interest rates. The United Nations has called on global central banks to halt interest rate hikes and warned that a further hike would risk hurting developing countries:
In its annual report on the global economic outlook, the United Nations Conference on Trade and Development said the Fed risks causing significant damage to developing countries if it persists with rapid rate hikes.
We saw a very similar sentiment shared by the IMF as Managing Director Kristalina Georgieva reportedly acknowledged that Fed policy was having an impact elsewhere in the world:
Georgieva called on the Fed to be extremely cautious in its policies and to be aware of the fallout on the rest of the world
More recently, Janet Yellen shared her concerns about liquidity issues in the Treasury market:
Treasury Secretary Janet Yellen has raised concerns about the possibility of a breakdown in U.S. Treasuries trading as her department leads an effort to shore up this crucial market. “We are concerned about a loss of adequate liquidity in the market,” Yellen said Wednesday, answering questions following a speech in Washington.
And these concerns seem justified because demand for US debt has been weak:
On Wednesday afternoon, the US Treasury Department raffled off $32 billion worth of 10-year paper. The request was lackluster to say the least.
The US 30-year yield is now slightly below 4% and continues to rise. The central bank isn’t buying it and foreign investors don’t seem to be either. Something has to give.
There is no doubt in my mind that Bitcoin has benefited from the lockdown monetary policy. Robinhood traders around the world chasing meme stocks and things like Dogecoin (DOGE-USD) with stimulus checks had nowhere to spend them. Bars and other attractions have been closed. The currency had to go somewhere and much of it was for stocks and crypto. That tailwind probably won’t return anytime soon. But dismissing the growing adoption of the Bitcoin network as another speculative frenzy would in my view be short term.
Bank of New York Mellon (BK) is the latest financial institution to give bitcoin its approval as it will allow customers to hold it. Bitcoin is a borderless, permissionless asset that has actually protected investors from inflation if your time horizon is long enough. Gold, of which I am a big personal advocate, is going nowhere. These two things are, and always have been, complementary. The key is to properly time your entries into these assets. It would be easy to say that Bitcoin performed terribly in a high inflation environment because anyone who bought it at $60,000 is underwater. It’s true.
However, you can also apply this exact logic to gold, which, like Bitcoin, has outpaced consumer price inflation for the past year and a half and has performed terribly since March. The dollar has been strong. He ate everything in his path. This includes foreign currencies, metal, crypto, and stocks. But the dollar race is almost over in my opinion. There is pressure from the rest of the world for the Fed to stop climbing and I think the central bank will engage in that sooner than many others are doing. The Bank of England has already proven that inflation can be fought until it can’t. If you think the market is looking to the future, I think it’s telling you something right now.