The long-awaited recession and bear market of 2022 that many had anticipated has yet to materialize in 2023. Surprisingly, most assets, including the NASDAQ, have experienced a rally, reaching a 52-week high on July 12. This has left many wondering how this could be happening and whether the rally will continue.
In January, Michael Burry, known for his role in the movie “The Big Short,” predicted that the US could enter a recession by late 2023, with the Consumer Price Index (CPI) dropping and the Federal Reserve cutting interest rates. Recently, independent macro and crypto analyst Lyn Alden explored this topic further in a newsletter, comparing today’s inflationary environment to two different periods: the 1940s and the 1970s.
Alden concluded that the US economy is likely to enter stall speed or experience a mild recession while facing persistent inflation. This suggests that the markets may continue to trend upward until an official recession occurs. The key difference between the two periods Alden compared is the rapid bank lending and large monetized fiscal deficits. While the 1970s saw inflation driven by baby boomers buying houses and the expansion of credit tied to banking loans, the current inflation is primarily fueled by the creation of new federal debt.
The Federal Reserve has been raising interest rates to combat inflation, but this strategy may be counterproductive. While higher rates can calm inflation tied to banking loans, they increase the amount of interest owed on federal debts, worsening the fiscal deficit. Today, the federal debt is over 100% of GDP, compared to just 30% in the 1970s. This means that the underlying cause of the current inflationary environment remains unaddressed.
Despite the Fed’s battle with inflation and the expectations of an imminent recession, the first half of 2023 has been bullish for equities, particularly tech stocks. This rally, however, has been led by just a handful of mega-cap stocks, making the market distribution lopsided. While bonds have sold off and yields have risen, the rally in tech has been supported by an easing in bond market liquidity.
The AI-driven hype around tech stocks and the easing in bond market liquidity have also caught the attention of the blockchain industry. A report from Pantera Capital highlights that blockchain might be a safe haven compared to traditional markets. Real interest rates remain at -0.35%, indicating that there is still risk in bonds. Bitcoin, in particular, has shown a near-zero correlation with equities, making it an attractive asset class in uncertain times.
In summary, the expected recession and bear market have not materialized so far in 2023. The rally in most assets, including tech stocks and cryptocurrencies, has defied expectations. While there are concerns about inflation and the Federal Reserve’s monetary policy, risk assets currently have a bid under them. However, this trend could reverse by the end of the year. The blockchain industry, particularly cryptocurrencies like Bitcoin, may offer a safe haven for investors in the midst of market uncertainties.
(Note: This article is for informational purposes only and does not constitute investment advice. Readers should conduct their own research and consult with financial advisors before making investment decisions.)
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