The Base, Bull And Bear Cases For Bitcoin Returns – Bitcoin Magazine
Darius Dale is the founder and CEO of 42 Macro, an investment research firm that aims to disrupt the financial services industry by democratizing institutional-quality macro risk management processes.
Important takeaways
The distribution of probable economic outcomes – and by extension financial market outcomes – is as flat and broad as it has been in recent years. 42 Macro’s baseline scenario of deflation calls for an expected return of -10% annually for bitcoin. Our bull case scenario of deflation plus policy rate cuts calls for an expected return of +29% annually for bitcoin. Our bear case deflation plus quantitative tightening calls for an expected return of -37% annually for bitcoin. Critically, all three scenarios are equally likely over the next three to six months. If we sounded very convinced by issuing sell warnings at every lower high in bitcoin’s price from early December to July, we should sound just as unconvinced today.
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The foundation
Growth in the US and globally continues to slow, albeit at a more modest pace than in recent quarters. The Fed and other central banks continue to tighten monetary policy procyclically through the end of the year: soft landing.
Bayesian Spotlight: The decline in headline ISM Manufacturing to its lowest level since June 2020 was an afterthought to the decline in the “new orders minus inventories” spread which fell to -9. This is the lowest level since December 2008. There have only been eight such cases where the spread has fallen to current levels or worse. The median trough ISM Manufacturing reading in such cases is 38.6, which is usually reached a month later on a median basis. The median bottom ISM Manufacturing reading when the spread falls +/- 1 point from today’s level of -9 is 42.5, which is usually reached three months later on a median basis (n=4). All in all, investors would be wise to stress test their portfolio holdings for at best a low-40s ISM Manufacturing statistic this fall.
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The bull case
Inflationary momentum in the US continues to slow sharply, which is likely to cause the Fed to hold off on a final rate hike in September. The improvement in real income highlights the positive bend in growth: soft landing.
Bayesian spotlight: The July consumer price index (CPI) release represented the river card in a trifecta of data points: July ISM Services PMI, July Jobs Report, July CPI, all of which lend credence to the soft landing view. While the downside surprises on both headline CPI (0.0% month-on-month versus 0.2% estimate) and core CPI (0.3% month-on-month versus 0.5% estimate) were to be celebrated, the brunt of the good news via sharp declines in median CPI (-250 basis points to 6.3% month-over-month annualized) and fixed CPI (-270 basis points to 5.4% month-over-month annualized) because these indicators track core spending to personal consumption expenditures (PCE) — The Fed’s preferred inflation gauge – better than most other CPI time series. If the deceleration in these leading indicators continues at the same pace and if historical correlations persist, we could be looking at month-over-month annualized core PCE rates of around 2% in the August or September data. There are obviously two very big ifs, especially given that we are devoid of historical examples of this kind of non-recessionary inflationary dynamics to adequately train a model on. In any case, the possibility that the Fed could be heading into its November 2 meeting with “clear and corroborating evidence” that inflation is likely to move back toward the 2% target within a reasonable time frame is shocking to write, but write it we have to, considering that August PCE is released on September 30th and September PCE is released on October 23rd.
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The bear case
The nascent slowdown in inflationary momentum stalls at levels inconsistent with the Fed’s price stability mandate, prompting the Fed to tighten well into 2023: hard landing.
Bayesian spotlight: The labor market is overheating with a doubling, compared to trends before COVID. The hotly debated 528,000 month-over-month “headline non-farm payrolls” number for July obviously stole the show from a market response perspective. The re-acceleration in the three-month annualized growth rates for headline (+40 basis points to a three-month high of 3.5%) and private payrolls (+30 basis points to a three-month high of 3.7%) suggest a domestic labor economy that is not responding to the the political austerity we have accumulated so far. With three-month annual private sector average hourly earnings growth slowing modestly (-20 basis points to a two-month low of 5.7%) along with unchanged private sector average hourly earnings growth of -1.2%, it is clearly +10 The basis point rise in aggregate monthly private sector earnings – to a three-month high of 8.3% – was largely driven by more workers finding work.
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This is a guest post by Darius Dale. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
