FIVE MINUTE FINANCE: CHANGING THE DEFINITION OF ‘RECESSION’, ALL EYES ON METAVERSE GROWTH, MORE
The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- Market’s Reaction to Latest Fed Hike Explained
- China’s Big Role in Everyone’s Daily Lives
- Metaverse Predicted to See Massive Growth
- Lightning Network on General Purpose P2P Apps
- Coinbase: The SEC Regulating via Enforcement
Markets Pump after “Dovish” Fed Hike
- 75 BPS Hike Reduces Chances of a Soft Landing for US Economy (link)
- GDP Shrinks for 2nd Quarter as the White House Downplays Recession (link)
Fed Talking Points Unmasked
Last week, we explained the old Fed trick. When the Fed hints at a higher interest rate hike, like 100 bps (one whole percentage point), but settles on the previous new high (75 bps), the market takes it as good news. This is precisely what happened when the new Fed hike of 75 bps dropped this past Wednesday.
Bitcoin, S&P500, and NASDAQ Composite respond to the Fed’s rate hike on Wednesday. Image credit: Trading View
Don’t forget the recent past: We saw near-zero rates for years, and a (mere) 50 bps hike in May which triggered massive market selloffs, as more costly capital spooked investors into abandoning their positions.
On Wednesday, the Fed made the market more shock-absorbent with this statement:
‘‘We are now at levels broadly in line with our estimates of neutral interest rates, and after front-loading our hiking cycle until now we will be much more data dependent going forward’’.
Meaning, the Fed is now in maintenance mode instead of surprise ramp up mode. It was also quite telling at the FOMC press conference that Powell repeated the phrase “incoming data”, putting the market in a free storytelling mode. And what does the data actually say? Per usual, madam “transitory inflation”, Treasury Secretary Yellen, noted that we are not in a recession:
“When you look at the economy, job creation is continuing, household finances remain strong, consumers are spending and businesses are growing.”
The Bureau of Economy Analysis (BEA) dropped the colloquial recession on Thursday. For both Q1 and Q2, the real gross domestic product (GDP) has now been in the negative range for two consecutive quarters, at -1.6 and -0.9% respectively. While you may find this scenario as sufficient to satisfy the traditional definition of a recession, the National Bureau of Economic Research (NBER) hasn’t declared a recession based on four indicators.
But wait, isn’t negative GDP growth supposed to be the aggregate telling indicator, regardless of minor indicators? Indeed, the minor indicators, such as Total Nonfarm Payroll Employment, was up by 372,000 in June. How is that possible if we’ve been bombarded with hiring freezes and layoffs for the last couple of months?
Well, it’s likely a lagging indicator, as it has been in the past. In the 1970s in particular, recessions were presaged by positive payroll growth, without exception:
The three grey areas represent three recessions of the 1970s, which all started with positive payroll growth. Image credit: @biancoresearch
It seems that US officials are maximally extending lagging indicators for the sake of short-term talking points. The White House is following the same approach, claiming two consecutive quarters of negative GDP growth is not a recession, though it has refused to clarify how exactly it defines a recession after all.
The situation has led many to believe the White House is effectively changing the definition of a recession.
In reality, officials are trying to use ‘objective’ data to support their arguments that we’re not in a recession. The issue is that much of the data they’re pointing to is lagging.
You may also remember last month when Powell said that “we’re not trying to provoke recession, but we do think it’s absolutely essential that we restore price stability”. At this Wednesday’s press conference, Powell said “we think it’s necessary to have a growth slowdown”, which suggests, a recession.
In other words, the Fed triggered inflation, and now it triggered a technical recession to undo inflation. While a recession has a 100% track record in squashing inflation, it remains to be seen if the next CPI report will show even higher inflation than 9.1%. If so, the new normal could turn into 100 bps hikes, repeating market chaos anew.
China Likely to Miss GDP Forecast
- China’s Politburo ‘insists’ on Zero-Covid, Omits Mention of GDP Growth Target (link)
- Wuhan Locks Down 1M People as China’s Economy Remains Uncertain (link)
China’s GDP and CBDC: The Space for the “Zero-Covid” Play
The importance of China for the world’s economic health cannot be overstated. Not only does China account for 28.7% of the world’s entire manufacturing output, but the US economy is increasingly dependent on exporting its goods and services to China’s growing middle class.
China’s purchases of US goods and services in 2020 and 2021. Image credit: PIIE
With such a unique combo of technical innovation, state-controlled capitalism, and its manufacturing hub, China’s ruling class has immense power. At will, they can select a major city or a port and cast the zero-covid spell, triggering a global ripple effect. When Shanghai was picked for a two-month lockdown this past March, as the world’s most-trafficked port, it affected every major player: Tesla, Apple, Suto Logistics, Amazon, Adidas, General Electric, to name a few.
Joerg Wuttke, the EU Chamber of Commerce President, noted the resulting shortages on Europe’s supermarket shelves:
“We never had this kind of uncertainty before, it gets worse week by week. We don’t know where [restrictions] will pop up.”
Of course, these measures hurt China’s economy as well. Since 2015, China has never missed its GDP target. Given that the first half of 2022 only saw a 2.5% GDP growth, the 5.5% target is almost certainly to be missed, now pushed to more likely 4%. This may seem vastly better than the negative US GDP, but China’s economy is reliant on high growth to outpace its liabilities, especially in the struggling real estate sector.
The start and completion of construction projects in China are on the decline. Image credit: Financial Times
Yet, China has another trick up its sleeve — digital yuan. Its “controllable anonymity” and flexibility as a central banking voucher is not an anomaly. From the Bank for International Settlements (BIS) to the European Central Bank (ECB) and the Financial Action Task Force (FATF), all are in agreement as to how new money should be. CBDCs — albeit quietly — are on their radar.
With the CBDC tool in hand, China can more effectively suppress local financial fires, but also suppress future revolts caused by bank runs. As Chinese CBDC becomes fully integrated into its social credit score system, expect China to use and promote its CBDC to further strengthen its position as an emerging global economic player.
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NFTs’ Great Reset
- Metaverse to grow at 47% CAGR, Estimated to be worth $1.5T by 2029: Report (link)
- Unstoppable Domains Raise $65M as NFT Market Falls to 12-Month Low (link)
Build-Up for the Next Cycle in Full Swing
As one of the biggest indicators of the metaverse market, NFTs are in a clear downfall. In January, the NFT market reached its $5.86 billion all-time trading volume peak, only to fall down by -1,181% in July, at $457.9 million. This caused NFT traders to huddle around their blue-chip NFT treasures, mainly led by Yuga Labs’ BAYC, MAYC, BAKC and Otherdeed.
Nonetheless, companies that owe their existence to the web3 surge see this slump as a prelude. Unstoppable Domains got another $65 million funding round, raising its valuation to $1 billion. Having registered over 2.5 million domains that go beyond the classic extensions such as .com, Unstoppable Domains is becoming a very popular tool to shorten wallet addresses and launch web3 ventures. At the high end of its potential, it could turn into something akin to the AWS of web3 in due time.
UD is betting on web3 domains to reach the same status as .com domains. Image credit: Unstoppable Domains
Metaverse investors remain bullish just as they were one year ago before market selloffs. Previously, Grayscale, Bank of America, Goldman Sachs and JPMorgan all projected large web3 market growth by 2030. The latest market research report by Fortune Business Insights (FBI) joins the long-term bullishness, forecasting 47.6% compound annual growth rate (CAGR) from 2022 to 2029.
The basis for a $1.5 trillion metaverse growth prediction is a combo of proxies: online shopping, tokenized gaming, augmented reality (AR), virtual reality (VR) and e-sports. One could easily see NFTs replacing in-game stores with tradeable NFT marketplaces, making play-to-earn (P2E) and play-to-move (P2M) as default gamification modes across the board.
The signs for this infrastructure build-up are in plain sight. Sumitomo Mitsui Financial Group (SMBC Group), one of the world’s largest commercial banks, is funding a “Token Business Lab”. Together with HashPort blockchain startup, they will research and build NFT/web3 businesses.
Overall, VC funding of crypto firms amid the bear market remains strong. So far in 2022, it reached $17.5 billion. Compared to last year’s $26.9 billion, the funding may yet exceed it before the year ends, despite a YTD -50% drop in Bitcoin as the crypto representative. This just goes to show that wealth is built with a long-term view.
And don’t think the metaverse is confined to the crypto space. Remember Zuckerberg’s move to ‘META’? Well, Meta’s metaverse unit, Reality Labs, lost $2.8 billion in Q2. In fact, it has lost $5.7 billion so far in 2022. Zuckerberg is OK with it though, saying he’s building a successful foundation to unlock trillions in value in the 2030s.
Conditions for Mass Crypto Adoption are Maturing
- Bill Backed by US Senators Seeks to Make Small Crypto Payments Tax Free (link)
- Tether and Bitfinex Launch Blockchain-Based Alternative to WhatsApp (link)
Tax Free Bitcoin Transactions on a P2P App?
Crpyto-friendly US senators have once again stepped up. Senators Patrick Toomey (R-Pa.) and Kyrsten Sinema (D-Ariz.) introduced a bill that would make all crypto transactions up to $50 tax-free. The main goal is to provide the necessary conditions for digital assets to practically be used for payment.
The $50 limit would apply to both trading profits and daily crypto payments. If it passes, the bill could move many cryptocurrencies under the authority of the Commodity Futures Trading Commission (CFTC). This is exceedingly important for cryptocurrency adoption as it is the first step in removing a major source of friction.
After all, it is one thing to have high transaction fees because of network load, but it is another obstacle altogether when you get taxed for using cryptocurrency as, well, currency. There could be other developments taking place to help facilitate this use of cryptocurrencies as well.
The largest stablecoin provider, Tether, and one of the oldest crypto exchanges, Bitfinex, have teamed up to launch Holepunch. Based on open-source peer-to-peer (P2P) Hypercore protocol, Holepunch will deliver a variety of P2P apps. The first one is Keet, aiming to become an encrypted, P2P WhatsApp. At first, it will provide file-sharing, free chat, and audio/video calls, without sharing user data with central servers.
The Holepunch platform itself is closed-source at the moment, but will be open source in Q4 2022 after alpha testing is concluded. Although the entire platform is blockchain-agnostic, it has integrated API payments through the Lightning Network.
This means that both stablecoins and lightning fast Bitcoin transfers will be united. In crypto, bear markets are for building — and we’re seeing plenty of building now.
The SEC Fills Crypto’s Regulatory Framework Void via Enforcement
- SEC’s Coinbase Listing Probe Predates Recent Insider Trading Case (link)
Will We Ever See a Clear Regulatory Framework for Digital Assets in the US?
For all the crypto hearings and proposed bills, the US still has a black hole for crypto regulation.
That void has been filled by the Securities and Exchange Commission (SEC). At the head of it is the former Goldman Sachs banker, Gary Gensler. He made it his mission to extend the 1934 Security Exchange Act to full extent, later bolstered by the 1946 Howey Supreme Court case that defines securities as satisfying the following criteria:
- There is an investment of money.
- There is an expectation of profits.
- The investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.
Without any definitive regulation, Gensler has been using these pre-computer rules to define cryptocurrencies. From Ripple Labs to LBRY tokens, the SEC is used to threatening companies with enormous fines. Once settled, these fines then serve as de facto regulations.
The Coinbase token listing probe is just the latest example in what many are considering an overreach by the SEC. Last week, the Department of Justice charged Ishan Wahi, a former Coinbase employee, of insider trading.
After the probe, the SEC filed its own securities fraud charges against Wahi, which claim that at least nine of the assets involved were securities. To clarify, these were digital assets listed on Coinbase, and Coinbase claims that none of the listed assets on its exchange are securities.
What we’re seeing here is regulation by enforcement — yet without any clear regulatory guidelines for digital assets. This sets a dangerous precedent, as the SEC appears to arbitrarily select whichever assets it deems securities based on sporadic cases of alleged fraud.
In the meantime, Coinbase continues to remain firm that it has no securities listed. It’s clear that Coinbase wants to play by the rules — but getting the SEC (or anyone) to provide a clear rulebook is apparently troublesome.
Tweets of the Week
Euro downside is massive. Markets are trading recession risk in the US on par with that in the Euro zone, taking down the terminal rate for ECB and Fed hiking cycles by about the same amount recently. That’s silly. The Euro zone is going into deep recession. Euro will fall a lot!
BlackRock and Vanguard shun the U.S. coal industry yet invest billions in a Chinese company whose name is literally “China Coal Energy Company,” without saying a peep about ESG over there.
The hypocrisy is staggering.
Bitcoin is a hedge against monetary debasement — Following year over year change in global money supply nearly perfectly.
I’m an energy density maximalist. ☢️
Great chart in Arcane Research’s latest weekly update. 236k BTC in known institutional #Bitcoin sales since May.
Could we have already have seen most of the forced sales / liquidations? 🤔
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