GM DOers!
Wondering where we are in the business cycle right now? 🤔
Let’s talk about where markets are going next.
Sticky inflation? Hyperinflation? Recession? Bank Crisis? 😱
WTF is going on?!
In Part 1 of this macro masterclass, we laid the groundwork for macro investing and gave you a glimpse of the business cycle. We shared why the business cycle is important to understand the trends of technological adoption and the flow of capital into crypto and web3.
Now, it's time ⏰ to take a deeper dive into the macro environment, exploring how it has transformed since the COVID-19 pandemic struck in 2020 and what we might expect in the future.
But first, let's discuss an essential lesson in macro that we didn't touch on in Part 1. 📚
Peering Into the Future: A Macro Investor's Crystal Ball 🔮
One critical aspect of understanding macro is the ability to gaze into the future – not with supernatural powers, but through keen analysis and a forward-looking mindset. 🧠🔍
When looking at macro, it's essential to project 6-9 months ahead.
Relying solely on current numbers is a surefire way to lose, as most economic indicators are lagging, and markets are forward-looking.
To thrive in macro, we must forecast where the world 🌐 will be in 6-9 months and make investment and business decisions accordingly.
When I say markets are forward-looking, you can understand that by looking at markets since the beginning of 2023.
The real economy has only gotten worse over the last few months, with companies laying off employees, banks collapsing and interest rates moving higher, yet financial markets like equities and crypto have done exceptionally well. 💸🚀
Why? It’s because markets are looking at where inflation, interest rates and liquidity will be in the future (as a result of the current situation), not where things are right now.
To help you grasp this concept as well as understand where things may go in the coming year, I’m going to walk us through the macro environment and the related crypto/web3 adoption since 2020. 🤝
This will help provide foundational knowledge to speculate on where things are going.
With that in mind, let's journey back to the beginning of the COVID-19 pandemic and see how it shaped the macro environment. 🦠📊
A Tight Squeeze: COVID-19 Lockdowns and Supply Tightening 🌍🔒
The COVID-19 pandemic brought the world to a standstill. 😷
Governments across the globe imposed lockdowns to slow the virus's spread, leading to a virtual shutdown of the economy.
This sudden halt stopped demand in its tracks and over time tightened the supply of many goods and services, as people were unable to work and produce goods.
📊 Of course, markets tanked in a matter of days as a result.
An Unemployment Tsunami
These lockdowns and the ensuing economic shutdown resulted in a tidal wave of unemployment. Unemployment rates surged to staggering levels, reaching the highest figures since the Great Depression of the 1930s.
📊 As businesses shuttered their doors, millions of people found themselves without work, setting the stage for a tumultuous macro environment.
Cash Infusion: Unprecedented Stimulus and Money Printing
In an attempt to counter the economic downturn, the Federal Reserve and central banks worldwide embarked on a bold mission: implementing unprecedented stimulus measures.
📊 Between 2020 and 2021, over $6 trillion was printed by The FED alone…
📊 and interest rates were slashed to near-zero levels:
The goal was to kickstart the economy and provide a lifeline to struggling businesses and individuals.
As the world began to emerge from lockdowns and economies reopened, a curious phenomenon took place.
Pent-up demand, fueled by low-interest rates and abundant liquidity, ignited a rapid expansion of the economy – perhaps the fastest in history.
This explosive growth sent asset prices, including real estate, stocks, and crypto, skyrocketing. 🏠📈🚀
Suddenly, everyone felt like they were on top of the world, riding a wave of newfound wealth.
During these times of euphoria, new technologies enter a hype cycle and adoption takes off.
This was the reason for the NFT craze, the metaverse hype and a lot of the web3 adoption in late 2020 and 2021.
The Perfect Storm: Rising Inflation and Supply Chain Disruptions
The combination of high demand, limited supply from factories closing or working at reduced hours/workers, and then of course adding fuel to the fire with the Russia-Ukraine war in February 2022, brewed a perfect storm for inflation. 🌩️📈
US CPI aka Inflation rate
Today, as I write this report, we are sitting in a world of high inflation (6% was the latest CPI as you can see above).
📊 Interest rates are higher than we’ve seen since the beginning of the financial crisis and the .com bubble:
📊 The largest companies in the world are beginning to lay off 10s of thousands of staff:
Oh and maybe you’ve heard? We’re in the middle of a banking crisis that has led to numerous banks collapsing and getting bailed out across the US and Europe.
📊 This has resulted in the FED resorting to firing up the money printer and erasing months of monetary tightening:
You might be wondering… WTF is going on right now? 🤔
The answer is A LOT is going on right now. The peaks and troughs of the business cycle are always the wildest and can be the most confusing.
We’re in a critical moment in macro, which is exactly why I decided to teach this masterclass. 🧑🏫📚
We are close to understanding if we’ve hit the trough (the low of the business cycle) and it’s time to head back in an upwards direction or if this is going to turn into something much worse (like 2008 or 2001).
The main debate right now amongst most macro people is if inflation is here to stay or if we’ve slayed the inflation dragon. 🐉 The reason this is important is that if inflation is sticky, things can become very problematic.
In short, sticky inflation is a type of inflation where prices continue to rise and are slow to decrease. It makes goods and services more expensive over time and can be challenging for the economy to address.
High interest rates are already sending the economy into a recession as well as causing a bank crisis. If we also have high inflation then the Fed will be unable to lower interest rates or print more money without causing even more inflation (big problem).
If we’ve slayed the inflation dragon, then this looks like a typical business cycle (albeit with a minor banking crisis) and the Fed can turn to lower rates and stimulate the economy as usual.
So what is it? 🤷
At this point, no one knows for sure. But here is my take… 🔮
Kyle’s Thoughts on Inflation and 2023 Macro
The inflation story has been one of the most discussed and debated in the last year in terms of financial markets and macro. Most people draw parallels between the current inflationary environment and the sticky inflation of the 1970s. 🕰️
However, there's reason to believe this comparison might be misplaced and I think this section is very important in understanding our current world and where we are headed next.
🔍 Let’s break down what caused inflation to spike at the end of 2021 and early 2022:
1 - Monetary stimulus drove incredible demand. Remember, there are 2 types of providing liquidity. The extremely inflationary kind of stimulus is when you give money directly to the people, rather than providing liquidity to a bank.
Why? Because people can and will IMMEDIATELY spend it, driving demand.
This is the type of stimulus that we had, which was a big cause of the inflation, and one which is no longer happening today.
The “stimulus” we have been getting recently from the bank crisis is to ensure the banks have money available for depositors, it’s not giving away new money to everyone 💰🚫
2 - The supply chain issues from lockdowns and the war that initially drove inflation have been almost completely resolved.
Some people suggest that the war is causing “deglobalization” (i.e. supply is limited because there is less trading around the world) but the numbers simply don’t support this.
So in terms of the big supply and demand drivers that caused the inflation originally, both of them have subsided. Now that doesn’t mean inflation still can’t be sticky, so let’s look into this a bit further. 🧐
Where Does Inflation Head Next?
When comparing to the sticky inflation of the 70s, it’s important to recognize that the demographic landscape is vastly different.
We don't have a massive influx of baby boomers entering the workforce, driving sustained demand as we did back then. 👨👩👧👦📈
Additionally, the rapid advancement of technology, especially artificial intelligence, robotics and sustainable energy has an extremely deflationary effect on the economy. 🤖🌱💡
We now have the ability to create things much faster and much cheaper by utilizing these technologies.
📆 Demographics and technology have played a big role in maintaining low inflation with low interest rates over the last 2 decades.
Now, these technologies are improving exponentially while also being adopted exponentially, meaning that this deflationary trend should only continue. ➡️🔄
Looking at our current order of affairs, over the last 1.5 years, we've witnessed the fastest tightening of monetary conditions in history.
Interest rates soared in 2022 and 2023, and so too did inflation. Let’s not forget that inflation in and of itself is a form of monetary tightening which also slows down demand and lowers inflation.
To top it off, we're currently experiencing a banking crisis, which is inherently extremely deflationary, as banks become much more reluctant to lend money in times of crisis. 🚨
When I look at the current macro situation and where things are heading, I see no way for inflation to remain sticky, unemployment not to rise (significantly) and demand not to fall off a cliff (...if it hasn’t already). 📉
Ask yourself, in this environment who or what business has any money to spend right now?!
In fact, I prefer to use Truflation to understand inflation metrics more accurately.
Truflation is an on-chain tracker that uses 10 million+ data points in real-time to better understand the current prices of goods and services and calculate inflation. 📊🔗
📊 Truflation is already showing inflation numbers in the US at 4.3%:
Inflation indicators may be lagging, but in my opinion, there are strong reasons to believe that inflation is not here to stay. ❌
Now, remember, when trying to understand macro we need to look not where things are at today, but where things will be 6-9 months from now.
So based on this information, where are things heading?
Unemployment = 📈 → Inflation = 📉 → Interest Rates = 📉 → Liquidity = 📈
Let’s explain that sequence a bit further.
The Fed Strikes Back: Lowering Rates and Saving the Economy
As the macro environment evolves, it's likely that the Fed will be forced to lower interest rates to save the economy (and their beloved banks). 🌐💳
Not to mention, lower interest rates are necessary for the government to afford their own debt payments – sustained high interest rates in a debt-driven world are simply not feasible.
The money printer is already revving up not just in the United States but also in China, signalling a more accommodative monetary policy ahead. 🖨️
One final note on this is that the US has an election year coming up in 2024. Recession and elections don’t mix, giving even more reason to believe the Fed will be easing monetary policy in the coming months...
The Trough of the Business Cycle: Recession Looms, but Markets May Shine
Given the current macro landscape, it's becoming increasingly clear that we're heading into a recession and thus, the trough of the business cycle. However, don't let this news dampen your spirits. 📉🔄
Remember, financial markets are forward-looking, and we are about to witness a substantial increase in global liquidity. 🌊
As central banks around the world ease their monetary policies to counter the economic downturn, this new wave of liquidity may very well propel financial markets to new heights.
As we learned in Part 1, crypto and ultimately the web3 industry does well during times of increased liquidity.
Wrapping Up: Navigating the Complex Macro Landscape
That was a lot to learn over the last 2 reports, but important nonetheless. At least I hope you thought it was important. 😅
(Do you find these insights valuable? Let us know by replying to this email with Yes/No 🙏)
Understanding the macro environment is crucial not only for managing your personal or business investments, but also for making informed business decisions whether you're considering expanding your product offerings, making new hires, or pivoting your business model. 📊🚀
The knowledge and insights gained from monitoring the macro environment will empower you to make calculated decisions that can positively impact your business growth, regardless of the economic landscape.
Remember, the world of macroeconomics is ever-evolving, and keeping your finger on the pulse of these changes will enable you to thrive even in the most uncertain times.
Now that you have a foundational and up-to-date understanding of macro I will be sure to keep you posted in the PRO newsletter as things unfold. 👌
Good luck out there! 🫡
ABOUT THE AUTHOR
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
