Global macroeconomic conditions are an important backstop for investors.
Since the Great Financial Crisis in 2008 and 2009, major central banks have taken an incredibly flexible stance on monetary policy to support the economy, a strategy that has been exacerbated by the coronavirus pandemic. While it wasn’t a problem before, today we are experiencing steep price increases across the U.S. economy. This is a direct result of money printing.
And now, to curb skyrocketing inflation on everything from food and gas to used car rentals, interest rates are rising. But the Federal Reserve’s recent hawkish stance may reverse and turn dovish in the not-so-distant future, and that would be an extremely bullish situation for one asset in particular — bitcoin (BTC -0.06%).
Cryptozyme
To be clear, while the central bank continues to raise interest rates to slow inflation, which is at 40-year highs, I see bitcoin remaining under pressure. This is because in this environment, investors are leaning toward safer assets such as treasuries and even cash instead of more speculative financial instruments such as growth technology stocks or cryptocurrencies. This helps explain why the Nasdaq Composite, a high-tech stock index, lost 17% in 2022, about double the decline of the S&P 500 (at the time of writing).
A long period of low cryptocurrency prices is known as the cryptocurrency winter. During this time, money tends to leave the market as investor interest declines. Like the bubbles that burst in traditional financial markets, this is what happens when flawed, fraud-like and unsustainable projects and companies wash out and the strongest teams and businesses survive. In cryptocurrencies in particular, developer activity must remain strong no matter what prices do.
Consequently, for someone who has cash sitting on the sidelines that they are willing to put to work, buying Bitcoin, which is down 65% from its record high last November and is in a major bear market, may be a smart financial decision right now. That’s because not only is its long-term potential absolutely huge, but over the next 12 months or so, we could see more favorable monetary policy.
Reverse course.
The Federal Reserve’s goal is to slow inflation without driving the economy into recession, with what is known as a “soft landing.” But some investors don’t believe this is a realistic scenario. The U.S. economy has contracted for two straight quarters. Which technically means we are already in a recession. The Biden administration, on the other hand, has issued a statement that the U.S. is not in a recession. But I think that was done to keep the public from panicking.
Central banks point to a strong labor market and a 3.5% unemployment rate, but that can be misleading. According to the Insuranks Small Business Insurance Market Study, 44% of Americans took the job to make extra money. And more Americans have two full-time jobs today than in February 2020, before the pandemic hit the economy. Moreover, consumer confidence is at an all-time low.
This means that as the Federal Reserve continues to set higher interest rates to stem inflation, it will inevitably lead to a full-blown recession, which is out of the question. And at that point, the central bank will probably have to change course and start lowering interest rates again, because they will need to stimulate economic growth. As a result, liquidity will be pumped back into the financial system to stimulate lending by banks and borrowing and spending by consumers.
And when that happens, the investment case for bitcoin ownership will become strikingly clear. Governments around the world must keep the money printing and interest rates low in order to support the enormous debt burden, again creating the conditions for the return of increased inflation. If only there were a scarce digital reserve of value that was absolutely finite without central bank control. Fortunately, there is.
