The Breakdown - All Roads Lead to Inflation (and Bitcoin)

Episode Date: October 25, 2024

Paul Tudor Jones recently said "all roads to lead to inflation." On today's show NLW explores how the macro shift is impact markets. Unlocking Bitcoin DeFi with ExSat The exSat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoins Ideology. The network has partnered with the largest mining pools in the world, major custodians and exchanges, BitTrade, Cubolt, Matrixport, Everstake, OKX and aims to have over $200M TVL at mainnet launch on the 23rd of October. Follow exSat’s Twitter to stay up to date @exsatnetwork or visit the testnet exsat.network Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on Macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, October 23rd, and today we are talking macro, and there is a lot going on. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Well, friends, you may have seen a quote from Paul Tudor Jones flying around the internet, or at least Bitcoin Twitter. Speaking to CNBC's Squawk Box on Tuesday, he said,

All roads lead to inflation. I'm long gold, long Bitcoin, long commodities, long NASDAQ, zero fixed income. The playbook to get out of this is that you inflate your way out. Now, many bitcoiners remember the last time Paul Tudor Jones got bulled up on Bitcoin, and that was when it was around $9,000 back in 20. So what is going on? What has Paul Tudor Jones talking about this? What do you need to know about the macro environment right now? Long story short, two weeks out from the election and the next Fed meeting, it seems like markets are rethinking macro conditions. Bond yields are spiking globally as investors

rethink the Fed's rate path. The U.S. 10-year Treasury is back above 4.2% for the first time since July. The two-year, which is typically viewed as a proxy for the Fed's target rate, is back up to 4% after spending most of September at 3.5%. Markets seem to be pricing the chance that the Fed's cutting cycle will be cut extremely short, perhaps even winding up by the end of the year. Bloomberg suggested, quote, traders are pairing back bets on aggressive easing given the U.S. economy remains robust, and Fed officials this week sounded a cautious tone over the pace of future rate decreases. Rising oil prices, meanwhile, on the prospect of ever-increasing fiscal deficits are only compounding

the concerns. Robert Dishner, senior portfolio manager at Newberger Berman in London, said, with less than two weeks now until the U.S. elections, concerns about the fiscal outlook and its potential upward pressure on inflation have become more acute. Inflation spike hasn't quite materialized, but markets are on the lookout after a sticky CPI print last month and no signs that fiscal spending will slow down under either presidential candidate. Now, it's important to note the shifted market sentiment is very much based on projections of the future rather than what's being observed in the present.

Real-time inflation measures like Truflation, Inflation chart, and the Cleveland Fed's now cast all show headline inflation between 2.2 and 2.6%. Still, all of those measures have increased markedly since September. Another big point is that this doesn't seem to be markets pricing in stagflation in a dismal economic picture. They seem to be looking ahead to a booming economy to drive higher inflation. Stephen Zeng, an interest rate strategist at Deutsche Bank, said that rising yields, quote, reflect the reduced probability of recession risks. He added, data has come in pretty strong.

The Fed may slow the pace of rate cuts. Comparisons are being made to the 1995 cutting cycle, which later became known as the mid-cycle adjustment. Then-Fed Chair Allen Greenspan lowered interest rates by just 75 basis points across six months of FOMC meetings. That adjustment set the stage for one of the greatest economic booms in U.S. history. although adoption of the internet was a far more important driver than Fed policy. The issue will be that hopes of an economic boom are based on future projections and traders need

to deal in the here and now. Brendan Murphy had a fixed income at Inside Investments said, it's a big risk to bond yields in general, but it would also be a risk to risky assets and to credit spreads because the market's pretty fully discounted a return to normalization. The other risk is that both presidential candidates have completely avoided the issue of government debt and fiscal restraint. Bloomberg opinion columnist John Authors wrote earlier this week that the market seems to be pricing in a Trump victory, which he suggested would be good for stocks and bad for bonds.

The thesis is pretty simple. Both parties have signaled an end to fiscal conservatism. With Republicans increasingly likely to win a clean sweep of Congress on the White House, there will be no restraint on increased spending. For now, the increased supply of treasuries is being met with increased demand, but whether that's sustainable is another question entirely. Paired with rising bond yields, the U.S. dollar is absolutely surging. The dollar index or Dixie is up more than 4% since bottoming at the end of September. It still has a long way to run to reach concerning levels, but the velocity of the move is starting to raise eyebrows. And even more concerning is that the move seems far from over.

Earlier this week, J.P. Morgan analysts wrote, The election trade is here. Despite the dollar buying so far in October, overall dollar net length looks fairly neutral still. There is scope for more election hedging over the next two weeks. This rapid macro shift seems to be crushing momentum in global risk markets. Strong rallies and Bitcoin and U.S. stocks have stalled out entirely this week. There's a lot of disagreement about what happens next, and the cost to play is already extremely rich. Matt Maley of Miller-Taback and Co. said,

Higher yields do not have to be negative for stocks. Let's face it. The stock market has been advancing as these bond yields have been rising for a full month now. However, given how expensive the market is today, these higher yields could cause some problems for the equity market before too long. There's very little reason right now to dive into markets, with a looming election and stock buybacks on pause for earning season. The unwinding of hedges once the election result is known could release a lot of pent-up energy, particularly if data continues to point towards economic strength. Callie Cox of Ritzholt wealth management said, Presidents don't control markets. Over time, the stock market's common thread has been the economy

and earnings, not who's in the Oval Office. Be prepared for mood swings in markets as we get closer to election day. But remember that election-fueled storms often dissipate quickly. Still, analysts are deeply divided on what's to come over the next few years. J.P. Morgan is optimistic, projecting that U.S. large-cap equities will compound at 6.7% over the next decade. Monica Esar, the head of multi-asset strategy at the bank's wealth management division, said, multiple contraction will be offset with healthier macro and corporate fundamentals over the next 10 years, and that foundation is a sturdier point in time for investors to allocate capital. Goldman Sachs, however, has a far more gloomy outlook, predicting just 3% annual growth for stock over the next 10 years.

That would be a huge miss compared to the long-term average of 11%. This episode of The Breakdown is brought to you by XAT Network. As regular listeners know, one of the things that I think is really exciting right now is all of the new builder energy around Bitcoin, and ExSAT Network is a great example of that. XAT Network utilizes a combined consensus mechanism of POW and POS, enabling miners to earn revenue and stakers to earn Bitcoin yield. Their state data index mirrors Bitcoin UTXO data, creating a venue for BTC to flourish and a platform to trade Bitcoin assets.

ExSat Network partners with MatrixPort committing 5,000 to 10,000 NBTC to the network, assisting with DAP development and enhancing security. Ultimately, the goal is for XSAT Network's decentralized asset custody to enable you to earn Bitcoin yield without sacrificing security or transparency. The X-SAT network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoin ideology. Check out X-SAT.network or follow X-SAT on Twitter at X-SAT network, that's EX-S-A-N-E-T-W-R-K, and unlock Bitcoin D-Fi with X-Sat. Another looming issue is the potential for a global growth slowdown. The IMF downgraded their global growth outlook again this week, reducing it by a tenth of a percentage point to 3.2%. Chief economist Pierre

Olivier, Gorincha said in a briefing, the risks are building up to the downside, and there is growing uncertainty in the global economy. There is geopolitical risk with the potential for escalation of regional conflicts. There is a rise of protectionism, protectionist policies, disruptions in trade that could also affect global activity. There are really two big factors in play. First, global public debt is reaching never-before-seen levels.

The IMF said it's expected to reach $100 trillion or 93% of world GDP by the end of the year. The recent surge is largely driven by China and the U.S. economies tend to struggle when dealing with the debt-to-GDP ratio above 100%, but we haven't seen the effect on a global scale since World War II. The IMF said, waiting is risky. Country experiences show that high debt can trigger adverse market reactions and constrains room for budgetary maneuvering in the face of negative shocks. The fund then is urging governments to stabilize borrowing.

However, with pressure to fund clean energy, bolster security, and support aging populations, they're not hopeful. The second looming issue is the hefty tariffs on the Trump agenda. It's not clear how serious Trump is about imposing 60% tariff. on China and 10% tariffs on the rest of the world, but the proposal is throwing economic models in disarray. The IMF said that the mere uncertainty of global trade conditions is enough to cut global GDP by around a half percent by 2026. They note that tariffs would directly impact around a quarter of global trade. This place is fed policy in a tricky situation.

In the scenario where the U.S. economy is booming but the rest of the world is laboring under tariffs and the strong dollar, what are the correct policy settings? Rate cuts would likely spur domestic inflation, but high rates could bankrupt large sections of the dollarized global economy and bring trade to a grinding halt. Treasury Secretary Janet Yellen has recently urged Republicans to reconsider the idea of tariffs. At a speech at the Council on Foreign Relations, she said the Biden administration has, quote, rejected isolationism that made America and the world worse off. This was an uncharacteristically political speech from Yellen who usually refrains from overt

partnership. Of course, for many, the big question is just, what's going to happen with the election? Stan Drucken Miller thinks the market has already determined the winner, stating, I must say that in the last 12 days, the market in the inside of the market is very convinced Trump is going to win. You can see it in bank stocks, you can see it in crypto, you can even see it in Trump Media Group, his social media company. Drunken Miller laid out his view of four possible scenarios, the two possible presidencies, each with a friendly or opposing Congress. He found three of the outcomes fairly unlikely, but noted that a blue sweep could lead to a rough

time for equities over the next few quarters. For a red sweep, his most likely outcome, Drucken Miller said, I think you get animal spirits in the business community, you get deregulation, and there might be some sort of uplift relative to where they were in terms of the business community. noted that he is completely unenthusiastic for both candidates, saying, both of them apparently think the government should have a major role in allocating capital, which I find frankly bizarre. The issue in Druckenmiller's view is that bond markets are not properly pricing the odds of a Trump

victory. Druckenmiller disclosed that between 15 and 20 percent of his portfolio is currently positioned for rising bond yields and said that inflation could reach 1970s level and the Fed may not be able to cut interest rates as much as expected, if at all. Drucken Miller said that his time horizon for this trade was completely indeterminate, but he's making his conviction-based bet on, quote, bipartisan fiscal recklessness. And that gets us back to macro legend Paul Tudor Jones, where, on that appearance on Squawk Box, he said, we are going to be broke really quickly unless we get

serious about dealing with our spending issues. With both candidates promising big spending packages, Jones thought that they could run up against the cold reality of the bond market. He said, the question is, after this election, will we have a Minsky moment here in the U.S. and U.S. debt markets? Will we have a Minsky moment where all of a sudden there's a point of recognition that what they're talking about is fiscally impossible and financially impossible? A Minsky moment here refers to a period where rampant speculation in financial markets is revealed to be unsustainable, coming to a sudden halt leading to a collapse. It was named for Chicago economist Hyman-Minsky, who hypothesized that long periods of prosperity lead to increased leverage and elapse of risk

management. The phrase was coined in 1998 to explain the sudden collapse of the Russian bond market, which had been a consensus trade after the end of the Cold War. Jones, for his part, said that he is completely out of fixed income and is considering shorting longer duration bonds. And indeed, that's where he responded that he is long Bitcoin. So, friends, that is the outlook on the macro environment, things are evolving quite quickly. You are definitely now starting to see people moving past their projections for the elections and into what happens next, but there is still a lot that could happen between now and then, and of course, we will be here to cover it all. For now that that is going to do it for today's breakdown. Appreciate you listening as always, and until next time,

be safe and take care of each other. Peace.