The Breakdown - As Economic Indicators Get Worse, the US Revs Up the Next Multi-Trillion Stimulus

Episode Date: July 25, 2020

This week on the Breakdown Weekly Recap, NLW covers: A terrible week for US-China tensions, with dueling Consulate closures and an incredibly hawkish speech from US Secretary of State Mike Pompeo Worsening economic indicators, particularly around jobless claims which saw their first weekly rise in four months The likely size of the next US stimulus bill - $1T to $3T  

Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, Crypto, and Beyond. This episode is sponsored by BitStamp and Crypto.com. The breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. What's going on, guys? It is Saturday, July 25th, and this is the Breakdown Weekly Recap. This week I'm going to talk briefly about three themes that I think really captured a lot of what was going on this week, and I have to start with the significant ratcheting up of the conflict between the U.S. and China.

It started on Monday with the U.S.'s announcement that China would need to close its consulate in Houston, accusing them of espionage and fraud. This was a significant move as this isn't just words. This is an actual direct action that serves to tangibly decouple China and the U.S. politically in an actual physical way. On Wednesday, the U.S. Senate held a hearing about winning the economic competition with China, where they had witnesses testify about issues like supply chains, about technology such as 5G, and about a digital dollar in the role of a digital dollar in competing with China economically.

In fact, earlier this week, I said that there had been something of a shift potentially in the debate around a digital dollar where if it becomes a more strategic geopolitical issue, you can expect to have that project accelerated in a big way. And in either case, holding aside the specific example of the digital dollar, the fact that the Senate is having a hearing all about winning the economic competition with China is notable. On Friday, China responded to the Houston consulate closure by forcing the U.S. to close one of its consulates in Chengdu. Importantly, this isn't being just seen as a war of words. In a Wall Street Journal article titled U.S. Stocks Slide as China Tensions Flair, one analyst said,

quote, today's act by China is seen as an actual political retaliation as opposed to the typical verbal scuffles that had been going on. Part of the reason that they may have felt compelled to actually act in a more tangible way was the speech given by Secretary of State Mike Pompeo called Communist China and the Free World's Future. In the speech, he called President Xi a, quote, true believer in a bankrupt totalitarian ideology. He said that the CCP, quote, fears the Chinese people's honest opinions more than any foe. And he said, we are now decades into America not responding to Chinese aggression. I think to get a full sense of just how aggressive this land.

is, you have to listen to this two-minute clip. Next year marks half a century since Dr. Kissinger's secret mission to China and the 50th anniversary of President Nixon Strip isn't too far away in 2022. You know, the world was much different then. We imagined engagement with China would produce a future with bright promise of comedy and cooperation. But today, today we're all still wearing mask and watching the pen. pandemic's body count rise because the CCP failed in its promises to the world.

We're reading every morning new headlines of repression in Hong Kong and in Xinjiang. We're seeing staggering statistic of Chinese trade abuses that cost American jobs and strike enormous blows to the economies all across America, including here in Southern California. And we're watching a Chinese military that grows stronger and stronger and indeed more menacing. I'll echo the questions ringing in the hearts and minds of Americans from here in California to my home state of Kansas and beyond. What did the American people have to show now 50 years on from engagement with China? Did the theories of our leaders that proposed Chinese evolution towards freedom and democracy proved to be true? Is this China's definition of a win-win situation? and indeed centrally, from Secretary's state's perspective, is America safer?

Do we have a greater likelihood of peace for ourselves and peace for the generations which will follow us? Look, we have to admit a hard truth. We must admit our truth that should guide us in the years and decades to come, that if we want to have a free 21st century and not the Chinese century of which Xi Jinping dreams, the old paradigm of blind engagement with China simply won't get it done. We must not continue it, and we must not return to it. As President Trump has made very clear, we need a strategy that protects the American economy and indeed our way of life. The free world must triumph over this new tyranny.

So there it is. The old paradigm of blind engagement with China simply won't get it done. The free world must triumph over this new tyranny. That is a serious level up of the rhetoric. this issue. That is undoubtedly Cold War-type language. Now, the question, of course, is, is this just language? Is this the opposite of a speak softly and carry a big stick mantra? Speak loudly and carry a nice, quiet, small stick or something like that. But on Thursday, President Trump told reporters that the phase one trade deal with China that had been signed in January, quote, means less to me now

than it did when I made it. So if you're actually going to see a follow-through, in specific ways, particularly around trade and the economy, then maybe this isn't just the same old rhetoric. In either case, even if this is just a rhetorical escalation, it is a pretty significant one and something that I think really needs to be paid attention to. When you have places like the Wall Street Journal titling articles and attributing global stock slides to those tensions, you know that the markets at least are actually taking this seriously. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors,

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is that we have had these lagging indicators for a couple of weeks now of more promising economic data in the U.S. outside of the stock market on the basis of the growth between May and June in things like jobs and things like retail spending and so on. The problem is that even as we were getting those numbers, which were two, three, four weeks lagging, we were also seeing numbers grow of coronavirus cases. We were seeing some states like California go into partial lockdown again. Unfortunately now, some of the numbers have started to catch up, and they're not looking great. Most notably, of course, is the jobless claims report from earlier this week that showed 1.4 million new claims, which was 100,000 more than the week previous, and about 100,000

more than was anticipated. We had spoken about before the problem of just it's staying so stickily at 1.3-ish million as it had been for weeks. So the fact that we've seen an actual trend reversal, though, to the upside, the first time in four months that initial claims actually increased, is a pretty significant indicator of just how much we are still in the thick of it. As I said, though, on yesterday's brief, I think that we need to start getting more granular when we're exploring this economic data. I believe that we're in a situation where there is simply no easy solution. There's no vaccine that's going to just magically appear.

One, because vaccines are super hard in general and take time. Two, because, as I said, there's a time process that's just lagging. And even if we push it wildly ahead, it still is going to take more time than we want to give it. Three, coronaviruses are extraordinarily tricky to develop vaccines. Four, as we've seen play out. Five, you really think in a country where everyone is, saying no to wearing masks or mask wearing has become a political issue, you're just going to get

mass adoption of a vaccine? I don't think so. Anyways, the point is that we're going to be living with this thing for a long time. And so in that context, painting with a broad brushstroke around economic impacts might not serve us. And what might be better to do is to try to understand which industries are getting affected and how, where the knock-on effects are, where there are long-term effects versus short-term effects, where things are playing out in a different way than we thought. For example, real estate has actually surged in some ways when you would think that that wouldn't be the case because so many people are out of work, but it's a different potential buyer set, and it's one who is benefiting from remote work. So there's all of these variants and nuance to the

data that we need to know. And so I want to share another piece of data that I think was really important from this week, which is LinkedIn laying off 6% of its employees, 960 jobs, most of which had do with professional recruitment services. That means to me that white-collar industries are getting hit because they're not out recruiting in the same way. I think that we could be seeing at some point a second wave of layoffs that aren't just about the initial frontline industries most obviously hit, but are in fact about the follow-on effects, either A, the professional services that accommodate those industries, be, the higher-ups in those industries who are seeing real demand destruction and don't anticipate the same sort of picture that they anticipate.

before, or see just companies in general that are adapting to a different landscape in terms of consumer demand, even if they're totally outside the same space that was being impacted by the first wave of coronavirus hits. To me, that level of granularity is going to be super, super important as we try to understand what comes next. Lastly, and I think this obviously relates to that second point about this data coming home to roost, is that you are about to see an absolute ever-loving ton more stimulus to come. has approved a $750 package recovery fund, as we talked about yesterday with Tuamus Malanin. The U.S. is very clearly prepping for another round of stimulus.

And there's an urgency to get it sorted out quickly because this $600 per week benefit that so many people have been enjoying is coming to a close and a lot of people are scared looking at that. In terms of what to expect from a new plan, the Wall Street Journal opinion board absolutely ripped this to shreds. They wrote, as Washington debates how many more trillions of dollars to borrow and spend, we are in a familiar political spot. Democrats want to spend as much as they can on everything,

while Republicans have no idea what they want. Guess how this is likely to turn out? In specific, they point out that the Democrats are united behind a $3 trillion Heroes Act that passed the House in May, while a Republican plan is closer to a $1 trillion plan. The WSJ opinion board, which obviously slants right, had this to say. This $1 trillion dollar GOP offer comes before they even sit down to negotiate with Democrats. It includes no money for state and local governments, but Speaker Nancy Pelosi will demand

hundreds of billions. By the time this is over, the bill is likely to be closer to $2 trillion. The larger problem here is that Republicans in the age of Donald Trump don't know what they stand for on economics. Treasury Secretary Stephen Mnuchin is a Kinesian whose idea of compromise is half of whatever Mrs. Pelosi wants. Republicans have no discernible economic agenda beyond paying people to feel better during the pandemic.

They need to offer voters alternative policies that would return the economy in 2021 to its pre-COVID prosperity. Now, this is not a political show, but I wanted to share an excerpt from this because I think it makes a really relevant point, which is that the Overton window has shifted so aggressively on fiscal stimulus and fiscal involvement in economic crisis that there's this $1 trillion GOP starting plan even before they negotiate, that includes all sorts of things that previously Democrats would have had to fight tooth and nail for. As I said, the point isn't for me to tell you which side is right or which side is wrong, or even if there's something else that's better. It's to show that there has been such a shift in the national conversation around the role of the government in the economy

that it isn't even a consideration that there wouldn't be at least a trillion dollar plan. That is a really notable shift in economic and political expectations. In summary, we're moving farther down the line of the inevitability of government intervention in the economy. And again, I think as we saw in March and April, while I don't think this necessarily means that we should expect to see some big Bitcoin price jump, I do think that every time it becomes clearer that this is just completely normalized behavior from central banks, more people in the traditional finance space look over to Bitcoin. Keith McCullough from Hedgeye wrote on Friday, Bitcoin ramps towards the top end of the hedge-eye risk range as the Fed slash fiscal dollar devaluation disaster gets the

informed paid. I think you're going to see more of these folks outside the Bitcoin space start to look over and wonder if this is a relevant hedge in the context we're moving into. But with that, guys, I'll wrap. Thank you for listening. I hope you're having a great weekend. Tomorrow I'll be here with Long Read Sunday. I'm really excited for this one. So stay tuned. And until then, be safe and take care of each other. Peace.