The Breakdown - Biden Meets with Powell as Inflation Battle Heats Up

Starting point is 00:00:04 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. The breakdown is sponsored by nexo.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, May 21st, and today we are doing a summer preview of the big macro issues that are likely to dominate the discourse for the coming months. 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 in the show notes or go to bit.ly slash Breakdown Pod. Also, a disclosure as always. In addition to them being a sponsor of the show,

Starting point is 00:00:53 I also work with FTX. All right, welcome back, everyone. I hope if you are a citizen of the USA, you had a great Memorial Day, and for everyone else, you had a wonderful weekend and be beginning of your week. Now, this is traditionally the first official day of summer after Memorial Day. Also, traditionally, summer is kind of a slow season for markets. There is a well-known saying, sell in May and go away, and it actually goes all the way back to an old English saying, sell in May and go away and come back on St. Ledger's Day. So this dates back to merchants, bankers, aristocrats in markets in London, decamping to the country or the shore for the summer. St. Ledger's Stakes was a major mid-September horse race that made up the last leg of the British

Starting point is 00:01:37 Triple Crown. Now, this idea of the Titans of Industry heading off during the summer for some R&R followed markets over into New York as well. The sell-in-May and go-away phrase was popularized by the stock trader's almanac, and the more important thing is that it seems to have some basis in reality. There has been a historic underperformance in markets between May and October. Since 1990, May to October sees an average gain in the S&P 500 of about 2%, while November to April usually average around 7%. Now, there are some questions of to what extent this aphorism still holds. Since 2013, there has been slightly less correlation and obviously larger events like the injections of liquidity from central banks post-coronavirus crash can certainly beat this effect.

Starting point is 00:02:22 But still, the idea looms large in market perception, and so given that we're heading into a historically quieter time in markets. What we're going to do today is look at a set of news from the past long holiday weekend, but in the context of a summer preview. I think each of these stories reflect the type of thing you're going to see a lot of in the next couple months. Let's start with the issue that has dominated markets and politics for that matter throughout 2022 and was already starting to late last year. Pomp's newsletter title kind of nails the story. Jerome Powell is being called to the principal's office. So from Bloomberg, President Joe Biden will hold a rare Oval Office meeting on Tuesday with Federal Reserve Chair Jerome Powell amid the highest inflation in decades, which has angered Americans and hurt his standing with voters. The two will discuss the state of the American and global economy, according to a White House statement. It's the first meeting between the two since Biden in November announced his intention to nominate Powell for a second term at the helm of the U.S. Central Bank. End quote. When it comes to inflation, we have two things going on right now, an official rock in a hard place situation.

Starting point is 00:03:29 On the one hand, is that elevated level of inflation. And keep in mind, what's important about this inflation is that it's actually impacting consumers in ways that are knowable, clear, and painful. Increased cost of rent and housing, increased food costs, increased gas and energy costs. These things are a type of inflation that people feel distinctly, especially if they're living paycheck-to-paycheck. But there is also a a political context that makes this even more pertinent. It is a midterm year in the U.S. and the Democrats are looking like they're going to get hammered. The economy is the most important issue to voters historically, and inflation is of the highest concern right now. So part of Biden's pushing of Powell

Starting point is 00:04:10 is clearly focused there. So that's the rock. The hard place is the increasing belief in markets that there is no possibility of a soft landing, aka a return to normalcy of inflation without getting a recession as well. This is something we've been watching markets come around to the perspective of for weeks. The top headline on Bloomberg this morning was Soros Money Manager warns recession inevitable, but market timing is off. But, but, but wasn't there a relief rally in equities at the end of last week? Morgan Stanley strategist Michael Wilson doesn't really buy it. He wrote, last week's strength will prove to be another bare market rally in the end. The key fundamental call we are focused on now is slowing growth and our view that

Starting point is 00:04:52 earnings estimates are too high. Wilson goes on to say that the relief rally was driven by comments from Fed officials that September may be a time to pause or reduce, tightening after what everyone believes will be a 50 basis point hike in June and a 50 basis point hike in the federal funds rate in July as well. Again, Morgan Stanley does not think that this will matter. Quote, the primary rationale ascribed to this particular rally beyond just an oversold bounce is that the Fed may be contemplating a pause in September. But inflation remains too high for the Fed's liking, and so whatever pivot investors might be hoping for will be too immaterial to change the downtrendant in equity prices.

Starting point is 00:05:29 End quote. So basically the argument here is that despite some hints that there may be relief from the tightening of the screws come the September FOMC meeting, the Fed is still more likely to keep the pedal to the metal than they are to back off and take a turn back to the dovish. For what it's worth, this would also make sense from a political perspective if you're primarily concerned with the midterms in November. Dems definitely aren't super happy. Senator Mark Warren said, I recall urging the Fed late last fall that they would start needing to ratchet these rates up. I wish they would have done earlier. Remember,

Starting point is 00:06:02 recessions are sort of lagging economic stories, and if inflation is the dominant narrative and you can show prices coming down, then maybe that gives you more tailwinds heading into the elections. Then, of course, you can clean up the recession later in 2023 after the inflation problem is solved. Now, whatever the actual political calculus, alongside the meeting with Powell, Biden also published an op-ed in the Wall Street Journal, my plan for fighting inflation. The subtitle is, I won't meddle with the Fed, but I will tackle high prices while guiding the economy's transition to stable and steady growth. There isn't that much of note to me in that op-ed. At least there's nothing that's really new. Putin isn't blamed for inflation, but is invoked within the first

Starting point is 00:06:43 couple sentences is making it worse. There is an attempt, as you might expect, to shift the discussion from rising prices to the job market, which Biden calls the strongest since the post-World World War II era. When it comes to the steps in his plan, as I mentioned, there's really not that much new. First, it's the Fed's job. Second, they need to make things more affordable right now. Third, they need to reduce the deficit. And importantly, within each of these, he's mostly just saying how existing Biden administration plans would actually solve them. Basically, it's a reframing of most of the policies that he's introduced over the last few months as saying I'm doing something about inflation. It kind of reminded me of this great episode of the West Wing where Josh takes over

Starting point is 00:07:23 for CJ as press secretary for one afternoon and accidentally invents Bartlett's secret plan to fight inflation. I would highly recommend looking it up if you haven't seen it. Anyway, the point is that this is clearly going to be one of, if not the biggest, driver of discourse in macro throughout the summer. At this point, the June and July hikes are basically priced in, totally assumed, and I think you can expect the market to focus on commentary and little hints about the Fed's evolving thinking when it comes to the September meeting. What's more, of course, what the inflation numbers do month to month over the next period will have a pretty big impact on what we can expect for the fall. Looking for ways to step up your crypto game? Then go with

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Starting point is 00:09:23 US is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show. Next up in this summer preview, though, we turn to war in Europe. This continues to be a force for shaping the larger macroeconomic and geopolitical landscape, even if in the U.S., it's largely focused on how it impacts the inflation story, in specific around gas prices. The biggest news on the Ukraine-Russia front is that the EU has agreed to a pretty significant ban of Russian oil. European Union officials agreed yesterday to embargo most Russian oil imports by the end of the year. The embargo will affect imports by sea and exclude pipeline imports.

Starting point is 00:10:13 Still, shipped Russian oil as about two-thirds of EU imports, and effectively, with some exceptions such as for countries like Hungary, it means about a 90% ban on Russian oil by the end of the year. These sanctions required the agreement of all 27 EU member states. People are, of course, scrambling to project what this means. Bartholomew's quandary says that pretty much seals the deal for $200 oil in a full-on energy war across Europe. Whymarsh-style inflation no longer sounds unrealistic. A bit dramatic, but there you have it. Helen C. Robertson, who's the London correspondent on Bloomberg, says oil in London climbs past $120 a barrel, as China eases antivirus lockdowns and the EU works on a plan to ban imports of

Starting point is 00:10:52 Russian crude. This morning before recording, Brent Crude, which is the global benchmark, was up 1.9% and West Texas International was up 3.5% a barrel. This sets the stage for a bunch of new challenges. First, can Europe get enough crude oil from other places? And second, can Russia shift sales to other markets, particularly Asia? For Russia, it's a lot of not necessarily an easy shift. A lot of the ships that would be used to transport Russian crude won't be able to move as banks and insurers will fear sanctions. What's more, much of Russia's production infrastructure can't just easily shut down. For example, in frigid areas of Siberia, pipes can burst without oil in them. So things are now coming into view. We've got

Starting point is 00:11:32 inflation is the major thing in America, a war-induced energy crisis in Europe. But what about the crypto world? Well, one of the biggest themes of this year has been the rise of regulatory discussions. Regulators around the world are finally recognizing that the crypto industry is here to stay, and they have to figure out where they stand. This is producing both surprises to the downside, i.e. more harsh regulation than might have been expected, which seems unfortunately to be a bit of the trend line in the EU, for example, but also surprises to the upside, where prognostications of potential bannings and draconian measures are ending up to be just hot air. The best example of the latter so far is the U.S. itself. The executive order from the Biden administration was much more

Starting point is 00:12:12 open than expected, and there has been a noticeable shift in tone among administration officials. One of the most anticipated upcoming moments around U.S. crypto regulation is the introduction of a comprehensive new legislative framework from Senator Cynthia Lummis of Wyoming. The bill has been in the works and teased by Lummis for months, but saw a bipartisan boon when Kirsten Gillibrand of New York jumped in as a co-sponsor in March. These are two very, very different political perspectives collaborating on this bill. On Friday, the block published what appeared to be a full draft of an older version of the bill, and there are a few interesting nuggets. It seems to move a lot officially under the purview of the CFTC. It adds a term ancillary asset to the Securities Exchange Act.

Starting point is 00:12:55 But honestly, it's kind of not worth parsing too much, given that after the release of the doc, Lummus tweeted that, quote, any language circulating online is an incredibly outdated version from March 1st, and that we should all, quote, stay tuned for our release of the actual bill on June 7th. Now obviously things can change, but if it actually comes out June 7th, that's next week, and that is going to be a big moment. In the UK, we also saw a shift in tone when the Chancellor of the Exchequer recently said that they were going to make the UK a crypto hub, including officially recognizing certain stable coins as official payments channels. Following the Terra crash, it looks like there are some additional discussions and consultations on managing systemic failure

Starting point is 00:13:35 and bolstering protections, especially in the context of stable coins, which honestly only makes sense. As you would expect, it has not been all positive developments. India has been the longest running speculative story about what they are going to do or not do or ban or not ban in the entire history of the crypto industry, I think, at this point. We end up reporting on these tiny in-between things, and once again, here we are. A.J. Seth, the Secretary of the Finance Ministries Department of Economic Affairs, said over the weekend, our consultation paper is fairly ready. We've gone through a deep dive consulting with not just the domestic and institutional stakeholders, but also organizations like the IMF and World Bank.

Starting point is 00:14:12 We hope that we will soon be in a position to finalize our consultation paper. Simultaneously, we are also beginning to work for some sort of global regulation to determine what role India can play. Now, no legislation has been presented to Parliament at this stage, and when pushed to clarify whether a crypto ban is being prepared, Seth acknowledged that if they went to that sort of place, it would have to be in concert with other global actors. quote, whatever we do, even if we go to the extreme form, the countries that have chosen to prohibit, they can't succeed unless there is a global consensus. Given how much pressure the

Starting point is 00:14:43 IMF has been putting on countries around crypto and given recent comments from the Indian Prime Minister speaking at Davos, where he said, cryptocurrency is an example of the kind of challenge we are facing as a global family with a changing global order. To fight this, every nation, every global agency needs to have collective and synchronized action. Given that framing, you'd be forgiven for being a little nervous about what we might see out of India. Lastly, on the crypto markets. I don't think it really needs to be said that nothing on this show should ever be considered financial advice, but just in case nothing on this show should ever be considered financial

Starting point is 00:15:17 advice, it's clear, however, that everyone is trying to figure out what crypto markets are likely to do next. Right now, we're finally in something of a small relief rally. It started just after Bitcoin completed its ninth red week, which was a record, a bad record. The price of Bitcoin jumped to over 31k, its biggest jump since the beginning of March, and lots of other assets followed. The explanation that some have pointed to is optimism returning to Asian markets as China eases lockdowns. Still, I would say that broadly speaking, there is not a ton that people see coming down the pipeline in the next couple of months that's really likely to drive sentiment. The thing to watch is if there is some internal catalyst unique to the crypto industry that can actually break it out of the macro-determined cycle. As I mentioned, June and July have basically priced in rate hikes from the Fed, and I kind of think

Starting point is 00:16:07 markets are just going to be on autopilot until we get more clarity about what's likely to happen in the fall. Should it be the case that what the Federal Reserve does is going to shape the entire complex tapestry of the crypto industry? Absolutely not. But here we are. That is a bit of what I am seeing right now and how I think it will relate to conversations that we'll be having over the next couple months.

Starting point is 00:16:29 For now, I want to say thanks again to my sponsors, nexo.com. near an FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, Breakdown listeners, come join Coin Desk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.

The Breakdown - Biden Meets with Powell as Inflation Battle Heats Up

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