The Breakdown - Bitcoin Bull Bukele Cruises to Second Term in El Salvador

Episode Date: February 6, 2024

Plus updates from Jerome Powell, US jobs data, and Chinese stocks. 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 Monday, February 5th, and today we are catching up on the macro and then looking at El Salvador. 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. Okay, friends, so like I said, we're starting off with a little bit of everything this week, but we are going to kick it to the macro side first. On Friday, the Bureau of Labor Statistics released a scorching hot jobs report for January.

353,000 non-farm payrolls were added for the month, which was almost double the Dow Jones estimate. Unemployment held steady at 3.7%, defying predictions of a slight uptick. Wage growth showed hourly earnings increasing at a 0.6% pace, which was twice the forecasted rate. The one disappointing statistic among the headline figures was average weekly hours worked, which declined slightly to 34.1. Across all of this, job gains were broad-based,

led by the professional services sector with strong contributions from health care, retail trade, government, social assistance, and manufacturing. Daniel Zhao, lead economist at Glassdoor said, this just reaffirms that the jobs market is entering 2024 on solid ground. The fact that job growth was so widespread across industries is a healthy sign,

Coming into today's report, we were concerned about how concentrated jobs were in really just three sectors, health care, education, and government. While it is great to see those sectors drive job gains, there was no guarantee that would be enough to support a healthy labor market. Now, at last week's Fed meeting, Jerome Powell was very clear that he wanted to see more data before committing to the first rate cut. He took the March meeting off the table suggesting that the data would not support rate cuts that soon. The strongest jobs report in 12 months seemed to validate that call, suggesting there is no slowdown currently present in the data. more than a year of the economy remaining strong, it's beginning to be difficult to find a negative

narrative without outright rejecting the data. In response to this report, Zero Hedge pointed out the massive seasonal adjustment required to offset the end of temporary work for the holidays. This year, there were 2.9 million jobs artificially added to the total for data-smoving purposes. Many noted that without the seasonal adjustment, every January would technically be a recession just due to seasonality. Zero Hedge even supplied a chart demonstrating that this month's seasonal adjustment is nothing out of the ordinary. Bloomberg economist Anna Wong has recently been questioning whether the BLS is accurately accounting for the effects of business formation. New business registrations are dealt with by assuming the average number of hires for the

relevant sector, known as the birth-death model. Wong pointed out that a huge amount of recent business formation were from self-employed workers engaged in gig work, which won't have any additional employment associated with them. Regarding the latest data, Wong wrote, we are changing our Fed call to a cut in May on the basis of this jobs report. We have doubts about the January blowout, but the revisions for 23 show a hotter labor market, though even further boosted by birth-death model. So that was Friday, but then on Sunday, Jerome Powell made an appearance on 60 minutes, seemingly to reinforce the message from last week's Fed meeting. He underscored that the economy is strong, inflation is cooling, but interest rate cuts are not on the table for at least

the next few months. Now, it's worth noting that Powell rarely sits down for televised interviews, unless it's critical that the general public understand what the Fed is up to. His most notorious appearance was in 2020, while the U.S. was in the grip of brutal deflation and the Fed was desperately trying to stimulate consumer spending in retail investment using QE. During that interview, he insisted that the Fed really is printing enough money to flood the system. This time around, the narrative seemed to be that a few more months of interest rate pain really are necessary to kill off inflation. High rates are already causing a crunch across credit card balances and new consumer loans, leading to outcries around the country. Still, Powell repeated his main point that the Fed

needs more time to develop confidence that inflation is returning to 2%. He added, Interest rates always include an estimate of future inflation. If that estimate is 2%, that means you'll have 2% more than you can cut in your interest rates. The central bank will have more ammunition, more power to fight a downturn if rates are a little bit higher. The alternative would be buckling to pressure and cutting rates sooner, which Powell said, quote, could just halt the progress.

I think more likely if you move too soon, you'd see inflation settling out somewhere well above our 2% target. Overall, he said, we have to balance those two risks. there is no easy, simple, obvious path. Now, the other point Powell wanted to address was the risk of perceived political interference. As the election approaches, the speculation has been swirling that the Fed is planning to cut rates in order to give Biden a late-stage boost in the polls. Powell said that politics is never considered in Fed timing, adding, I would just say this, integrity is priceless, and at the end, that's all you have, and we plan on keeping ours. Finally, Powell touched on the

government debt, which has been piling on at an alarming rate in recent years. He said, the U.S. federal government's on an unsustainable fiscal path, and that just means that the debt is growing faster than the economy, so it is unsustainable. Powell said this worries him in the longer term, adding, you know, we're effectively borrowing from future generations. It's time for us to get back to putting a priority on fiscal sustainability, and sooner's better than later. Now, markets did not respond well to this.

Out of all of this, what markets chose to pick up on was the fact that while they had been pricing around six rate cuts in, Powell seemed to suggest it was going to be more like three. What's more, the estimated first cut has moved out from March to May and now, for many, all the way back to June. Now, U.S. stocks weren't the only that saw wobbles on Monday. China stock market opened with a bang, with the broad SCI-1000 index crashing by 8%. The SCI-1,000 is designed to capture small-cap stocks traded in Shanghai. Almost 30% of stocks underlying the index were halted due to volatility in the opening hours of trading. The index is now down 21% in the last 10 days and 30% for the year.

In recent weeks, Beijing has discussed setting up a stock stabilization fund to address the route in Chinese stocks. The government again pledged to intervene on Monday morning, but no policy action has been taken so far. Part of the issue has been traders betting that larger names will get the bulk of the support once Beijing finally intervenes, leading to heavy betting against small-capped stocks. Ken Wong of East Spring Investments said, The medium cap and the small caps are under intense selling pressure, as some investors have been betting on more national team support for the big caps, the long CSI-300 and in short CSI 500 and CSI 1000 trade has been one such popular trade.

Now, many appear convinced this will be the final drawdown before policy intervention. David Chow, a strategist at Invesco, said, whether or not today marks the floor to Chinese equities is yet to be seen. But it sure feels as though we're bumping along the bottom as policymakers have signaled they no longer want to see any further declines. With Chinese stock indices at five-year lows, the question is rapidly shifting from whether Beijing will intervene to whether they will have the firepower to put a floor under the collapsing stock market.

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Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, Crakin. Now, our main story for today does kind of keep the international and big picture theme, but connects it more directly with Bitcoin. Naï Bukele has declared victory in the El Salvador presidential election.

He won in a landslide on Sunday with more than 85% of the vote. He will commence his second term as president in June. Now, of course, beginning his first five-year term in 2019, Buckele embarked on a radical reform policy. He cracked down on two major gangs and helped reduce the murder rate by over 90%. During his first term, El Salvador went from one of the most dangerous countries in the world to having a murder rate only slightly higher than Canada. Now, of course, his most noteworthy policy for our industry was leading El Salvador to become the first country to adopt Bitcoin

as legal tender. Despite warnings from the IMF and World Bank, Puekele stuck to this policy throughout crypto-winter. By all accounts, Bitcoin adoption remains low among nationals, but the policy has attracted tourism and immigration, as well as kick-starting financial industry reform. Puekele's campaign slogan during his 2019 campaign was, money to go around as long as no one steals. By encouraging Bitcoin adoption, Buckele has helped reshape El Salvador in that direction. Now, of course, Buckele's reform policy has been heavily criticized by Western media, who have often called the president an authoritarian dictator. His gang crackdown led to a startling 1 in 45 adults being imprisoned, often with very little

by way of due process. Buckele, for his part, has leaned into the criticism, at one stage calling himself the world's coolest dictator. The latest controversy was Buckele's re-election campaign itself. El Salvador's constitution does not allow presidents to serve a second consecutive term. This measure was first put in place in 1962, following the end of one of the nation's many periods of military rule. After stacking the Constitutional Court with new appointees in 2021, Buclei was able to circumvent this limitation. The court introduced a novel interpretation of the Constitution that same year. This ruling allowed a president to stand for re-election, providing they resigned from office six months before

inauguration day. In addition, a redrawing of political divisions last year has meant Buckele's party and waive us ideas will occupy almost every seat in Congress. Anna Maria Mendez, Dardon, director for Central America at the Washington office on Latin America, warned about the dangers of the landside victory, saying, one of the risks of this election is that El Salvador becomes a one-party system. Buckele has almost completely displaced the political opposition. Juan Papier, the America's deputy director at Human Rights Watch, took a more historical view. Noting, Latin American history is full of authoritarian leaders who use their initial popularity

to undermine the checks on their power. And when they are no longer popular, they are able to keep themselves in power to silence criticism to repress demonstrations, and citizens have nowhere to turn. Jorge Quaylar, a professor of Latin American studies at Dartmouth said, were moving towards a one-party state with only a semblance of democratic legitimacy. But at the same time, Jorge noted, people have a sense of security now and safety that they hadn't felt in quite a long time. So we can't discount that. Bitcoiners are, of course, extremely excited. With, for example, Nick Carter writing, the liberal position against Bucheli's second term is strictly speaking anti-democratic. The American left is demanding that their

constitutional interpretation should overrule the wishes of at least 70% of the population. Now, you may think constitutional norms should overrule an enormous popular landslide, and you might have good reasons for that, but you cannot claim to be on the side of democracy when you make that claim. The White House for its part seems to be acting very cautiously and deliberately. Secretary Anthony Blinken tweeted, Congratulations to President-elect Naibo Kelly of El Salvador on his electoral victory. We look forward to continuing to prioritize good governance, inclusive economic prosperity, fair trial guarantees, and human rights in El Salvador under the root cause.

strategy. Now, one more global story, this time strictly focused on crypto, the Hong Kong government is moving to the next phase of establishing crypto regulations, giving crypto exchanges a firm deadline to register or leave the city. In an official blog post, Christopher Hui, Hong Kong secretary for financial services in the Treasury, wrote that existing crypto service providers have been given a grace period to come in and register. He added, if these service providers would like to continue their operations in Hong Kong, they have to submit their license applications by February 29th this year. If firms are unable to meet the requirements of licensing, they will be issued a notice, directing them to cease operations within three months. The first batch of unlicensed exchanges will be

forced to shut down by the beginning of June. He wrote that regulators are already preparing for enforcement work, including issuing notices to disapprove service providers, and stepping up publicity efforts to inform the public. His post reiterated the official position that many digital assets have, quote, no intrinsic value, and that only officially licensed platforms should be used. The government official also noted that regulators are currently looking into regulating over the counter-trading venues. He noted that OTC venues have played specific roles in some fraud cases involving trading platforms over the last year, and regulators will begin a consultation process on OTC regulations later this year. Now, ultimately, you have to remember that the regulations in Hong Kong

are a lot better than what we thought we were going to get. However, as you can tell from the tone here, it's hardly going to be some Wild West Traders' Paradise. Lastly, today, Coinbase analysts expect that downside pressures on Bitcoin are becoming exhausted. Their weekly market report said, technical factors pressuring crypto performance to the downside are starting to be exhausted in our view, which may give way to a more supportive trading environment in the weeks ahead. Alongside technical factors, the report highlighted that the FTX estate has now sold its GBTC holdings, which amounted to around $800 million worth. Now, this report was published before incoming GBT selling pressure from the Genesis estate was reported, so that could, of course, change things. Analysts, however,

noted that ETF flows are now firmly positive averaging almost $200 million per day over the past week. Total net inflows since the ETF launched are now at almost $1.5 billion. The report concluded that overhangs are now largely out of the way, leaving Bitcoin to respond to macro events. Consequently, they wrote, we expect macro factors to become more relevant for the digital asset class in the weeks ahead, which could be supportive for performance. The report zeroed in on the beginning of Fed rate cuts as a big positive catalyst for Bitcoin, and although last week's FOMC meeting took March cuts off the table,

analysts suggested that starting in May wouldn't meaningfully change the nature of cuts as a macro tailwind for Bitcoin. They wrote, in the U.S., the likelihood of a soft landing seems higher than it was a few months ago, with the economy ostensibly making only minimal tradeoffs between activity and inflation. The report also contemplated that rate cuts will now likely just be a few weeks after the Bitcoin having. They wrote that this confluence of news events alongside a lack of downward pressure, quote, could potentially prop up both Bitcoin and other tokens in Q2 2024. Now, that Genesis story that could spoil Coinbase's thoughts

is basically that bankrupt crypto lender Genesis has asked the judge to approve the sale of their Grayscale holdings. They currently own $1.4 billion in GBTC shares, as well as $200 million worth of Grayscale's Ethereum and Ethereum Classic products. The GBT shares formed part of the collateral which was pledged to Gemini as part of the Gemini Earned loan agreement. A further $1.2 billion worth of GBT shares is currently in dispute, having been pledged to Gemini but never transferred. Gemini called the sale an important step forward in the resolution of the bankruptcy. The filing included a request for permission to purchase Bitcoin or Ethereum using cash on hand in advance of settlement, presumably to hedge price risk. Some have interpreted this as an

indication that Genesis intends to repurchase Bitcoin immediately in order to distribute crypto-in-kind to its creditors. The application provides no indication that this is the case, but the wording is not entirely clear. Now, the Genesis Bankruptcy plan has not yet been approved by the court, with a hearing scheduled on February 14th. Gemini customers, the majority creditor in this case, have voted to accept the plan. Genesis has asked for the issue of liquidating GBTC shares to be heard separately in a hearing on Thursday. If approved, the sale of those shares could begin by the end of the week. So, friends, that is the outlook from here. Like I said, kicking it off with kind of a macro setting. And like Coinbase's report points out, the more that we move out of this forced selling

period, even though it looks like there may be at least one more burst there, the more we will be back to tracking what's going on in the wider world. For now, however, I want to say one more big thank you to today's sponsor, Cracken, go to cracken.com and see what Crypto can be. Until next time, be safe and take care of each other. Peace.