The Breakdown - Markets Wobble After CPI Surprise

Episode Date: February 14, 2024

Markets got an unpleasant jolt this morning when January CPI numbers came in hotter than expected. Many investors took it as a reason that the Fed would look to push anticipated rate cuts out further into the year. 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 Tuesday, February 13th, and today we are talking hotter than expected CPI. 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, Breakdown Pod. All right, friends, welcome back to the show.

This morning, we got a bit of an unpleasant surprise with the most recent CPI data. Bloomberg writes, U.S. inflation tops forecasts and blow to Fed rate cut hopes. U.S. consumer prices jumped at the start of the year, tempering hopes for a continued drop in inflation and likely delaying any Federal Reserve interest rate cuts. So in terms of those specific numbers, the overall CPI was up 0.3% between December and January, and 3.1% year over year. The core consumer price index, which excludes food and energy, increased 0.4% from December to January, and 3.9% year over year. That 0.4% increase was both more than expected and the most in eight months. Immediately, markets took this as a sign

that Fed rate cuts, which were already being pushed back in terms of expectations, were likely to move back even farther. Remember, before Fed Chair Jerome Powell's appearance on 60 minutes a couple weeks ago, the market had been pricing in six rate cuts this year beginning in March. After that appearance, markets were pricing in three rate cuts, with most thinking they'd begin in May. After these numbers came out, odds of a March cut were marked down to almost zero, and many are looking even farther out. Kathy Jones, who is the chief fixed income strategist at Charles Schwab said, the Fed will view this as another reason to wait until May or June, but she was still actually optimistic, saying the direction of the trend is still lower. With much of the increase

due to housing, it's a waiting game to see when those costs will come down. Now, what she was referring to was that shelter prices, which are the largest category within services, went up 0.6% month over month, which is their biggest increase in about a year. writes Bloomberg, economists see a sustained moderation in this area as key to bringing core inflation down to the Fed's target. Excluding housing and energy, services prices climbed 0.8% from December, which was the most since all the way back in April 2022. Now, to some extent, as much as this pushes rate cuts out, the Fed seems to me to have been signaling that this was the most likely outcome anyways. Once again, it is felt to me like markets were getting

out ahead of themselves and making guesses around what they wanted the Fed to do rather than what the Fed was actually likely to do. Still, of course, in the immediate aftermath of this, SMP 500 futures plunged, Bitcoin cratered down below 50,000 again, and in general, markets prepared themselves for disappointment. Now, speaking of Bitcoin, up until this news, Bitcoin had held above 50,000 throughout the night and into the morning. It is worth noting that throughout its history, Bitcoin has only spent 100, 143 days above 50,000, so price discovery above this point is fairly open. 58,000 appears to be the next major level, representing multiple tops and bottoms throughout 2021. Currently, the Bitcoin Fear and Greed Index is topping out in extreme greed.

This metric has questionable predictive value, but it is currently showing a level not seen since November 2021. Importantly, Bitcoin markets have changed entirely since the last trip above 50,000. During 2021, price action had been propelled by a ton of embedded leverage. The grayscale carry trade had only broken down in February that year when GBT traded at a discount for the first time. In addition to this leveraged hedge fund trade, a huge number of crypto lenders had sprung up, eagerly lending out the crypto holdings of retail customers. Luna was only beginning to hit high gear with few doubting the soundness of algorithmic stable coins, Fed rates were still at zero and the money printer was still going burr, and of course, SBF was betting on everything with 100x leverage

as much as he could, including unfortunately with all of our orange coin. Now, this time around, Bitcoin is rising on the back of a relentless spot bid from the new ETFs. Wall Street is getting its first taste of number go-up technology. PLEBs have been stacking sats throughout the winter, and 80% of Bitcoin has been sitting in cold storage for six months or more. You still have to scroll down to find Coinbase on the App Store and interest in searching the term Bitcoin has barely moved on Google trends. As Blockworks, Mikey Bolito writes, Bitcoin at 50K, no MSM coverage, no text from family, timeline is unbothered. Man, this is a good time to be alive. Adding more to that, CoinChair's latest fund flows report has confirmed what we already knew,

that crypto funds had a gigantic week. Last week, $1.1 billion in fresh capital was deployed into crypto funds, almost all of it landing in the U.S.-based ETFs. Switzerland-based products saw the second largest flows adding $38.9 million. U.S. products now represent around 95% of global flows into crypto funds and 75% of assets under management. Last week's inflows were about a third larger than the previous week, but fell short of the multi-year record set on ETF launch week. now at its highest level since early 2022, reaching $59 billion. Unsurprisingly, Bitcoin continues to dominate the data recording 98% of flows. Short Bitcoin was the only fund category to see net outflows, albeit a tiny $400,000 reduction. Each alt-coin-focused fund recorded net inflows,

with Ethereum and Cardano funds outperforming. The story for the moment is that ETF inflows are accelerating. After two increasingly hot days last Thursday and Friday, Monday's flows fell in between. $493 million was added to the U.S.-based ETFs down from $541 million on Friday. An uptick in gray-scale outflows accounted for almost the entire difference. GBT lost $95 million, which was still low enough to rank among the slowest five days. Overall, Monday saw the third strongest inflows across all ETFs. BlackRock was the clear outperformer registering nearly $375 million in net inflows. That was more than twice its closest competitor fidelity,

and the second largest day of inflows for BlackRock since launch. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life.

Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. 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, DBA, Cracken. Monday also wasn't just a big day for Bitcoin. The enthusiasm of new year-to-date highs carried over into all manner of crypto-related stocks. Micro Strategy popped by 11% on Monday, vastly outperforming the 5% Bitcoin pumps since market close on Friday. Micro Strategy stock is moving in tandem with

Bitcoin with a near-perfect correlation, but often outperforms due to the embedded leverage on the company's balance sheet. With the stock now reaching fresh two-year highs, many are calling on Michael Saylor to double down and add to the company's position by raising additional funds. tweeted, Sailor, can you please issue the common stock faster? Coinbase had a slightly muted day on Monday compared to Bitcoin trading up by only 3.7%. Still, the stock has been running hot for the past week, up 25% since last Monday, which is slightly better than Bitcoin's 17% gain. Coinbase is reporting Q4 earnings on Thursday after the close. Riot Platform's, one of the largest publicly listed Bitcoin miners, is having an outrageously hot period. The stock was up 9.4% on Monday in addition to a

40% gain last week. Marathon Digital is seeing even better price action up more than that. than 64% since last Monday. The MVIS Global Digital Assets Mining Index has more than doubled since the beginning of the year. The huge jump in mining stock could be reflective of the unique return profile in the industry. Unlike micro-strategy, miners are extremely sensitive to Bitcoin's price, especially heading into the halving. According to a research report published recently by Cantor Fitzgerald, almost every publicly listed miner had a post-having cost of mining above 44,000 per Bitcoin. Marathon was one of the higher-cost miners requiring Bitcoin to trade above 50,500 to cover their expenses. For most mining companies, then, Bitcoin's shooting above 50,000 doesn't represent

an incremental bump in profit. Instead, it's the difference between mining profitably or operating at a loss following the halving. One other interesting mining story, according to Bloomberg reporting, Ethiopia is seeing a boom in investment from Chinese Bitcoin mining firms. Following the 2021 ban on mining in China, Chinese firms have been scouring the globe for suitable destinations. Seeking cheap electricity costs in a friendly legal environment, Ethiopia appears to be a new hotspot for Chinese miners. Ethiopia legalized mining in 2022, although it maintains a ban on crypto trading. The nation generates 92% of its electricity using cheap and reliable hydroelectric power. Ethiopia is also currently undergoing an electrification push, adding capacity with a view to rolling

out service to the 50% of citizens who currently live without electricity. One of the projects to recently begin operating is the Grand Ethiopian Renaissance Dam, the largest hydroelectric power plant in Africa, which has been under construction since 2011. Once the project is fully completed, it will double the electricity generation capacity in Ethiopia. According to Bloomberg sources, the state power monopoly has signed electricity supply deals with 21 Bitcoin mining firms, of which 19 are Chinese. One of the benefits in courting foreign mining firms is that electricity bills are paid in foreign currency. This makes the deals look a lot like exporting electricity without the need for cross-border transmission.

Ethiopia is in desperate need, meanwhile, of foreign currency, since defaulting on private creditors in December. The nation is currently in negotiations for an IMF bailout. With an excess of cheap power generation, Ethiopia has become one of the top destinations for new mining equipment, according to mining services firm Luxor Technologies. The concern is that frontier markets often carry a huge risk that regulations will be changed quickly, leaving mining investments stranded. Following the Chinese mining ban, Kazakhstan became the most popular destination to set up new facilities. After acute energy shortage was blamed on miners, however, the Kazakh government imposed strict new limitations in punitive taxes on the industry in 2021. To this day, there are idle mining

facilities throughout Kazakhstan. Nemo Semrette, CEO of local miner QRV Labs, hopes the same fate doesn't lie ahead for Ethiopian miners. Semrette assisted with lobbying efforts to legalize Bitcoin mining and said, Ethiopia is heavily regulated. Introducing a new sector like this has been a big challenge, and we've been working for the last two years to get all the necessary permissions from the government. At this time, the government has paused signing new contracts, saying that that's to ensure a well-controlled and managed process. Miners in Ethiopia are currently being charged a fixed price of 3.14 cents per kilowatt hour for electricity drawn from substations. That rate is similar to the average charge for Texas-based miners, but without the volatility of the wind and solar-heavy

Texas grid. The price is also set to fall once Ethiopian miners begin connecting directly to power plants. Nuo Zhu, founder of Chinese Digital Mining Association, said that some Chinese mining firms are not waiting for government licensing, stating, miners present themselves as factories or agriculture companies. Part of the reason for this brazen disregard for regulations is the position China plays in the economic development of the country. Located in the Horn of Africa, Ethiopia is a linchpin in the Chinese Belt and Road Initiative. Between 2006 and 2018, the Chinese government and financial institutions lent almost $15 billion to Ethiopia for 70 mega projects in the nation. Shu said, the Chinese miners don't have any problems building sites in Africa. It is like any

other Chinese province. So really interesting stuff there, certainly a story I'm going to be watching much more closely. A couple last things before we get out of here. CZ's criminal sentencing has been delayed until April 30th. The Binance founder was set to be sentenced on February 23rd for violations of anti-money laundering requirements and is expected to face up to 18 months in prison, a sentence which he has agreed not to appeal. No details were contained in recent court filings on the reason for the two-month delay. Some are speculating that it is to allow prosecutors to more fully prepare to argue for harsher sentencing. Given that in November, while arguing that CZ is a flight risk, prosecutors had pointed out to the judge that, quote,

the reality is that the top end of the guidelines range may be as high as 18 months, and the United States is free to argue for any sentence up to the statutory maximum of 10 years. Z is currently out on bail, but has been prevented from returning home to Dubai to attend to his family. Finally, Peter Thiel's Founders Fund reportedly allocated $200 million into Bitcoin and Ethereum during the summer and fall of 2023. According to reporting from Reuters, the fund bought $100 million of each of the two major crypto tokens, getting ahead of the ETF hype while Bitcoin was still below $30,000.

Founders Fund has a long history of crypto investing with their earliest known purchase of Bitcoin coming in 2014. The fund liquidated its Bitcoin holdings in 2022 for a $1.8 billion profit. Teal himself has also been an outspoken Bitcoin advocate for many years. During the last run, Teal said he felt under-exposed to Bitcoin, so perhaps this allocation is an attempt to silence that thought this time around. Anyways, friends, that is going to do it for today's breakdown. One more big thank you to my sponsor for this show, Cracken. Go to crackin.com and see what crypto can be. Until next time, be safe and take care of each other. Peace.