The Breakdown - Q4 GDP Was Better Than Expected: What Does It Mean for Rate Cuts?

Episode Date: January 26, 2024

NLW explores the most recent macro news stories, including a look at Q4 GDP which came in stronger than expected. Swan also announces Swan Mining. 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 Friday, January 26th, and today we're talking GDP. 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 at the show notes or go to bit.ly slash breakdown pod. Hello friends, happy Friday. We are diving right into another combined macro and crypto show, and we are starting off on the macro side of the house. On Thursday, the Bureau of Economic Analysis

released their first estimate of Q for GDP growth. Real GDP increased at an annualized rate of 3.3% for the quarter, putting full year growth for 2023 at 2.5%. That's a massive increase from the 1.9% measured in 2022 and exceeded all expectations. Forecasters were anticipating quarterly growth at 2%. And looking back at projections before the year commenced, most economists had a recession as their base case. Strong growth in Q4 was attributed to a number of factors. Personal consumption growth came in at 2.8% annualized, outperforming forecasts of 2.5%. Build out of factories and industrial plants underpinned a solid rate of non-residential fixed investment. Wholesale trade industries led an increase in inventory investment, and perhaps most notably, government spending increased

at 3.3%. Now, core PCE inflation, the Fed's performance. preferred measure, has now settled to 2% for the second quarter in a row right on target. And through all of this, some economists are holding on to the recession forecast, but are pushing it out into this year. Bloomberg economist Eliza Winger wrote, Most economists have walked back their recession calls, but were still not convinced. GDP could slow meaningfully in the first half of 2024, given rapid cooling in the labor market and concerns about credit availability and consumer demand. Others are noting that this environment of moderate inflation and strong growth could give the Fed

license to drop rates slightly. Chris Lowe, the chief economist at FHN Financial, wrote, The Fed has already explained why easing makes sense even if economic growth is strong, but not willy-nilly rate cuts. Today's GDP release, while it is 2023 data, reinforces the logic behind the Fed to a cautious approach. Now, the data for this quarter looks a lot like the soft landing the Fed has been aiming for. FT Alphaville even printed an article making that point that if Team Transitory was right, the Fed can cut rates whenever it wants.

Now, the next Fed meeting is scheduled for next week with no expectation of rate cuts. The following meeting in March is believed to be the first live meeting, with split expectations on whether the Fed will begin cuts or hold rate steady into April. Jason Furman sum things up. Overall, the economy is doing really well with strong consumers making up for weak businesses and even weaker housing, which is to say, monetary policy only partly offsetting the fiscal explanations and other positive factors for demand. Still, if that was a rosy take, there was more salt out there than anything else.

Sven Henrik, for example, tweeted, today we get to see the best GDP report a half a trillion dollar deficit in one quarter can buy. Indeed, Mark Dow pointed out the salty environment saying, never seen strong economic growth anger so many people. Now, staying over in this world for just a minute, the Fed has announced that the bank term funding program will wind down this year as originally planned. The BTFP was established in March of last year to help people deal with regional banking failures. The idea was to allow banks to lend against their portfolio of devalued government bonds at full face value in order to access emergency liquidity. This would allow banks to service withdrawals without needing to sell their bond portfolios at a loss

and realize that impairment. The BTFP was intended to operate for a year, but many assumed the facility would be extended. Regional banks are still under significant pressure, primarily due to distress in the commercial real estate sector. Interest rates also remain at similar levels as they were in March of last year, so the impairment of bank's bond portfolios likely hasn't been meaningfully repaired. Michael Barr, the Fed's vice chair for supervision, said earlier this month, the BTFP was really designed in that emergency situation. It was designed for that emergency to say, we want to make sure that banks and creditors of banks and depositors in banks understand that banks have the liquidity they need. Now, the BTFP will stop making new loans on March 11th. In addition, interest rates on new loans

have already been raised from their discounted levels to ensure there is no arbitrage opportunity as the facility has wound down. Previously, banks were able to borrow the cheap funding and then deposit it with the Fed, capturing around 50 basis points in additional yield. The facility currently has 161 billion in loans outstanding. Very little in additional lending was done since the banking crisis abated last summer. However, around $40 billion was loaned from the facility over the past six weeks, which appears to be related to banks taking the final opportunity to arbitrage the yield differential, rather than signaling another wave of distress. Stephen Kelly, Associate Director of Research at the Yale's Program on Financial Stability, said before the announcement that he

suspected the Fed was, quote, not happy with the current state of BTFP activity. He said of the changes, it doesn't surprise me given the negative press and the very real arbitrage that presented itself. The Fed doesn't want to be in the business of printing money in this way for the banks. Now, the negative press he's referring to is likely last week's economist, which called the BTFP a, quote, free money machine for banks. Derek Tang, an analyst at forecasting firm, L.H. Meyer, reinforced this point, saying that the arbitrage in the borrowing rate, quote, gave banks free profits, which is not a good look politically. Now, in its press release, the Fed made the pointed comment that, quote, after March 11th, banks and other depository

institutions will continue to have ready access to the discount window to meet liquidity needs. Although full details of lending from the discount window is delayed by two years, its limited use means it's typically easy to infer when a troubled bank has tapped emergency liquidity based on aggregate figures. This means that the use of the discount window comes with a heavy stigma, with banks often delaying until it's too late. In an attempt to de-stigmatize use of the discount window, the Fed is currently considering forcing banks to access the discount window at least once a year. This rule change would also mean that all financial institutions are familiar with the process ahead of any crisis.

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. And now, friends, we get to move to the exciting crypto side of the world. In a surprise story, Swan Bitcoin have unveiled their new mining division, Swan Mining. Quietly, the business has been operational since last summer and has already built out 160 megawatts or 4.75 XA hash's worth of

mining power, around 1% of the network. That's a similar size to Iris Energy and around 20% the size of Marathon Digital. Swan Mining has already raised 100 million from institutional investors, and plans to continue raising capital to expand operations. Its target is a further 44% growth of mining power by March ahead of the halving. Rafa Zagari, Swan CIO, and head of Swan Mining said, We bring financial expertise in operational excellence, while our investors provide equity capital to our mining unit in exchange for priority on initial payouts and continued shared upside. Now, the development of Swan mining in stealth mode explains the massive $205 million in fundraising conducted by Swan over the past year. Questions were swirling among Bitcoin influencers about

where nine figures' worth of capital was being deployed. Some had even tried to suggest that the fundraising might be an indication that Swan was in financial trouble. However, the rapid buildout of a mining operation to position for the halving easily negates those rumors. Swan said that it has already purchased and taken delivery of the mining rigs required to hit its target of eight exahashes of mining power by March. It claims that 750 Bitcoin have already been mined across seven operating sites both in the U.S. and overseas, with three more sites currently in development. Zagari said, Swan mining developed and deployed at warp speed. Our understanding is that this is the fastest ever initial deployment of hash rate at this scale in

Bitcoin history. Now, Swan Mining will operate as a subsidiary of Swan Institutional, which plans to offer Bitcoin-backed lending, asset management, private equity, and Bitcoin custody. CEO Corey Kippston said, Swan Mining is a great example of our company thesis playing out. According to a statement from Swan, Series C fundraising is planned for the coming months, with the ultimate goal to take the firm public within the next year. By and large, the community has been really excited and welcoming. Kent Halliburton, from Saz mining said, welcome to the mining community, Swan, glad to have another quality player in the space. Guillaume Gerard, who does mining research at Galaxy Digital, said,

that's possibly the fastest ramp-up in hash rate for a U.S. company ever. Now, of course, the other story that everyone is paying attention to in crypto continues to be around the ETFs, and more specifically, outflows from the Grayscale Bitcoin Trust. Those outflows continued to slow on Thursday for a third day in a row. Yesterday, $394 million was redeemed from GBTC, down from a peak of $640 million on Monday. The bad news is that inflows into the other ETFs are falling even faster. The BlackRock product, for example, underperformed its average on Wednesday, receiving only 66 million worth of inflows.

That made Wednesday the largest single day of net outflow since the ETF's debut two weeks ago, with 158 million coming out of the group of funds. Thursday flows were closer to neutral, with the nine new ETFs falling just short of keeping up with redemptions, resulting in an $80 million outflow. Bloomberg's senior ETF analyst Eric Baukunis encouraged everyone to take a step back and look at the bigger picture. He tweeted, The good news, GBT outflows trending down.

The bad news, so are the nines. That leaves us with total rolling net flows of plus 744 million. Also, ARC and Bitwise crossing half a billion is remarkable. For any normal launch in its first month, that's considered blockbuster level success. On top of that, JPMorgan analysts have said that the institutional selling of GBT has likely concluded. Analyst had been monitoring the GBT discount trade, which they estimated at around $3 billion in size late last year. A note published on Thursday said, given $4.3 billion has come out already from GBTC, we conclude

that profit taking has largely happened already. Now, one of the other things that people have been asking about is whether retail was involved at all with this ETF launch. And it really doesn't seem like it. Deutsche Bank has released a survey showing frosty retail investor sentiment. 2,000 retail investors were surveyed across the U.S., the UK, and Europe shortly after the approval of spot Bitcoin ETFs. Over one third of respondents said they believe Bitcoin prices will fall below $2,000. 20,000 by the end of the year. Less than 20% expected Bitcoin to go up this year. 42% of participants said they don't even think Bitcoin will exist in the coming years,

answering that they, quote, anticipate its disappearance. The report suggested that the average retail investor has been spooked by the high-profile failures of 2022, stating that, quote, more than half of the respondents expressed concern about a major cryptocurrency experiencing a collapse within the next two years. Deutsche Bank, of course, highlighted the collapse of FTX and TerraUSD, as well as ongoing regulatory crackdowns in the U.S. as overhangs which could loom large in the minds of retail investors. The survey seems to confirm what some analysts have been saying about the ETF launch, that flows so far have reflected existing bitcoins shifting over to the new products or adding

to positions rather than an influx of newcomers buying their first Bitcoin exposure. Now, of course, if the prevailing sentiment among no-coiners is that Bitcoin is doomed to fail and likely to fall below 20,000, the question is what it will take to actually get them interested again. And I think what everyone's wondering is will it take actually getting to a new all-time high? Anyways, friends, we were going to wrap it there. As you can hear, I am a little rough around the edges today. But sickness or not, I want to say one more big thank you to the sponsor of today's show, Cracken. Go to Cracken.com and see what Crypto can be. And until next time, be safe and take care of each other. Peace.