The Breakdown - The US Economy's Declining GDP Surprise

Episode Date: April 30, 2022

  This episode is sponsored by Nexo.io, Arculus and FTX US.  On this edition of the “Weekly Recap,” NLW looks at the surprise GDP decline in the U.S., as well as wraps up other stories from the macro environment, regulatory sphere and around institutional adoption. - From cash to crypto in no time with Nexo. Invest in hot coins and swap between exclusive pairs for cash back, earn up to 17% interest on your idle crypto assets and borrow against them for instant liquidity. Simple and secure. Head on to nexo.io and get started now. - Arculus™ is the next-gen cold storage wallet for your crypto. The sleek, metal Arculus Key™ Card authenticates with the Arculus Wallet™ App, providing a simpler, safer and more secure solution to store, send, receive, buy and swap your crypto. Buy now at amazon.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Consensus 2022, the industry’s most influential event, is happening June 9–12 in Austin, Texas. If you’re looking to immerse yourself in the fast-moving world of crypto, Web 3 and NFTs, this is the festival experience for you. Use code BREAKDOWN to get 15% off your pass at www.coindesk.com/consensus2022. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “I Don't Know How To Explain It” by Aaron Sprinkle. Image credit: skynesher/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.  

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 nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, April 30th, and that means it's time for the weekly recap. 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. and, of course, if you want to get deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.com slash breakdown pod. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX.

And finally, if you are not registered yet, I highly suggest you check out CoinDesks Consensus 2020. It's happening June 9th through June 12th in Austin, Texas this year. And what makes this event cool is that it is really about the full breadth of this space. Everything from Web 3 to Metaverse to Bitcoin and everything else in between. It's designed for newbies, investors, entrepreneurs, developers, and everyone else as well. If you are interested in attending, you can use Code Breakdown to get 15% off your pass. Go to CoinDesk.com slash Consensus 2020. And again, that's Code Breakdown for 15% off.

All right, so this week we are doing a true weekly recap. We're looking at a bunch of the stories from the week, some of which I've mentioned, others of which I haven't spent as much time on. And we're going to start with the numbers and the macro landscape. We continue to be in a scenario where everything, all these markets, technology, the NASDAQ, Bitcoin, is in some way shaped by the broader macroeconomic scenario. And in particular, right now, that means inflation and the Fed's response to it. inflation. This week, however, the big unfund surprise was that US GDP declined 1.4% last quarter. This is the first contraction since COVID in 2020. It's also a big shift from the end of last year when we saw a 6.9% rate of growth. The median economist projections had been a 1% increase in GDP, so clearly this was a miss. The narrative from mainstream media is summarized in this quote from Bloomberg. The report is more an illustration of how GDP calculations tend to be volatile from quarter to quarter, not necessarily indicating weakness in the economy or a sign of a recession. As you can probably tell from my tone, I find this line to be somewhat deserving of skepticism,

but let's dig in a little deeper. The contraction was specifically due to a few things, namely the big jump-in imports and a drop-in exports. There was also a slower build-up of business stockpiles. Overall, trade and inventory subtracted four percentage points from headline growth. On top of that, government spending also declined. That's said, and this is the counter-narrative, real final sales to domestic purchasers, which is a measure of underlying demand, accelerated at a 2.6% annualized rate. This feeds into that narrative I mentioned above. Bill Adams, the chief economist at Comerica Bank said, with strong growth of consumer spending, business investment, and employment in the first quarter, the U.S. economy was not in a recession

at the beginning of the year. Growth should resume in the second quarter as the trade deficit and inventories become smaller headwinds. A substantial drag from trade, a result of weak exports amid a global growth slowdown, coupled with robust imports due to strength in both domestic demand and the dollar, will prove temporary, with trade flows normalizing as the year progresses. Building on this same line, President Biden blamed the contraction on, quote, technical factors, saying in a statement that employment, consumer spending, and investment all remains strong. Now, all of these reasons for optimism are there, and I hate being overly simplistic. But I do have to say, this technical factors talk sounds a lot like calling inflation transitory.

Meanwhile, out in the Twitter sphere, there is a lot of skepticism. Jim Bianco says 2022 is off to the worst year-to-date start for the S&P 500 total return index through April 27th in the last 34 years. worse than 2008, 2009, and 2020. Because of this, there's also a lot of skepticism that the Fed is going to be able to carry through on more interest rate hikes. Uri and Timmer, the director of global macro at Fidelity, says, For the Fed to destroy demand, it needs to tighten financial conditions by raising the cost of capital. It is achieving this now that stock prices are back under pressure.

Zero hedge writes, NASDAQ is on pace for a 12% drop in April, its worst performance since October 2008. Alistair McLeod, the head of research at Gold, money says the Fed has a practical problem with raising interest rates. The entire financial system is based on financial assets as collateral. Collateral is compounded on collateral. Now imagine the consequences of falling values on the entire financial system. That is the Fed's true dilemma. Finally, Travis Kling writes, the tricky part about this setup, everyone, and I mean everyone knows the burr is coming soon. It's inevitable. And everyone, I mean everyone knows that there is nothing on planet Earth you want

to own more than crypto in the period that follows. Basically, the belief, here is that the Fed will have to turn away from its tightening and move back into easy accommodative monetary policy. If that is the FinTwit and Crypto-Twitter take, the traditional market is now starting to believe that in this circumstance, the Fed is likely to front-load half-point hikes next week and then again in June, but then slow back rate hikes to quarter points after that. Obviously, this will be a huge topic of discussion around the FOMC meeting next week. Crypto markets also didn't have a great week, with Bitcoin fairly closely following stocks. Ben McMillan, the founder and chief investment officer at IDX Digital Assets, says,

The key story with Bitcoin price continues to be its correlation with tech stocks, which is at all-time highs. As a result, the slate of tech earnings we've seen this week have been driving the daily trading in Bitcoin. While that's expected to continue in the near term, we do expect Bitcoin's correlation to tech stocks to come down later this year. Looking for ways to step up your crypto game? Then go with Nexo. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily.

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Let's move now to the regulatory side with a story that we didn't have a chance to cover yet. On Thursday, a group of lawmakers introduced the Digital Commodity Exchange Act. It was a bipartisan group that included Glenn Thompson, Republican from Pennsylvania, Ro Khanna, Democrat from California, Tom Emmer, a Republican from Minnesota, and Darren Soto, a Democrat from Florida. The goal is to create a definition for a digital commodity, and on top of that, allow the CFTC to oversee the companies issuing or letting people trade this particular type of digital commodity. In this setup, the Securities and Exchange Commission

or SEC would continue to oversee tokens that fall under U.S. securities law. The bill says the term digital commodity means any form of fungible, intangible personal property that can be exclusively possessed and transferred person to person without necessary reliance on an intermediary. This year's version of the DCEA is an updated version of a bill that was originally introduced two years ago by former Representative Michael Conway Republican from Texas. Glenn Thompson said, closing the spot market gap is an essential piece of the regulatory puzzle, but more work remains. I look forward to working with my colleagues to bring greater clarity to crypto users and creators, and I hope to see it move through the legislative process promptly.

Rokana said to foster American innovation and tech job growth, Congress must establish a clear process for creating and trading digital commodities that prioritizes consumer protections, transparency, and accountability. To me, this is another great example of something that we've been talking about a lot, which is that in the face of the Biden administration, getting coordinated about how it wants to regulate crypto, you're seeing Congress and the Senate rise up and say, hey, this should be elected officials who are doing that.

I think that push and pull and even that tension is a really healthy thing for the industry. Other notable events in the regulatory sphere include Panama, pushing through a crypto regulatory bill. The last time we discussed it, it had passed through one test but still was being debated in the assembly. But as of Thursday night, Gabriel Silva, from Panama tweeted,

Crypto Law approved in third debate. This will help Panama become a hub of innovation and technology in Latin America. Only thing missing is for the president to sign it. Thank you to all who helped. This will create jobs and financial inclusion. Other events include Brazil advancing legislation that would regulate crypto.

New York State declaring a two-year moratorium on new mining using fossil fuels, which as I discussed is both a real challenge but also, I think, an opportunity for the crypto industry. Fort Worth became the first city to mine Bitcoin, and Oklahoma, one I haven't mentioned yet, has approved a Bitcoin mining bill in their state legislature. It aims to provide tax incentives to Bitcoin miners. The bill says blockchain technology used in the commercial mining of digital assets as an industrial process that should be taxed in a manner similar to historical forms

of manufacturing or industrial processing in order to encourage the location and expansion of such operations in this state rather than in competing states. Moving from the regulatory to the institutional side, I continue to be convinced that there is tons and tons happening in terms of institutional adoption, and that it's just happening much more quietly than it used to be. However, Fidelity wasn't totally quiet this week when they announced that later this year, retirement account holders working with Fidelity will be able to put Bitcoin in their 401 case. Fidelity is the United States biggest provider of these types of retirement plans. And while individual employers will be able to exclude the Bitcoin option,

I still think this creates a ton, a ton of new opportunity for would-be Bitcoin holders. Now, there may be a bit of a fight. The Labor Department was not at all happy about this announcement, but by and large, over the last couple years, Fidelity has tended to be the early indicator of where the rest of the institutional world was going. Another interesting story from the institutional side was the Bit Stamp Crypto Pulse Survey. In that survey of more than 28,000 respondents, including 5,000 institutional investment strategy decision makers, 88% of institutional respondents and 75% of retail investors believe that crypto will see mainstream adoption within a decade. 67% of retail and 70% of institutional investors say they trust crypto, and 54% of retail

investors believe cryptocurrencies will overtake traditional currencies within a decade. And then finally, of course, there is the Central African Republic. The country became the second nation to make Bitcoin legal tender. We discussed earlier in the week why this was even more significant, given the CAR's participation in the CFA franc currency union, and why it may be sort of an anti-colonial move. There is a lot more to learn about the CAR, to unpack about this decision. The president of that country is now on Twitter, it's official,

and so I expect that we'll be hearing a lot more going forward. So in many ways as we wrap up, I think this is a quintessential crypto week in 2022. We've got a macro landscape being driven by inflation that shapes everything in markets. We have institutions slowly, surely, surely, and fairly quietly moving into crypto. And we have jurisdictions everywhere, and I mean everywhere, from city level to nation-state level to even bigger than that, grappling and coming to completely different conclusions with what to do about and with this technology. And those three themes, the macro, institutions, and the relationship between governments and crypto are, in my estimation, the three big themes of 2022. For now, I want to say thanks again to my sponsors,

nexus.com. Arculus and FtX. An extra big thanks to Arculus, whose time sponsoring the show is for now, coming to a close today. It's been great to have you as a sponsor, and I encourage anyone to go check out Arculus's products for helping secure your Bitcoin and digital assets. Finally, I want to say thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, Breakdown listeners, come join CoinDesk'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. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.