The Breakdown - What Davos Man Thinks of Bitcoin and Crypto This Year

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 nexus.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, May 23rd, and today we are talking about what Davos Man thinks of crypto, as well as the markets hope for a relief rally. 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 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.orgly 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. So today we are doing a little bit of a preview of the week to come, and we're going to be focusing on two specific things. The first, is the latest in the macro environment. So much of what's happening in all markets, crypto and beyond, is being shaped now by the complex interplay of expectations around the government's response to, on the one hand, inflation, which has been the dominant force of the last year plus, and on the other, the risk of recession if the tools used to impede inflation are too heavy-handed. There are, of course, a million other macro and geopolitical factors, from supply disruptions based on war in Ukraine, to China COVID lockdowns, and so on and so forth.

Starting point is 00:01:37 But when it comes to U.S. markets, there is a clinging to any sign and signal from the Fed. On Friday at the end of the trading day, there was an unexpected bump in U.S. equities. Many pointed as a source to comments from St. Louis Federal Reserve President James Bullard's comments that hit the wires at almost exactly the bottom. In those comments, he said, first, that we have to get inflation under control. Second, that our goal should be to try to get to 3.5% inflation by the end of the year, and third, that to do that, we should be front-loading these 50 basis-point hikes. But there was a fourth and more positive thing that came from the conversation as well. Bullard said, the more we can front-load and the more we can get inflation

Starting point is 00:02:19 and inflation expectations under control, the better off we will be. In out-years 23 and 24, we could be lowering the policy rate because we got inflation under control. What's notable about this statement is that it was the first time since the tightening cycle began that any Fed official gave any public indication of a reversal or when the tightening might come to an end. What's more, it's coming from Bullard, who has been among the most hawkish policy makers this year, saying, for example, that a 75 basis point hike can't be ruled out. The market took this like a dying man getting a drip of water in the desert, and this week opened with some amount of optimistic expectation.

Starting point is 00:02:57 Jamie Diamond said storm clouds over the U.S. economy may dissipate. And so people are wondering now if we're in store for a relief rally, not a full reversal, but a small respite from the non-stop selling of the last couple months. Alex Kruger did a great little threat on this. He writes, on the Fed, the bottom, and a potential relief rally. Let's start with the good news. There's a traceable local bottom in equities, which barring very negative news, in my opinion, should lead to a relief rally, or at least put the market

Starting point is 00:03:26 crash on pause. And if so, crypto would follow for six reasons. First reason, the Fed. On Friday, right at the 22 bottom, a Fed official acknowledged eventually lowering rates for the first time since the tightening cycle started. Second reason, technicals. The S&P just traded and bounced right off its first major Fibonacci level 38.2. Indices put on a high-volume failure test on Friday break through the lows closed flat, contrarian Denmark traders inches away from turning bullish. Third reason, extremely oversold. Equities just had their longest losing streak since April 1932. Fourth reason, options gamma.

Starting point is 00:04:06 A large rally into Friday's close indicates high odds, a significant amount of puts was not rolled leading to dealers lifting short hedges. This would mean a not-as-negative dealer gamma profile leading to lower volatility. Fifth reason, flows. As per J.P. Morgan's estimates, end-of-month rebalancing flows into equities would be much larger than usual. Sixth reason. Sentiment. We are now in extreme bearish territory. Meanwhile, in the last two weeks, the Fed has clearly signaled it has entered a wait-and-see approach. The Fed is set to increase rates by 50 basis points in the upcoming two FOMCs and evaluate data in the meantime. These Powell comments

Starting point is 00:04:43 from May 17th summit all up. There is broad support on FOMC for having on table 50 basis point hikes at next two meetings. If we don't see inflation coming down, we will have to move more aggressively, while this Mester comment highlights the importance of September. September meeting is the moment to take stock of whether price increases are increasing or decreasing, and how policy should respond. Mester is one of the current eight FOMC voting members and known hawk. In fact, Fed officials are now simply repeating themselves. The only new thing offered has been dovish. Mester, saying financial conditions have already tightened significantly. Powell, saying increase of 25 basis points would likely follow moves of 50 basis points, and then Bullard's comment

Starting point is 00:05:25 from Friday. In summary so far, the market is shifted to a new regime. The shift is likely over. The Fed is now set on delivering 50 basis point hikes on the next two meetings and is waiting for new data to decide how to move next. Now, I will also note back to NLW now that Kruger says thread not over, now comes the bad news, but he has not followed up on that thread yet, so we'll see what he has to say there. So that is pretty much the state of play as it comes to the macro. Stocks are doing well today compared to where they've been, so we'll see if that can hold out. 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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Starting point is 00:07:45 Baby, yes, the World Economic Forum conspiracies are getting extra attention this week, as everyone's favorite to dislike event comes around again. Davos is the nickname for the annual World Economic Forum meeting that takes place in Davos, Switzerland. The meeting was delayed this year, typically taking place in winter. This year's meeting started on Sunday. The controversial W-EF leader Charles Schwab is billing the meeting as, quote, the most timely and consequential annual meeting since the creation of the forum over 50 years ago. The meeting's theme is history at a turning point,

Starting point is 00:08:17 and the agenda will feature Russian war in Ukraine, climate crisis worsening, COVID-19 in the steps needed for greater global resiliency to pandemics, global economic imbalance with too much debt, too much inflation, too much inequality, and not enough growth. Now, it would take a whole slew of podcasts to cover the full depth of how the World Economic Forum in Davos became a rallying cry for the anti-establishment. But to get a sense of where part of that discourse lies, there is a term coined by political scientist Samuel Huntington, the controversial author of The Clash of Civilization,

Starting point is 00:08:51 thesis, and that term is Davos Man. He said that the global elite personified in the concept of Davos Man, quote, have little need for national loyalty, view national boundaries as obstacles that thankfully are vanishing, and see national governments as residues from the past whose only useful function is to facilitate the elite's global operations. However, true or not that might be, there are few of those folks in Davos this year. Bloomberg's headline piece about it this morning was Davos Forum is back with less billionaire star power and no snow. The piece tried to explain why attendance is down. It could be a whole slew of billionaires from Russia are now sanctioned,

Starting point is 00:09:28 or that a whole bunch from China don't exactly feel like showing up right now. But given that definition of Davos Man from Huntington, it might also then be fair to ask whether the reduced attendance in Davos this year is at least in part, reflective of a larger de-globalization, a process that has certainly been accelerated and accentuated this year coming off of Russia's invasion of Ukraine and the West's response to it. But as is clear, this particular set of global establishment folks still obviously command a lot of influence. So one thing I'm watching for this year is the state of the discussion around Bitcoin and crypto.

Starting point is 00:10:02 This was jumpstarted in fine fashion over the weekend when European Central Bank President Christine Lagarde said that cryptocurrencies are, quote, based on nothing and should be regulated to steer people away from speculating on them with their life savings. There has been a ton of attention on IRA plans and other retirement accounts giving people the ability to start investing small portions into Bitcoin. LaGarde told Dutch television that she's concerned about people, quote, who have no understanding of the risks, who will lose it all, and who will be terribly disappointed. My very humble assessment, she continues, is that it is worth nothing, it is based on nothing, there is no underlying asset to ask as an anchor of safety. Of course, for Lagarde, cryptocurrencies are very different than central bank digital currencies. She said,

Starting point is 00:10:44 The day we have the central bank digital currency out, any digital euro, I will guarantee, So the central bank will be behind it, and I think it's vastly different than many of those things. Now, in point of fact, crypto was a secondary question to European monetary policy for Lagarde in this interview. While the U.S. has been tightening, the EU has left negative nominal rates intact. The big news coming out of this interview is that they're likely to leave the days of negative rates by September. LaGarde said, we are going to follow the path of stopping net bond purchases and then sometime after that, which could be a few weeks, hike interest rates. She also said that a 50 basis point hike is not really something on the table. One interesting question here is whether the ECB's slowness with regard to rate hikes and shifting monetary policy,

Starting point is 00:11:27 relative at least to the U.S., comes from a difference in political pressure. In the U.S., we have midterms this year, and the economy is the number one issue for voters. This is why Biden changed his tune on inflation late last fall. I don't believe that Powell is a direct shill for Biden or anything, but I also do think that Powell's political future is to tied up in what happens next with inflation. And even if he is nominally independent from any sitting president, you have to think that there is extraordinary pressure on him right now from the White House. Given the seriousness of some of these issues with the ECB, some commentators were surprised that she spent time talking about crypto. Dr. David O'Lalu wrote,

Starting point is 00:12:06 Instead of focusing on Bitcoin and how it's worthless and must be regulated, ECB's Lagarde needs to worry about the upcoming disintegration of the EU as a block and possible exit of Portugal, Italy, Greece, Spain, as EU is entering a hyperinflation slash stagflation. Is the euro as a project doomed? Whether that's true or not, the ECB really seems to be going in on crypto. Patrick Hansen, who has been an invaluable translator of what's been going on from a European regulatory perspective with crypto all year, did a thread on Twitter summing up a speech from Fabio Panetta, a member of the executive board of the ECB from a recent Columbia University appearance. Here are just a few of the quotes. Crypto evangelists promise heaven on earth, using an illusory narrative of ever-rising

Starting point is 00:12:49 crypto-asset prices to maintain inflows and momentum-fueling the crypto bubble. But appearances are deceptive. Nakamoto's dream of creating trustworthy money remains just that, a dream. He quotes Littlefinger from Game of Thrones, saying, crypto assets are bringing about instability and insecurity, the exact opposite of what they promised. To quote Littlefinger from Game of Thrones, chaos is a ladder. The story does not end well for his character.

Starting point is 00:13:12 And of course, it wouldn't be a regulatory critique of crypto without a comparison to the mortgage market of 2007 and 2008. Indeed, the crypto market is now larger than the subprime mortgage market was when, worth USD $1.3 trillion, it triggered the global financial crisis, and it shows strikingly similar dynamics. He goes on with a critique of defy, of stable coins, of crypto payments, on sanctions, and this one is a real hoot. While we cannot be sure that crypto assets are actually being used by sanction persons or businesses, and nonetheless shows that they provide a potential means to circumvent sanctions. Not to abandon our European crypto friends here, but this sort of commentary and recent pushes around AML and environmental issues kind of feels to me like Europe is on a track to GDPR

Starting point is 00:13:58 itself right out of crypto relevance just like it did with the last tech boom. I hope I'm wrong about that, as I think it would be a shame for the industry and all the innovation that could come from a different perspective, but it's not looking good. Now, going back to Davos for a moment, if Lagarde represents one perspective coming into the event, what are some of the others? Well, there are a number of panels on the official program about crypto-related topics, including crypto-carbon footprints, defy, and more. Brett Harrison of FTX tweeted a photo of the beautiful Swiss Alps and wrote,

Starting point is 00:14:29 The Hills Are Alive, with the sound of debate over cryptocurrency energy consumption, which pretty much sums it up. Meanwhile, expect over the next few days to see headlines about what prominent economists or businesspersons or politicians think about not only Bitcoin and crypto, but about other major economic topics. A piece that hit the wires just as I started to record came from Nobel-winning economist Joseph Stiglitz, who said raising interest rates is not going to solve the problem of inflation. It's not going to create more food. It's going to make it more difficult because you weren't going to be able to make the investments. What I think would be most interesting to me is

Starting point is 00:15:04 whether this discussion of de-globalization actually comes up. Lisa Abramowitz from Bloomberg tweeted this morning, an article from the Financial Times, Globalization's golden era nears its end, business leaders warn. She points out that data provider Centio says that mentions of nearshoring, onshoreing, and reshoring on corporate earnings calls and investor conferences are at their highest level since at least 2005. This seems to be the discussion where people are. Lastly, I will close on this note, bringing it back to crypto Twitter. Even with hope of a relief rally and a good bunch of dunks on the Davos man and woman. There is still a lot of intensity over here. Kevin from Galois Capital, who has been doing the podcast Junket after calling the likely failure of UST and Terra, says,

Starting point is 00:15:52 In the wake of the Terra collapse, I see troubling visions. A third of crypto Twitter, having already gotten out of bed, with pitchforks and torches ready, want to go burn something else down, anything. Another third is despondent, having endless nightmares of bare markets. The last third has grown twisted and nihilistic. They do not even know if they actually exist or only ironically so. They foment chaos. Yet in this chaotic time, there is a great opportunity. All narrative has been collapsed. Little anon, it is your time now. Build the life you want to live. The market is yours. The biggest players have no idea how to play this game. You are the vanguard of a new generation of crypto. Seize the moment and make your mark. Do not follow leaders. Think for yourself.

Starting point is 00:16:32 It is a good reminder and one that I hope you guys take to heart. For now, I want to say thanks again to my sponsors, nexus.io, neir and FtX, and 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. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.

The Breakdown - What Davos Man Thinks of Bitcoin and Crypto This Year

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