The Breakdown - What the US Midterm Elections’ Lack of a ‘Red Wave’ Means for Crypto

Starting point is 00:00:00 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 nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, November 9th, and today we are talking U.S. elections and inflation print previews. 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 in the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure as always. In addition to being sponsored by them, I also work with

Starting point is 00:00:47 FTX, or Binance, or, well, I'm really not sure. So let's start there. And first of all, what a couple of faking tays. It has been headspinning like nothing I've experienced in the five years I've been in crypto. And I think, frankly, it's already in the pantheon of head spinning moments in business in general. I am unfortunately not in a position to talk in-depth about it at the moment. The situation is still rapidly developing from everything that anyone on the outside can tell, so part of this is just not wanting to add rumors on top of what is already chaos. On top of that, of course, I am more personally wrapped up in whatever the heck happens next than than most, and in those in-between moments as deeply frustrating as it might be, especially to a

Starting point is 00:01:26 professional podcaster, saying less tends to be better than saying more. So what are we talking about today then, well, we're talking about what would have been the biggest news in any other moment, which is, of course, the U.S. midterm elections. This election was fairly significant, with both control of Congress and the Senate up for grabs. Polling data from Quinepeic University showed that going into the polling, Democrats had abortion policy and gun violence on their minds, while Republicans were voting for immigration and crime crackdowns. However, one thing that aligned everyone across the political spectrum was that inflation was the most frequently cited top issue for voters. This had caused many to assume that we'd see a red wave, a huge shift to the

Starting point is 00:02:07 political right in these midterms. But that's not exactly what ended up playing out. The results this morning are very mixed. The Bloomberg headline reads, GOP's gain is short of wave as Biden Dodge's worst-case scenario. The New York Times writes no signs of red wave that Republicans expected. The Wall Street Journal, race remains tight for control of Congress. Republicans are favor to win a House majority, but not as big as many in the party had hoped. Basically, right now as it stands when I'm recording, Republicans do remain favored to take control of the U.S. House. However, it won't be by much if it happens, and certainly won't amount to the sort of sweeping gains that many had been projecting. Control of the Senate is

Starting point is 00:02:48 currently still pretty up for grabs, with contests in critical states like Georgia still too far off to call. However, in many ways, from the results that we do have, the notable thing was just sort of the trading off. From the Wall Street Journal. Democrats flipped governorships in two states, while two of the nation's most prominent Republican governors, Florida's Ron DeSantis and Texas's Greg Abbott, cruised to re-election. Georgia Governor Brian Kemp also held on to his seat holding off a challenge from rival Stacey Abrams. End quote. Now in the Senate, so far only one seat is flipped, with Pennsylvania Democrat John Federman beating TV personality Dr. Oz. So if you're wondering what's going on, it feels fairly clear to me that this became a battle between economic policy and inflation on the one hand,

Starting point is 00:03:30 and the galvanized left who felt they needed to come out and fight in the wake of the Supreme Court overturning of Roe v. Wade. In fact, Arthur Herman, a senior fellow at the Hudson Institute, wrote, did Scotus, i.e. the Supreme Court of the United States, cost the GOP of victory in the midterms? One of the races that people are watching most closely, or really one of the politicians people are watching most closely, is Florida's Ron DeSantis. The Bloomberg article this morning read, Ron DeSantis' victory sets him on collision course with Trump. Quote, Trump has already made DeSantis his leading foil on the campaign trail, boasting at rallies of polls that show the former president leading DeSantis roughly two to one

Starting point is 00:04:04 among Republicans. Those who know DeSantis say they believe he'll seize the moment and won't be deterred from taking on Trump. Trump, who's expected to announce his own candidacy on November 15th, has increased his swipes against DeSantis, dubbing him Ron DeSanktonious and threatening to divulge damaging information if he runs. DeSantis already has financial backing from one key Republican consideration. constituency, a wide swath of Wall Street donors and wealthy individuals, some of whom have made clear

Starting point is 00:04:28 that they are not eager for a Trump return in 2024. Many see in DeSantis a candidate who is just as conservative, anti-tax and anti-regulation as Trump, but with none of Trump's baggage. End quote. So obviously, the 2024 presidential elections are going to be an extremely watched race for all business circles. And between now and then, one of the key issues that will come up will be financing issues of the government. The U.S. government is forecast to hit the debt ceiling early next year and will require congressional approval to raise the limit. Recent debt ceiling negotiations have been tense but resolved reasonably. However, in 2011, Republicans used the debt ceiling to extract major concessions from the Obama administration. The U.S. government was partially shut down for 21 days,

Starting point is 00:05:09 furlowing 284,000 workers and seeing sovereign debt default placed on the table by the president. With just two days left until default, an agreement was reached where Republicans would authorize a raise in the debt ceiling in exchange for a dramatic reduction in spending from the Obama administration. The setup for 2023's negotiations looks remarkably similar. After releasing record stimulus in response to pandemic shutdowns, the Biden administration is facing the highest inflation in decades. It has already rolled out major long-term spending packages in the infrastructure bill and the Inflation Reduction Act.

Starting point is 00:05:38 Obviously, as we talked about before, and as we talk about regularly on this show, inflation is a key issue for both Republican lawmakers and their constituents, and excessive government spending is seen as a significant driver of inflation, rightly or wrongly. The issue is that in 2011, the U.S. was in the middle of the recovery from the global financial crisis. While the recovery ultimately rolled over and was seen as unsuccessful in retrospect, the macroeconomic setup was strengthening domestically and could handle a congressional dust-up. This time around, the U.S. economy is weakening after flirting with recession all year.

Starting point is 00:06:08 If Republicans attempt the same gambit as 2023, we could end up seeing a dramatic spending reduction, crimping government support for the economy during a decline. Market participants view a debt-sealing standoff as likely for next year. A recent Bloomberg survey showed that more than half of both retail and institutional investors, see a situation at least as bad as 2011 as the likely outcome, with more than 20% of each category seeing a worst-case scenario on the horizon. With global recession definitively within the range of outcomes over the next year, a global sovereign considering defaulting on its debt could be a catalyst for horrific systemic risk to ripple through the global economy. So that should be a fun one to watch play out in Congress over the next

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Starting point is 00:08:43 Warren Davidson, the author of the Token Taxonomy Act, has retained his seat, as has Republican Patrick McHenry. Patrick McHenry has served as the Republican leader in the House Financial Services Committee during the previous Congress and will likely go on to lead the committee should the Republicans win the House. McHenry has been a key figure in pushing a pro-crypto agenda in Washington and has been a level-headed lawmakers, seeking to ensure legislation does not stifle the growth of the industry. Also worth noting that the Federman's seat that we were talking about before was the seat of

Starting point is 00:09:09 retiring Senator Pat Toomey. Tumi was, of course, one of the fiercest defenders of crypto in D.C., so that shift will be fairly consequential. So far, we don't know what Federman's position on crypto is. A crypto PAC did run ads firm earlier this year, but it wasn't in coordination with the campaign, and the ads didn't have anything to do with crypto. In fact, Federman's campaign took the chance to say that even though he was the subject of the ads, he still believed that PACs were a huge part of the problem in current American politics. Now, when it comes further to the stakes of these sorts of elections, one of the key outcomes will be the leadership of congressional committees. There are major reforms currently in action across multiple committees. Markets,

Starting point is 00:09:45 banking, and crypto reform is being considered in the two finance committees, with the possibility of a multi-pronged approach to crypto legislation with regulation that would assign major oversight over crypto markets to the CFTC being considered in the House Ag Committee. The House Committee on energy and commerce also has its handful between issues surrounding the global energy squeeze and the questions of antitrust action to dampen the impact of big tech monopoly power. By taking either the House or the Senate, the Republicans would be able to install leadership at the committee level that could have a major role in driving the shape of the legislative agenda over the next two years. For crypto control over the committees will be key informing

Starting point is 00:10:18 forthcoming legislation on stable coins, market structure, and possibly even establishing a comprehensive regulatory framework. While Republicans have typically been viewed as more permissive on crypto issues, a split government with no real interest in passing legislation could be counterproductive in failing to establish the regulatory clarity of the industry needs. Although then again, that also seems to potentially have changed this week. One fallout of the FTX collapse could be a shifting in the legislative agenda. Yesterday, the GOP House Agriculture Twitter account wrote, We're paying close attention to this developing news and are supportive of ongoing efforts to bring oversight and clarity to crypto markets. Congressman Glenn Thompson's DCEA is a necessary

Starting point is 00:10:54 step forward to bring transparency to crypto exchanges in the United States. The blockchain association's Ron Hammond quote tweeted and said, Note how the House Agriculture Committee lead Republican Congressman Glenn Thompson is advocating for his bipartisan bill, the Digital Commodity Exchange Act, DCEA, as opposed to the controversial Digital Commodity Consumer Protection Act, DCCPA, which is led by the lead Senate, ag R&D. Indeed, there was a lot of commentary, as you might imagine, from the crypto crowd around legislation over the last couple days. On Tuesday, Jake Chervinsky, wrote, I joined Blockchain Association exactly one year ago today. That week marked the top of the bull

Starting point is 00:11:29 market and the start of 12 months of crypto winter. It's been a cold year for crypto policy and today is freezing, but I still have no doubt that we can and will achieve great things in D.C. Ryan Selkis, the founder at Masari, says there are a lot of freshman senators and congressmen who are pro-crypto and winning their races tonight. The ground game is working. Republican Patrick McHenry recommitted to pushing crypto legislation forward. The recent events show the necessity of congressional action. It's imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S. Now, Tom Emmer, the Republican representative for Minnesota, was more focused on oversight of

Starting point is 00:12:05 regulators, tweeting, Gary Gensler's leadership has been marked by unproductive regulation by enforcement action that has jeopardized public trust and hammered our financial markets. He claims this is only the beginning. I have a message for Gary Gensler. A new day is coming. Now, when it comes to what the crypto industry was looking for, perspectives were a little split. Former acting comptroller of the currency, Brian Brooks said, quote, If you assume that Republicans take one or both chambers, I actually think the chances of bipartisan legislation is pretty high. That is because crypto adoption is fairly high, Democrats realize that, and Republicans are really leaning in. The leadership of the Democrats has been quite hostile to crypto assets from the administration and in both houses of Congress,

Starting point is 00:12:41 so I think it requires at least one house to change hands for there to be momentum. Howard Greenberg of Prosper Trading Academy echoed some of these thoughts, saying a win by the Republican Party would be considered positive for crypto on two different fronts. First, the split leadership is considered to be positive for the markets as the fear of legislation through reconciliation dissipates, and there will be more debate on fiscal policy moving forward. The second positive would be that we have seen many bills on crypto regulations stall out over the last 12 months. The change in leadership in Congress and the Senate could lead to more cooperation and coordination between the parties providing a more conductive atmosphere to get

Starting point is 00:13:12 some legislation passed. Anyways, there is going to be no shortage of interest around crypto legislation going forward, and I'm sure that we're going to be talking more about it. But now let's talk about the other big macro event happening this week. With inflation by far the leading issue for voters on Tuesday, the release of October CPI data on Thursday will be closely watched for indicators that inflation has finally begun to moderate. On that front, September's data was less than ideal, accelerating to 8.2% and exceeding expectations which called for a continued slowdown. This indicated to the Federal Reserve that it needed to do more to bring inflation under control. Indications at this moment look good to some for a minor reduction in inflation.

Starting point is 00:13:51 Economist estimates are forecasting an average of 8% headline inflation, while core CPI, which removes food and energy inflation, is forecast to remain steady at 6.6%. One of the big reasons inflation could begin to moderate from here is the way inflation is measured. October last year was a particularly high inflation month, and month-on-month inflation remained elevated for the next nine months before falling to zero in July. While this wouldn't necessarily mean a decrease in the prices that are squeezing Americans, it would mean that annualized inflation will begin to show a fall off as prices stabilized at elevated levels. Joe LaVorna, chief U.S. economists at SMBC Capital Market, said this looks like, quote, an inflation inflection point. He pointed out that the rate of change

Starting point is 00:14:30 in headline inflation has diverged from the change in core inflation and has now reached the largest speed since 2009. Quote, the last time this happened, core CPI collapsed within nine months. The upshot is that investors and monetary policymakers alike should proceed more cautiously going forward. Related data is also reflecting a slowdown in inflation. The supply manager's survey for the manufacturing sector, which manages prices paid for commercial inputs, moved into contraction last month for the first time since mid-2020. This could indicate that the supply shortage is beginning to clear within the U.S. manufacturing sector. The corresponding survey for services showed a small uptick, which aligns with the narrative that inflation is seen to be moving from goods to services.

Starting point is 00:15:08 CEOs and CFOs reporting their earnings for the third quarter were also flagging easing inflation. The number of executives mentioning lower input prices for commodities and raw materials is rising, according to Bank of America research. More executives are reporting lower materials costs than in any quarter since they started counting in 2017. There were also some indications of a less tight labor market, as the mention of needing to pay signing bonuses to employee staff dropped dramatically from its peak last year. The level is still elevated, but it's now back within a long-term range. J.P. Morgan analysts are ready to call the top for inflation. quote, the disinflation phase has already begun.

Starting point is 00:15:42 Bond yields are likely in the process of peaking out. Inflation prints will be meaningfully lower in three to six months' time. Our economists project U.S. core CPI at 5.3% year-over-year rate in Q1 versus 6.6% currently. Now, of course, other analysts are breaking with consensus and forecasting a hotter than expected CPI reading. The 8% consensus is partly based on the Cleveland Fed's real-time CPI estimate, which is currently sitting a little under 8.1%. Michael Kramer, the founder of Mott Capital Management, noted, quote,

Starting point is 00:16:10 CPI has come in at or hotter than the Cleveland Fed estimates 16 of the last 19 times. Analyst estimates seem too low. Others are pointing out sectors that can contribute to higher inflation moving forward. While rents are beginning to fall in major cities, the rent inflation component is smoothed out over a long period of time, so it will still feed in as higher core inflation until the middle of next year. Javier Blas, an Energy and Commodities columnist at Bloomberg, also noted that the price of diesel fuel had recently spiked.

Starting point is 00:16:37 So the short answer is we just don't know. Inflation is poised to remain high, but whether it surprises to the upside or the downside or is right in line with expectations will be the key thing the market is looking to learn. For now, I want to say thanks again, and an extra special big thanks to all of you, the listeners. I've appreciated all of your reaching out and asking if this affects the breakdown in any way, and the short answer is no. You can still expect the show just the way that it has been every day. So with that, you know what I say next.

Starting point is 00:17:03 Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - What the US Midterm Elections’ Lack of a ‘Red Wave’ Means for Crypto

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