The Breakdown - What's More Important: BlackRock Trading Crypto or 7.5% Inflation?

Starting point is 00:00:00 But I still think the impact here is a bit more muted than that January QT surprise. Indeed, if you listen to all the smart observers, what they're focused on is not the potential of problems from rate hikes, but what happens when you remove liquidity from markets? That's, I think, what people are going to be looking out for next. 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, arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, February 10th, and today we are

Starting point is 00:00:44 talking about the weird back-and-forth tension between macro being good and macro being bad for crypto and what it all means. But before we do that, if you're enjoying the breakdown, please go subscribe to it, give it five stars, leave a nice review, or if you want to get deeper into the conversation, join the Discord. You can find the Breakers Discord at the link in the show notes or go to bit.ly slash breakdown pod. As usual, a quick disclosure. In addition to them being a sponsor of the show, I also work with FTX. And one final note before we get into today's fascinating topic. This week, I'm incredibly pleased to have have a special sponsor in Meld. If you've ever wondered how the rich are able to spend their money and still stay rich,

Starting point is 00:01:34 it's because they borrow against their assets. Meld is creating a protocol that can be used by anyone, and which offers this exact service, but in a decentralized way. Users of Meld's protocol will be able to borrow dollars, euros, and other fiat currencies against their cryptocurrencies. If you want to learn more about the first defy non-custodial banking protocol today, go check out Meld.com. That's m-E-L-D.com.

Starting point is 00:01:59 Thanks again to Meld for sponsoring the show. So last night, I was doing a Twitter Spaces discussion with the crew over at Blockworks, and one of the things that came up in a question from Jason Yanowitz over there was how to make sense of the weird dualistic nature of crypto right now. On the one hand, you have this sense that maybe the chickens are coming home to roost, the macro environment isn't looking really good, you've got rates that are likely to get raised later this year and other sort of Fed policy things that could get in the way of a crypto bull market. But then on the other, you have continued interest

Starting point is 00:02:35 from institutions. NFTs booming. All of these positive scenes, right? Over the last two weeks, we've seen Bitcoin recover in a big way and drag some other assets with it. So what's really going on? I think to understand, we need to first look at how crypto has been correlated with the macro over the last couple months. You started to really see this in December of last year. That was the point at which the Fed started changing its tune and came out with their dot-plot predictions that suggested that there would be at least three rate hikes in the year 2022. Markets mostly shrug that off. In fact, they sort of liked that the Fed was finally taking inflation seriously versus continuing to claim it was transitory. However, even at that time, you did start to see markets price in the

Starting point is 00:03:19 likelihood of these rate increases. And it didn't happen all at once. It wasn't some big sort of exodus from risk assets, but if you look at what started to happen vis-a-vis institutions in Bitcoin, coin shares each week publishes their list of whether funds are flowing into or out of Bitcoin and crypto-related products from institutions. Around the middle of December, they started to flow out. And that was some of the first sign that we were clearly heading into a different type of macroeconomic environment. What really started this January off with such an aggressive downward shift was the publishing of the Fed's meeting notes, which showed that they were thinking about not just peeling back support for the market in terms of bond purchases and not just raising rates, but in fact,

Starting point is 00:04:02 going all the way to quantitative tightening. That means selling assets, removing liquidity from the markets. After previous episodes of QE, they had not shifted to QT so quickly, and markets did not like that at all. That's why we saw such an exodus from risk assets of which Bitcoin and crypto were part of that. At the same time, I saw this other thing happen, which was the Bitcoin and Crypto World, kind of almost remember that although it was in some way tied up with those larger macro forces, it was still something that was independent, distinct, long-term focused, and having other types of inputs that determine how the market is doing it at a given time. And I think that's a good set up to get us to this week, where we have two very different forces going on in terms of

Starting point is 00:04:49 whether people are feeling bullish or bearish. So let's talk first, drawing through that macro and monetary policy theme into the discussion of inflation. We just today got the inflation numbers back for January, and inflation hit 7.5% year over year last month. That's the highest growth in inflation since 1982, or four decades, if that's your preferred nomenclature. The year-over-year gain in December was 7% and from December to January over that last month was 0.6%. The so-called core price measure that excludes food and energy, which are considered to be highly volatile, increased 6% year-over-year, and again, 0.6% from December.

Starting point is 00:05:32 Now, importantly, when it comes to inflation, it's often less about the headline number and more about the expectations. And in this case, economists had projected 7.3% year-over-year growth and 0.4% month-to-month growth. What's more, many people went into this thinking that we were going to slightly underperform that, so it was a surprise to the upside. Nexto is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button, and start earning up to 18% annual interest that is paid out daily.

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Starting point is 00:07:00 That's G-E-T-A-R-C-U-L-U-S.com. The breakdown is sponsored by FTX-U-S. F-T-X-U-S is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees.

Starting point is 00:07:39 Download the FTCX app today and use referral code breakdown to support the show. As you might imagine, Twitter went off with a lot of buy Bitcoin-style tweets. Ali Farhad, 79, summed up an entire genre of tweets when they wrote, The Fed printed $7 trillion in a year and now everyone shocked about inflation. Lynn Alden pointed out other dimensions of the historical nature of this print. Writing official inflation currently has its biggest gap over short-term interest rates since 1951. Now, in terms of what's causing inflation, the story's the same as it's been. You take supply constraints as the world came back online.

Starting point is 00:08:20 You match that with massive demand in a surge in household purchases that's based both on pent-up demand from lockdowns alongside government money that was sitting in people's accounts waiting to be spent, and you have, voila, this sort of inflation. And that's been the story for a year or more. But on top of all that, you have the capacity constraints on the supply side being exacerbated by a tight labor market, which was itself made worse by people leaving the workforce around the COVID crisis. unemployment is now around 4%, and that means employers are starting to bid up wages. That's a good thing, right? People being paid more? Well, the issue is, of course, that it comes with consequences. Companies aren't just paying their people more, they're also hiking prices. That sort of positively

Starting point is 00:09:03 reinforcing cycle between increasing wages and increasing prices is exactly how inflation moves from something that is a supply demand mismatch to a much more intractable sort of structural inflation. And it's still gnarly out there. Inflation adjusted wages just had their 10th straight decline following 1.7% in January. That means that even though wages had been moving up so much, they're not keeping pace with inflation. Shelter also saw the biggest jump in rent of primary residence price since May 2001. This in particular has economists concerned because shelter cost increases tend to be stickier. In other words, once prices come up, they don't come back down. There is also the political dimension of this. Inflation is absolutely crushing Biden right now,

Starting point is 00:09:47 and it's not hard to understand why. Food prices are up 0.9% in January, which is the most in three months, and energy prices are up about the same. Year over year, food is up 7%, which is the most since 1981. All this means that Biden's trademark buildback better plan is even less likely to pass.

Starting point is 00:10:06 Overall, though, the biggest impact in the short term is that people are starting to suggest that in March we'll see not just a 25-bases-point hike, but a 50-bases-point hike. Anna Wong and Andrew Husby, who are economists, say January's upside CPI surprise adds strongly to the case for a 50-bases-point hike at the March FOMC meeting. The increase was broad-based, with energy, food prices, and rents-keeping prices elevated, and with some alarming increases in categories not seen before, such as medical services, which has a much larger weight in the PCE deflator, the Fed's preferred price gauge. I think that's true. Certainly this discussion of a 50-bips hike instead of a 25-bips hike in March is the thing that I'm seeing most. on FinTwit, but I still think the impact here is a bit more muted than that January QT surprise.

Starting point is 00:10:55 Indeed, if you listen to all the smart observers, what they're focused on is not the potential of problems from rate hikes, but what happens when you remove liquidity from markets? That's, I think, what people are going to be looking out for next. But there is a whole additional side to the story of what's going on in crypto markets right now, and part of that is institutional interest. Yesterday, one of the biggest headlines was that BlackRock, the world's single biggest asset manager, with 10 trillion in assets that they manage directly, is entering the crypto space with, quote, client-supported trading and then with their own credit facility.

Starting point is 00:11:34 In other words, clients would be able to borrow from BlackRock by pledging crypto as collateral. BlackRock would also allow clients to trade crypto with Aladdin, which is short for asset liability debt and derivative investment network, which is BlackRock's integrated investment management platform, which is an absolute behemoth in the investment space. Now, this comes from sources with knowledge of what's going on, and BlackRock hasn't yet confirmed. However, it also wouldn't be out of the blue. Last June, BlackRock started hiring for an Aladdin blockchain lead. They've discussed Bitcoin in crypto frequently. They started trading CME Bitcoin futures, and they plan to launch an Ishare's blockchain and tech EDF. And, of course, on top of all that,

Starting point is 00:12:15 they own 16.3% of micro strategy. Additionally, other folks with knowledge of these BlackRock plans say they're looking to, quote, get hands on with outright crypto and was looking at providers in the space. And another person says that a working group of, quote, approximately 20 or so is evaluating the crypto space and adds, quote, they see all the flow that everyone else is getting and want to start making some money from this. So what to make of this? Well, BlackRock is not just institutional investors.

Starting point is 00:12:43 It's like sovereign wealth fund shit, insurers, pensions, corporations, asset managers, banks, and official institutions, i.e., government institutions. That means the stakes here are quite different. This is not about giving access to some small group of institutions. It's about enabling nation-state level type actors, giant pension funds, and large banks to manage crypto assets through the same risk and analytics engine that they use for sovereign currencies, sovereign debt, and macro-scale financial assets. Like I said, the Aladdin piece is big, although BlackRock directly manages 10 trillion, the Aladdin platform in 2020, which is the last stats we could find, saw 21 trillion in assets managed. There are huge implications here. Of course, the level one analysis is that

Starting point is 00:13:28 Bitcoin isn't going anywhere when you're creating crypto-collateralized credit vehicles at BlackRock for the likes of pensions and sovereign wealth. The level two analysis, which is probably much beyond the scope of this particular show is about what the implications of that much money and that much financialization coming to the sector really mean. That's something that clearly we're going to have to come back to in a future show. Now, of course, it's not just the BlackRock news that's in the positive side. You continue to see interests coming into the industry through other areas, such as NFTs. There are crypto intersections with pop culture all over the place. And all of this does lead to this weird time where on the one hand,

Starting point is 00:14:07 you have a macro setup that looks rough for all risk assets, not just crypto this year, but on the other hand, you have a lot of these forces which could bring in new money to the space. So what to make of all of this? To me, I think it's clearly another sign that we've broken out of the type of cycle where everything points in the same direction at once. You are going to have macro and micro forces intermingling and frankly competing to be the biggest shapers and drivers of the Bitcoin and crypto industries going forward. What's more, I don't think that you're going to see the same all-in, all-out patterns of people moving into the space and then people coming out that we have in the past.

Starting point is 00:14:45 Especially as we now have different groups from retail investors all the way to the biggest institutions in the world coming in and getting involved, that happens on different timescales and with different sensitivities to those larger macro events. I called 2022 the year of absolutely everything a couple of weeks ago, and to me, this is just more of an indication of that. It certainly won't make you bored. For now, I'm going to say thank you again to my sponsors, nexo.io, arculus, Ftx, and mel.com.

Starting point is 00:15:15 And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - What's More Important: BlackRock Trading Crypto or 7.5% Inflation?

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