Will the Fed crash the crypto markets? | Interview with Lyn Alden
The federal reserves fight against inflation is far from over. In his latest speech, defense chair, jerome powell vowed to continue tightening monetary policies in order to kill demand and tame rising prices. But how effective are these policies, if you dont, fix the supply side? It you know its hard to have disinflationary growth. I dont think the feds going to be able to normalize interest rates in this video. We sat down with macro analyst lynn, alden, to understand the shortcomings of the feds monetary policies and their impact on the crypto markets. We also try to identify the assets that are likely to come out ahead of this economic cycle before we start dont forget to smash the like button and subscribe to our channel im giovanni your host – and this is a coin telegraph interview. So in his latest speech, the feds share: jerome powell expressed his determination to continue fighting inflation, no matter what so no loosening of monetary policies anytime soon. Apparently, what is your take of power speech and its significance for the markets in the coming weeks and months? So the federal reserve cant do much about the supply side of inflation, and so their main tools are about modulating the demand side, and so what theyre, essentially trying to do is reduce demand, basically try to try to engineer something akin to a a mild recession. In order to to quell that inflation, the challenge with that, of course, is that if you dont fix the supply side, it you know its hard to have disinflationary growth, and you know, a lot of inflationary problems were seeing today are: are global, not just a single Country phenomenon, and so its really, you know kind of challenging proposition for them to do, especially considering how much debt is in the system, and so with powells speech.
He actually didnt really say anything new. There was not really anything new uh said there. No new information um, but it reaffirmed uh his commitment to continue tightening and so in the prior couple months, uh some of his some of his recent language uh. You know talking about basically being data dependent and things like that gave the market the idea that he might be considering you know, slowing down or easing some of his tightening stance uh. But this speech kind of reaffirmed that that no hes still sticking to that that tightening approach, and so my you know, i think the general assumption to go with is that theyre going to tighten until they break something or until they you know they cause recessionary enough Conditions uh and at that point they might pivot, and i think the the biggest challenge under the surface is that until they actually fix the supply side of certain things like energy, especially about commodities broadly and logistics infrastructure. Until that is improved its hard to have a more persistent uh fix to the inflationary problem. Okay now lets talk about crypto, so there is a common expectation that the next bull run will happen as soon as the fed will pivot its monetary policy and stop rising interest rates. So is that the catalyst that we are all looking forward to so, i think, longer term the way i would phrase it is that i dont think the feds going to be able to normalize interest rates and what i mean by normalized.
Is you know if you look back at history? More often than not, interest rates were higher than the prevailing inflation rate. Basically, you know: youd earn uh interest on your treasuries or your bank deposits uh at a rate that was higher than a headline cpi um and for the most of the past decade, thats not been true only for very brief periods of time has that been true. Most mostly weve been in a negative interest rate environment and, of course, with inflation, this high and industry, its still this low uh that that you know that hit pretty extreme levels here in in 2022, and so you know theyre going to tighten policy, but i think The biggest challenge is that theyre going to be unable to quote unquote normalized policy, which means to get back to a period of structural, positive rates and thats because of how much debt is in the system. So if you look at public debt and private debt in the united states, its about 370 percent of gdp – and you have similarly high numbers in in europe and japan right so so, a lot of the major uh developed countries have an inability to get to. You know positive real rates and hold it there and, if thats true – and i think it is then that is that is bullish for more scarce assets in the long term, which would include you know certain types of equities and things like that, but also you know, Includes uh, bitcoin and any other project that is, you know, going to stick around and grow for a long period of time, and so, but if you look in the near term, for example, you know if you look at broad money supply in the united states this Year or bank deposits this year, theyre actually flat uh, you know all all year to date here in 2022.
, so its ironically, the dollar has been less inflationary than bitcoin. You know with like an eight month, uh snapshot and, of course, thats thats. Thats significantly, you know deviates from the normal trend. Usually money supply growth is, you know, maybe seven percent per year on average uh, it spiked over 25 percent during the height of the 2020 and 2021 stimulus uh, but now its its you know, basically running at zero percent and so thats a thats, a tough environment. For bitcoin and you know other assets in the ecosystem, anything anything anything is kind of considered risk on or speculative in any way. But i think that, eventually, when you get to a part where the fed is unable to keep tightening um and you you kind of have it that shift in liquidity uh, then i i think the space – and you know bitcoin, especially and well, see what happens with Other projects, i think that gives them another opportunity for another leg up, but that could that could take you know quite some time to get to so is the fed interest rate policy, the only catalyst that could spark the next bull run or there are other macro Factors or indicators that would also play a role in that, so i think so theres a couple things to look for together, uh, and so one thing i like to point out is that if you look at at the purchasing managers index the pmi, that is a Kind of a measure of whether an economy is accelerating or decelerating, and so, if its above 50, it means its.
You know its its growing and you know if its you know, 55 or 60, then its growing quite quickly and if its below 50 it means its shrinking and if its below you know 45, it means its its shrinking pretty severely and generally, when you look at Pmi cycles for most countries, youll see something like a three year cycle looks like it looks like a sine wave uh going across and if you map bitcoins price onto the uspmi, you have a pretty strong correlation generally rising pmi environments. Basically, periods of economic growth, uh thats when youre getting a positive bitcoin price. When you have a declining pmi, you generally have uh, weaker, uh or or outright falling bitcoin prices, uh and, of course, theres theres high correlation across the whole whole digital asset space um. So if you look at, for example, the 2017 bull run, the fed was tightening policy throughout that entire time they were raising rates throughout the entire 2017 bull run, but they were doing so at a time when uh uh pmis were going straight up. So you had, you know you had fiscal stimulus happening from you know, unfunded tax cuts uh and then you had um. You know the fed trying to tighten policy, and that was that was a very risk on environment. So emerging markets did well, bitcoin did well. Cryptos did well uh stock market in general did well pretty much risk assets across the board did well despite the fact that the fed was tightening because they were, they were tightening in a way that made sense relative to that economic cycle.
The challenge that they ran into by say, late 2018, was that the economy rolled over and they were still tightening and thats when they started to run into turbulence, and they eventually had to pause and what were seeing now is kind of similar, where, except even even More shifted back where they didnt even start tightening until we already got the rollover in the pmi uh and so now, theyre tightening policy into a declining uh economic environment and, i think thats. The toxic combination that until that ends, it is pretty challenging to get a significant and sustained rally. Uh, you know in in bitcoin and the rest of the space, so lets talk a bit more about inflation and specifically about bitcoins relationship to inflation. There is a common perception of bitcoin being a hedge against inflation, but this year we see bitcoin down and inflation up, so is that narrative still valid according to you? So, generally speaking over the past, you know three cycles. If you map bitcoin price relative to broad money, supply growth, its actually very strong correlation, you know, bitcoin does exactly what youd expect it to if, if dollars are being expanded at a higher than normal pace, bitcoin is usually doing quite well as a scarce asset. What we saw is that you know during 2020 and 2021 we have the fastest money supply growth uh in decades, uh and bitcoin uh did amazing, along with most other risk assets, and this year to date, you know, weve had complete cessation of money supply growth in The united states uh, and so its not surprising that we had a rollover in in assets that are basically you know, marketing themselves.
As as these you know, scarce and inflation resistant assets and the challenges that the the actual price increases were seeing, especially around energy, are happening with a lag from that money. Supply growth. So you know a lot of financial assets felt the effects of that money. Supply growth before all these price impacts happened, and now these price impacts are happening and people are saying well why didnt bitcoin protect me from inflation and the main two ones are one that it already did its just that you know in the core. What triggered inflation happened a year or two ago and bitcoin was responding to that. Another issue, i think, is that the word hedge normally describes paying off in the specific moment that something happens right. So if you uh, you know short a stock and then the stock market goes down youre its paying off in that moment. So you know when it comes to inflation. Normally, the things that pay off the best in the moment are ownership stakes in the things that are driving that inflation, which in most cases is energy and energy, related types of assets. So those are generally the best types of hedges youre going to get against inflation, because theyre going to go up specifically at the time where that inflations happening. The way i would describe bitcoin is that its more like long term, protection from inflation, because youre basically buying into a long term scarce asset against an asset that is historically growing and talking about the dollar here, talk growing at seven percent a year or more so In a recent article that i found quite fascinating, you explained that bitcoin has a good chance to establish itself as a successful payment system, specifically because it already established itself as a trustless, decentralized, audible, store of value.
So can you explain what is the connection between between these two very common uh narratives around bitcoin sure, so you know bitcoin and cryptocurrencies that you know they try to fill a couple different roles, and so you know bitcoin focuses on the monetary aspect, and so you Have medium exchange, uh and store value, uh aspects, and it its the narrative around that has fluctuated over time, uh and so early on the the medium exchange. Uh aspect was emphasized, but also store value. I mean you know the whole quote about, like you know, buy some in case it catches on, for example, if thats more about the store value aspect. Whereas you know the idea of e cash and peer to peer payments is emphasizing the medium of exchange elements, and so i think i think satoshi realized early on um. You know in his comparisons to gold and talking about a supply cap that he had to make an attractive asset that someone might want to hold for the long term, because if you have a situation where something is, is optimized to be a medium exchange. But not a store of value um that lowers the attractiveness or merchants to want to accept it. You know if you just if youre just getting something and then quickly convert it away, especially if it historically loses value over time. Then it becomes just the the incentive to accept it is low and then people dont want to hold it.
And if people arent holding it theres, not a strong reason for merchants to want to accept it and so its a negative loop. Whereas, on the other hand, if you have something that appreciates over time and more and more people are holding it and then because it appreciates uh, it becomes a larger and larger share of their net worth uh. Then there starts to become pressure on merchants to accept it awesome thanks a lot for the great discussion, lynn.