GFC versus 2023
It looks like the contraction in the US economy is starting to show. However, a recession is not expected at this time. Comparing past eras and recessions might suit human psychology, but it will undoubtedly be different. But most likely, the Federal Reserve will continue to raise rates until something materially breaks.
We had a banking crisis, which is fundamentally different from 2008. In 2008, we had mortgage defaults and saw a ripple effect with a drastic drop in property prices. At the same time, banks recorded heavy loan losses on their balance sheets. The SVB was fundamentally different, with depositors panicked by severe unrealized losses on their cash portfolio.
To start the week, we had the announcement from OPEC+ to cut over 1m bpd starting next month, while 2m bpd will be cut from October. CryptoSlate analyzed the repercussions of these cuts; not only does this pure demand signal collapse. It also left the Biden administration struggling after tapping into the strategic oil reserve while failing to tap the reserves when prices were breached. WTI Crude Oil (NYM $/bbl) ended the week at $80/bbl from as low as $67, with some analysts expecting triple digits.
America’s manufacturing industry is collapsing
The ISM manufacturing survey for March continued its decline, remaining in the contraction zone of 46.3, below expectations. Additionally, JOLTS data printed 9.93 million against the expected 10.5 million. This was the smallest print since April 2021. While every part of the ISM Services PMI also continued to decline. New orders are down to 52.2 from 62.6.
Unemployment at historic lows
Surprisingly, unemployment fell to 3.5% from 3.6%. At the same time, the US Bureau of Labor Statistics employment report showed 236,000 non-farm payrolls added for March. Economists were counting on 239,000 jobs.
As a result, we now see a 69% chance of another 0.25 rate hike at the May FOMC. This would bring the federal funds rate to over 5%.
Fed balance sheet update
The Thursday afternoon eve of the Fed’s balance sheet is now becoming a major event. The Fed’s balance sheet fell by $74 billion this week, reduced by about $100 billion in the past two weeks. The Fed’s balance sheet is now shrinking faster than before the SVB collapse.
This shows that fewer banks and fewer troubled assets are needed to be supported by the Fed. In addition, BTFP lending fell from $64.4 billion to $79 billion as Fed discount window utilization fell to $69.7 billion from $88.2 billion. dollars.
It is safe to say that this was not a round of quantitative easing, but short-term emergency loans that will be repaid.
But the main issues here are quantitative tightening and the drain of liquidity from the system. We have seen the fastest tightening cycle in history; Money supply as measured by M2 has fallen 2.5% since last year, the biggest deterioration since the Great Depression of 1929.
Even small contractions in the money supply can cause big economic problems and lead to bank runs. You would assume that banks will start to reduce their lending and hold more cash, which could lead to a credit crunch. There is no doubt that lending standards will tighten.
Bitcoin against M2
In the short term, it is very difficult to give definitive answers about a credit crunch, a recession, and whether Bitcoin will exceed a certain price target. But we defend Bitcoin because it’s an asset that lets you ignore all the macro uncertainty and geopolitical games and focus on the bigger task at hand. An asset without counterparty risk does not suffer from the contagion potential of TradFi assets.
The long game is that the money supply will continue to increase; the balance sheet will grow, inevitably swelling all our assets.
CryptoSlate has analyzed the major assets against the M2 money supply, and it is clear to see a winner in this game. The illusion of printing money makes you think you are getting richer; however, in real terms, you don’t even stay afloat.
Bitcoin remains the number one asset to keep you ahead of currency devaluation.