Stagflation is likely here, the CPI is staying above 8%, and real inflation is much higher. In a delayed effort to try and bring inflation down, the fed is tightening the economy into what very well could be a recession.
What is stagflation and what constitutes an economic recession?
Stagflation is an economic climate in which inflation is high and the economy is either stagnant or in recession.
A technical economic recession is 2 or more consecutive quarters of negative GDP.
The Current Economic Picture
In 4 of the last 5 recessions, 1980, 1981, 2000, and 2007, crude oil doubled in a year shortly before the economy went into recession. Even in 1989, crude oil had a substantial spike prior to the economy entering recession in 1990.
Today we are getting close to seeing a similar setup, the price of crude went from $50 to $75 in 2021, and is currently at around $120, some analysts think it could get to above $140.
We’re also seeing record high inflation, the last time we saw an inflation spike this drastic was in the 1970s, in which inflation stayed above 5% for almost a decade, getting above 12% on multiple occasions. In this time frame, the stock market peaked in january of 1973 before falling and eventually bottoming out in September 1974.
following the dip, the market didn’t reclaim its highs until the summer of 1980, the good news is that most analysts aren’t expect inflation to stay at these levels as long as they did in the 70s.
To try and combat inflation, the fed is aggressively raising interest rates, and about to start Quantitative tightening (QT) – which essentially means the central bank reducing the amount of assets on their balance sheet, and the amount of cheap capital in the economy.
This reduction in “cheap money” leads to less investment into business and productivity growth. Due to higher interest rates paired with inflation, consumer spending is also starting to fall which will likely hurt companies’ earnings.
Lower earnings mean companies will need to shift their focus from growth to increasing free cash flow and margins to keep shareholders happy, which is already being partially reflected in a cut back on hiring and potentially even lay-offs, this would result in a less competitive job market and maybe even lower wages.
What This Means for The Crypto Market
Because there isn’t as much historical data on crypto during recessions it’s hard to tell exactly how the market will react. The recently very low fear greed index, following the crypto dump which started last fall, suggests that the majority of gamblers have left the market.
JP Morgan recently stated that their price target for bitcoin is $38,000 although that seems to be very optimistic for a short-term target.
The last time the Fed started tapering its balance sheet was post the 2017 crypto crash.
As you can see from this chart, the implications of the fed reducing their balance sheet did not bode well for bitcoin. Historically, risk assets underperform during times of economic uncertainty, and as much as we would love to call bitcoin digital gold, it’s obviously not there yet.
In a recent CNBC interview, Valkyrie CIO, Steve McClung stated that they think the crypto market could potentially lose another 30%, to us that seems reasonable for a conservative estimate.
The Long Term Outlook
while the near term future doesn’t look great, with Ethereum 2 merge expected to happen later this year, layer 2s making great developments for the future, and new Venture capital still currently flowing into the market the long term outlook is still bullish.
Historically these slowdowns can actually be beneficial as they allow the developers and people working in the space to forget all of the noise and focus on developing new innovations.
Compared to the last crypto bear market in 2018 the space is in a much better place, and our long-term optimism is high.
On another bright note, this is the best time for new people to get into the space and start learning and interacting with the technology. Dumb money and speculators are slowly being flushed out and the opportunities for both investors and developers will soon become abundant.