Yesterday Senator Joe Manchin announced he would not be supporting President Biden’s Build Back Better spending bill. Goldman Sachs cut its 2022 US GDP forecast as a result, but the fallout could be good news for a Federal Reserve that would like to get inflation under control. Will inflation settle down later on in 2022? And how will that affect Bitcoin?
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White House accuses Manchin of betraying “commitments” on BBB: “After months of back-and-forth negotiations and overtures from the White House, Sen. Joe Manchin (D-W.Va.) chose an appearance on “Fox News Sunday” to announce he was torpedoing President Biden’s signature agenda… The unexpected announcement via the conservative-leaning Sunday morning show just days before Christmas sent fellow Democrats reeling.” (Axios)
Goldman Sachs cuts US economic forecast after Joe Manchin rejects Build Back Better: “”A failure to pass BBB has negative growth implications,” Goldman Sachs economists, led by Jan Hatzius, said in the research report. Citing the “apparent demise” of Build Back Better, Goldman Sachs now expects GDP to grow at an annualized pace of 2% in the first quarter, down from 3% previously.”” (CNN)
Fastest Inflation in Euro’s History Set to Raise Pressure on ECB: “Consumer prices in the 19-country region rose 4.5% in November, according to the median of 40 estimates in a Bloomberg survey before the statistics due Tuesday. Every respondent predicts an acceleration from last month’s level of 4.1%, which already matched the fastest since the 2008 financial crisis.” (Bloomberg)
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– [Scott] How’s it going, everybody? Scott Hawksworth here with Cryptogic. Welcome to our first-ever episode. I’m so excited about today’s show. We’re going to be talking about some big events, both politically and in the world of finance. And joining me to offer his insights on all of this is Andy Hagans, who is the co-founder of the Alternative Investment Database.
He’s also the co-founder of Cryptogic. I’ve worked with Andy for a long time. So happy to have him on the show here. Andy, welcome.
– [Andy] Hey, Scott. How are you doing today?
– I can’t complain. I’m just kind of eager to see your thoughts on some of the big happenings, certainly, politically as well.
– Yeah. And it’s interesting how all these current events. I guess you could say I’m hooked into crypto because every current event, I’m like, “Well, how’s this going to affect crypto? How are the markets reacting?” you know…
– Right. And crypto markets never sleep.
– Exactly. Exactly. So, yeah, Build Back Better is pretty much dead.
– Yeah, it is. And for those of you not totally in the loop on that, Senator Manchin basically said he’s not going to vote for it. He’s got some concerns about it and there was a long battle back and forth, but he has said he’s out.
So, Andy, what are your thoughts on this?
– Well, all along, I think there was this mismatch of expectations between some members of the Democratic caucus and others where even as far back as last summer, Senator Manchin was clear that, you know, he wanted a bill that was $1.5 trillion or smaller that didn’t contain a lot of budgetary gimmicks.
In other words, if there were programs that were included that they’d be fully funded for 10 years rather than, you know, having them funded for two or three years to try and game the CBO budget score.
– Right. And then just kind of kick the can and all that. Yeah.
– Exactly. And he’s… So, he’s always been clear about that. And I think he and the progressives in the House were playing a game of chicken where they thought, well, ultimately, if all of this depends on him, because the legislation passed the House, if they have 49 other votes in the Senate and he’s the 50th and then they have, you know, Vice President Kamala Harris as a tiebreaker, in this game of chicken, they bet that he would ultimately fold and fall over.
The issue is, and this is where I think people make the mistake, our politics are so nationalized now, people forget every senator represents a specific state. And in West Virginia, the Build Back Better framework is very unpopular. I think it’s like 70% plus disapprove of Build Back Better in West Virginia.
So, at the end of the day, you know, Joe Manchin had a choice. Did he want to represent his larger party like the National Party?
– Or his constituents.
– Or his constituents. Exactly. So, I’m a little bit confused why the progressives in the house thought that they would win this game of chicken because the reality is, is they had a lot of different spending programs in this bill and they probably could have gotten one or two of them passed if they would have, you know, come to where Joe Biden was, what he wanted because he’s always been pretty clear about what he wanted.
They could have… Maybe it wouldn’t have been half a loaf. Maybe it would have been a fifth of a loaf, but they probably could have gotten a fifth of a loaf, and instead, it looks increasingly like they’re going to end up with nothing.
– Right. And really to tie this all back to, I guess, the main topic today, one of the big things too and why Manchin is saying no to this is there is the inflationary concerns. And kind of tied to that, though, and sort of the other side is, “Okay. Well, how does that impact Bitcoin? And how does that impact, you know, the larger economy?”
Goldman Sachs on this news has actually adjusted their forecasts down in terms of GDP. So, Goldman Sachs has cut their forecasts over the first three quarters here. So, if you’re looking at GDP for the first quarter, it was going to be 3%. Now they’re saying now it’s going to go 2%.
For second-quarter 3.5%, now we’re going down to 3%, and then third, from 3% to 2.75%. So, there’s the other side of this where, yes, Manchin has the inflation concerns and that’s why he’s saying no, but then there’s also that sort of GDP impact. So, I’m just curious to hear your take on that.
– Well, GDP is a function of not only activity in the consumer side of our economy, but also on government spending. So, I feel like that kind of forecasting is really quite simple and quite direct. The government is not going to be spending these hundreds of billions of dollars in Q1 and Q2. What effect does that have directly in our economy?
And so they cut their forecast. But I think if you can zoom out a little bit and look at what the Federal Reserve has signaled, they want to get inflation under control. They’ve signaled that they’re willing to hike rates several times, hike interest rates several times in 2022.
And so the idea that we won’t be, you know, passing Build Back Better with all of this additional government spending probably is going to make the Fed feel like they’re going to have an easier time getting inflation back under control. So, I don’t know, it’s kind of maybe half a dozen on one side, six on the other where we’re not getting this additional stimulus, this additional, you know, goose of government cash influx into the economy, but on the other hand, probably, it’s bullish in the sense that, you know, we do want to get inflation under control.
Now, the thing… And by the way, Senator Manchin, he specifically mentioned inflation concerns in his statement about why he couldn’t support Build Back Better because we’ve had these recent CPI prints that have been so high and, you know, there’s rumors that we might have like a 7% print coming up.
And the interesting thing, Scott, is this is, even if there’s none of these new, you know, boondoggle spending bills or stimulus bills passed by Congress, and we don’t have that additional liquidity injected into our economy, that’s the demand side of inflation, but we also know that part of the inflation right now is due to the supply chain, right?
And we can see that because in Europe, for instance, they’re having higher inflation as well. And think about it. Even if we were to fix all of our supply chain problems, if you just snap your fingers and all of the policies that got us here were fixed tomorrow, it would still take 12 or 18 to 24 months to unwind even in the United States.
And then if you add into that our trading partners in Asia, in Europe, they have their own supply chain issues. That kind of shows me inflation isn’t going to go away just because we stopped passing these stimulus bills and injecting that liquidity. It’s also going to take us unwinding these supply chain issues.
And that’s where I’ve kind of said, you know, from the beginning, I think we’re going to have a couple more years of sustained inflation, I usually say two to three years. Beyond that, I don’t know. I don’t know that we’re going to have permanent hyperinflation. We may also be still in this long-term deflationary trend that, you know, you’ve seen Japan go through.
So, I try and be a little bit agnostic in the sense that I think there’s a good chance we may be in that long-term secular deflationary trend, but then within that in the next two and a half to three years, we still see this sustains inflation regardless of what Congress passes, regardless of whether we have more stimulus or not.
– Well, Andy, and I want to jump in here so we can tie this really to the main, main topic here is Bitcoin and how does this impact Bitcoin? Because there’s this question of, “Well, wait. Is inflation good for Bitcoin?” A lot of people they use it as an inflation hedge and that’s why they love Bitcoin.
So, then there’s this question of like, “Well, wait. If this even kind of works or mostly works and, okay, we’re going to adjust things, you know, we’re not going to pass the Build Back Better, we’re going to let interest rates…we’re going to raise interest rates, the Fed is.” Does that signal… Well, that’s not great for Bitcoin because then that means there’s going to be more control over inflation.
I’m just curious to your sort of perspective on how this all ties together and how crypto investors are really thinking about it.
– Well, that’s just it, is, I think, different investors own Bitcoin for different reasons, and so they might view this news differently. And by the way, when I say that, you know, I think maybe we could get inflation under control, I don’t mean in the next three months.
And I also want to point out that CPI print, that’s not the real inflation rate. I mean, your inflation rate is your inflation rate. If your rent goes up 20% and your energy prices go up 40% and your health care costs go up 15%, you know, and your price for a used car goes up 60%…
– Your groceries.
– Yeah, exactly. And you add up all your living expenses and they’re up 20% overall, then your inflation rate is 20%. It ain’t 6%. But even if we get it under control, it’s not going to be right away. My point is just, you know, I think the markets have almost gotten used to the idea that there’s just going to be this constant stimulus.
And maybe, politically that’s not going to be happening going forward for the next couple of years, but I think we’ll still have inflation because of the supply chain issues. But to the question about how does that affect Bitcoin, some Bitcoin investors purely buy bitcoin as an inflation hedge and they view it as, you know, digital gold. But other Bitcoin investors are buying it for totally different reasons decoupled from that.
And I think there are other trends that are driving what I view that Bitcoin is being teed up. It may be in a consolidation phase for like a couple of years, but I think the next leg up, the next bull market is being driven by the fact that there’s just increased institutional buy-in to Bitcoin, because at the end of the day, you know, if we have more hedge funds that are buying into Bitcoin, if pension funds start to buy in, and some of these other larger institutional players, if they all want to have even 1% of their portfolio in Bitcoin, that’s going to create a lot of pressure on the price, right?
And I think Bitcoin has been pretty volatile in the past couple of weeks, but it’s in a range, though. And I think what’s been happening as there are more institutional players and more hedge funds that own Bitcoin, I think they’re a little bit more disciplined, especially getting into the end of the year where they want to lock in gains. So if it goes up, they might take chips off the table and, you know, take some gains.
If it goes down, they may take that as a buying opportunity and buy in the dip. So, I think there’s a chance that Bitcoin… Everybody is kind of waiting for this bear market. Is there going to be a 70%, 80%, 85% drawdown? Bitcoin may not behave that way anymore.
And increasingly, it looks like it’s more correlated just to the S&P. It’s just almost like another risk asset for some of these institutions like hedge funds.
– Well, it’s worth mentioning, just as of this recording, you know, Bitcoin’s been pretty flat over the last 24 hours. So, even with this kind of news coming out and any thoughts that well maybe some inflation will be under more control or something like that, Bitcoin is just kind of hanging out.
– Yeah. And I think it’s always very hard to parse whether stock market or Bitcoin, like, why is something up or down 3% today? And there are so many factors that go into that.
– Sure, of course.
– I don’t want to pretend like I know why it’s flat. I mean, I guess you could say everyone’s priced it in. The Build Back Better would flop.
– I don’t know. But I mean, I really do think, though, that we have more and more different types of investors buying Bitcoin for different reasons, and so that may change the way that the price moves in the long-run relative to the past.
– Right. And I would argue that, yeah, you may still have, you know, huge run-ups where if, I don’t know, they figure something else out and they pass a huge bill and there’s all these inflation concerns. Yeah, things can be impacted that way, but what you’re saying is long-term, it’s just becoming more and more like the stock market and kind of the ebb and flow of it, right?
– Yeah. And certainly, if, like, you’re a hedge fund and you own equities and you have a smaller allocation to Bitcoin, you’re going to treat it as a risk asset, you know, either risk on or risk off. So, I think that’s part of what, you know, those two assets are starting to move a little bit more closely.
But I just think as the total market cap of Bitcoin grows, the next bull driver is going to need to be, you know, increased institutional interest, just more and more people… You need to have more demand, right? Because just with the existing investor base, for them to move the needle on the price, you know, once the market cap already is exceeding $1 trillion, it sort of takes more and more juice to give it that next leg of the bull run.
So, personally, I think the really big next leg of the bull run is going to be from that increased adoption. But to your point, if it looks like…if we get like a 7% or an 8% CPI print, or maybe there’s a rumor that starts that, “Oh, Joe Manchin is back in the game.”
– Yeah. Yeah. They had a discussion and they got on the phone with Biden and he’s changed his mind.
– Yeah. For sure I could see that goosing the price a bit. Absolutely.
– But again, to your point, that won’t even impact every Bitcoin investor, so you may have some people that want to jump in because I feel like we’ve seen that over the past few months here a lot of people in this sort of inflationary cycle that we’re in are kind of saying, “You know what? Crypto seems pretty good. I want to move some of my portfolio into that.”
But that’s not necessarily the way everybody is thinking about Bitcoin, right?
– Yeah. And I mean, I view… Owning Bitcoin right now it’s still volatile. It’s probably less volatile than it used to be. But if you think about an allocation to crypto in the context of financial repression, right, in the context of, “Okay. I can own this bond fund that yields 2%. The inflation rate is 6%.”
So, the opportunity cost of putting some of it in crypto is, “Well, I’ll put it in this bond fund instead that is decreasing in purchasing power by 4% a year.”
– Right. So, I think that risk-reward shifts a little bit to where you’re saying, “Well, I can move it into crypto. I’m actually not really giving up any yield on a real basis because yields on bonds on a real basis are negative.” And then I think also within crypto, and this is probably a topic for a future show, but there’s more and more ways to earn yield, right?
So, like, I stake some Ethereum at Coinbase and it’s earning 4.5% APY right now. Well, that’s more than a junk bond, right? So, I actually am earning yield on that Ethereum holding. So, I think that’s kind of changing everybody’s perspective a little bit where if you can get some yield with your crypto and it’s yielding, you know, as much or higher than junk bonds, let alone the 10-year.
I mean, what’s the 10-year at? Like 1.4%?
– So, I think you have to factor that in too. It’s just… It seems like there’s less opportunity cost to an allocation of crypto when yields are just… I mean, they’re just in the basement. I mean, I guess they can go further negative, but on a real basis, they’re totally negative even before factoring in taxes.
– And then, you know, what I would add to that too, especially as newer crypto investors become more sophisticated and there is just more knowledge about, you know, all of this…
– Wait. Wait. Crypto investors are sophisticated?
– Some of them. But as you learn more…
– You need to spend more time on Reddit, Scott. You need to spend more time on all these sub-Reddits.
– You spend less time on Wall Street bets. But my point is, is that what you’re talking about is, okay, if you can kind of have that yield peace and you’re still getting exposure to the underlying technology and the use cases, certainly, with something like Ethereum, that’s where it’s becoming, you know, even more attractive and it kind of balances out the risk in a way, right?
– Absolutely. I mean, it’s still highly volatile. It is still highly volatile. So, you got to understand if you buy Ethereum and you’re yielding 4.5%, well, it could draw down 60% in a year.
– So, 4.5%…
– And you’re cooked.
– Yeah. But if you buy a 10-year treasury right now that’s yielding 1.3%, the total yield over 10 years is 13%. Inflation is going to eat that up in the first two years all future payments, right?
So, I think some of it is just this inflation where inflation is and where yields are, that’s called financial repression. And I think investors have to decide, “Do I want to park so much of my investable assets in this asset class that is shrinking? The purchasing power of this asset class is shrinking.”
It’s an implicit wealth tax. It’s a wealth tax by another name. And so in that kind of environment, you know, liquidity is going to slosh around and it’s going to look for new asset classes where maybe you can get some yield. And yeah, there’s a risk and return trade-off, but you might accept more risk, right? You can stay in bonds.
I guess you could say, “Well, they’re not that risky. I guess they’re not that risky. There’s not that much uncertainty.” You know you’re getting screwed, right?
– Right. Well, I mean, and this is… Andy, you co-founded The Alternative Investment Database. I mean, this is one of…maybe the key thesis for why you are so excited about alternative investments is this idea of, you know, investors looking for other options and other ways to get yield and return, right?
– Absolutely. Yeah, they’re looking to generate positive returns after inflation. They’re looking for tax-advantaged strategies, 100%, and frankly, they’re also looking into some of these alternative asset classes that they believe have prospective returns that are going to outperform definitely the bond market. And there’s a lot of sophisticated investors who are recycling some gains from this year, putting them into all kinds of different alts including crypto.
So, that’s 100% right.
– Andy, I feel like we’ve really covered a lot of the basis here. I’m curious if there’s any sort of sum-up or ultimate, I don’t know, prediction or insights you can offer when we’re talking…
– Absolutely not, Scott. Absolutely not.
– No more. You’ve given me all we can have.
– No. I just think, you know, like, with inflation versus deflation, I guess if you really put a gun to my head, I can give you predictions, but I think it’s more helpful to be a little agnostic and to say, “What do I think I know? I think it’s likely that we’re going to have sustained inflation for the next two to three years. But as far as that larger trend, okay, people can make a pretty compelling case for hyperinflation or sustained long-term inflation depending on what we do with the printing presses in Washington.
But also you can make a pretty compelling case for deflation if you look at our demographic trends, if you compare the United States to Japan, right, which has had this lower birth rate and it’s been in this long-term secular deflationary cycle. And who knows how long that’s going to continue? So, for me, personally, I’m long Bitcoin, I’m long crypto.
And part of that is not trusting our printing presses in Washington, but my…
– To resist the urge.
– Yeah. But my thesis is larger than that. It’s definitely also a bet on the technology in the utility. And could we be in a crypto bubble that’s going to pop? Sure, just like, you know, maybe the internet was a bubble in 1998 and 1999, but ultimately, the internet technology changed the world and added a ton of productivity and value to the global economy.
And I guess that’s my macro thesis for crypto, Scott.
– To kind of piggyback on that, I’ve always stated, you know, when I’ve talked to a lot of folks that have founded companies, you know, built around crypto or the underlying technologies and blockchain technology, I always say, you know, the cat is out of the bag. This is not going away. And whether, you know, a bubble bursts and things crash down to earth or, you know, the volatility continues or whatever you may be seeing, the underlying technologies, the desire from whether it be, you know, traditional financial organizations or, you know, entrepreneurs and folks in business, the desire to find these use cases, solve some of the challenges that still need to be solved when you’re looking at cryptocurrencies.
These are going to continue to exist and it’s going to continue to march forward. And, again…
– And Scott, on that note, I mean, to me, the bottom line is almost, if you just look at the talent entering the space from developers and just entrepreneurial talent, entering, you can kind of just watch the flow of people of high-quality entrepreneurs, very, very smart people, way smarter than me going into the space and building things.
So, no. You’re asking me for predictions? I’m probably not smart enough to do that, but I think even if there’s a bubble pop, like you said, it’s here to stay, for sure.
– Absolutely. So, maybe in many ways, you know, to kind of sum up our whole discussion here, is inflation not irrelevant to what’s going on in crypto, but almost if you look at the bigger picture, it’s, yeah, that’s where it is now. And if there is some impact, does that change really the long-term future for crypto?
I don’t think it necessarily does. It may just make the environment look a little differently, right?
– Andy, thank you so much for joining me on the show today, offering your insights and no predictions, but maybe philosophies which I think is great. And if folks want to find out more about any of the articles we talked about today or any of this, you can always go to cryptogic.com. Check out our show notes. And stay tuned because we’re going to have more exciting episodes where we’re going to be talking about things like inflation and beyond because, as I said, it’s here to stay.