🎭 Macro Mood Swings: Optimism returns
The Crypto Market Caps board stayed overwhelmingly green this week, as BTC and other leading crypto values moved sharply upward. Bitcoin moved back into the 20s for the first time since Nov 2022. Even Solana is up, partly buoyed by supportive tweets from Ethereum lead Vitaly Buterin.
Some noticed that the jump this week retraces the dump that occurred after the FTX scandal broke:
So, all good now?
Inflows of capital to riskier assets have definitely restarted, after a year of holding cash and capital preservation, and a wave of optimism is sweeping the markets. Why? and is it worth banking on?
Inflation is slowing. The popular sentiment at the moment sees this as all good news, based on several questionable assumptions:
- The Fed will “have to” stop raising rates
- This means there won’t be a recession
- Things will go “back to normal”
I'm not so sure.
I think what happens next will be influenced by 2 factors - inflation measures and the talent market - which are tied together.
Economic Driver #1: Flawed inflation measures
Some started to note last year that inflation is performing differently across multiple categories. Service inflation in particular is rising, even as goods inflation moderates (see Dallas Fed report).
As reported previously in S3T, anything that requires focused human attention, care and expertise has and will continue to experience significant inflation.
This reality is not accurately reflected in the Fed inflation measures and 2% inflation target, both of which hark from an older economy that is now a subset of today's overall economy.
The cause of today's inflation is not aggregate demand, this Roosevelt Institute report argues, but rather "a host of microeconomic problems on the supply side (including increased exercise of market power) combined with shifts in the patterns of demand."
To have meaningful inflation controls and a more equitable distribution of gain and pain, a rethinking of inflation measures is unavoidable.
Unfortunately the Fed, embarrassed about its "transitory inflation" blunder appears bent on a false hope of regaining control, and appears unwilling at least in the near term to rethink inflation measures.
So this will take time (perhaps an Administration change). In the meantime expect volatility, and uneven distribution of pain (disproportionate impacts to lower-income households) as pointed out here and here.
- Tim Barker