Today the CPI numbers came out. As should be a surprise to no one, they were the highest yet, indicating inflation is hurting consumers and causing risk-off fears.
Don’t forget this is YoY, and last year June was 5.4%, so it’s actually even worse than it looks — that’s what’s really shocking; that they can’t even lie that inflation is cooling off because it’s a lower number. We are seeing it climb higher from a higher starting point.
However, this shouldn’t be a shock. Here’s the pattern from the last couple of months.
1) CPI data released and it’s high
2) Everyone freaks out for a week
3) Things recover a little bit and people start to call peak inflation
4) Everyone becomes optimistic over the next couple of weeks and start pricing in a new rate hike
5) CPI data comes out and it’s high
If you were to buy in to the media’s take, it’s that you should be afraid and catching onto your cash for dear life.
However, contrary to that prevailing rhetoric, here’s some other points to consider:
The UN Food Price Index was down
Gas prices are falling
The NY Fed Global Supply Chain Pressure Index is easing
Wage growth is cooling
Based on fundamentals alone this should be the ‘peak of inflation’, right?
We could very well see the Fed entertaining a 100 bps hike this month to ‘shock’ the system, only to later have to turn off QT when it’s clear that they can’t control the narrative with fear anymore.
So, why then, if Bitcoin is a deflationary asset & a reflation hedge, does it go down after announcements of record inflation?
It’s largely due to the fact that the investment world is not dominated by retail investors. It’s dominated by institutions with mandates and heavy regulations. You and I may not perceive Bitcoin as a risk asset, but those institutional investors certainly do. When inflation is high and interest rates are high, institutional money managers go risk off. They sell off their risk assets to buy cash or cash flowing equity. We can easily see this is the case because, despite it being known as a safe haven asset, gold is also being sold off, and that’s because the people who are overleveraged elsewhere are having to sell their positions in gold to provide liquidity, causing the price to drop.
We live in a world where cash is still king. Bitcoin only has 10 years of network effects. The dollar has about 60 years of network effect. It takes time for people to understand what kind of money Bitcoin is, especially when everyone only knows money as government debt that can be created at infinite.
Consider Bitcoin is a CDS on government liability. Think of it as insurance against government-created fiat moneys.
Also, consider the fact that it’s not just inflation.
It’s stagflation, fears of recession, war, neverending pandemic, neverending supply chain issues, possible food crisis, runaway energy costs, RE bubble crashing in China, and all sorts of other bubbles. If this is not perfect recipe for uncertainty — if not the perfect recipe for disaster —- then I don’t know what is. If there was JUST inflation alone, BTC wouldn’t have had the same issues maintaining its 2021 levels.
So, let’s break it down this way:
High inflation = fed response. Fed response = markets go down.
Three month timeline? Cash is king. Three year timeline? Cash is trash.