The Hard-Landing Scenario
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In this article, we conduct a data-based assessment of the likelihood of a hard-landing. Finally, we evaluate the outlook of cryptocurrencies given that context.
Before we dive into the data, here is what big banks have just publicly forecast:
We consider these forecasts to be somewhat optimistic in light of the recent data. Our analysis suggests that a U.S. recession is likely in the coming months, a scenario that would present special opportunities in the cryptocurrency market.
The data below is sourced from the Federal Reserve Bank of St. Louis. Our case study focuses on the U.S. due to the ease of gathering consistent and uniform data, its similarity in trends to Europe, and the significant impact a recession there would have on the global economy.
1. Money supply contraction.
As an introduction, let's zoom in on the past 20 years. In that time window, the US economy has arguably gone through two recessions, and while we can find a lot of similarities in the current situation, one element stands out:
The M2 money supply contraction is at a 90-year high.
As we can see in the graph above, during the two previous recessions, periods of optimism coupled with money supply contraction led to large downturns.
2. Consumers.
The latest data from FRED is showing that the net saving is now negative, indicating that Americans are having a very hard time saving money.
Latest data is also showing an all-time high in credit cards loan defaults rate for small banks, as well as a strongly accelerating rate for all banks.
3. Businesses.
The net percentage of banks tightening standards for loans to large and midsize firms has reached recession levels. (same for small firms and personal loans)
This next graph is crucial and fundamentally significant. It shows the relative attractiveness of the sp500 vs. 3-month treasury yields. Recently, it has gone through a significant decrease, as earning yields have fallen while short-term Treasury yields have risen, leaving the sp500 in danger zone.
Finally, corporate bonds are also in a bad spot relative to fed funds rate, putting businesses in a difficult position to access capital from public sources.
Recent article from Bloomberg: Japan’s US Corporate Bond Sell Off Brings Risks.
4. Manufacturing.
5. Real-Estate.
Naturally, mortgage payments have been exploding with interest rates and housing market prices. Obviously, this doesn't go well with net saving going negative.
6. Treasury yield curve inversions.
Yield curve inversions are arguably the most popular recession leading indicators, and have a remarkable history of accuracy.
Our favorite Treasury yield spread is the 10Y-3M, because it offers a likelihood function of a recession occurring in any given month within the coming year.
According to this highly accurate likelihood model, the probability of a recession increases to over 50% in the upcoming month, December 2023—a level not seen since 1982. Furthermore, the model estimates the likelihood of a recession not occurring in the next:
- - 3 months is <8.5%
- - 5 months is <0.81%.
- - 7 months is <0.088%.
7. What to expect in the crypto market?
The crypto market is so young that it didn't experience the 2008 financial crisis. The message in Bitcoin's first block, citing bank failures in early 2009, serves as a reminder of its founding purpose. So, would it suffer during a recession? Theoretically, it shouldn't, but in practice, it certainly will face short-term impacts.
Bitcoin is still in the process of becoming a risk-off and crypto remains a risk-on. Most importantly, let's not forget that during global liquidity crisis events, no asset class is spared. What's really interesting however, is what happens after such crisis.
Systemic Risks?
The most significant systemic risks in crypto are associated with centralised entities, such as stablecoins like Tether and exchanges like Binance. If any of these entities were to be revealed as insolvent, it would likely trigger systemic selling.
Both Binance and Tether have reportedly failed to provide comprehensive and traditional audits. As observed with the FTX case, large market downturns often lead to panic, potentially causing bank runs and putting the solvency of such entities to the test. Additionally, investigations by U.S. authorities could exert pressure on these entities to undertake thorough audits.
What can be described as a bank run on USDC has been unfolding, gradually yet steadily, for over a year now. As the most reliable source for redeeming real USD in the stablecoin market, USDC has been consistently used for converting stablecoins to fiat currency, a trend that raises concerns. Meanwhile, the supply of USDT has been notably increasing, potentially concerning as well given its financial opacity.
Examining the graphs above, it might be suggested that the correlation between the supply of certain stablecoins, the cumulative net flows into Binance, and Bitcoin's price could indicate fraudulent market manipulation. While our research into this matter is not extensive enough to draw definitive conclusions, we mention it because 'market manipulation' and 'lack of market surveillance' have historically been cited as reasons for denying Bitcoin ETFs.
Is BlackRock playing the market with their timing?
Currently, the market is factoring in the near-certain and imminent approval of BlackRock's Bitcoin and Ethereum spot ETFs, a sentiment echoed by many prominent figures in the media. However, considering the video above and past instances of denial, it's plausible to speculate that these ETFs might not receive approval in the near future, a scenario that would not bode well for short-term bulls.
The absolute worst-case scenario price targets.
Conclusion.
In drawing our analysis to a close, it's important to acknowledge the sobering reality our research presents: a looming recession appears increasingly likely in the months ahead, with significant repercussions for the crypto market. This outlook, notably divergent from the more optimistic public forecasts by major banks, invites a careful consideration of what lies ahead.
Despite the grim economic outlook, it is crucial for Anaideia to view this as a moment ripe with opportunity:
Identifying True Value: Challenging market conditions do not diminish the underlying fundamental strength of blockchain technology. Instead, they present Anaideia with an opportunity to invest in highly undervalued assets.
Eyes on the Future: Short-term fluctuations are just that—temporary. The long-term outlook for crypto is not just positive but incredibly bullish. For Anaideia, this signals a strategic window to invest before the market surges.
Federal Reserve Pivot: The likely shift in the Federal Reserve's policy in response to a recession would catalyze a bull market in crypto. This anticipated pivot represents for Anaideia the golden opportunity to fully deploy its bull strategy.
So, while the immediate future may present challenges, the path forward holds the promise of remarkable opportunities in the crypto market.
