The inflation measured by the (flawed and misleading) Consumer Price Index (CPI) series published by the US Bureau of Labor Statistics peaked around 9% in mid-2022 and is now hurtling down towards the all-important 2% level.
There are many who think that the CPI’s recent steady downtrend can mean only one thing — Sir Powell is getting primed to turn back on the free monaaay taps and make it rain like it’s March 2020. With America — and possibly the world — on the verge of a recession, those prognosticators would argue that our esteemed Lord Powell is looking for every opportunity to pivot away from his current Quantitative Tightening (QT) policies, which would shoulder a good chunk of the blame if we were to enter into an economic downturn. And with the CPI moving lower, he can now point to the dip and say that his righteous campaign to slay the beast of inflation has succeeded — making it safe to turn the taps back on.
I’m not so sure these forecasters are right, but more on that in a bit. For now, let’s assume that the market believes this is the likeliest path forward — begging the question, how can we expect Bitcoin to react? To accurately model that out, we must remember two important things about Bitcoin.
The first is that Bitcoin and the broader crypto capital markets are the only markets that are truly free from manipulation by central bankers and large global financial institutions. “But what about all that alleged shady behaviour at failed companies like Three Arrows Capital, FTX, Genesis, Celsius, etc?” you might ask. And it’s a fair question — but my response would be that these firms failed as crypto market prices corrected, and the market quickly found a much lower clearing price at which leverage was washed out of the system. If the same reckless behaviour had occurred in the parasitic TradFi system, the authorities would have attempted to delay the reckoning of the market by propping up the failing entities — as they always do — and in the process undermined the very economies they are supposed to be protecting (thanks for nothing!). But the crypto space faced its reckoning head-on and quickly purged itself of poorly run businesses with flawed business models, laying the groundwork for a swift and healthy rebound.
The second thing to remember about Bitcoin is that, because it is a reaction against the profligacy of the world’s global fiat monetary system, its price is heavily dependent on the future path of USD global liquidity (due to USD’s role as the global reserve currency). I spoke at length about this concept and my USD Liquidity Index in my recent essay “Teach Me Daddy”. To that end, over the last two months, Bitcoin has outperformed a flatlined USD Liquidity Index value. This indicates to me that the market believes the Fed pivot is upon us.