PEOPLE

Leo's Perspective | Understanding Macro in One Article: Recession Is More Indicative Than Inflation, Viewing the Next Bull Market with Institutional Thinking

share
Leo

It is not difficult to see that the cryptocurrency market is now closely tied to the global financial situation, so understanding the current macroeconomic situation is essential homework for cryptocurrency investors. This article summarizes the views of Leo Lee, a former Gamma Tech Investment contributor, who not only analyzes the current financial landscape but also shares insights on how to position oneself.

The global financial situation is undergoing significant changes, with various factors pulling in different directions. On one hand, the annual inflation rate has reached a 40-year high, causing concerns about increasing inflation stickiness, while the market is also worried about an economic recession. Paradoxically, while the market fears an economic downturn, it also hopes that a recession could cool down inflation.

This article presents the views of Leo Lee, a former Gamma Tech Investment contributor. In addition to being a Gamma contributor, Leo Lee is also the host of the "WEB 3,3" Podcast and frequently shares his views on the overall economy and the cryptocurrency market on Facebook and Twitter.

Advertisement - Please scroll down for more content

This article provides an overview of the current global economy, including the Consumer Price Index (CPI), the Federal Reserve's monetary policy, and what an inverted yield curve represents. Additionally, Leo Lee shares investment insights to help readers better understand future asset allocation.

Inflation is Rising, but the Real Concern is Economic Recession

The U.S. Labor Department released the Consumer Price Index (CPI) last week. The index showed a year-on-year increase of 9.1%, reaching a new high in 40 years. However, the market's response to this figure has been mixed. While the yield on the ten-year Treasury bond, which reflects inflation expectations, initially surged (causing prices to fall), it later declined. Meanwhile, the U.S. stock market remained steady, and even cryptocurrencies saw an increase.

Leo Lee stated that this phenomenon indicates that the market has gradually priced in inflation, with the key focus shifting towards "economic recession." The consensus in the market is that a recession is almost inevitable in the future, and it has already started affecting end-consumer spending.

Prior concerns about the CPI stemmed from fears that escalating inflation could lead to two possible outcomes: 1) Fed tightening monetary policy causing an economic recession, or 2) evolving into stagflation.

"The market's consensus has shifted to the inevitability of an economic recession, which will cool down inflation. But what truly concerns the market is: when will the recession arrive? In the second half of 2022 or in 2023? When can we expect an economic recovery? Under this premise, the CPI has become a lagging indicator."

The CPI is now a lagging indicator, and it is essential to consider how much it will impact the market. The reason why CPI was previously a focal point is that it could affect the Federal Reserve's (Fed) monetary policy.

Leo believes that although the Fed's monetary policy follows CPI, since CPI lags behind, under relatively stable conditions, the Fed's influence on the market will gradually diminish.

Energy Prices May Rise, but Other Commodities Could Cool Down

Currently, the market's view on inflation is that economic recession and monetary policy tightening will lead to decreased demand, gradually bringing inflation under control. Leo believes that inflation should be divided into at least two aspects: energy and other commodities, as there has been a structural change in energy prices post the Ukraine-Russia conflict.

He pointed out that Europe's increased demand for natural gas during winter has provided support for natural gas prices. On the other hand, due to the Ukraine-Russia conflict and political tensions between Europe and Russia, Russia may further reduce oil supplies, impacting Europe's economy, making future energy prices unpredictable.

"The current decrease in energy prices is due to market expectations of decreased demand resulting from economic recession, with general predictions of continued decline, which also drives down prices of other commodities. However, due to geopolitical factors and the Ukraine-Russia conflict, energy prices have a support level, so I am not that optimistic and further observation is needed. Especially after entering the winter, natural gas demand in Europe will increase, coupled with the potential supply reduction from Russia, raising the risk of higher energy prices. This will further affect the prices of other commodities."

Leo believes there won't be stagflation, but inflation may have more "stickiness" than anticipated.

It is worth noting that while the increase in energy prices will raise the costs of goods, it will also squeeze demand for other commodities, as evident from credit card data. Leo pointed out that according to U.S. bank credit card data, excluding automobiles and gasoline, retail sales growth in June would decrease by 0.1%. Therefore, compared to energy, the prices of other commodities are expected to further decline.

Furthermore, what will truly determine whether the CPI decreases will be in early next year. He mentioned that the current high year-on-year inflation rate is not only due to supply-demand imbalances but also because of a low base period (lower CPI at this time last year). Therefore, with a high base period next year, coupled with reduced original energy demand in Europe, there is a chance to control inflation. "By the time winter passes, with reduced energy demand in Europe and inflation transitioning to a high base period, the combination of these factors should help control inflation. This is also the current market consensus."

2y-10y Yield Curve Inversion: What to Really Pay Attention to?

The 10-year bond yield is often used to examine a country's economic inflation situation, while the 2-year bond yield is an expectation of interest rate decisions.

In normal circumstances, the yield on a 10-year bond is higher than that of a 2-year bond. However, with increasing inflation expectations leading to rapid interest rate hikes by the central bank (increased short-term rates), the current 2-year bond rate is higher than the 10-year rate, which is typically an indicator of an impending economic recession.

Leo believes that discussing whether the inversion of the 2y-10y yield curve will lead to an economic recession is not particularly significant, as an economic recession is already the market's consensus. The real issue lies in how long this economic recession will last, when the recovery will begin, whether it will be a V-shaped recovery or a gradual one, and some even believe that we have not fully priced in the recession yet.

Leo suggested that investors should pay more attention to leading indicators, such as bank credit card consumption reports: "We should focus more on leading indicators, like credit card consumption data, as this can show the monthly consumption patterns of consumers. Currently, although the monthly growth rate is still positive, it is approaching zero, indicating that we are entering an economic recession."

Additionally, the trend of bond yields, these data will tell investors the market's recent view on the economy: "For example, if we observe a decrease in bond yields, it means the market may start to believe that inflation will decline. Similarly, if the 2y-10y yield curve inversion begins to reverse, it indicates that the bond market believes the economic recession may be coming to an end, and the recovery phase is about to begin."

Future Outlook for the Crypto Market

In the first half of 2022, due to uncertainties, the market is reacting dramatically to "short-term factors" like interest rate hikes or the CPI index. However, the market's indifferent response to CPI indicates the need for more forward-looking indicators or expectations.

Regarding the crypto market, Leo believes it can be judged using an institutional perspective.

Over the past two years, a large amount of institutional funds have entered the crypto market, which have since been washed out. Therefore, the next bull market's return timing is related to when institutional funds will re-enter the crypto market.

Interestingly, he also mentioned a view similar to Sun Binsheng's, stating that 2024 will be another cycle for the crypto market, coinciding with the Bitcoin halving. He equally believes that 2024 is "quite anticipated."

Moreover, while some people believe in regularly purchasing spot assets to prepare for the next bull market, Leo cautioned to consider one's "risk tolerance."

He pointed out that the crypto market has poor liquidity, so even during consolidation, volatility remains higher than in the stock market. For long-term investors who can tolerate higher price fluctuations, crypto assets are currently at relatively low levels, offering a good risk-return ratio in the long run.

However, he also warned that although the large-scale liquidation of crypto institutional players seems settled, the subsequent acquisition of assets by creditors may trigger a new round of sell-offs. Compared to crypto assets, Leo believes that certain growth stocks are more worth paying attention to. This is because the stock market's pricing mechanism is more mature, with better liquidity. Although the volatility is still relatively high, the risk-return ratio is attractive in the medium to long term.