Market update — where are we now?
Last week we chatted to Baby Su from our Astro Girl Community and picked her brain on where we are in the current crypto market. Su is currently working in the TradFi world so we got some insight into where the market is from a macro market perspective.
Here’s a summary of what went down.
Q. What is an economic cycle and where are we?
An economic cycle means the fluctuation of the economy between an expansion and contraction phase. The expansion phase is where the growth is very rapid and the interest rate is low. Production productivity increases too as a result.
The expansion phase will usually reach what is called a “peak stage” where growth is at its maximum. After that, the market usually moves to a contraction phase which is what we call a recession. This is where growth slows down, employment falls, consumption decreases and we hit the trough.
So where are we at now? We’re at the late stages of the expansion phase. We are going through growth but this is slowing down. US GDP growth for the fourth quarter of 2021 was 6.9%. GDP growth for the first quarter of this year was negative 1.4% — this is a pretty significant slowdown.
On the inflation side, inflation is at historical highs of 8.6% over the last 12 months — this is the highest it’s been since 1981. The positive we are seeing at the moment is that the unemployment rate is still quite low (currently sitting at 3.6%). This is why we’re at a “late cycle”. We’re not really in a recession yet as the unemployment rate remains relatively healthy. But given the high inflation, we’ve seen that the federal government has been hiking interest rates which are expected to cause further slow down in the broader economy.
Q. Are we heading towards a recession?
The short and sweet answer is not yet.
A recession means that there is negative GDP growth for two consecutive quarters.
We’ve already seen this in the first quarter so if we see negative GDP growth in the next quarter then we are officially in a recession. Most people do not expect this to be the case for the second quarter because the negative GDP growth from the first quarter is caused by some external factors. The first and most obvious one is increased import costs given the COVID-19 situation in China. As a large global manufacturer, the COVID situation in China has caused massive supply constraints and has increased shipping costs.
The second reason is the price of raw materials (especially oil) which has been surging this year due to the Russian-Ukraine war. The combination of these two factors are large impactors of GDP growth. However, as we move to Q2 of 2022, we expect this to shift — especially with a better managed COVID-19 situation in China. We, therefore, expect the supply constraint to ease.
On the raw materials side, we also expect this to stabilise so these two factors will hopefully help in the second-quarter GDP number.
Overall, if the second quarter remains in the positive range, then it means that we’re not going to be in a recession yet. But whether we’re going to head into recession in the next 12 months will still play on everyone’s mind. The key signal will be if there is a significant surge in unemployment rates. We have seen a lot of news coming out on lay-offs in the tech and crypto space. If this continues then we expect that this will be followed by consumption weakness — i.e. if you lose your job you can’t spend as much. These factors combined together will bring us into an environment that will eventually lead to negative GDP growth.
In short, we’re not in a recession yet, but we could be heading into that phase in the next 12 months. What we need to watch is the unemployment data.
Q. What does the general state of the economy mean from a crypto perspective? Have we reached the bottom?
I will caveat this and say that this is my personal view and not financial advice!
I think there has been a recent “baby” bounce back. Bitcoin is now stabilising above 20,000 and Eth is out of the 3-digit territory. However, I wouldn’t say that we are out of the woods just yet for two reasons.
Firstly, the crypto market is still heavily correlated to the US equity markets. Unfortunately, we’re not at a stage where crypto is an inflation hedge asset or an asset class that can be separated from equity assets. This means that we will need to observe the direction of the US equity market. From a macro perspective, I don’t think we’re at the bottom yet because the current rally/bounce back in the equity markets are triggered by the fall in oil price and the fall in the near-term and 2-year interest rates. These two factors are driven by the fear of an economic slowdown.
When the economy slows down, there’s going to be less activity in general. Hence less demand for oil. However, the world is still recovering from COVID-related restrictions meaning that the global demand is not at its peak. There is still further room for oil prices to increase as demand recovers to pre-covid levels.
Secondly, on the interest rate side, from what we’ve seen so far the rates are not actually at peak levels yet — there’s still more room to go. Jerome Powell (Chair of the Federal Reserve of the United) emphasised in his semi-annual testimony that the government is still looking for compelling evidence that inflation is actually moving down.
The Feds want to control inflation at the 2% level. So there’s still much more room to go in terms of the interest rate. They also did not give forward guidance on projected future increases. The government however has confirmed that they will continue to raise rates as the incoming data on CPI comes out. The situation is still pretty fluid and we cannot say that we are far from the point where inflation is under control.
The inflation interest rate and oil price are two things that lead to my cautious view. One last thing to touch on is Q2 results for most of the US companies which will be out in late July / early August. Investors will have a number in their heads and they’ll compare their expected number with the actual company’s Q2 results. It is likely that the company’s real number will be below people’s expectations given the raw material price increase and also the interest rate hike.
If the Q2 numbers are below people’s expectations, we will see further downside in the overall market as well. So that’s another reason why I have a cautious view at this point. Investing in crypto right now would be for a long-term strategy and it is not the time to gamble on short-term gains just yet.
Also, make sure you don’t over-leverage. We’ve seen a couple of the crypto funds go into liquidation, given the over leverage. My advice would be not to risk what you can’t lose and that’s what I try to hold myself to.
My leaving remark is that the market right now is pretty tough, but don’t forget the other important things in life. Go hang out with your friends and call your parents. There are more things to life than just making money and following the market.