The Dark Night Rises - Part 1

Wading Through The Noise

This is one of the most challenging macro environments we’ve seen in a long time. Separating the signal from noise has arguably never been harder, at least that’s how I feel.

Right now, I could show you a bunch of charts that support the case for the Fed to ease up and cut rates. I could also show you a bunch of other charts that make the argument the Fed should stay the current course.

Inflation is a lot more under control than it was 12-18 months ago — but there’s still a risk that easing policy too early could reignite the flame.

There’s clear signs the US labor market is softening and that peak tightness is behind us — but the US consumer still appears to be relatively healthy, while US households are >$40 trillion wealthier than they were pre-COVID (at least in the aggregate).

Real GDP growth has slowed while the Citi US Economic Surprise Index just hit its lowest level in almost two years — but key indicators like the ISM imply we’re more likely in the earlier stages of the business cycle, not the final innings, so the odds of a US recession in the next 6-9 months is unlikely.

Meanwhile, the US equity market is trading at all-time highs, and cutting rates now could just pour even more fuel on the fire (absent some serious deterioration in the economic outlook over the next couple months). Oh, and it’s a presidential election year.

These are just some of the considerations when it comes to the US specifically. If we look outside, Japan is in the midst of a currency crisis, China is battling serious deflation pressures (opposite problem of its Western peers), multiple major wars are going on as we speak, and on top of that the whole world is scrambling to figure out what life will even look like in a post-AI era.

That only skims the surface of everything going on right now, but that in and of itself is a lot.

Nevertheless, this is a piece about markets, and at the end of the day, global liquidity has been — and continues to be — the biggest driver of financial markets and asset prices in our view (hence why we continue to spill so much ink talking about it).

Global liquidity conditions have tightened in recent months, led by a contraction in central bank liquidity, alongside a slowdown in aggregate money supply growth. As we’d expect, this shift has not been kind to BTC and crypto markets.

The question now is whether this trend will continue, or if it’s just a speed bump on the road to new highs? The End Game hasn’t changed in our view, even if the road to get there takes some twists and turns.

The purpose of this piece is to understand how we got here, where we are, and where things could head from here.

As we’ll outline, there’s a bunch of factors at play right now, each of which carrying its own implications and potential knock-on effects. Our goal is provide context on some of the key things to be on the look out for — as new data comes in and these trends evolve — to better assess which path we’re ultimately heading down.

How Far We’ve Come

Heading into 2023, our view was that the worst of the bear market was behind us. We foresaw an increase in global liquidity — boosted by an expansion in central bank liquidity — as the key driver underpinning this shift.

We continued to harp on this as the year went on, doubling down on our view. In early August, we became even more vocal about our conviction that were in the early innings of a new cycle, just a few weeks before global liquidity and money supply started to accelerate higher.

Between September and December 2023, the PBOC added nearly $700B to its balance sheet, Global M2 grew by more than $4.5T, and the US Treasury added a whopping $1.4T to its already-staggering debt load. The end result? BTC surged from $26K to $45K.

Heading into 2024, we outlined a speculative timeline for how we thought things might transpire this year. We noted favorable liquidity conditions, the launch of spot BTC ETFs, and hype