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With global liquidity – a term that encompasses the M2 money supply of all major economies – recently reaching a new all-time high of 95 trillion dollarsOne would expect Bitcoin to exhibit phenomenal strength given its high sensitivity to this key metric. However, the world’s leading cryptocurrency is currently moving in the opposite direction. The reason: the increasing likelihood of a recession.
LATEST NEWS: #Bitcoin falls below $58,000. photo.twitter.com/scEVe8kEuQ
— Observer.Guru (@WatcherGuru) August 4, 2024
Sahm’s rule
🇺🇸 US Jobs Report (July)
NFP: 114k (exp. 175k, previous 206k, revised 179k)
Unemployment rate: 4.3% (exp. 4.1%, prev. 4.1%)
M/M Profits: 0.2% (exp. 0.3%, prev 0.3%)
Y/Y Profit: 3.6% (exp. 3.7%, previous 3.9%, revised 3.8%)— Newsquawk (@Newsquawk) August 2, 2024
On Friday, the Non-Farm Payroll report shook markets around the world after revealing that the rate of job creation in the US in July fell far short of analysts’ consensus expectations.
The Sahm Rule was triggered on Friday, August 2, 2024. Over the past three months, the average unemployment rate has risen to 4.13%, which is significantly higher than the lowest three-month average a year ago (which was 3.63% between June and August 2023).… https://t.co/vY2ZTRX7aq
— Doc aka Trader McGraw (@doc_mcgraw) August 4, 2024
Critically, the report also formally triggered the so-called Sahm Rule conditions, which postulate that a recession materializes in the U.S. when the three-month moving average of the national unemployment rate (U3) moves 0.5% above the low of these three-month averages over the past twelve months.
I’m surprised at how quickly the market narrative has changed about what the Federal Reserve should do.
The widespread comfort of just a few days ago that the Fed had time to wait until September to cut rates by 25 bps is being replaced by more analysts and economists calling…-Mohamed A. El-Erian (@elerianm) August 2, 2024
This has led to a violent repricing of interest rate expectations, with the market now expecting a full percentage cut in the Federal Reserve’s benchmark interest rate between September and early 2025.
Bitcoin, Recession and Liquidity
Given the recent surge in global liquidity measures, how do we explain Bitcoin’s recent weakness? Well, the answer is quite simple: right now, the market is not discounting the liquidity bonanza that will surely follow the formal onset of a recession in the US; instead, it is focusing on the recession itself and the demand destruction that such an economic contraction will surely trigger.
The chart above illustrates Bitcoin’s 30-day correlation with gold, the S&P 500 index, and the Nasdaq Composite. Note that Bitcoin was positively correlated with U.S. stock indices for much of this year, but that correlation shifted into deeply negative territory in June.
Now, if equity markets are headed for a deep selloff as recession expectations are formally factored into lofty valuations, and Bitcoin continues on its current bearish trajectory, this correlation regime will turn positive again.
Berkshire Hathaway sold more shares this quarter than in any other quarter in its history.
They know what’s coming. 🩸 photo.twitter.com/Y4CnWHitdr
— Jacob King (@JacobKinge) August 4, 2024
Of course, it’s not entirely certain that a recession will materialize. However, judging by the fact that Warren Buffet’s Berkshire Hathaway just dumped a record amount of shares, the outlook does look bleak.
On the plus side, once the much-touted recession hits, the market will quickly turn its attention to the impending flood of liquidity that a panicked Federal Reserve is sure to unleash. This paradigm shift could then play a major role in driving up asset prices, including Bitcoin, especially if it remains in a positive correlation regime with U.S. stock indices.