Bitcoin And Gold, The Two Outliers
Can Bitcoin Finish The Year Like It Is 2020 And The Fed Is Walking A Tight Rope
Welcome to the Friday edition of the Ecoinometrics newsletter.
Every week we bring you the three most important charts on the topics of macroeconomics, Bitcoin and digital assets.
Today we'll cover:
Bitcoin And Gold: The Two Outliers
Can Bitcoin Finish The Year Like It Is 2020?
The Fed Is Walking A Tight Rope
Each topic comes with a small explanation and one big chart. So let’s dive in.
In case you missed it, here are the other topics we covered this week:
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Bitcoin And Gold: The Two Outliers
Take a bunch of assets representing a range of asset classes from crude oil and copper, to various stock indexes to crypto and precious metals.
Look at their performance over the past twelve months on two dimensions:
Total returns.
Risk adjusted returns.
Two assets pop out:
Bitcoin has the best total returns.
Gold has the best risk adjusted returns.
The battle of the stores of value...
Actually when you look at the chart more closely you even see that Gold not only have good risk adjusted returns, he also have nice returns in general. And Bitcoin risk adjusted returns are solid.
We use the Sortino ratio to measure risk-adjusted returns in this chart. The Sortino ratio is similar to the Sharpe ratio but focuses on downside risk. It measures an asset's return relative to its downside volatility. This makes it particularly useful for comparing assets with different risk profiles.
So given that gold has had very little downside event over the past twelve months it is no surprise that it performs well relative to other assets.
Interestingly, the outliers on this chart are the assets most sensitive to global monetary conditions.
With major central banks expected to cut rates in the coming year, both Bitcoin and Gold are likely to remain important players in the big picture.
Can Bitcoin Finish The Year Like It Is 2020?
We're now in the fourth quarter, and Bitcoin's performance this year can be split into two phases:
The ETF launch
Not much else
Sounds disappointing, right? But this pattern is actually pretty common for Bitcoin.
The chart shows how Bitcoin's year-to-date returns have changed month by month this year compared to the last five years.
Surprisingly, Bitcoin's returns are just average. At the end of September, BTC was up 50% year-to-date, putting it in the middle of the pack. From here, it could go anywhere.
A U.S. recession would likely cause Bitcoin to drop in the short term.
A clear soft landing could mean significant upside potential.
A rapid increase in global liquidity might trigger a parabolic move like in 2020.
So what's most likely to happen? Based on current data, the U.S. economy seems to be in the middle ground. It's not clear which way it will go. Without a strong narrative favoring either a recession or a soft landing, I don't see a catalyst for a parabolic move.
Let's keep an eye out for more data to clarify the macro situation.
The Fed Is Walking A Tightrope
Let's get back to the Federal Reserve and the bigger picture.
The current rate cut sequence must balance two goals:
Not reigniting inflation
Protecting the job market
Surprisingly, it's working so far.
Inflation is down, especially PCE inflation, which is the standard measure:
Headline number is down to 2.3%
Core number is down to 2.7% (but levelling off)
Key core services number is down to 3.3% (also levelling off)
At the same time, continued unemployment claims have held steady in recent weeks. This suggests the job market has stopped getting worse.
The big question is: Can this balance last? The Fed doesn't have a great track record with precision work. Not surprising given their blunt tools. We can't take a soft landing for granted.
Let's see how long this equilibrium holds up.
That’s it for today. I hope you enjoyed this. We’ll be back next week with more charts.
Cheers,
Nick
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Great post. Thanks.