Bitcoin is experiencing one of its toughest bear market on record
Also the job market is losing steam and why crude oil could cause another inflation spike
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:
The fall of Bitcoin’s compound annual growth rate.
Why looking a new trend in job openings tells us unemployment is about to rise.
How the extremely tight supply of crude oil could trigger another inflation spike.
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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The fall of Bitcoin’s compound annual growth rate
There are many different metrics you can look at to describe the performance of an asset. You could look at the total return over a given period. You could look at the Sharpe ratio. You could look at distribution of daily, weekly, monthly, yearly returns… or you could look at the compound annual growth rate or CAGR.
I like the compound annual growth rate because of its intuitive nature.
You take the total growth of Bitcoin over a given period, I am using a 5-year window today. Then you work backwards to extract the equivalent of that growth in terms of annual return. And annual returns are much easier to compare to familiar numbers.
Example, if I tell you Bitcoin has a 100% CAGR over the past 5-years then that’s saying Bitcoin’s growth is the equivalent of having posted a 100% return every year over the last 5-years.
Now unfortunately for Bitcoin, its current CAGR (calculated on 5-year rolling window) is down to an average of 26% in 2023.
To put that number in perspective:
Bitcoin’s CAGR last year averaged 62%.
During the last bull market it averaged 120%.
26% was the lowest point Bitcoin’s CAGR reached in the bear market in 2018.
Said differently Bitcoin is having its toughest bear market on record.
This is what you get when you combine two ingredients. A bull market in 2020/2021 that wasn’t exceptional in terms of total returns. And a bear market which is as bad as any of the previous cycles.
The worst part is that the US is likely heading towards a recession. And that isn’t going to help Bitcoin’s price action in the short term.
But if you look past the macro turbulences the long term perspective on Bitcoin hasn’t changed. If I was starting from zero today, I would make this same bet again.
Job openings are falling below the trend line: unemployment rise is next
Since the post-COVID recovery started the US job market has been on an incredibly good streak of extremely low unemployment, rising wage and explosion in job openings.
You have to thank the Federal Reserve for the unprecedented injection of liquidity that had to be done to achieve this result.
Now focusing on job openings, the post-COVID spike can be explained pretty easily by two factors.
Many people left the labor force during the pandemic.
Many workers chose to quit their jobs to chase higher salaries.
But that period is over now. Job openings have been trending lower for months. And while they are still higher than the pre-pandemic level, they are now below a long term trend that has been established since the end of the Great Recession.
What that means is that the job market is getting less tight. And that’s exactly what you need to see in order for the unemployment rate to rise.
The problem is when the unemployment rate start to rise you are already in a recession.
So keep your eyes open for updates on this metric.
The crude oil supply is extremely tight and prices are rising again
Inflation is not under control. In the US the PCE inflation (preferred measure of inflation by the Federal Reserve) is at 3.3% year-on-year. This is still relatively far from the 2% target. Especially now that the base effect no longer helps with the deceleration.
But there is a bigger problem on the horizon than inflation not going down fast enough? Which one?
How about, inflation could experience another spike driven by energy prices?
The culprit is crude oil again. Its supply side is in an incredibly tight situation.
On way of measuring the supply situation for crude oil is to look at the comparative inventories. This is simply the difference between the current inventory of oil stocks and refined products and the five year average of this number.
Currently comparative inventories are -233 million of barrels.
That is compared to the 5-year average of the crude oil supply, the world currently has a deficit of -233 million of barrels. That’s simply one of the largest deficit we have seen over the past 10 years.
And now OPEC+ is threatening more production cuts.
Based on this level of inventory deficit we could see crude oil WTI trade anywhere up to $120 per barrel, from about $90 right now…
Let me remind you that crude oil is directly or indirectly part of the input for almost every single product that you consume. So rising crude oil prices don’t affect only the energy sector of the inflation basket. Almost everything would be priced higher.
The result, another inflation spike while the previous one hasn’t even completely resolved yet.
And this time around no US Strategic Petroleum Reserve to serve you. They have been emptied and not refilled over the past couple of years.
And the Federal Reserve cannot directly affect commodity prices.
Another spike in the inflation rate would certainly be awkward for central banks and politicians. Which means the Federal Reserve could come in the next recession with its hands tied.
So definitely something to follow.
That’s it for today. I hope you enjoyed this. We’ll be back next week with more charts.
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Cheers,
Nick
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