On the Margin Newsletter: Is an economic slowdown on the horizon?

Welcome to the On the Margin Newsletter, brought to you by Ben Strack, Casey Wagner and Felix Jauvin. Here’s what you’ll find in today’s edition:

• A look at the numbers: Is the economy slowing at a time the market has overpriced strength?
• The largest public holder of BTC and a bitcoin mining giant have seen share price gains this week for very different reasons
• Oh, and if you have a few free hours Wednesday morning, the House of Reps wants to talk about tokenization

1708

The year Antonio Stradivari built the violin known as “Empress Caterina.”

What the heck does that have to do with crypto? Well, Galaxy Digital tokenized the violin on the Ethereum blockchain. Animoca Brands co-founder Yat Siu owns the instrument and is using the tokenized violin as collateral for a loan from Galaxy’s global markets business.

Efforts to use blockchain tech to convert physical and TradFi assets into digital tokens — from debt securities to real estate — continues to ramp up. Financial market infrastructure giant DTCC and others last week threw support behind tokenized asset advancement via an industry-wide crypto ecosystem plan.

Galaxy CEO Michael Novogratz noted: “By starting with high-end assets like this violin, we’re creating a process that will transform how a whole range of assets are managed, valued and traded in a digital economy.”

Economic slowdown soon?

At a time the market has finally priced in fewer rate cuts than the Fed in their most recent Summary of Economic Projections, it looks like the US economy is rolling over and slowing.

We see in this chart that the blue line (3-month term SOFR), which represents the market expectations of short term interest rates, is above the Fed dot plot (blue dots). To be fair, these dot plots are dated, and the updated ones are coming at the next FOMC meeting in June.

Source: Chatham Financial

This represents something quite interesting. For the first time this cycle, the market has overpriced hawkishness compared to the Fed. What this translates to is that for the Fed to simply meet expectations of priced-in hawkishness in the upcoming June FOMC meeting, it will need to reduce the amount of cuts it is forecasting from three to two, or less.

This makes the hurdle rate for a hawkish surprise very high and the hurdle rate for a dovish surprise quite low.

Therefore, piecing out whether the economy is now slowing down at a moment when the market has overpriced a strong economy is key. Let’s look at some coincident data to see whether that’s happening or not.

Atlanta Fed GDPNow is cratering from 4% projected growth only a few weeks ago to a measly 1.8% now:

Pending home sales — a key driver of the housing market — which is a key driver of the most lagging aspects of CPI (e.g Owners Equivalent Rent), is also cratering:

Finally, looking at oil as one of the key coincident indicators of the state of the economy, it just took out the February lows:

Every datapoint is flashing that an economic slowdown is on the horizon right as the market has overpriced hawkishness and a strong economy. This leads me to believe that rate cuts are coming, and coming soon.

What this means for risk assets like bitcoin depends entirely on whether this remains a slowdown or accelerates into a recession. If the rate cuts are part of a “normalization” regime in line with a slowing economy, it will most likely be very bullish. If it is part of an accelerating recession, risk assets will be hit until a major liquidity pivot from the Fed emerges:

To know which side of the coin we’ll land on, we will just have to practice patience.

— Felix Jauvin

MSTR, CORZ on the up and up

Two very different developments have spurred notable crypto stock moves so far this week.

First, on Monday, MicroStrategy’s share price saw a nearly 7% lift. This came after the company and its founder, Michael Saylor, said it would pay $40 million to resolve the DC AG’s tax fraud allegations.

Neither Saylor nor the company admitted to any wrongdoing as a result of the settlement, a Monday filing noted. And Saylor will be footing the entire bill, the document adds.

Lance Vitanza, a senior analyst at TD Cowen, told Blockworks that investors will probably “cheer the company and [Saylor] for putting the issue behind [them].”

MicroStrategy owned 214,400 bitcoin at the end of March, and has shown no signs of slowing down its buy-and-hold strategy.

“The potential for a worse outcome clearly has not inhibited the company’s ability to raise capital with proceeds earmarked for bitcoin acquisition,” Vitanza said. “Probably business as usual from here on out with potential for a negative tail risk event removed.”

Bitcoin miner Core Scientific saw even bigger stock price gains Tuesday after inking a deal with cloud provider CoreWeave.

The Texas-based company is set to offer 200 MW of infrastructure for CoreWeave’s high-performance computing (HPC) operations in a 12-year deal expected to drive average annual revenue of $290 million.

Core Scientific’s shares jumped roughly 40% to as high as $6.84 by midday ET on Tuesday. The stock price is up nearly 100% from the start of the year.

CEO Adam Sullivan told Blockworks in March that Core Scientific had a chance in the HPC space “to beat other companies by years to getting megawatts up and operational.”

— Ben Strack

Here we go again

Congress is back in session after its holiday weekend recess last week, and surprise, surprise, the House is hosting yet another crypto hearing.

The House Financial Services Digital Asset Subcommittee is convening tomorrow to talk about real-world assets and tokenization.

Witnesses include Securitize co-founder Carlos Domingo; DTCC’s global head of digital assets Nadine Chakar; USDF consortium CEO Robert Morgan; Sidley Austin LLP partner Lilya Tessler; and Hilary Allen, professor at American University law school.

Committee members will be considering two laws during the hearing: one to require the CFTC and SEC to study tokenized securities, and another urging the Fed, FDIC, Comptroller of the Currency and National Credit Union Administration Board to do the same.

The hearing could get fairly heated. Allen, in her prepared statement, called out two bills that recently passed the House — FIT21 and the anti-CBDC Surveillance Act. Both proposed laws could be “detrimental” to RWA tokenization, she noted.

“A lack of investor protections would also undermine any financial inclusion benefits associated with tokenization — but realistically, the benefits of tokenization will sound more in efficiency gains than in financial inclusion improvements,” Allen wrote.

“When roughly half of all Americans (some surveys say more) are living paycheck to paycheck, the problem is not a lack of investment opportunities but a lack of money to invest in the first place,” she added.

Insert mic-drop here.

Rep. Tom Emmer, who wrote the anti-CBDC bill, is a subcommittee member. So I’m sure Allen’s comments have him riled up already.

If your idea of a good time is watching representatives fight for three-plus hours, the hearing starts Wednesday at 9 am ET and can be streamed here.

— Casey Wagner

Bulletin Board

• FTX and the IRS have come to an agreement that would see the bankrupt exchange’s estate pay the government nearly $1 billion, should the court sign off.
• Mexico has its first-ever female president, but its currency is sliding. Analysts say the commotion should calm down soon enough though.

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