Analysts are forecasting a 6.5% year-over-year increase in the US Consumer Price Index (CPI) for December 2022 – with official data from the Bureau of Labor Statistics released on January 12 – but 2023 could bring some upside as investors. Michael Burry It expects CPI to fall this year, but warned that any further move in interest rates to stimulate economic activity would trigger a second inflation spike.
The actual consumer price index for November 2022 was 7.1%, which is less than the forecast level of 7.3%. The better-than-expected result caused a spike in cryptocurrency prices at the time of the announcement, with Bitcoin immediately rising to $18,000 at the time.
Throughout this bear market, CPI data and interest rate announcements have been significant catalysts for cryptocurrency price volatility before, after, and during announcements. But to what extent?
The chart below shows roughly half positive and half negative effects on the Bitcoin price prior to the CPI announcement; it was the same during the announcement.
Conversely, the day after the announcement tended to have mostly negative price effects, probably because investors had time to absorb the reality of rising consumer prices and subsequent interest rate hikes.
Separating the three categories of “Previous Day,” “During CPI,” and “Next Day” into individual percentage change graphs better illustrates the previously noted findings.
Based on these patterns, there is no likelihood of significant bias before or during the CPI announcement. However, Bitcoin is expected to trend lower after the announcement.
Signs of rising stagflation
Despite current recession denial, including the White House redefining what a recession is, there is growing evidence of stagflation.
Stagflation refers to the combination of high inflation and economic stagnation, especially high unemployment. This presents policymakers with a dilemma, as measures to reduce inflation may exacerbate unemployment.
A recent article by Peter Schiff blamed our current economic woes on “those tight checks” that fueled inflation that has since turned into stagflation. He noted that state expenses should be paid by the people in one way or another.
In addition, the article, which cites the work of Spanish economist Daniel Lacalle, addresses the reality of weak growth trends, rising taxes, and high inflation, particularly related to energy prices.
The last time things looked this bleak was during the stagflation of the 1970s. This decade was characterized by weak economic growth, high unemployment and double-digit inflation.
A 1970s rerun?
Burry recently tweeted:
“Inflation has reached its peak. But this is not the last peak of this era. We are likely to see CPI in 2H 2023 low, possibly negative, and the US in recession by any definition. The Fed will taper and the government will stimulate. And we will have another jump in inflation. It’s not difficult.“
The scenario described by Burry happened three times in the 1970s. The chart below shows these three distinct waves of inflation peaking and then declining over the course of a decade.
Between 1975 and 1979, Paul Volcker, who was the chairman of the Fed, finally brought the increase in consumer prices under control.
Reflecting on this, investor Bill Druckenmiller recently noted that once inflation exceeded 5%, the Fed funds rate never retreated until it was taken above that, which begs the question, why aren’t interest rates at 9%?
In the 1970s, the debt-to-GDP ratio hovered between 30% and 35%, which allowed Volcker to charge rates as high as 19%. Now, with 120% debt to GDP, interest rates above CPI inflation would destroy the economy.
The next FOMC meeting is due to end on February 1. Analysts are now 4/1 in favor of a 25 basis point hike, supporting narratives that a slowdown is playing out in the pace of interest rate hikes.
However, Fed Chairman Jerome Powell’s earlier comments about rates being “higher for longer” suggest that we are not yet at the bottom, despite the slowdown. Likewise, there is no indication of how long the Fed intends to leave its policy rate on hold.
Regardless of Burry’s prediction, from the current perspective, a turnaround seems far off, currently keeping pressure on risk assets, including Bitcoin.