Inflation & Bitcoin

hey everyone and thanks for jumping back into the macroverse today we're going to talk about the most recent inflation report and we're also going to discuss implications for assets like Bitcoin if you guys like the content make sure you subscribe to the channel give the video a thumbs up and also check out the sale on intothe cryptoverse premium at intothe cryptoverse decom let's go ahead and jump in so we did just get the most recent CPI report so we're just going to run through it fairly quickly the headline inflation number came in at 2. 7 3% obviously the fed's target is 2% but 2. 7% is relatively close the only thing to really look at is that it has been going up the last couple of months that doesn't necessarily um mean that it's going to re accelerate to a second wave like what we saw back over here in the 1970s but it is at least something to keep an eye on remember inflation has essentially been dropping since 2022 right since mid 2022 now that doesn't mean that prices have dropped it just means that the prices of items that you buy every day just haven't been going up as much right so there's often sort of a misconception about this just because inflation is dropping does not mean prices are the only way you get prices to drop is if you see inflation go below zero okay and that would be a sort of a deflationary environment now remember deflationary environments are sort of what you saw back during the financial crisis right so you know obviously seeing lower prices is is somewhat welcome but it it probably wouldn't be that great for financial markets so in the short term inflation has started to tick back up a little bit right from 24 to 26 now to 27 still relatively low right still relatively low and historically you can see that the S&P 5 100 often will'll find lows around the time that inflation tops right and you can see that this cycle has basically been no different right you'll you'll see the S&P often finds lows whenever inflation tops um now the question is is will you see sort of inflation re accelerate and we're going to break down some of the different categories but one of the things that we've looked at before of course is the 1970s right and the reason we looked a little bit at the 1970s is because back then we sort of had waves of inflation right where the first wave topped out in January of 1970 and then the next wave didn't top until about almost 5 years later right and it was basically almost January 1975 and then there was another wave of inflation that came five years after that right April of of 1980 so It's always important to sort of recognize what happened in the past so that hopefully we can avoid that this time you know I I don't really think pow wants to see that happen again and so I imagine they're going to try to do what they can to make sure that this peak here plays out differently than what we saw back over here in the 197s all right there are examples before where inflation does Spike not necessarily to what we saw over here where then it just kind of slowly comes back down and that's ultimately what we would like to see I don't think anyone wants to see a second wave of inflation in the short term uh Bitcoin has moved up today and it it it makes sense I mean you know bitcoin's back above 100K it makes sense first of all because you know when inflation did start to move back up even in the 1970s right even when it started to move back up the the S&P 500 continued to go higher the S&P 500 only really started to sell off again once inflation really started to accelerate right where one month it went from 3.

8 to 4. 8 right in a single month okay and that didn't even happen back then until the post elction here right that occurred out in March of 1973 so that would still be you know several months from now if the cyclical Behavior does repeat from the 1970s um but you can see that as long as it was sort of these slow moves back up the market wasn't really that concerned by it right it wasn't you know this was not you know an obvious re acceleration of inflation the the re acceleration didn't actually occur until the post election year and that's obviously when markets uh got somewhat spooked by that because well markets had just experienced what that was like back over here and once they sniffed it out again then they basically were sort of warning all right well the fed's going to have to raise rates again and and we're going to have to go through this whole process once again again I'm hoping we avoid that outcome um one good thing this cycle so far compared to what happened in 1970s although there's a caveat in the 1970s you can see that inflation sort of bottomed out at around 3% in the summer um whereas this time it it it looked like it was also potentially bottoming out at 3% but then it actually eventually fell all the way back down to 2. 4% by September now the caveat of course is that the way they calculate inflation today is different than what they calculated in the 1970s and in fact if you do some sort of like back of the envelope math on how they calculated inflation back over here in the 1970s this peak that we had in 2022 would actually be fairly in line with these Peaks we saw in 1974 and 1980 but because they they change the way they calculate inflation um it looks it looks like it is is lower and I've always had you know kind of a problem with that not because I don't think it's worthwhile to to sort of come up with better ways to to measure inflation if they can find them but you know if you're an academic and you have like sort of a data series and then halfway through you decide to change the methodology for how you're calculating the data point but you continue to sort of showcase it on the same graph with the other data points that is you know that wouldn't fly in in academic journals right that wouldn't fly at all but this is essentially what the FED uses um you know they look at this stuff and and even though it's calculated differently um it is it is all put on on the same chart so there is caveat to those to these Peaks it might look like it's not as bad as the 1970s but if calculated the same way this peak we had in 2022 was essentially just as bad as 19 4 and 1980 was somewhere up there I think you know it was around yeah around those levels definitely in the in the double digits had it been calculated the exact same way so I suppose the thing to watch for over the next few months is just you know does inflation continue to slowly go back up like it did in the 70s and then accelerate next year or does it just continue to go down if you take a moving average right let's take a three-month moving average you can see that it is still mostly decreasing it did go up a little bit this last month when looking at the 3mon moving average um but back over here right it the three-month ese of inflation bottomed in in August um this cycle the three-month estimate if this is a local bottom was not until October so you know if inflation were to re accelerate next year perhaps it's you know perhaps the big move up is delayed by a couple months so rather than March maybe it'll be out in in May or something um but that's at least one way to look at at inflation obviously one of the things we could do is is look at it per category um kind of figure out like where is you know where is the recent move up coming from well first of all we'll look at it like this so this is just per category remember these categories are not all weighted the same we can look at that next um this is headline inflation it has been moving up the last couple of months but you can see I mean even over here in early 2024 there some months where it moved up but eventually it it fell so you look at food and beverage that actually went up this past month but food and beverage is essentially at 2% right I mean it's been at 2% for for a lot of 2024 so you know it Rose slightly from 2.

11% to 2. 33% that doesn't really seem that concerning right now that it that it had that rise uh housing inflation continue to drop from 4. 18 back to 4.

13 still a little bit higher than where it was back in September at 4. 08 but hopefully still will continue to move down it does tend to lag most other inflation measures right so if you look at food and beverage normally food and beverage you can see will sort of top out before housing inflation you can see that's what happened in the you know mid1 1970s it's also what happened in 1979 going into 1980 and it's also happen what happened over here right food and average inflation topped out before housing inflation but also you know it it took longer for housing inflation to fall back down to to some of those lower levels so do keep that in mind if you look at apparel inflation uh it actually is went up slightly to 1. 13% but obviously you know there's nothing wrong with it being 1% uh Transportation went up slightly I believe this is one of the reasons why there is a change in headline inflation is because last month uh Transportation was deflationary right it was negative .

27 n% this month it was 45% so it's back to being inflationary so that was you know sort of a a headwind for inflation last month and now it's sort of a Tailwind which kind of partially explains why inflation continued to go up if you look at Medical Care inflation actually dropped from 3. 29 to 3. 08 if you look at Recreation it also Al went up from 1 to 1.

48 but again it's still around you know it's even below 2% education and communication dropped from 775 to 79 and then finally other goods and services d uh Rose from 3. 29 to 3. 42 but remember these categories are not all weighted the same if you were to look at inflation year-over-year contributions per category let's go to the entire the entire series and if we just simply look look at this this is headline so this is headline inflation right here now let's go through each category you can see that food and beverage contributed right 3.

3 of the of the 2. 7 right so it contributed . 3 of the 2.

7 that's an increase from last month of only contributing 3 right this one it was 33 um you look at housing its contribution dropped from 1. 86 to 1. 84 but you'll notice that a majority of inflation is just the housing right I mean in headline inflation is 2.

73% 1. 84 of that 1. 84 of the 2.

73 is just housing if you look at apparel it contributed a negligible amount right 029 not really contributing a lot Transportation contributed 06 79 again really small contributions Medical Care contributed 0. 246 so you know something there Recreation contributed you know Rose from contributing 054 to 008 so that increased education and communication dropped from 004 to or dropped from 044 to 041 and then other goods and services Rose from 88 to 0091 so I mean all in all inflation is still sort of loosely at the fed's Target not exactly at 2% it's obviously a little concerning uh that inflation is starting to go back up especially when you look at it through the lens of what happened in the 1970s and you can see it kind of slowly started to move up and then at some point in the post elction year it really shot up again this is a scenario I imagine all of us would like to avoid so I'm going to hope that that doesn't happen but we will continue to talk about this just in case it it Trends in that direction what I'd like to see next month is I'd like to see it continue to come down and there's chances that it does I mean especially considering that housing inflation makes up such a huge contribution and to note that it still has been in a downtrend right if you just take a a three-month moving average of housing inflation it's basic the contribution per category it's just been dropping right very slowly but it is at least dropping now if you were to look at the monthly change that's where it might get somewhat concerning because you know the contribution from housing the drop was it used to be quite substantial recently it's it's been getting a lot less substantial so that was a prior headwind for inflation that's could become a Tailwind if if housing inflation starts to go back up now core inflation is arguably more important to track than headline inflation and there's also core PC as well you know core inflation has been a lot stickier and I think this is you know one of the more concerning sides of inflation headline inflation has at least dropped below 3% but core inflation has not right and it's been at 3% for a while now um furthermore core inflation has been going up since July of 2024 right it's been going up since July of 2024 and bottom out in July if you look at the 19 7s you can see that core inflation basically bottomed out in the summer right June July but it did go lower one last time in January which interestingly marked the top for the S&P 500 but the problem is that just like today core inflation essentially was flat at around 3. 2 to 3.

3% and if you go look at the 1970s that's also where it kind of bottomed out at and then it wasn't until the post elction year where inflation started to go up once again and obviously the S&P 500 did not like that so you know market conditions today are are obviously different back then um in in some ways one of the things that you have to consider about the 1970s that is somewhat different than today and and we could go look at this on on say the S&P 500 chart if you go look at at the 1970s um one of the things to consider is if you were to Overlay the unemployment rate back then to today um you know it certainly was a little bit different right like in in 1970 when inflation started to really go back up causing the stock market to top out in January of 1973 it was du during a period where the unemployment rate was going down right so you were seeing sort of these these wage inflation pressures but you're not seeing that today in the same way there's not I mean there has been wage inflation but unemployment has actually been going up suggesting that things are are loosening up in the labor market which should be a good thing you know to help bring inflation down so that's something to consider here is that like you know back then when inflation really started to and you you can even overlay it right if you look at inflation rate year-over-year and you overlay it um with the S&P you know this purple line inflation started to go back up while the unemployment rate was going down you see that inflation up unemployment down but this cycle it's a little different right it's a little different because this cycle you're not seeing that right you're you're seeing inflation has been going down still but unemployment is going up so to me it's not even necessarily clear that it will play out like it did in the 1970s because back then when inflation really started to accelerate it was during a time when the unemployment rate was going down but we've seen the opposite of that right we've we've seen inflation go down while the unemployment rate goes up so you know obviously there's always going to be something to worry about and that's why they call it climbing the wall of worry and that's why I've said many times that the best strategy for for you know things like thep 500 is to not try to time the market and to just GCA low expense ratio index funds um and and obviously that is worked out over the Long Haul especially as the S&P continues to push new all-time Highs but just shows you it really goes to show you that not everything is always as it seems when you look at these prior comparisons and you have to figure out like why was inflation going up back then and one of the reasons was you know because the unemployment rate was dropping and that was you know contributing to a tight labor market which contributed to wage inflation which then helped inflation generally go up today you're seeing almost the opposite yes it's true that inflation has started to go up a little bit and it might become something that the Market worries about in 2025 but why like you know why not let tomorrow worry about that if it in fact plays out so far we've seen inflation drop as the unemployment rate goes up so in the short term what the market might be more worried about in early 2025 might be this if this starts to go back down in 2025 and you start to see inflation go back up then the market might care about that but in the short term you know the the unemployment the labor market has been has had a more concerning Trend because it's been steadily going up for a while whereas inflation is only really started to go back up the last couple of months um so you know going back over to core inflation ideally we would see it come back down to 2% but we just haven't seen that yet it's been hanging out at around 3% now you might assume that because inflation came in you know higher for a couple months in a row and that core inflation is higher for a few months in a row you might assume that the FED will not cut rates but you would probably be wrong um because it looks like according to the markets and usually you know only a week out the markets have it fairly correct I think more often than not um you could argue that the markets tell the FED what to do not the other way around like the FED doesn't tell the market what to do the market tells the FED what to do and the Market's telling the FED that they're going to cut 25 basis points um if you look at probabilities sort of going out it seems like one potential outcome is you know the FED Cuts 25 basis points in December and then the market thinks they're not going to cut in January and then they might cut Again by March and then again by by June we'll see we'll see if if that's how it plays out but in the short term the market is is not really that overly concerned with you know with the rising inflation it it seems to be a little bit more concerned with the labor market and and I think that's kind of the disconnect here is is that it's it's easy to look at a chart like this and to sort of scream like why is the Fed cutting right why is the Fed cutting when inflation starting to go back up why is the Fed cutting when core inflation is not going to their target right it's still flat at 3% and their target is 2% so why are they cutting of course the reason is is the unemployment rate right the I think I think I mean that that's what I would assume is the reason is is this that's the reason why they're cutting is is that the unemployment rate has continued to go up if you take like a thre Monon moving average of the unemployment rate you can see that it has been steadily going up and I think they're trying to sort of keep this from going parabolic you know the reason why the market hasn't been that concerned about unemployment is because it's it's it's been sort of slow move up whereas these prior recessions were more parabolic moves up by the unemployment rate so I think that's the reason why the FED continues to cut because they'd like to loosen they'd like to slow down the loosening of the labor market before it's too late um and I don't I don't really think you could necessarily fault them for that and I've said for a long time they're they're really in an unfortunate position because no matter what they do unless they thread the needle perfectly they will be blamed if they cut too soon obviously they'll be blamed uh you know for cutting too soon if if inflation re accelerates if they if they don't cut aggressively enough and then you start to get a scary unemployment rate print sometime next year then they'll be blamed for not cutting enough even though right now everyone's blaming them for cutting too much so again I don't envy the position of the FED it seems like a a fairly difficult position to be in and I I think I do think they're they're probably trying to do the best they can to sort of thread that needle but right now the Market is essentially saying that there's a about a 95% chance of a rate cut in December um and and actually it's really mimicking sort of the rate cutting cycle from uh from 2019 almost exactly actually if you think about it I mean because in in 2019 um they did basically the same thing the only difference between between 2024 cuts and 2019 Cuts is that in 2019 uh I don't believe they ever cut 50 basis points right it was always 25 basis points right you had a 25 basis point rate cut in um July it was like the last day of July then you had a a 25 basis point 25 basis point rate cut in um September and then I think you had another one a month after that um so you essentially had had one and then two you know right you know back to back right so it was basically three back it was three backtack cuts at meetings but I I guess they didn't have a meeting in August right they had a meeting in July they had a meeting in um September and and potentially another one you know a month after that so this cycle in terms of rate Cuts looks similar but the main difference is that the First Rate cut this time was 50 basis points rather than 25 um and then after they had three rate cuts the FED paused after the third rate cut right so you had three rate cuts um and then the FED paused and it seems like this time we're getting three rate Cuts you know the first one was 50 but then the second was 25 and then the third one also 25 um but it seems like you're getting sort of those three cuts at three meetings in a row and then at the fourth meeting which will be in January the market is speculating that it will ba pause which is kind of what happened in 2019 um you had three rate cuts and then at the fourth meeting the FED paused uh so in terms of monetary policy you can see you know a lot of of similarities um in in how it's playing out and remember we we talked about this as well throughout a lot of 2024 with Bitcoin is that it would likely play out kind of how it did in 2019 where it would spend about 6 months putting in lower highs as those rate Cuts came in right you see that see as these rate Cuts came in you got Bitcoin putting in lower highs for about six months and then it broke out same thing here right as those rate Cuts came in you had Bitcoin putting in lower highs for about six months and then it broke out yes we did get a pandemic induced recession that led us to a hard Landing um but that's one of those things that's very hard to predict what was easier to predict was just sort of the lower high structure by Bitcoin throughout 2024 throughout sort of the summer that that from March until sort of September October that was a lot easier to predict because it's essentially exactly what happened last cycle when the FED kite rates and then after about 30 weeks right after about 30 weeks in 2019 Bitcoin broke out and the same thing happened this cycle right after about 30 weeks Bitcoin broke out we look at that 30 weeks later and then here is basic 30 weeks later when Bitcoin broke out right from the lower high structure so there just there are there continue to be a lot of similarities between what happened back then and and and and then of course sort of the argument is that as long as as long as the unemployment rate doesn't continue to go up too quickly and as long as the inflation rate doesn't continue to go up too quickly then Bitcoin continues to climb the wall of worry um until you see a concerning data point by either of those metrics the most likely outcome right is that Bitcoin climbs the wall of worry what's really interesting about Bitcoin is that despite all this macro stuff it's basically just following what it did in 2023 the orange line is year-to dat Roi of Bitcoin in 2024 the blue line is year-to dat Roi of Bitcoin in 2023 at this point and you can see that it looks almost identical you know they they look almost identical to each other um and that's why I say right I mean you know the best strategy for navig getting not just Bitcoin but but investing in general is just a DCA strategy based on risk levels which is what I use but you can use basically anything um because despite all the macro noise and whatnot Bitcoin is just doing exactly what it did in 2023 um we'll obviously see what happens in in 2025 which is only a few weeks away but it is interesting how how similar you know 2024 is to 2023 and again as I've pointed out before it's not just Bitcoin um it it it's plenty of of different markets and if you look at say sort of the Blue Chips within each asset class the ones that have been performing you know among the best uh if you look at Nvidia in 2024 it's basically tracking what it did in 2023 so it really is fascinating how how similar these things have been uh in 2024 compared to 2023 obviously it'd be a good thing if the unemployment rate does not continue to go up too quickly I know we never did I guess we never did the um the the the labor market video after the release uh maybe I'll still do one but there just wasn't a whole lot a whole lot not a whole lot changed right I mean the unemployment rate did move up a little bit but it's still below the prior cycle high of of 4. 3% so anyways guys we will go ahead and and wrap it up there we'll see if Bitcoin what it does here we talked a lot about you know is it following 2016 is it following 2012 is it following 2020 obviously if you look at it compared to 2020 sort of late November early December that's that's this is basically exactly what Bitcoin was doing back then right where it was just hesitating for a few weeks um if you look at at 2016 uh Bitcoin did continue to go up into the end of the year but the Counterpoint is that um sorry this is NVIDIA the Counterpoint is that in 2016 you know bitcoin's already exceeded or basically yeah it's already Ed sort of the 2016 returns in 2024 um and in fact if you look at at 2023 Bitcoin you know it sort of elevated around this time but then it it essentially stayed flat the the Counterpoint though is if you compare this to the average of Prior having years right if you compare it to the average prior having years Bitcoin is basically where it has always been around this point in having years on average right the average return of Bitcoin in 2024 at you know today is 2. 28 X so that's the the the return of Bitcoin in 2024 at this point is 2.

2x the average return of all prior having years at this point was 2. 3x um if it continues to follow through to the end of the year that would put bitcoin's year-to dat Roi closer to 3x so that would that could put it as high as 120 but if it just follows you know 2023 and just kind of remains flat for the rest of the year then you might have to wait until 2025 to see something like that but anyways guys we'll wrap it up there thank you guys for tuning in make sure you subscribe give the video a thumbs up and again check out the sale on into the Crypt premium at intothe crypto.