# Tailwinds for crypto into 2025? _A macro update_ December 13, 2024 • Michael Nadeau --- # Tailwinds for crypto into 2025? ## A macro update Michael Nadeau December 13, 2024 Hello readers, If we’ve said it once, we’ve said it a thousand times: if you don’t know your macro, you don’t know your crypto. Of course, the same could be said for onchain data. [That’s why we took a peek behind the curtain last week](https://thedefireport.io/research/local-top-full-send?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=tailwinds-for-crypto-into-2025). A useful exercise. But while the blockchain provides valuable alpha, it’s all about pairing those insights with a view of the broader economy. This week we’re zooming out to explore how macroeconomic trends could impact the crypto markets in 2025. Topics covered: - [Inflation](#inflation)  - [The Dollar](#the-dollar)  - [ISM Data](#ism-data-business-cycle)  - [Credit Markets](#credit-markets) - [Labor Markets](#labor-markets)  - [Treasury & Fiscal Spending](#treasury-fiscal-spending) - [Fed Policy](#fed-policy)  - [Trump](#trump-policies)  - [China](#china) - [Global Liquidity](#global-liquidity)  - [Conclusion](#conclusion) ***Disclaimer:**** Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice. * Let’s go. # Inflation It’s on the rise. After bottoming in September at 1%, we’ve accelerated back above 3% per Truflation. Data: Truflation We like Truflation’s data because it uses real-time, web-scraped data from diverse online sources. Plus, it’s updated more frequently than traditional government metrics, such as PCE. However. *The Fed is focused on PCE*. Therefore, we use PCE as a way to forecast Fed policy, using Truflation for a more real-time view of what’s happening in the economy. Here’s PCE: Data: FRED Database It’s currently 2.3% (October reading). Also on the rise — which is difficult to see in the chart (September was 2.1%). We’ll have the November data on 12/20. ##### View on Inflation Energy costs and shelter were the primary drivers of the increase. However, crude oil prices are at cycle lows. Data: Trading Economics The question is whether they’ll stay here, or possibly drop further. Given seasonality impacts + Trump’s plan to increase supply via deregulation in the US, it’s hard to see why oil would spike anytime soon. On the other side, geopolitical conflict, unforeseen natural disasters, or supply cuts by OPEC (in anticipation of increasing supply in the US) could cause higher oil prices. We don’t see those events playing out. Furthermore, it’s our stance that the inflation from ‘21 was caused largely by supply shocks + fiscal spending & stimulus checks — which we don’t see as a threat today. Therefore we’re projecting range-bound oil prices and lower inflation/growth. # The Dollar Data: Trading View Bitcoin is up 58% since 10/1. Meanwhile, the dollar has rallied from 100 to nearly 108 on the DXY. It sits at 107 today. This is idiosyncratic behavior. Normally, a strengthening dollar would be bad for risk assets such as Bitcoin (see 2022). But we’re seeing the two rally together now. So what’s going on here? Should we be concerned? We think the dollar is showing strength due to the global market pricing in Trump’s victory. Trump’s policies are good for business. Which means they are good for markets. We saw the same dynamic after Trump’s victory in 2016. The dollar rose. Why? We think foreigners are pricing in the “Trump Bump” and are buying dollar-denominated assets as a result. ##### View on the Dollar We think growth is slowing/normalizing. This is lowering inflation, albeit with a delay. And that interest rates are likely to drop. Therefore, we expect to see a range-bound dollar over the medium term, possibly dropping back to 100. # ISM Data (Business Cycle) Data: MacroMicro In terms of the business cycle, we can see that the blue line (manufacturing) appears to be bottoming. A reading below 50 historically indicates the economy is in contraction. A sustained period below 50 indicates a slowing economy. This is where we’re at right now — with services (red line) doing slightly better. These levels tend to coincide with rising unemployment. Which typically leads to an accommodative monetary policy from the Fed. Again. This is exactly what we see today. ##### View on the Business Cycle We think growth has slowed, leading to an uptick in unemployment. This could ultimately manifest in downward pressure on inflation. Which leads to rate cuts. Which puts downward pressure on the dollar. In the medium term, we think these dynamics should support risk assets/crypto. # Credit Markets Data: FRED Credit spreads continue to clock in at historically low levels — an indication that investors are demanding less compensation for additional units of risk. This can mean two things: 1) markets are complacent, mispricing risk. Or 2) market participants are optimistic about the economy, with Fed and Fiscal policy accommodative. We think it’s the latter. Next, we have trends in bank lending: Data: Fred Database The % of banks tightening lending standards has been in decline since peaking in late ‘23. Ideally, this KPI would remain stable as the Fed cuts rates. With that said, historically we see a negative correlation with rate cuts and the % of banks tightening lending standards. Why? Rate cuts tend to indicate a slowing economy or recession — making it harder for banks to lend. ##### View on Credit Markets No signs of stress. Not yet anyway. # Labor Markets The unemployment rate rose to 4.2% in November (from 4.1%). Below we can see a recent uptick in unemployment claims. Data: Forex Factory We believe weakness in the labor market has the full attention of the Fed right now. Rising continuing claims data is telling us that for those losing a job, it is getting increasingly difficult to find one. This is another sign that growth is slowing/normalizing. With that said, the stock market is at all-time highs. Corporate profits are strong. This is what’s keeping the labor market intact. But my sense is the Fed is watching this like a hawk. After all, the Sahm Rule was already triggered in July. ##### View on the Labor Market It’s softening. But not rapidly. We expect the Fed to (attempt) to get ahead of any weakening in the data (as they already cut 50 bps in Sept. after the Sahm reading in July). # Treasury & Fiscal Spending Data: United States Treasury The US Government has now spent $1.83 trillion more than it has earned in tax receipts this year. In November alone, it spent more than 2x its receipts. That’s $1.83 trillion that has been printed and pushed into the economy/the hands of Americans — a key driver of financial markets this year (and the primary driver of inflation in our opinion). Now. Trump is coming in. And we have a new agency called “DOGE,” or Department of Government Efficiency — spearheaded by Elon Musk. Some people think excessive spending will be curtailed as a result. And maybe it will. But what sectors will be cut? Medicare/Social Security? The military? Interest? That’s 65% of the budget right there — which seems untouchable. Meanwhile, the Treasury has to refinance over 1/3 of its debt next year. We don’t think they can do this with elevated rates. ##### View on Treasury/Fiscal Spending We think it’s unlikely that major cuts to fiscal spending will happen anytime soon. DOGE may find $100b of spending to cut. But it’s not going to move the needle in a material way. And it will take some time. Meanwhile, the Treasury needs to refinance 1/3 of all outstanding debt over the next year. We think they will be doing this at lower interest rates. Combining these views gives us a bullish outlook for risk assets/crypto. # Fed Policy The next FOMC meeting is 12/18, and the market is currently pricing in a 97% chance of a cut. We think this could give China the green light to ease as well. Why? We think China wants to continue easing. But it’s difficult for them to cut rates when the Fed is not cutting because the Yuan would weaken against the dollar, making Chinese imports more expensive. ##### View on Fed Policy Rate hikes seem unlikely anytime soon. A cut is all but guaranteed in December, with the market pricing in a pause for January at 76%. There is no FOMC meeting in February. So, the next decision on policy won’t come until March. We think the labor market may be showing more signs of weakness at this time, with the Fed likely cutting more into the middle/late 2025 — finishing somewhere around 3.5%. Will rate cuts exacerbate inflation? We don’t think so — which is a non-consensus take. In fact, it’s our view that rate hikes are playing a role in elevated inflation (as well as other fiscal spending). Why? Because interest expense is now over $1 trillion. That’s money being printed and passed to Americans holding bonds, which appears to be getting spent into the economy. Of course, higher rates have not caused the Banks to stop lending (see chart above). Therefore, it’s our view that inflation could *drop* as the Fed cuts rates (assuming oil prices stay low and we don’t see further increases in fiscal spending). Remember, we had 0% interest rates for 10 years with low inflation. Japan has had 0% interest rates for 30 years with low inflation. # Trump Policies The market knows what to expect from Trump’s presidency: - Lower taxes. This should boost corporate profits, potentially leading to higher stock prices. It can also lead to higher income inequality and more deficits. More deficits = more $ in the hands of Americans. - Tariffs/”America First”. This can lead to higher prices domestically. We think AI/automation may actually offset this to some extent. - Deregulation. This is good for business as it will likely lead to higher profits in the energy, tech, and finance sectors. - A stronger border. This could potentially lead to labor shortages and higher wages (inflationary). ##### Views on Trump Policies We think Trump is generally good for business, free markets, and asset prices. The trade-off is that we may see some inflationary impulses. This is where things get interesting as the Fed will be looking to pause rate hikes or tighten monetary policy if inflation comes back. Of course, we think Trump will try to impose his will on Jerome Powell. Ultimately, we think Trump wants to run the economy hot and inflate away some of the debt over the next 4 years. This means inflation has to exceed nominal interest rates, which is not the case today. Finally, given Trump’s support of the digital asset industry (as well as the incoming SEC Chair), we think crypto will benefit from his administration. Not to mention the potential for favorable regulations from Congress in the coming years and the potential for a Strategic Bitcoin Reserve. ##### View on Trump Policies We think the Trump Administration will be good for crypto — from both a market + regulatory perspective. # China According to [Dan Tapiero](https://x.com/DTAPCAP/status/1865421449730617525?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=tailwinds-for-crypto-into-2025) (one of my favorite macro investors), China is currently deflating (negative real interest rates). Negative rates in China dampen US inflation fears. This strengthens the dollar (as we see today). Rate cuts in the US could permit China to cut as well. Ultimately, it leads to more global liquidity. Speaking of global liquidity… # Global Liquidity Given that 1/3 of the US debt needs to be refinanced over the next year, we think the Fed may have to step in as a buyer of last resort (QE). Lower rates in the US will allow China and Europe to ease conditions — in somewhat of a coordinated fashion. We think this will lead to plenty of liquidity/collateral within the financial markets — with crypto/risk assets one of the biggest beneficiaries. These dynamics are lining up with year 4 of the crypto cycle — which is historically the most volatile to the upside. # Conclusion - Growth is slowing. - This leads to turmoil in the labor markets (the Fed is watching this). - Which leads to rate cuts (as we see today). - This allows China and Europe to ease conditions without sacrificing their currencies/imports. - Which leads to favorable liquidity conditions for risk assets. That’s the setup as far as we see it. Layer in the fiscal spending, an incoming Trump administration, and year 4 of the crypto cycle and you get the recipe for explosive bull market conditions in 2025 (expect volatility). Of course, we’ll continue to monitor the markets and provide you with updates from both an onchain data + macroeconomic perspective. After all, if you don’t know your macro, you don’t know your crypto. Thanks for reading. Take a Report. And Stay Curious. ***Disclaimer****: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.*