This episode of Bits + Bips LIVE dives into non-consensus macroeconomic forecasts, particularly the risk of summer stagflation driven by tariffs and its potential collision with crypto market dynamics, alongside a deep exploration of evolving crypto regulations and institutional adoption.
Macroeconomic Outlook: Challenging the Consensus
- The discussion opens with Rahm presenting a non-consensus view that markets might face a surprise bout of stagflation—a period of slow economic growth and high inflation—over the summer. This is primarily attributed to anticipated tariff policies, with a potential 10% floor, which could fuel inflation.
- He also highlights seasonal weakness typically seen in initial claims and employment data during June, July, and August, which could trigger a growth scare. “Markets right now are priced for the consensus story,” Rahm notes, implying they are unprepared for these potential shocks.
- James concurs that rate cuts are likely pushed back, but maintains a positive medium-term outlook for crypto. He then poses a critical question for investors: “Assume we're wrong, why were we wrong?” encouraging a contrarian examination of prevailing assumptions.
- Noah provides market data on rate cut expectations, noting a shift from a June/July possibility to September for the first cut, with markets pricing in one cut by September and two more by year-end. He confidently states, “I think we see a cut this year...and I think it happens in September at the latest.”
Recession Risks, Market Valuations, and Fed Policy
- Rahm, citing analysis from Neil Dutta of Renaissance Macro, outlines a bearish scenario including a potential recession. Factors contributing to this view include weaker government hiring, declining tax receipts, real income falling below inflation, and persistent weakness in the housing market. He suggests the S&P 500 is near fair value around 6,000.
- Noel considers the implications of multiple rate cuts, suggesting, “If we've had three cuts...things are really bad out there,” such as surging unemployment or a seized Treasury market. She questions the efficacy of small, 25-basis-point cuts.
- A basis point (bps) is one-hundredth of a percentage point, commonly used to denote changes in interest rates or financial instrument yields.
- Noah counters that the Fed might implement "adjustment cuts" as inflation moderates, though he acknowledges the summer could introduce volatility. He points out that real interest rates remain elevated, which Fed officials see as restrictive policy, though he believes it reflects strong underlying growth.
Tariffs, Growth Scares, and the Yield Curve Control Debate
- Alex expresses skepticism about the impact of summer data, believing the market will look through any short-term growth scares, especially given a "pragmatic administration capable of pivoting fast." He views the 10% tariff floor as manageable.
- Regarding Yield Curve Control (YCC)—a monetary policy where a central bank targets a specific longer-term interest rate and buys or sells government bonds as needed to maintain it—Alex asserts, “That's consensus in crypto only. It's not consensus outside of crypto...That's not going to happen.” He believes the US is far from an emergency requiring such an extraordinary measure.
- Noel disagrees, seeing YCC as a plausible scenario, drawing parallels with Japan's debt policy. She suggests it could be implemented subtly, perhaps through shifts in the Fed's balance sheet runoff.
Fiscal Policy: The "Big Beautiful Bill" and Its Implications
- Rahm discusses a Bank of America Merrill Lynch flow show report detailing a fiscal package. Key components include extending Trump-era tax cuts (a continuation, not new stimulus) and $700 billion in new tax cuts, offset by revenue from tariffs (effectively sales taxes).
- He characterizes the policy as a redistribution: “high income earners, shareholders, and big corporates, and then small business owners, they're going to get a tax hike that funds a tax cut for sub 150K.” Rahm is critical, arguing for broader tax participation.
- James notes the $2.7 trillion deficit added but sees the fiscal measures as “definitely good for markets.”
- Noel suggests YCC could be introduced indirectly by “changing bank regulations...encouraging banks to buy 10-years or 20-years.”
- Rahm concurs that regulatory adjustments, like waiving the supplemental leverage ratio (SLR)—a capital requirement for large banks—are likely to facilitate bank purchases of government bonds, though questioning if it's in the banks' best long-term interest.
Housing Market Dynamics and Employment Nuances
- James observes that the housing market correction is regional: Texas and Florida are cooling significantly, while the Northeast remains tight.
- On employment, he references Bloomberg economist Anna Wong and Neil Dutta, noting that the time people take to find new jobs has extended, indicating some labor market softening.
- James also posits that large-cap tech stocks, the "Mag Seven," might behave more like consumer staples than cyclical stocks in a downturn, as services like Netflix or Google Cloud are deeply embedded in consumer and business life.
- Rahm shares an anecdote from an upstate New York factory manager struggling to hire due to individuals reportedly gaming the unemployment system. He views this as inflationary and a "quasi form of universal basic income" that is counterproductive.
- James acknowledges hearing similar stories, particularly post-COVID, though perhaps less prevalent now.
Housing Market Deeper Dive and Investor Sentiment
- Alex downplays fears of a housing market implosion, stating that while the market is weakening (e.g., a shift from buying to renting), US household balance sheets are strong. “The housing market is not what defines the economy going forward in the US,” he argues, expressing more concern over tariffs, hyperscaler investments, and yields on the 10-year Treasury rising above 4.7-4.8%.
- Rahm questions what's priced into markets, suggesting a "Goldilocks" scenario (moderate growth, low inflation) is largely reflected in the S&P 500's 21x earnings multiple.
- Alex agrees things are "fairly priced," which could allow for further upside, especially with potential "carrots" from Trump's deal-making and the fiscal package. He notes sentiment indicators show investors are "slightly underweight risk,” which often precedes further market gains.
- James suggests current high market multiples could mean a flatter market ahead. He also observes that many bearish housing calls originate from regions experiencing localized bubbles (e.g., Florida, Texas, California Airbnb hotspots) and that the rent-versus-buy calculation is currently "so broken" due to high mortgage rates, trapping existing homeowners with low rates.
- Rahm presents a chart showing hedge fund net exposure remains historically low despite recent increases, indicating a "performance chase" where funds are forced to buy into a rallying market. He anticipates rotation from overvalued tech into sectors like healthcare.
Crypto: Consensus Conference Insights
- James, having attended the Consensus conference in Toronto, reports a positive and institutionalizing atmosphere with over 10,000 attendees. He focused on panels covering DeFi/TradFi bridges, staking, and ETFs.
- “The vibes were good. They were positive...It didn't feel frothy,” James notes, contrasting it with the exuberance of 2021-2022. Regulation was a significant topic. His panel included Andy Bear (CoinDesk Indices), Anthony Scaramucci (SkyBridge), Pascal Gauthier (Ledger, though the transcript says 3iQ which is a different entity/person - likely Pascal St-Jean from 3iQ), and Jonno Steinberg (WisdomTree). The conference is moving to Miami next year.
Crypto Regulation: The Stablecoin Bill ("Genius Act")
- James discusses the "Genius Act," a stablecoin bill, noting that initial bipartisan support seems to be fracturing, with some Democrats raising concerns over KYC and citing the Trump family's crypto activities as a reason for opposition. He quotes Nick Carter: “If cash were invented today, it would be illegal.”
- KYC (Know Your Customer) refers to mandatory processes businesses use to verify the identity of their clients to prevent fraud, money laundering, and other illicit activities.
- Alex believes the bill will likely pass.
- Noel is less confident, highlighting Senator Elizabeth Warren's opposition due to concerns about potential Trump family enrichment, the lack of a ban on USDT trading on US platforms, the possibility of private companies like X issuing stablecoins, and general consumer safeguards. “If even the low-hanging fruit...can't get through, then that is going to deflate expectations for further progress in regulation,” she warns.
- Rahm, referencing insights from Austin Campbell (a notable figure in stablecoin policy), believes the bill should pass and that the Treasury should support it due to the funding benefits (an extra $250 billion for the Treasury market). Campbell's key insight: stablecoins could weaken China by allowing Chinese exporters to receive USD-denominated payments outside state control.
- Noel adds that the EU's push for a digital euro is partly driven by fears of dollar-backed stablecoins dominating European digital payments.
- James expresses concern that if the stablecoin bill fails, a broader market structure bill is highly unlikely, leaving the industry reliant on SEC and CFTC rulemaking.
Coinbase: S&P 500 Inclusion and Competitive Landscape
- The panel discusses Coinbase's likely inclusion in the S&P 500. Rahm calls it "what a round trip" and congratulates the company. Key questions for Coinbase include its strategy regarding USDC and Circle (potential acquisition) and its positioning against Robinhood (cross-asset expansion vs. deepening payments focus).
- Alex suggests MicroStrategy as another crypto-related company that could eventually join the S&P 500.
- Rahm notes Coinbase's significant revenue from Net Interest Margin (NIM) on USDC holdings and current valuation challenges. He recalls how retail investors championed Coinbase stock when hedge funds were short.
- Net Interest Margin (NIM) is a measure of profitability for financial institutions, representing the difference between interest income generated and interest paid out, relative to interest-earning assets.
- James admits past skepticism about Coinbase's stock due to its reliance on NIM and high transaction fees (1-2%+) plus spreads.
- Alex criticizes Coinbase as "a horrible product and a horrible platform run horribly," citing poor customer service and a recent data leak affecting 1% of active traders.
- Rahm acknowledges Coinbase's operational achievements but points to Robinhood as a strong competitor with a compelling UX, cross-asset offering, and lower costs. He humorously notes receiving fraudulent "Coinbase customer service" calls.
- James observes Robinhood (TradFi-focused) is leaning into DeFi, while Coinbase (crypto-native) is launching traditional, CFTC-regulated futures, signifying a convergence.
- Rahm gives Coinbase credit for its role in the industry's response to SEC actions, including support for the Fairshake PAC.
Circle: Potential Acquisition and Valuation Dynamics
- The discussion shifts to Circle, the issuer of USDC, and the potential for Coinbase to acquire it, especially given Ripple's prior interest. James notes Coinbase's significant revenue from its USDC profit-sharing agreement with Circle.
- Rahm believes Coinbase has leverage due to its distribution agreement with Circle. While USDC has a strong brand, he anticipates competition from new yield-bearing stablecoins. “The ability to have a digital dollar that accrues yield that's non-custodial onchain...that's innovation that is significant,” he states.
- James agrees that yield is a powerful differentiator, though US regulatory hurdles for yield-bearing stablecoins (often deemed securities) persist.
- Noel suggests the "Genius Act" might prohibit yield as an intrinsic part of a stablecoin token, but distributing returns separately could be a viable workaround.
- Alex emphasizes the difficulty of replacing Circle's established liquidity in DeFi. “Coinbase does not have the entire upper hand,” he argues, due to USDC's deep integration in trading pools.
- Noel raises the possibility of antitrust concerns if Coinbase were to acquire Circle and make USDC its exclusive stablecoin.
- Rahm concludes the merger "needs to happen," benefiting both. He suggests Coinbase use its "expensive valuation" stock for the acquisition, while Circle has a "funny money valuation" as a private entity.
Crypto ETFs: Staking, New Assets, and Regulatory Hurdles
- James provides an update on crypto ETFs, noting that decisions on Solana, XRP, and other new asset ETFs are generally being delayed.
- A major uncertainty is staking within ETFs. The grantor trust structure used for US spot crypto ETFs faces challenges with handling staking yield, which could be considered "bad income" by the IRS. Clarity from the IRS, SEC, and CFTC is needed.
- A grantor trust is a legal trust structure where the individual who creates the trust (the grantor) retains certain powers and is typically taxed on the trust's income. In the context of ETFs, it's a common pass-through vehicle.
- James speculates Solana ETFs might be approved before staking solutions for existing Ether ETFs are finalized.
- He points to crypto index products (Grayscale's GDLC, Bitwise's BITW, and offerings from Franklin Templeton and Hashdex) with a deadline of July 2nd for one product. This could prompt the SEC to release a broader framework for approving other crypto assets.
- Noel references a statement by SEC Commissioner Hester Peirce, who reiterated her view that most crypto tokens are not inherently securities, but their sale can constitute an investment contract. Peirce acknowledged the complexity of crypto rulemaking.
- Rahm expresses frustration that the SEC isn't pursuing figures like Richard Hart for alleged fraud, arguing that enforcement against bad actors builds market confidence. Alex concurs, noting Hart "advertised very aggressively literally a memecoin as a certificate of deposit. That's the sin."
Concluding Thoughts and Strategic Positioning
- When asked about optimal positioning, Alex states, "If I had to pick one asset to deploy right now it'd be Bitcoin."
- Rahm suggests crypto miners are worth considering, especially with firms like Galaxy Digital looking to repurpose inefficient mining operations for AI computing. He highlights the CoreWeave and Core Scientific deal as an example of these "hybrid plays" gaining traction.
This episode underscores the critical interplay between macroeconomic shifts, particularly potential stagflation, and the crypto AI sector's trajectory. Investors and researchers should monitor tariff impacts, Fed policy signals, and the progress of stablecoin legislation, as these will significantly shape market opportunities and regulatory landscapes.
