Bitcoin Soars, Stocks Slump Ahead of PCE Data

Stocks took a step back this morning following a session that ended in mixed results as investors trod lightly in anticipation of a pivotal inflation report. This report – the PCE price index – is expected to play a significant role in shaping the future of interest rate reductions.

The Dow Jones Industrial Average and the Nasdaq Composite both experienced declines exceeding 0.5%, and the S&P 500 dropped by 0.3%.

In the waning days of February, the market, which had been riding high on the wave of AI excitement, faced a reality check with the prospect of enduring elevated interest rates. The countdown to tomorrow’s PCE inflation figure has been the week’s focal point for investors, given its potential influence on the Federal Reserve’s pace in implementing rate cuts.

Earlier today, the Bureau of Economic Analysis unveiled its first revision of the GDP for the fourth quarter of 2023. This update seems a bit outdated, considering it reflects the US economy’s status from over two months ago, and we’re now approaching the second quarter of 2024. Meanwhile, Bitcoin’s value surged past $60,000, nearing its peak by less than $10,000. At first glance, these two developments might seem unrelated, but there’s a connection between them. Here’s why:

According to the Biden administration, the GDP in the fourth quarter grew by 3.2%. This figure is slightly down from the initial 3.3% estimation and falls short of the 3.3% consensus estimate.

Despite this, the BEA reported that the fourth quarter’s growth mainly came from increases in consumer spending, exports, and state and local government expenditures. Imports, which detract from the GDP calculation, saw a rise.

Consumer spending went up, reflecting gains in both services and goods. The service sector’s significant growth areas included health care, food services, accommodations, and other services, with international travel leading the way. In the goods category, pharmaceutical products, recreational goods, and vehicles were the main growth drivers.
Exports grew in both goods and services sectors, with petroleum and financial services leading their respective categories. State and local government spending increases were noted in both investment and consumption expenditures, particularly in structures and employee compensation.

Comparing the first and second estimates reveals a few key points. Personal Consumption grew more than anticipated, with a 3.0% QoQ annualized increase. This growth contributed 2.0% to the overall GDP of 3.21%, an improvement from the initial 1.91% estimate. Fixed investment’s contribution rose to 0.43%, and the government’s share increased to 0.73%, accounting for about a quarter of the final GDP figure. These gains were somewhat offset by a decrease in the change in private inventories.

However, these details might seem less relevant over time. What’s more important is not the GDP of the past quarter but the economic outlook for the upcoming quarters.

But how does this relate to the surge in Bitcoin’s value?

A closer examination of the data reveals a surprising detail: the nominal GDP increase from $27.61 trillion in the third quarter to $27.94 trillion in the fourth quarter indicates a $334.5 billion growth in the US economy in absolute nominal dollar terms.

This growth was primarily fueled by debt, and a significant amount at that. The US Treasury shows an increase in debt from $33,167,334,044,723.16 on September 30, 2023, to $34,001,493,655,565.48 on December 31, 2023.

In essence, it took $834.2 billion in debt to generate $334.5 billion in GDP growth, equating to $2.5 in debt for every $1 of GDP “growth.”

This analysis, derived from BEA and US Treasury data, circles back to the reason behind Bitcoin’s current trading level at $60,000, its highest since late 2021. It suggests not just the potential for Bitcoin to exceed its all-time high soon but also for its value to climb significantly higher from here as the US effectively surrenders in the fight against inflation.

That being said, a hot PCE index print tomorrow would probably knock Bitcoin back down a peg or two as Treasury markets price in a lower chance of imminent rate cuts – something that would whack stocks lower, too.


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