Mr. Pal tells his 965,100 Twitter followers he believes Bitcoin and the rest of the crypto markets are closely tracking the global money supply or M2.
M2 is a measure of the current money supply that takes into account cash, checking/savings deposits, money market securities and other easily convertible assets.
“So, I like growth tech but love bonds but clearly there are always risks to this view. This is how I see the balance of probabilities. What about digital assets? From a macro perspective, the big driver is global M2 growth.”
Mr. Pal, a former Goldman Sachs executive also notes that M2 growth runs roughly inverse to the ISM Manufacturing Index. The index is viewed as an indicator of the health of the US economy.
Mr. Pal, “As ISM falls, M2 should begin to grow…. ISM of 38, as per the model, puts M2 growth back at 13%.”
He also predicts there will be a recession in the next 12-18 months.
“Monetary conditions will be much weaker. Just to be clear – I think risk assets probably go lower before reversing but not 100% sure. Yes, there is a risk of an extended recession like 2001/2 or 2008/9 but I don’t really see that being the higher odds. I’m still using 1947, 1974 and 2018 as my blended hypothesis.”
Macro strategist Lyn Alden has also highlighted the correlation between Bitcoin and M2 growth.
“There’s different types of inflation. There’s monetary inflation and then there’s price inflation that often comes with a lag after that monetary inflation, and what we’ve actually seen for the most part is that Bitcoin is correlated very strongly with money supply growth, global M2 especially as measured in dollars, and so over the past couple years as we got that huge ramp-up in broad money supply around the world, Bitcoin did very well.”
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