Per a Reuters report, Bank of America (BofA) Chief Investment Strategist Michael Harnett has warned the U.S. public about a potential economic recession and crypto as a possible safe haven. In a note sent to the bank’s clients, Harnett claimed the current macro-economic outlook is turning bearish for stocks and bonds.
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BofA’s CIS believes inflation, and an increase in interest rates will create this economic storm. The U.S. Federal Reserve (FED) and its Chairman Jerome Powell will attempt to prevent the economy from getting into recession levels.
The financial institution will begin to tighten its monetary policy in May 2022. Initially, Powell hinted at a 25 bps hike, but now other members of the FED seem to be asking for a more aggressive approach.
In this scenario of high inflation and high-interest rates, equities and bonds could take a hit as cash, volatility, commodities, and crypto trade higher.
If digital assets manage to outperform stocks, this could break a multi-year apparent correlation between the different asset classes. As seen below, Bitcoin, the crypto market, and the S&P 500 have been trending to the upside since 2020.
At this time, the world faced a global pandemic, and measures were put in place to prevent an economic fallout. This led to a massive increase in the U.S. FED balance sheet which stood at above $6 trillion for the first time in 100 years.
This backed the crypto market boomed into the $2 trillion total market cap, but the excess liquidity contributed to a hike in inflation. In other words, the FED supported the global economy but ended up boosting inflation.
This situation could become a headwind for Bitcoin and crypto short-term appreciation, according to Bloomberg Intelligence’s Mike McGlone. The analyst is also bullish on the long-term potential for this new asset class.
The biggest headwind to #bitcoin and macroeconomic-sensitive commodities such as #crudeoil and #copper stems from possible stock-market declines. Near-term risks are rising as the #Fed steps up its inflation fight, which could include efforts to cool the wealth effect. pic.twitter.com/YJLQLTdjoR
— Mike McGlone (@mikemcglone11) April 7, 2022
Crypto Could Outperform Regular Assets
In the long run, digital assets could decouple as investors seek inflation hedges and assets capable of generating yield. In that sense, Bitcoin and Ethereum seem poised to attract fresh capital.
Bill Bonner from Bonner Private Research believes the FED and its Chairman are responsible for the current economic outlook. In that sense, he believes the financial institution will fail in its attempt to prevent inflation from rising further.
To stop inflation metrics from rising, Bonner said reaching a similar conclusion that BofA’s executive, the FED would have to cause a market shock. Bonner said:
In order to escape his trap, Jerome Powell needs to cut away 14 years’ worth of bad policy. Does he have the stomach for it? Could he endure the pain? We doubt it.
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Commodities, Bitcoin, and digital assets could be the only way out for the small guy waiting to take shelter before the perfect storm hits land.