At this year’s World Economic Forum in Davos, few were willing to discuss the possibility of stagflation, a concerning term that combines stagnation and inflation, despite the specter of Trump’s tariff and trade conflict.
Nevertheless, investors have begun to recognize the risks associated with stagflation, resulting in the outperformance of stagflation-oriented strategies compared to the typical buy-and-hold approaches seen with bitcoin and the S&P 500.
As of last week, Goldman Sachs’ “stagflation basket,” which bets on commodities and defensive sectors like healthcare while shorting consumer discretionary, semiconductors, and unprofitable tech stocks, has seen nearly a 20% increase this year.
In contrast, the S&P 500, the benchmark index of Wall Street, has declined by 4% this year, while bitcoin, the leading cryptocurrency by market capitalization, has decreased by 10%, according to data from TradingView and CoinDesk.
The International Monetary Fund characterizes stagflation as a scenario where high inflation coincides with economic stagnation, elevated unemployment, and a general reduction in economic activity.
“It does appear that stock and bond prices are adjusting to reflect lower growth and higher inflation [stagflation]—though it’s important to note that other factors are also influencing this, such as healthcare, which could be benefiting from the prospect of deregulation despite direct funding cuts,” stated Noelle Acheson, author of the Crypto Is Macro Now newsletter, in a conversation with CoinDesk.
While murmurs of stagflation have been circulating since early 2022, markets have started pricing these fears this year, primarily due to Trump’s tariffs and rising trade tensions.
Indicators of future inflation, such as two-year and five-year swaps, have surged to multi-year highs, suggesting concerns that a trade war could increase consumption costs. Additionally, a significant part of the Treasury yield curve has recently inverted, indicating a potential recession on the horizon. Real-time GDP trackers, including the Atlanta Fed’s GDP, have pointed to a notable contraction in economic activity.
Has BTC Failed as Digital Gold?
Stagflation could create an ideal environment for assets viewed as stores of value, like bitcoin, to excel. For comparison, gold has appreciated by 13% this year.
However, the bullish narrative surrounding cryptocurrency proposed by its advocates has yet to materialize, as BTC’s correlation with U.S. stocks has intensified in recent weeks.
This correlation does not necessarily imply that BTC has lost its status as a safe haven, according to Noelle Acheson.
“In the short term, BTC behaves like a risk asset, with prices influenced by the most recent trade; yet in the long term, it is a secure asset due to its verifiable hard cap and global utility. Currently, the market is in a risk-averse state, and macro portfolios are reducing their positions. We are still waiting for new inflows that could trigger the subsequent phase of its rally; this may take time given the high level of uncertainty among both institutional and retail investors,” Acheson explained.
She noted that the underlying positive forces remain, and once the market adapts to the new economic conditions, inflows into the crypto sector are likely to pick up again.
“The positive factors are still in play, with increasing education, new institutional services launching, and governments around the world establishing regulatory frameworks that will be attractive to institutions (and subsequently to mainstream retail),” Acheson remarked.
Mispricing in Stagflation
Markus Thielen, founder of 10x Research, presented a slightly different viewpoint, suggesting that the market’s interpretation of the situation as stagflation might be incorrect.
“What we are likely seeing is a preemptive response to tariff effects, resulting in a temporary surge in commodity demand that will likely diminish in the coming months. Furthermore, uncertainty surrounding DOGE is impacting growth forecasts,” Thielen commented to CoinDesk.
He added that a potentially dovish tone from the Fed later this week could rekindle a bullish sentiment for risk assets, including BTC. Recently, Trump suspended a proposal to double U.S. tariffs on Canadian steel and metal imports to 50%. The Fed is scheduled to unveil its rate review on Wednesday.
“Recent remarks from Trump indicating a possible easing of aggressive trade policies, alongside a mildly dovish stance from the Fed this week, could create an opportunity for a rebound in growth-oriented assets. Historically, adopting a stance favoring prolonged stagflation has rarely been a successful strategy over the past 40 years,” Thielen concluded.
