The Stagflation Debate at Davos
At the recent World Economic Forum in Davos, no one dared to mention the troubling prospect of stagflation—a term that merges stagnation and inflation—despite the palpable concerns surrounding Trump’s tariffs and the escalating trade conflict. Yet, investors have started to recognize the risk associated with stagflation, as evidenced by the superior performance of stagflation-linked investment strategies compared to traditional buy-and-hold approaches for assets like bitcoin and the S&P 500.
As of last week, Goldman Sachs’ “stagflation basket,” which focuses on commodities and defensive sectors such as healthcare while shorting consumer discretionary, semiconductor, and unprofitable tech stocks, has seen a remarkable increase of nearly 20% this year. In contrast, the S&P 500, which serves as Wall Street’s benchmark equity index, has declined by 4%, and bitcoin, the leading cryptocurrency by market capitalization, is down by 10%, according to data from TradingView and CoinDesk.
The International Monetary Fund (IMF) characterizes stagflation as a scenario where high inflation coincides with economic stagnation, elevated unemployment, and a general decline in economic activity. “It appears that stock and bond prices are adjusting for lower growth and higher inflation [stagflation],” noted Noelle Acheson, author of the widely read Crypto Is Macro Now newsletter. “However, there are additional factors at play—healthcare, for instance, is likely benefiting from the promise of deregulation, offsetting direct funding cuts.”
Whispers of stagflation have been circulating since early 2022, but this year, the markets have begun to factor in these concerns, primarily due to the ramifications of Trump’s tariffs and rising trade tensions. Key inflation indicators, such as two-year and five-year swaps, have surged to multi-year highs, signaling fears that a trade war will make consumer goods more expensive. Additionally, a crucial segment of the Treasury market yield curve has recently inverted, a historical precursor to recession. Various real-time GDP trackers, including the Atlanta Fed’s GDP estimate, have indicated a sharp contraction in economic activity.
Bitcoin’s Role as Digital Gold
The potential for stagflation creates an ideal environment for assets that are perceived as stores of value, like bitcoin, to thrive. For context, gold has appreciated by 13% this year. However, the bullish narrative surrounding bitcoin, which its proponents have championed for years, has yet to materialize. In fact, the correlation between bitcoin and U.S. stocks has intensified in recent weeks.
Despite this, it does not automatically imply that bitcoin has lost its safe-haven status. Noelle Acheson argued that “In the short term, BTC behaves like a risk asset, with its price influenced by the latest short-term trades. However, in the long run, it remains a safe haven due to its verifiable hard cap and global utility.” She added that the current market sentiment is risk-averse, leading to reduced positions in macro portfolios, and emphasized that new inflows are essential to initiate the next phase of bitcoin’s upward trajectory. “This could take some time, as uncertainty is high for both institutional and retail investors,” Acheson remarked.
She concluded by stating that the underlying tailwinds for bitcoin remain strong, noting that as the market adapts to the new economic reality, inflows into the cryptocurrency sector are likely to resume. “The tailwinds are intact, with education spreading, new institutional services becoming available, and various jurisdictions worldwide developing regulatory frameworks that will instill confidence among institutions and, consequently, mainstream retail investors,” she said.
Analyzing Stagflation Mispricing
Markus Thielen, founder of 10x Research, presented a contrasting viewpoint, suggesting that the market may be misinterpreting the situation as stagflation. “What we’re witnessing is likely a preemptive reaction to tariff impacts, causing a temporary surge in commodity demand that should diminish in the coming months. Additionally, uncertainty surrounding DOGE is dampening growth expectations,” Thielen explained to CoinDesk.
He further noted that a potentially dovish stance from the Federal Reserve later this week could rekindle a bullish sentiment in risk assets, including bitcoin. Last week, Trump decided against a plan to double U.S. tariffs on Canadian steel and metal imports to 50%. The Fed is expected to announce its rate review on Wednesday.
“Recent comments from Trump indicating a possible easing of aggressive trade policies, combined with a potentially mildly dovish tone from the Fed this week, could pave the way for a recovery in growth-oriented assets. Historically, betting on prolonged stagflation has seldom proven to be a winning strategy over the past four decades,” Thielen concluded.
