Disinflation is back, even as Iran is still a risk. Liquidity and the business cycle are strong.
But at the same time, consensus is that the Fed is shifting hawkish.
The market is pricing crypto like it’s dead - and completely ignoring its AI tailwinds.
[TLDR] We think the inflation scare is overblown, and the Fed is less hawkish than feared.
The market is underpricing the odds of a late 90s-esque goldilocks period, as well as the explosive demand for crypto that the AI wave represents.
Crypto is a coiled spring, and we believe that the remainder of this summer presents generational entry points for crypto.
For the month of June.
Crypto:
BTC (-21%)
ETH (-22%)
SOL (-11%)
Equities:
S&P 500 (-1%)
NASDAQ (-1%)
Gold:
Gold (-12%)
May’s hot inflation was driven by Iran (energy): The 4.2% YoY reading was the hottest since 2023, with ~60% of the gain driven by oil spiking as a result of the various closures of the Strait of Hormuz.
June rolled over: June’s -0.4% MoM inflation reading was the largest one-month drop since April 2020. YoY inflation came down to 3.5%.
Recent re-escalations in Iran have driven oil prices up again.
Core inflation remains in check: Despite oil’s vicissitudes, core inflation remains a key signal. Core inflation was flat in the June report, with the 3-month annualized figure continuing to trend down to 2.3%.
[TLDR] The inflation scare has been driven by one variable - energy, driven by the conflict in Iran. We have yet to see persistent, fundamental drivers of sustained inflation pick up.
Consensus reads Kevin Warsh as hawkish: The market is now pricing a 66% chance of a rate hike this year. The focus is on headline inflation, as well as attempts to read into new Fed Chair Kevin Warsh’s brief public comments.
This is just as forward-looking inflation expectations are falling: 1-year forward expectations for inflation have fallen from 3.5% → 2.4%, and 5-year expectations have fallen from 2.7% → 2.3%.
The market is unsure how to interpret Warsh’s new, quieter Fed: Warsh is explicitly moving the Fed away from forward guidance and ongoing public commentary. He even abstained from providing his forward-looking rate expectations between rate decisions, as has previously been customary. The market is fearing the worst - reading the latest FOMC minutes as the most (subjectively) hawkish since 2022.
We see Warsh creating optionality to be increasingly data-driven - not pivoting hawkish: Warsh has been a vocal critic of the Fed’s policy mistakes since COVID - mistakes tied to the limitations of the Fed’s ongoing communications and forecasts to the public (and the market’s resulting over-reliance on this guidance). We see Warsh’s rollback of public commentary and forecasting as a welcome one, alongside his stated mission to improve and modernize the set of data the Fed incorporates into its decision-making process.
Kevin Warsh believes in the frontier: Warsh has been transparent about his POV - he is against rampant money printing, but he understands the important role that technological innovation has in a robust economy, and in delivering the Fed’s mandate - low unemployment and stable prices. He is also personally heavily invested in frontier tech, with 20+ disclosed crypto, AI, and space investments.
We continue to believe the late 90s Greenspan era is the right analog: Greenspan in the late 90s correctly saw that technological innovation would drive productivity and growth. Despite elevated headline inflation, Greenspan saw core inflation remain in check. Greenspan refused to tighten preemptively into a booming economy.
[TLDR] Consensus is that rate hikes this year are more likely than not. We think those fears are overblown. Consensus also reads Kevin Warsh’s new approach at the Fed as hawkish - we simply see more optionality.
We take the under on rate hike expectations.
Fed net liquidity & M2 are trending higher: The Fed and commercial banks continue to add liquidity to the system.
Financial conditions are under pressure: Lead dominoes key to liquidity (USD, rates, oil) are tightening financial conditions as tensions in Iran re-escalate, presenting risks to future liquidity growth.
Key financial conditions thresholds have been breached: As we’ve said before, every time these have broken through key thresholds (the red lines on the charts below), the administration has quickly reversed course. June’s US-Iran ceasefire was broken this month, and financial conditions have tightened once again.
Trump must end the Iran War: With the midterms looming, we continue to believe the administration must pull out of Iran. Not only is support for the war at lows (alongside Trump’s overall approval rating), but continued involvement worsens the most sensitive issues for voters - the economy and inflation.
[TLDR] Liquidity remains strong, with tightening financial conditions posing risk to continued liquidity growth.
With midterms on the horizon, approval ratings at lows, and key financial conditions indicators adding pressure, we see another abrupt reversal from the administration ahead - and with it, removal of the main macro risk in the markets.
PMIs remain in expansion territory: Both manufacturing & services PMIs from the ISM remain above 50.
AI capex is still climbing: Hyperscalers have increased capex guidance for 2026 to over $800B - more than double last year. Philly Fed capex intentions reached the highest since 2021. Semiconductor sales are still ripping, reaching ATHs.
[TLDR] Business cycle fundamentals continue their strength. This is not late-cycle stuff. If geopolitical risks resolve, and financial conditions ease in response, the resulting liquidity tailwind will add fuel to the fire.
This is the first crypto bear market with liquidity at highs and business cycle strength: Every prior bear market coincided with financial conditions tightening, liquidity draining, and the business cycle rolling over.
This time? Geopolitical volatility and capital rotation: Capital didn’t leave risk-taking. It rotated - to the AI trade - bottlenecks, equities, and impending IPOs. Crypto took the biggest hit, with more than $5B leaving ETFs alone. AI took the frontier tech narrative, and gold took the debasement trade narrative last year.
The good news? These factors can reverse: There are forces pressuring a resolution in Iran, the AI trade is now deeply consensus, and the IPOs will pass.
AI’s tailwind for crypto is grossly under-appreciated: Consensus is that AI is everything, and crypto is dead. The reality is that they’re two sides of the same wave - the agent economy needs crypto as its trustless rails and coordination layer.
Crypto is coiled: BTC volatility is sitting at historic lows, >50% of supply is held at a loss (a marker that has coincided with every major bottom), and crypto is in the process of bottoming - majors as well as alts.
[TLDR] Fundamentals and macro - unlike past bear markets - remain strong. Capital rotated out of crypto over the last 9 months amidst a titanic AI opportunity combined with 4-year cycle fears.
Our bet is that capital rotates back.
On our horizon of years and decades, we believe the remainder of this summer presents generational entry points for crypto. It’s crypto’s turn.
Until next month,
Devin