The Merge Is Coming

CEO and Co-Founder Ivan Zhang tackles the top market observations for the week. Follow us on Twitter and Instagram to stay up to date in real time.

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TLDR:

1. A suite of indicators came in weaker than expected this week.
2. Powell tried to strike a tough tone on inflation. Markets tanked in response.
3. Estimated date of Ethereum's biggest protocol upgrade is Sept 15th.

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The theme this week is that of reversals. The Jackson Hole speech by Powell is a masterclass of setting proper expectations. The tough rhetoric against inflation is a necessary component of combating inflation, which is largely driven by consumer expectations in the first place. The hope is that such language would be just as effective at staunching the flames of inflation as hiking rates. But maybe it has gone too far? What have we learned this week?

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Indicators

Lower than forecast indicators include PMI, home sales, durable goods, and PCE inflation. While the readings show a slowdown in the economy, many other indicators are still healthy. Amongst them is the GDI (Gross Domestic Income), which has tended to be negative going into recessions. Currently, it’s roughly flat to slightly positive, which means there might still be a chance that we get out of this in a “soft landing”. As long as the Fed doesn’t kill the economy with aggressive hikes… oh wait…

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Jackson Hole

The Fed is taking a hawkish note and saying they may have to make unusually big hikes to ensure inflation will reach their targets and that consumers may have to take some pain. The first time I recall, this was spelled out explicitly, and the market took it very negatively. Equity indices are down for the first time in a few weeks, and crypto has also dropped precipitously following the news.

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ETH Merge

This has been an upgrade seven years in the making with opportunities to bring in a new set of participants that were previously anti-crypto largely due to environmental concerns. The upgrade will reduce energy consumption by roughly 99.5% and the inflation rate from ~4.5% to roughly 0.5%.

These two components may mark a paradigm shift in how people view blockchains. With higher usage, this upgrade may render ETH into a deflationary asset. Given the permissionless nature of crypto, this opens the doors for people worldwide to build wealth and earn fixed income in an asset free of sovereign risk. This would be a world first, and the possibilities beyond this are endless.