What is a soft” landing?

Good morning It was another terrible day for stocks yesterday. Re-examining the reasons for this would be unnecessary after we combed through the charred remains of the bull market last week. Suffice to say, a major oil selloff and falling two-year yields suggest that fears of slowing growth - as opposed to fears of inflation - were at the forefront on Monday. As we looked across the sea of ​​red, we were surprised to find this deep green spot on the FactSet screen:

Investors are literally buying canned goods, toilet paper, and bleach, all in bulk. This tells you what you need to know about mood. If you have a nice, opposing, optimistic opinion, send it to us: robert.armstrong@ft.com and ethan.wu@ft.com.

From soft to soft

We and several others giggled when Fed Chair Jay Powell hinted at the possibility of a "soft" landing for the economy if the central bank raises interest rates. Jokes have been made about how unnerving it would be to hear the term from the pilot of your plane.

This apparently wasn't off the cuff or a gaffe on Powell's part. Several people have pointed us to a presentation that former Fed Vice Chairman Alan Blinder gave in February. In it he makes the soft-effeminate distinction explicit.

The consensus view is that almost every Fed tightening over the past half century has culminated in a recession, with the only notable exception being the 1993-1995 cycle. Blinder strongly disagrees. He counts 11 tightening cycles since 1965 and finds that three of them were hard, three were soft, three were "soft" - meaning they were accompanied by fairly shallow recessions - and two were ambiguous. Blinder puts stars on a Federal Reserve interest rate chart to mark the end of tightening cycles. I scribbled a few notes:

I marked the cycles/stars that Blinder considers “hard” with red checkmarks. In these cases, Blinder says, the Fed wanted to create a recession and succeeded. I have circled soft cycles (without an official recession) in green. The yellow circles mark cycles followed by GDP contractions of less than 1.5 percent. The last two cycles before the housing bubble and the pandemic are difficult to estimate. Were the recessions caused by tightening – or by the financial crisis and Covid-19?

Here are the numbers, as Blinder lays them out:

Given this scorecard, Blinder argues, “soft landings may not be too difficult to achieve.”

Perhaps last week we saw Powell move the goalposts by signaling that while it will be very difficult to avoid a recession, hopes for a shallow recession are more realistic. From the perspective of real economic growth alone, a recession on the scale of 1970, 1990 or 2001 would be a welcome outcome at this point.

But investors have more to worry about than GDP. All tightening cycles, with the exception of 1993-1995, resulted in significant losses in stock markets. And the magnitude of the recession from a GDP perspective does not always correlate with the magnitude of the drawdown. The numbers:

In this tightening cycle that has just begun, we have already seen a sell-off as big as ’66, ’80 and ’84. But the experience of the last three cycles and ’69 are important. While the landings may have been soft, the damage to stocks was severe. Recessions trigger sell-offs. The extent of these sell-offs depends on factors such as valuation that go beyond the real economy.

El Salvador’s Bitcoin experiment has failed

El Hodlador is back! After Bitcoin fell 50 percent from its peak, President Nayib Bukele tweeted on Monday:

Bukele's embrace of Bitcoin has come in three forms: direct purchases, a sale of Bitcoin bonds, and declaring Bitcoin an official currency. The first two were flops. Although the government hasn't said much, its Bitcoin punts have almost certainly lost money. Meanwhile, the Bitcoin bond is in limbo as a debt crisis looms.

That still leaves the official currency boost, the Bukele argued would reduce the cost of remittances, which account for a quarter of GDP. In January I tried to find out if things were going well. What I found – a small one-off increase in transfers – was not encouraging. But data was scarce back then.

Now three economists – Diana Van Patten of Yale, Fernando Alvarez of the University of Chicago and David Argente of Penn State – have published a remarkable study on Bitcoin adoption in El Salvador. Their findings, based on a representative in-person survey of 1,800 Salvadorans, suggest that there has been no sustained interest in Bitcoin outside of young, educated, tech-savvy men.

One little thing the paper makes painfully clear is how far the government has gone to get Salvadorans to adopt Chivo, its digital payments app, including:

• A $30 installation bonus paid in Bitcoin. This is a sensible flat rate of 8 percent of the monthly minimum wage

• A discount at the largest gas stations in the country, only for Chivo users

• A $150 million national fund to subsidize Bitcoin-related fees (the details are unclear)

• Launching 200 Bitcoin ATMs in El Salvador and 50 more in America

• A major marketing push across social and traditional media

• Legal tender status, so businesses must accept cryptocurrency and taxes can be paid in Bitcoin

Covid has also spurred a global boom in contactless payments, as Van Patten pointed out to me. Aside from a few technical issues, virtually every conceivable barrier to adoption has been minimized. The result? Here is the key table:

The typical Chivo user was a young man with a high school education and access to the internet and the formal financial system – belying Bukele's claims that the technology would promote financial inclusion. The most common reason for using Chivo was to cash out the $30 bonus; 61 percent of users left the app immediately afterwards.

Even among Chivo users who took transfers, most did so in dollars, not Bitcoin. Likewise, some companies, around 20 percent, accept Bitcoin. But these are mostly larger companies, and almost all of them convert them into dollars immediately after selling Bitcoin.

Bukele's government gave out free money, and many Salvadorans took it. Some still use the Chivo app, but mostly for dollar transactions. The authors conclude:

We document that Bitcoin is not widely used as a medium of exchange [despite] the great pressure exerted by the government. . .

The most important reason [people who knew about Chivo did not download it] was that users prefer cash. This was followed by trust issues – respondents did not trust the system or Bitcoin itself.

There were some silver linings for Bitcoin in the paper, highlighted by people close to the government. Felipe Vallejo, head of regulation at El Salvador's crypto tech partner Bitso, told CoinTelegraph that the 20 percent of Salvadorans still using Chivo shows this is just the beginning:

We believe this is a relatively strong sign of adoption. As education about cryptocurrency and everyday use cases increases in the region, more users will stick with the application with a deeper understanding of the technology and its associated opportunities.

Well, no. This chart shows Chivo downloads since the app launched. In 2022 they have flattened near zero:

This early adoption pattern is not normal, Alvarez explained. A far more common adoption pattern is to start slowly, accelerate, and then stop. Alvarez, Van Patten and Argente are currently studying a central bank-run digital payments platform in Costa Rica, where 80 percent of the population sends 10 percent of GDP through the system. As Argente put it:

[Costa Rica is] ein Beispiel dafür, wie Technologie für die finanzielle Inklusion eingesetzt werden kann, sobald genügend Planung für die Umsetzung vorhanden ist. Aber es dauerte mindestens sieben Jahre.

Bukele's gamble looks like a comprehensive failure. (Ethan Wu)

A good read

The tech/VC bubble has swelled and shrunk but never burst. Is this time different?