Bulls vs. Bears: Recession and AI Bubble Threaten the Market, an In-Depth Analysis

• Market sentiment is conflicted - analysts see both bullish and bearish signals both for crypto and commodities.
• On a macroeconomic level, a recession is looming, with a 35% probability by the end of 2024. Inflation is decreasing but remains sticky, and the US national debt is rising.
• The AI bubble may burst as investors realize that many AI projects are overvalued.

The global crypto market cap fell by 2.77% over the last day, and the Fear & Greed Index stood in the bearish zone for over a month. Despite the negative sentiment, analyst Michael van de Poppe predicts a crypto rally due to debt refinancing.

In contrast, Louis-Vincent Gave sees signs of imminent correction as investors realize the AI market run was over-hyped and over-valued. Weakening macroeconomic indicators contribute to the bearish outlook.

Which outcome is more plausible? Let's find out.

Crypto Undervalued and Ready to Rally?

Van de Poppe considers crypto and commodities extremely undervalued - the latter were last valued at similar levels in 2000, at the onset of the tech bubble.

Commodity valuations spiked in 2008 following excessive speculation in technology stocks before crashing to current levels. Van de Poppe suggests commodities are set for another valuation hikein the foreseeable future.

Raoul Paul supports van de Poppe's stance, saying that a rise in global liquidity due to potential debt refinancing by leading economies will trigger a crypto and commodity rally.

Chief analyst at Realvision Jamie Coutts also notes that $BTC's price is highly correlated with M2 money supply. A significant part of the increased global liquidity could flow into crypto.

M2 money supply

M2 measures all money in circulation and includes M1 components (currency in circulation, demand deposits, and other checkable deposits) plus savings deposits, time deposits, and money market mutual funds.

Chris Burniske at ARK Invest shares this vision. He highlights the subtle green shoots' that could propel the crypto market to his $10T market cap target.

Burniske notices contagious enthusiasm around relatively new projects like Aptos and Celestia as major players like $BTC and $ETH struggle behind.

$BTC's 50-week simple moving averages (SMAs) indicate an upcoming bounce of at least 40%. Yet, some investors validly highlight that such a bounce was historically followed by a substantial dip.

Recession Fears Loom LargeMacroeconomic indicators cast a grim shadow over predictions of an imminent bull run. The probability of a global recession starting by end-2024 now stands at 35%, up 10% from the mid-year outlook. The recession probability score will gain another 10% in 2025.

J.P. Morgan links the impending downturn to a weakening in labor demand and loss of momentum in manufacturing and retail trade.

On a good note, inflation is coming down (2.5% compared to a 40-year high of 9.1% in 2022), and the service sector sees solid continued gains. And the Fed's imminent interest rate cut on September 18 might further stimulate the US economy.

However, sticky inflation' remains a concern. This refers to inflation in goods and services that are less sensitive to changes in interest rates, like children's clothing, auto insurance, and medical products.

The US national debt exceeds $35.3T, up half a trillion since June. The total public debt stands at 121% of US GDP, down 11% from Q2 2020 yet up 4% from Q1 2023. The ratio surged during the 2008 financial crisis and has continued to rise since.

This suggests a high risk of fiscal crisis. The US paying off its debt seems to be more of a mathematical exercise than an actual possibility in the next decade.

Another reliable indicator of an economic downturn is the yield curve inversion, which has suggested an impeding recession since 2022.

Oil Prices Plummet, Gold SpikesThe commodity and crypto markets reflect concerns regarding the global recession. Oil prices fell by 11.6% last month and 20% over two months, with a barrel now trading at roughly $70.

Part of this decline has to do with China's accelerated shift from oil to coal in electricity generation and the transition to renewables.

China aims to have 150 active nuclear reactors by 2035, which would cover abut 15% of its energy needs. Unlike traditional nuclear reactors, next-gen thorium reactors are inherently safe' and don't require water.

The surge in electric vehicle purchases by Chinese consumers is further diminishing domestic oil demand.

This trend is likely to intensify, potentially leading to a near future where China, the world's second-largest economy, becomes entirely self-sufficient in energy.

On the other hand, central banks worldwide are heavily investing in gold in attempts to diversify their reserves away from fiat currencies. This led to a 77% monthly spike in gold prices.

Will the AI Bubble Burst?

Louis-Vincent Gave at Gavekal explains the dip in oil prices with politics, namely, Venezuela and Iran fearing Trump's potential presidency.

Gave also highlights theimplosion of the AI bubble and its positive correlation with the energy market.

Last month, Elliott Management hedge fund warned mega-cap tech stocks, particularly Nvidia, are in bubble land' and that AI is not ready for prime time.'

AI tokens went on a rally in August despite the substantial dip in Nvidia's stock price. $FET led the pack with an 85% three-week increase, followed by $ABT (+68.21%) and $RENDER (+43.40%).

Yet, the present situation is less inspiring for AI enthusiasts. The cumulative AI token market cap fell from nearly $33B on August 25 to $29B.

Nvidia's stock price saw an 11.86% five-day bump but decreased by 9% over three months, now trading at $119.

Investors might be realizing that overvalued AI projects hinging on hype and speculation are bringing lower-than-expected returns, which causes a correction.

Sentiment could be shifting toward scarce assets like gold and $BTC or AI projects with proven real-world utility, like Artificial Superintelligence Alliance, Render Network, and NEAR Protocol, all of which saw substantial gains this month.Potential AI Correction Ahead, High-Risk Assets Not Recommended

While some analysts anticipate a rally driven by debt refinancing and increased liquidity, others foresee a market correction due to overvalued AI assets and a general macroeconomic downturn.

The prevailing sentiment is uncertain, so only time will tell which outlook holds more truth.

Meanwhile, we remind you to diversify your portfolio to offset potential losses, as the crypto market is extremely volatile.

ReferencesClick to expand and view sources

• The probability of a recession now stands at 35% (J.P. Morgan)
• 12-month percentage change, Consumer Price Index, selected categories (BLS)
• Here are the lessons from every stock-market correction since 1973, according to Goldman Sachs (MarketWatch)
• U.S. National Debt Clock (USDebtClock)
• Federal Debt: Total Public Debt as Percent of Gross Domestic Product (FRED)
• Titan of Crypto (X)
• Oil Price (Markets Insider)
• Gold Price Performance USD (GoldPrice)
• Why gold prices may rise this September (CBS)
• Video: Beyond The Slide In Energy Prices (Gavekal)
• NVIDIA Corp. (MarketWatch)
• Top AI & Big Data Tokens by Market Capitalization (CoinMarketCap)
• Elliott says Nvidia is in a bubble' and AI is overhyped' (Financial Times)
• Raoul Paul (X)
• Michael Van de Poppe (X)
• Chris Burniske (X)
• China to build first-ever thorium molten salt nuclear power station in Gobi Desert (ABC.net)
• 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (FRED)
• How Innovative Is China in Nuclear Power? (ITIF)

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