Good morning. It was another horrible day for stocks yesterday. Revisiting the reasons for this would be redundant after we combed through the charred remains of the bull market last week. Suffice it to say that a big oil sell-off, and falling two-year yields, suggest that fear of slowing growth — as opposed to fear of inflation — was at the fore on Monday. We were struck, looking over the sea of red, to find this patch of deep green 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 sentiment. If you have a nice, contrarian, optimistic view, send it to us: robert.armstrong@ft.com and ethan.wu@ft.com.

From soft to softish

We, and several others, had a giggle when Fed chair Jay Powell referred to the possibility of a “softish” landing for the economy as the central bank raises rates. Jokes were made about how unnerving it would be to hear the term from the pilot of your plane.

This was not, apparently, off the cuff, or a slip-up by Powell. Several people have pointed out us to a presentation that Alan Blinder, former Fed vice-chair, made back in February. In it, he makes the soft-softish distinction explicitly.

The consensus view is that in the past half century, almost every Fed tightening 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 “softish” — meaning that they were accompanied by quite shallow recessions — and two were ambiguous. Blinder annotates a Federal Reserve chart of the policy rate with stars to mark the end of tightening cycles. I have scribbled in some annotations:

The cycles/stars that Blinder considers “hard” I have marked with red checks. In these cases, Blinder says, the Fed wanted to induce recession, and succeeded. Soft cycles (unaccompanied by an official recession) I have circled in green. The yellow circles mark cycles that were followed by GDP contractions of less than 1.5 per cent. The last two cycles, preceding the housing bubble and the pandemic, are hard to assess. 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 can’t be all that hard to achieve”.

Maybe what we saw last week, then, was Powell moving the goalposts, by signalling that while it will be very challenging to avoid a recession, hopes for a shallow one are more realistic. Solely from the point of view of real economic growth, a recession of the magnitude of the ones in 1970, 1990 or 2001 would be an outcome one might welcome at this point.

But investors have more to worry about than GDP. All of the tightening cycles except ’93-’95 brought significant stock market drawdowns along with them. And the size of the recession from a GDP point of view does not always correlate with the size of the drawdown. The numbers:

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

El Salvador’s bitcoin experiment has failed

El Hodlador is at it again! With bitcoin down 50 per cent from its peak, President Nayib Bukele tweeted this on Monday:

Bukele’s embrace of bitcoin has come in three forms: direct purchases, a bitcoin bond sale and declaring bitcoin an official currency. The first two have been flops. Though the government hasn’t said much, its bitcoin punts have almost certainly lost money. The bitcoin bond, meanwhile, is stuck in limbo while a debt crisis looms.

That leaves the official currency push, which Bukele argued would slash costs on remittances that make up a quarter of GDP. Back in January, I tried to figure out if it was going well. What I found — a small one-off bump in remittances — wasn’t encouraging. But data was scarce at the time.

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 of bitcoin adoption in El Salvador. Their findings, based on a representative in-person poll of 1,800 Salvadoreans, suggest that outside of young, educated, tech-savvy men, durable interest in bitcoin has not materialised.

One bit the paper makes painfully clear is how far the government stretched to get Salvadoreans to adopt Chivo, its digital payments app, including:

• A $30 installation bonus, paid in bitcoin. This is a meaningful lump sum, worth 8 per cent of the monthly minimum wage

• A discount at the country’s biggest petrol stations, only for Chivo users

• A $150mn national fund to subsidise bitcoin-related fees (the details are murky)

• Rollout of 200 bitcoin ATMs in El Salvador and 50 more in America

• A major marketing push on social and traditional media

• Legal tender status, so firms are required to accept the cryptocurrency and taxes can be paid in bitcoin

Covid also spurred a global touchless payments boom, as Van Patten pointed out to me. A few technical problems aside, just about every obstacle to adoption you could imagine was minimised. The result? Here’s the key chart:

The typical Chivo user was a young, high school-educated man with access to the internet and the formal financial system — undermining Bukele’s claims the tech would boost financial inclusion. The most common reason for using Chivo was cashing out the $30 bonus; 61 per cent of users abandoned the app immediately after.

Even among Chivo users who did take remittances, most did so in dollars, not bitcoin. Likewise, some businesses, about 20 per cent, do accept bitcoin. But these are mostly bigger firms, and nearly all convert to dollars immediately after making bitcoin sales.

Bukele’s government handed out free money, and many Salvadoreans took it. A few still use the Chivo app, but mostly for dollar transactions. The authors conclude:

We document that bitcoin is not being widely used as a medium of exchange [despite] the big push exerted by the government . . . 

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

There were a few silver linings for bitcoin in the paper, which people close to the government leapt to highlight. Felipe Vallejo, regulatory head at El Salvador’s crypto-tech partner Bitso, told CoinTelegraph the 20 per cent of Salvadoreans still using Chivo showed this was just the beginning:

We believe that this is a relatively strong sign of adoption. As education regarding cryptocurrency and everyday use cases increase in the region, more users will remain on the application with a deeper understanding of the technology and the opportunities that it creates.

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

This front-loaded adoption pattern is not normal, Alvarez explained. A far more common adoption pattern is to start slow, accelerate and then tail off. Alvarez, Van Patten and Argente are now studying a central bank-run digital payment platform in Costa Rica, where 80 per cent of the population sends 10 per cent of GDP through the system. As Argente put it:

[Costa Rica is] an example of how technology can be used for financial inclusion once there is enough planning for the implementation. But it took at least seven years.

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

One good read

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