Unemployment rates are low. GDP rates are growing. Consumers are spending. The economy is booming. These are pseudo statements that have been regularly echoed by western world leaders, in particular, Donald Trump.
The thing is, these statements are true, but they’ve all come at a huge expense:
- Corporate bond-market is severely over-leveraged. Corporations are becoming embroiled in an M&A frenzy.
- Companies can’t afford to pay back their debt. Many of these ‘zombie’ companies are on a life-support machine (i.e the Federal Reserve).
- We can’t afford to pay back our credit. Consumers are spending alright, they’re spending on their credit card. Hence why US consumer debt has reached all-time highs. So, whilst the leader of the free world is flaunting the increase in consumption, the regular Joe is taking out another credit card to pay back the credit on the one before.
Do it again, but this time bigger
Since the economic downturn in 08/09, the ‘free world leaders’ in Washington have enforced monetary policies that have inflated prices of assets such as stocks and real estate.
The collapse of the banking system and the economic slowdown dried up liquidity in the market, so the strategy exercised from the US and the majority of the west was to pump money directly in the economy — think of this as a stimulus program in the form of ‘artificial’ money.
Here’s a snippet of how and what:
- Quantitative easing (QE) — The Federal Reserve (Otherwise known as the Fed, or the central banking system of the USA) has injected more than $3 trillion dollars into the economy since the 09 crisis.
- Low-interest rates — Interest rates have been close to 0% since the last recession. The ability to borrow money practically for free has led to the accumulation of assets en-masse. Rich people have got richer.
The chart above is an indication of this mirage that has come to fore. The S&P 500, otherwise known as the American Stock market is reaping the rewards of this ‘stimulus’ program. Companies and investors are all becoming richer. The feedback loop that has been catalyzed by cheap debt is all too similar to what we witnessed in the last financial crisis.
The cracks are starting to appear:
- Subprime loans defaulting > https://www.youtube.com/watch?v=UOppLfJp1Ow&feature=share&fbclid=IwAR19_InA_uxLaUmTrq8ZHbpyf0SnDGYuYuG33IVUQPapPa-HaqL4MHPuqPU
- Consumer debt hitting all-time highs > https://www.youtube.com/watch?v=RqUQfNNICNo
- Over-leveraged corporate bond market — “There is a study recently done by Morgan Stanley research that said if you used leveraged ratios alone (leveraged ratios of a corporation), 45% of the investment grade bond market would be rated junk right now” — Jeffrey Gundlach, DoubleLine Capital
It’s a ticking time bomb, and simply an inevitability.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — -
So, we know the economy is running on borrowed time. We have a fertile fallacy in the form of the S&P500 that is due for a major bust. We know that populism is on the rise. And, as a result of this crisis, banks will come under increased scrutiny. Relationships between corporations and consumers will become jaded.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — —-
The last time we had the above occur simultaneously was the 2008 financial crisis. This was also the year of the inception of Bitcoin. The innovation from an individual (or group) marked the start of Bitcoin with the message of “The Times 03/Jan/2009 Chancellor on brink of the second bailout for banks”.
Since then, Bitcoin has been at the mercy of human nature. We’ve seen over 3 boom/bust cycles. Promises of an autonomous worldwide currency marred by human greed. Just like past disruptive innovations, Bitcoin has been susceptible to bubbles. But, as Bitcoin comes out the other end of the latest mania, might the innovation that was birthed during a crisis, about to undergo a metamorphosis that will see it realize it’s potential?
Macro crisis — net positive for Bitcoin
Bitcoin has been alive for over 10 years now. Unlike gold, we can’t look at the past 100 years and closely analyze the correlation between macro-economic factors and price performance of Bitcoin. We have never seen Bitcoin in an economic crisis. So the thesis that I’m about to put forward should be considered extremely speculative but hear me out.
Looking back on a macro-economic scale, 2013/14 was relatively insignificant, that is, unless, you were a Cypriot citizen. Greece and Cyprus were still suffering from the 08' crash hangover. The lack of economic infrastructure and regulation within Cyprus debilitated its ability to repay back its debt, thus requiring a $10bn bailout by ECB and IMF. The repercussions of the bailout were felt by citizens of Cyprus in the form of levies on uninsured depositors. Essentially, citizens were faced with the possibility of their assets being frozen.
What’s this got to do with Bitcoin?
Bitcoin was a by-product of the crash in 2008. It was introduced as an autonomous currency that wouldn’t fall at the peril of short-sighted governmental monetary policies. The turmoil in Cyprus was the first major crisis since 08 that had Bitcoin available to individuals that were going to be impacted by this crisis — so how did Bitcoin perform?
The bailout was agreed on the 16th March, much to the displeasure of the Cypriot citizens. Following on from the bailout, MtGox, the largest Bitcoin exchange at the time witnessed a remarkable increase in buying volume — consequentially Bitcoin appreciated in value by 205% (March to April 2013).
Not only did Bitcoin perform well, but this new asset-class also outperformed the S&P, US treasuries and most notably, Gold, in the wake of the Cyprus bailout.
This little snippet of recent history is our only real example of Bitcoin successfully being deployed as a hedge against an immediate crisis. Whatever your opinion of Bitcoin, you can’t hide from the fact that the global economy is coming under immense pressure with debt piling up and recessions looming. The trade war between the US and China is threatening to derail the equities market which has already morphed into the biggest bubble the world has witnessed.
With Bitcoin coming out of a prolonged bear market — and adoption on the rise, you can’t help but think that it may just be the one shining light of the chaos that is about to ensue.
What we know about the global financial crisis is that we don’t know very much — Paul Samuelson
For more concise soundbites, follow me on twitter @twitmeserifi
P.S your virtual claps above are appreciated :D