Over the last few days, almost everything has been falling with the number of new coronavirus cases and fatalities increasing.
Yesterday, the DOW Jones dropped 3,000 points with a 12.9% selloff (the biggest percentage drop in history) and the S&P 5000 dropped almost 12% at its fastest pace ever.
What we are witnessing are markets around the globe falling into bear markets (dropping more than 20% from their peaks) and a global liquidity crisis across the board that can quickly become a widespread economic shutdown, which we explained in our previous post.
Essentially, credit markets have been severely hit, causing the cost of repaying debt and the spread between government yields and other bonds to jump significantly.
Global Money Printers Are Going Into Overdrive:
To combat the recent coronavirus turmoil, the Federal Reserve announced a $700 billion bond-buying program and that it would be slashing the interest banks charge one another overnight for reserves to between 0.0 and 0.25%.
The Fed also reduced reserve requirement ratios to 0% — eliminating reserve requirements for all U.S. depository institutions, in other words.
On Monday, the Federal Reserve announced an additional $500 billion repo program on top of the $700 billion in Treasury and mortgage-backed security purchases it began on Sunday evening.
Repos are when banks give high-quality collateral like Treasurys in return for reserves (money) from the Federal Reserve. Banks can then use this money to fund short-term operations to keep things afloat.
The Fed also announced on Tuesday that it will continue daily repos to the tune of $500 billion (equivalent to 98 million Bitcoins) until Friday.
Government stimulus won’t be enough this time:
It would seem the current bazooka of measures lead by the Federal Reserve has been unsuccessful in stabilizing markets and spurring confidence in desperate investors caught in a panic flight towards cash.
Much like the Federal Reserve, central banks and governments around the globe are attempting to prevent further economic disaster and possible worldwide bankruptcies.
At the same time, the Federal Reserve announced plans for a “Coordinated Central Bank Action to Enhance the Provision of U.S. Dollar Liquidity” in union with the European Central Bank, the Bank of England, Bank of Canada, the Bank of Japan and the Swiss National Bank.
Essentially, the Fed and other central banks are trying to minimize the cost of accessing the US dollar for financial systems across the world in an attempt to ease markets.
This is significant when you consider that 90% of transactions in foreign exchange markets are done so in dollars.
But, if these financial institutions run out of dollars, it would effectively destroy the entire financial system.
The Federal Reserve’s failed attempts to stabilize markets and the dilution of the dollar has left central banks across the globe with little tools.
Global Central Bank Interest Rates:
- Swiss National Bank: -0.75%
- Eurozone -0.50%
- Bank of Japan: -0.10%
- Bank of England: 0.01%
- Bank of Canada: 0.75%
- US Federal Reserve: 0.01%
Massive money printing to buy assets such as government or corporate bonds, expanding balance sheets seem to be the last resort with the Fed’s balance sheet reaching $4.6 trillion this week.
Quantitate Easing Plans:
- European Central Bank: $821B
- US Federal Reserve: $700B
- Peoples Bank of China $100B
- Bank of England England: $330B
- Reserve Bank of India: $13.5B
- Bank of Australia: $5.5B
So, why are these efforts ineffective?
Simply put, markets have no confidence in these tools. The market is responding negatively, implying that the more central banks intervene, the more they will increase panic and accelerate steep declines.
Is this the beginning of the end of modern central banking?
In an historic global coordination, governments & central banks have been willing to do whatever it takes to increase liquidity as much as possible to swerve a 2008-style crisis. But these tools have been ineffective for many years and will be even less effective now.
Blasting markets with these measures has done the complete opposite in raising confidence in the efficiency of central banks.
Until the Coronavirus can be curbed or contained, government stimulus, massive repos, and drastic rate cuts will not lift the lockdown on global economies.
As Gabor Gurbacs points out above, while M2 money — assets which are still highly liquid but that are not exclusively cash — stock doubled (+$8 trillion) since the financial crisis, M2 money velocity (the rate at which people spend money) decreased 30%.
It appears that newly minted money (QE/stimulus) doesn’t make it’s way to the economy/spending.
So, why is this crisis different from the last?
This crisis is economic, not merely financial. Today, the Coronavirus has grinded global markets to a halt. During the 2008 financial crisis, real estate prices dropped, borrowers defaulted, and lenders lost their money.
In 2008, the Federal Reserve and the U.S government managed to postpone much of the crisis by bailing out the banks, as they were the mortgage owners.
This time, however, it’s not just mortgage debtors who can’t pay, it’s all debtors. Every over-leveraged business in every industry needs to be bailed out, not just the banks.
Most SP500 companies spent over 50% of their free cash flow on stock buybacks rather than investing for the future or to survive a crisis like the one we find ourselves in now.
Airlines spent $45 billion on buybacks and now are asking for a $50 billion bailout. Ridiculous.
Many S&P 500 companies have been playing a game of musical chairs:
1. Borrow as much free money as much as possible.
2. Buy back stock, boosting share prices.
3. Pay themselves massive bonuses.
4. Wait for more free money to repeat and if bankrupted, get bailed out.
So, are we about to enter a global recession?
Typically, a correction of the global financial markets takes place every 10 years and it would seem the Coronavirus is the pin to pop the bubble.
If the United States, the world’s largest economy is forecasted to enter a recession, you can bet the rest of the globe will follow. This is likely if you consider that the U.S. stock market is the most overvalued and indebted.
The U.S. yield curve has been an incredibly accurate recession indicator. The U.S. yield is made up of long-term and short-term interest rates given by the treasury.
The yield curve graphs the relationship between bond yields and bond maturity. More specifically, the yield curve captures the perceived risks of bonds with various maturities to bond investors.
The entire US Treasury yield curve fell below 1% for the first time ever as yields on the benchmark 10-year and 30-year bonds slumped to record lows
For an entire minute, the 1-month bill dipped below zero. For the first time in history, the U.S came extremely close to negative interest rates.
Goldman Sachs forecasts that over 2 million people will file for unemployment benefits in March. If you look at the chart above, the 2008 crisis is almost unnoticeable by comparison.
Are we likely to recover anytime soon?
Global markets have retreated to mid 2009 levels and if the U.S does the same, worst case scenario, it could crash a further 55-60%.
Global growth estimates continue to assume a V-shaped recovery. Even in this optimistic scenario, Daniel Lacalle points out that global growth would fall short of +0.8% in 2020 with the eurozone in recession, China in stagflation and the United States flat year-on-year.
The VIX Index is a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. The VIX reached a high of 84.83 on 17th March 202, just shy of the 89.53 peak reached in the 2008 global financial crisis.
We can see from the VIX Index that volatility has still been very high which implies risk has also been greater but as of now it’s showing some signs of relief at 64.16 today. A good sign.
10 highest closes for the VIX (Volatility Index):
1. Mar 16, 2020: 82.69
2. Nov 20, 2008: 80.86
3. Oct 27, 2008: 80.06
4. Oct 24, 2008: 79.13
5. Mar 18, 2020: 76.45
6. Mar 17, 2020: 75.91
7. Mar 12, 2020: 75.47
8. Nov 19, 2008: 74.26
9. Nov 21, 2008: 72.67
10. Mar 19, 2020: 72.00
What does all this mean for Bitcoin?
As of now, we are in uncharted waters and we can’t fully comprehend Bitcoin’s anti-fragility until we see it respond in an environment like this.
Bitcoin dropped over 50% in 36 hours while the S&P500, DAX, Nasdaq, HK Stock Exchange, and Nikkei and few other global equity markets crashed at about 20% on average.
If you consider just how small the Bitcoin and cryptocurrency markets ($265 billion before the drop) are in comparison to other trillion dollar global markets, it’s easy to see why Bitcoin dropped so violently.
As explained in the previous post, Bitcoin was caught in a liquidity crisis, meaning that because the number of sellers outweighed the number of buyers, desperate investors were willing to sell their Bitcoin & crypto assets at drastically lower prices just to exit markets.
Thin order books in major exchanges meant they lacked the liquidity to support this sudden drop.
Finally, some good news for Bitcoin:
- Long-term investors are accumulating despite recent price dump
- Bitcoin is possibly decoupling from global markets
- Bitcoin’s hash rate has responded well despite recent price dump
- A lot of money is waiting on the sidelines
- The Bitcoin Halving is in less than 60 days
- Bitcoin and the Cantillon Effect
Long-term investors are accumulating despite recent Bitcoin price dump:
Data from Glassnode has revealed long term investors have been accumulating discounted Bitcoin and increasing their positions. This is exactly what we expected in our last post. Those remaining are possibly long-term holders with high time preferences. This is incredibly bullish.
Unchained Capital also confirms this as data from HODL wave shows 6 months old or younger have been the major sellers during this recent drawdown.
A majority of the volatility came from UTXOs 6 months old or younger. Between 3/11 and 3/15, assuming 18.265m Bitcoin, here’s how much moved:
0.64%, or ~116,900k BTC from 1–3 month
1.36%, or ~248,400k BTC from 3–6 month
0.51%, or ~93,200 BTC from 6–12 month
Bitcoin is possibly decoupling from global markets:
We’ve seen across longer timeframes that Bitcoin is largely an uncorrelated asset, however over the past few days, we’ve started to see something very interesting.
Bitcoin has remained largely flat while stocks and other markets have continued to fall. With oil down 20%, global stocks down 8% and gold down 3%, Bitcoin is showing some strength amidst a historic drawdown.
As of today, March 19th 2020, here’s how global markets ended the day:
S&P 500: +0.47%
Bitcoin’s hash rate has responded well despite recent draw down:
During the recent price dump, Bitcoin’s hashrate was down only 10% in the last 7 days and on a logarithmic scale, the drop was largely unnoticeable.
A lot of money is waiting on the sidelines:
Stablecoin balances on exchanges have doubled in the last 14 days from $405 million to $840 million.
Currently, $720M of USDT and $120M of USDC are sitting on exchanges, which would imply there is a lot of money on the sidelines waiting for the right moment to jump back into crypto markets and for Bitcoin to bottom.
Undergoing flight to safety right now, Bitcoin is looking for its bottom. But once that bottom found it will lay the bedrock for the strong bullish pressure ahead.
Bitcoin and the Cantillon Effect:
The Cantillon Effect refers to the change in relative prices resulting from a shift in the money supply.
The change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy.
In basic terms, as assets such as stocks and real estate become overpriced, assets like Bitcoin become more attractive over time.
What we know right now is that the quantity of stimulus and money printing global central banks & governments are launching at this crisis is staggering.
In comparison, the QE1 program that saw the Federal Reserve buying $600 billion in mortgage-backed securities and $100 billion in other debt lasted from the end of 2008 to March 2010.
Today, the Federal Reserve is injecting the equivalent of the 2008–2010 QE1 program in a single day. 30x the market cap of Bitcoin has been printed out of thin air in one week.
For some perspective on how much money is being created:
The U.S. spent $1 trillion on the war in Afghanistan across 18 years.
The Fed printed $3.2 trillion in just the last 4 days.
This is quite possibly the biggest opportunity Bitcoin has ever seen:
Let’s face it, the average citizen has much greater worries right now when you consider that 40% of Americans have less than $400 in savings.
People obviously need to be prioritising food, living expenses and their livelihoods over what they consider speculative investments.
During this flight to liquidity, many people may drop Bitcoin for the time being and that’s completely understandable. Those who have put their finances in order and are in the position to hold on to their Bitcoin are part of a very lucky few.
But, in this outcome where central banks and governments are continuously printing money to stay solvent while devaluing the dollar and eroding savings, people at some point when the turmoil is over may begin to look for alternatives.
This is quite possibly the biggest opportunity Bitcoin has ever seen.
Fixed Income ETFs such as TLT (20+ UST Bonds) and Vanguard S/T Investment Grade Corporate Bond ETF, totalling approximately $40 billion in assets are trading a -4% to -5%. Where will investors look to for passive investment yields in the near future?
The Bitcoin Halving is in less than 60 days:
In a recession, it’s important to focus on how Bitcoin reacts thereafter, not during. It’s also important to remember that gold was never a true safe haven during the 2008 financial crisis.
Gold crashed -30% from $1000 to $700 along with a similar timeframe as that of -50% S&P500 crash. Only in 2009 did it begin to climb up to $1200.
In a liquidity crisis, cash is considered as the only safe place to store wealth. Historically, however, safe-haven assets are bought up after the market finds a bottom.
Coinciding with the halving in May 2020, it’s possible that Bitcoin could rebound massively a year later, much like gold in 2009.
Bitcoin has many advantages over gold such as:
1. Divisibility (e.g you can own or send a fraction of a Bitcoin.)
2. Verifiability (e.g. gold counterfeits are common)
3. Portability (e.g. Bitcoin can be transported anywhere in minutes)
4. Permissionless (e.g no need for third-parties like gold storage vaults)
5. Scarcity (21 million Bitcoin vs. gold’s unknown total supply)
But after the Bitcoin Halving in May, Bitcoin’s supply will also drop to an annual rate of around 1.7%. Now, this is also important because it means Bitcoin becomes less inflationary than gold (2–3%) and than central banks (2%), making it the hardest form of money in existence.
Bitcoin could quite possibly be the scarce and liquid asset many investors will thirst for.
Think about it this way:
700,000,000,000 dollars were printed yesterday and 500,000,000,000 more today. There’s no telling when the Fed will stop printing dollars. No schedule. No limit. No Guarantee. Nothing.
On our current trajectory, with record-low interest rates, trillions in quantitate easing, helicopter money, and with more stimulus on the way, a return to 1980 inflation rates (15%) seems highly likely.
At some point, surely people will ask themselves: if my money keeps losing value, what’s the point in saving any of it?
With Bitcoin, on the other hand, we have programmable accountability. We already know 1,800 Bitcoins will be mined per day and it’s about to be slashed to 900 Bitcoin per day in less than 60 days.
No delays. No debasing. No deposit limits. No withdrawal limits. No transaction restrictions.
Dollars: Unlimited supply, no schedule, easy to create, mathematically designed to lose value over time.
Bitcoin: Fixed supply, fixed schedule, difficult to create, mathematically designed to gain value over time.
While money printers of the world are about to go into overdrive. Bitcoin is about to experience a supply shock in less than 2 months.
Essentially, global markets have been over-leveraged for the last 50 years, now the game of musical chairs is coming to end and there are not enough seats to go round.
For many years, we have been warned that the music will stop. Today, there are less than 21 million chairs for 7 billion people. Plan B is a chance not to get caught without a place to sit.
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Disclaimer: All facts and figures were correct on original date of publish. This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks and such decisions should not be based solely on the information contained in this document.