Wednesday, October 21, 2020
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Where Do We Go From Here? Macroeconomic Analysis

With covid fears amidst government response being unpredictable and inconsistent, the markets have seen a rollercoaster ride since the initial grab for liquidity in March 2020, when every asset, from stocks to gold, all saw a deep decline in price.

Circuit breakers in conventional markets meant that markets were shut down temporarily, ranging from minutes to the whole day, whereby the sell-offs seemed relentless.

Since then, we have seen a steady rise in all markets, with a lot of speculation as to why. One contributing factor may be the stimulus checks paid out during the lockdown; many were stuck at home investing money instead of spending it.

We saw confirmation of this by Robinhood, the popular retail investment app as they saw a massive surge in usage during the lockdown, as we can see below:

Another reason is the advantageous position certain companies have fallen into, such as Amazon, taking the market share of other companies as their business model was set up for this type of situation.

Companies like Apple and Microsoft are also reaping the rewards from people having to work from home, therefore requiring new equipment.

Big tech stocks make up most of the stock market, if we look at their market cap (5% of companies make up over 90% of the whole market), we can see why the overall market can look healthy at times and not represent the majority.

An interesting insight into the way the markets operate is the correlation between all assets during this time. The close relation between the stock market and cryptocurrency had many investors re-considering their current narratives regarding whether crypto is a risk-on or risk-off asset.

The one thing to consider is the relation to precious metals also, therefore it can be inaccurate to come to a conclusion based on this information alone, as every asset responded in the same way during this time.

The Next Step

Due to the stimulus terms & conditions attached to the prior injection into USA businesses, employees have to be kept until October so the businesses don’t have to pay back the grants given to them.

Although there are still millions becoming unemployed each month, this situation could lead to a massive lump sum of people becoming unemployed in one go.

Without further government intervention in the form of stimulus, this could lead to bearish markets for the month of October if there are grabs for liquidity from the general public, who have lost their jobs and want to liquidate their assets into fiat to cover expenses.

However, before opening aggressive short positions, remember the disparity we see and have seen between Wall Street and Main Street. There’s also potential to see see steady, or even bullish markets as the link between the economic behaviour by individuals could be much different to the picture being painted by the charts.

With the election coming in November, there could be more social unrest if Trump wins, or a bleak economic outlook if Biden takes office due to the increase in capital gains and income tax, with a rumour of a wealth tax being discussed.

The silver lining is the regulatory clarity coming out for digital assets, as seen in the latest report from the OCC which is good for on Stablecoins, DeFi, Ethereum and the cryptocurrency space in general. Federally chartered banks can now hold reserves for stablecoin issuers.

In contrast, we have see the latest leaked documents coming out about trillions of dirty dollars being laundered around the world with the help of banks. The five global banks that were named include JPMorgan Chase, HSBC, Standard Chartered, Deutsche Bank and Bank of New York Mellon.

With interest rates currently near 0% and J Powell stating they will allow “inflation to run”, bonds / treasuries are guaranteed to lower your purchasing power. This means that there is trillions worth of fiat that needs to find a new place to preserve purchasing power.

When inflation goes up (the fiat currency losing value), asset prices seem to rise as everything is relative (for example, BTC/USD is the relationship between Bitcoin and the US Dollar).

DeFi-APR

A lot of that money will surely find its way into tangible assets such as real estate and precious metals, however if a small portion of that money enters cryptocurrency then it could lead to a increase in market prices as institutions or investors accumulate their positions.

If we look at the freedoms and incentivations provided by decentralized finance (high APY for interacting with the DeFi ecosystem, tokenized real estate etc.) and the cracks showing in centralized finance with inflated asset prices and a guaranteed loss of purchasing power by holding fiat, one could predict what the next wave could bring in the medium to long term.

In the short term, all we can do is look at the situation and try to speculate what factors could potentially take precident over others. What do you think? Let us know your thoughts on Twitter!

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