Parabolas swing both ways

Views expressed in the article below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.

Looking only at speculative markets, one might get the impression that the last two years have been a roaring success across the globe. Since the Covid crash of March 2020, major markets have enjoyed tremendous gains across the board, despite rising unemployment and widespread business closures due to pandemic restrictions. It’s no secret that during the current global pandemic, wealth inequality has deepened significantly, with billionaires raking in even more wealth as global markets have steadfastly maintained an “up only” trajectory.

However, as the adage holds, what goes up, must come down. A closer look at the green fever dominating property, tech, and tradfi markets helps us understand the current glaring disconnect between lived experiences and the movement of stock markets – the policy of quantitative easing (or inflation, for us civilians). Fearing the economic consequences of a prolonged pandemic, the US Federal Reserve has been printing trillions of dollars in stimulus packages to support US citizens and businesses. In fact, more than 20% of all US dollars ever printed, were printed in 2020 alone. 

A familiar picture

While many economists have dismissed concerns surrounding the consequences of injecting such vast sums into existing money supply, the capitulation of Chinese real estate giant Evergrande in recent weeks has sent fearful waves through the market, as murmurs of a black swan event akin to 2008’s global financial crisis permeate speculative markets.  

Evergrande, one of the Fortune Global 500 institutions, amassed $300bn in liabilities in recent years pursuing a diverse array of large-scale projects, including electric vehicles and the development of the world’s largest football stadium for the company-owned soccer team Guangzhou Evergrande. The scale of the company’s debt came to light this month in stock exchange filings indicating a cash flow crisis at the Chinese conglomerate. Evergrande defaulting on its loans underpins an all-too-familiar macroeconomic situation: riding high on exponential growth and fresh funds injected into the market, large companies overextend their debt to offer customers unsustainably cheap rates. 

Despite occurring on, quite literally, opposite sides of the world, Evergrande’s default and the excessive printing of dollars are inextricably intertwined. In a globalised society that still maintains the US dollar as a global reserve currency, the injection of >$9Tn in the space of two years has seen markets soar, while also having the inevitable knock-on effect of debasing and devaluing the dollar due to rapidly increased supply. 

Inflation of money supply, while by no means a new practice for the Fed, has rarely been enacted on this scale. One need not look further than Zimbabwe and Venezuela to understand the potential consequences of currency debasement. 

The contagion effect

The present macro situation, in many senses, affirms the core arguments made by crypto maximalists, such as the need to maintain scarcity and the importance of trustless transacting without third-party intermediaries. However, as we witnessed in March 2020, drawdowns in established sectors could have a significant impact on crypto sentiment, as many look to lower exposure to high-risk assets.

As news of Evergrande’s crisis entered the mainstream, global markets observed significant corrections, crypto being no exception.

S&P 500 (Tradingview.com)

BTC/USD (Tradingview.com)

 What happens next?

While Evergrande may receive bailouts from the Chinese government, the State’s increased focus on reigning in overspending may force it to take a harsh line against the property giant. Should Bitcoin function as a store of value, as is its primary utility, individuals may look to BTC as a hedge against an increasingly devalued fiat monetary system. However, as illustrated above, continued tension surrounding what follows the prolonged euphoria of tradfi markets could see further drawdowns spill over to crypto in the short-term. 

Macro considerations aside, BTC has found solid footing above $42k as a historically bearish September draws to a close. Having successfully retested the height of its previous trading range at $40k, with ETH fighting hard to reclaim the $3k mark, crypto could be poised for the long-awaited blow-off top that characterised previous bull cycles.

The key question remains: is BTC is ready for another stress test as a true store of value, should we see a repeat of last year’s crash? With the wealth of institutional interest, and even governmental adoption, that has flowed into crypto since March 2020’s lows, the sought-after decoupling could be closer than we think.