“This is not a financial crisis” — President Donald Trump
There is no systemic risk” — Goldman Sachs
"This is not a financial crisis"
The Corona Virus has taken global economies by surprise. While it started out as a health crisis, it has taken out the tide on the financial markets, revealing just how much risky and levered financial practices have been going on.
Everybody seemed to be drinking from the same cool aid over the past decade. Corporates have been spending all their free cash flow on stock buy backs.
Hedge funds and market making funds have taken on more leverage to squeeze out profit on small moves only to get blown out when COVID19 hit.
Rates will go negative this cycle to stimulate growth.
ORDER OF EVENTS THAT HAVE UNFOLDED
For the past decade, volatility has been at all time lows with the vix not breaking the 30 mark.
- Then COVID19 hits sending volatility to an all time high.
- Banks and Funds are forced to reduce the value at risk since their investment models are based on market volatility. Heard recently that a bank trader had his book reduced from 200m to 15m.
- As a result, forced liquidations occur causing markets to move drastically lower
- In a liquidity crisis, everyone looks for a flight to safety. IE. the US Dollar.
- USD rips against all FX currencies because of US reserve currency status and significant foreign debt liabilities are denominated in USD (think oil and commodities).
- Almost everything sells off initially including Gold and BTC.
- Fed is forced to bail out Airlines, hedge funds and corporates that gorged on stock buybacks.
- The only way to save the economy is to print money, have the FED buy assets and bring rates to 0.
- Eventually this calms markets at a new low base
- As Central bank money starts to make its way into markets, investors look to buy safe haven assets to protect against massive currency debasement.
- Fed balance sheet will go to $5–10 Trillion through this recession.
- As that money is put to work, people will look to an alternative.
- First investors will look to Gold, but they may not trust the paper or ETF gold market as physical gold supply has dried up.
- Investors will then turn to BTC as the better game in town and can be divisible to 8 decimal places.
FUTURE POTENTIAL KNOCK ON EFFECTS
Pensions default on liabilities
- Corporates with BBB rated debt get downgraded to junk
- Pension funds and other funds holding debt can’t hold junk debt by their mandates and are forced to sell — causing price to drop further
- Pensions holding equities and corp (now junk) debt can’t perform on their pensioners obligations requiring a bail out from the fed to make the pensions whole. No chance fed lets pensions go bust as it’s their biggest base and would break government trust forever.
THE ONLY CHOICE, is to bail out pension funds with mass amounts of QE.
People keep saying the fed didn't raise rates early enough and now they have no where to bring rates down and thus they are out of bullets. What people are missing is willingness for fed to go to negative rates (and your commercial banks to charge you to keep deposits there) in very dire times.
When people are forced to spend money but are still fearful of the future they look for stores of value that will hold their value or appreciate against cash over time.
There are only a few options.
- High Cash Flowing real estate
- Bitcoin (and certain other crypto)
- High growth technology startups that can generate the next productivity boom 25%
- USD / bonds
MMT will look very attractive in the face of a pension crisis
There are no atheists in a foxhole = there are no free market capitalists in a financial crisis.
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“The Tipping Point of Crypto Finance will be a Black Swan Event.”
In 2015, I wrote that the tipping point of crypto finance would be a black swan event. COVID19 may just be that tipping point.