Given that global interest rates are approaching zero, and there is another round of quantitative easing, this could be a defining moment in the life of a young investor. Will you invest in real estate, bonds, and the stock market at record highs or immerse yourself in a volatile new asset class that could represent a paradigm shift in the next decade?
Since the Fed lowered rates this week for the first time since 2008, despite relatively strong internal data, there is reason to believe that this is not for the health of the economy. Europe intends to conduct another round of quantitative easing in the 2020 year, and New Zealand has just cut its official cash rate at 50 basis points to 1% to facilitate debt servicing in the dairy and housing sectors.
The official narrative of US cuts slows global growth, but in fact it has many points of view, not least pressure from the US president to devalue the dollar so that it remains competitive and to ease the situation for the US, one of the largest debts. empire in history to continue financing its deficit.
Adjustment of interest rates for reasons beyond the “mandate” of controlling economic inflation and employment in order to overstate asset prices or corporate balances is a central bank manipulation. There are more and more reasons to believe that this is happening all over the world. The dynamics created as a result of quantitative easing (the transfer of wealth from creditors to debtors), after the introduction during the GFC, was called the "new norm", and it seems that it will continue in the inherited markets after the 2020 year.
Safe haven
Bitcoin has long been perceived as the main source of financial media. As the story goes, volatile cryptocurrency markets are driven by the shadow presence of “whales” (large cryptocurrency holders, often among early adopters) that are hiding in small markets.
While not perfect, is this more of a Ponzi scheme than what we have now - 70% of global assets held by the 1% of the world's population in debt-driven markets? Perhaps due to the slow implementation of monetary manipulation by central banks, Bitcoin is beginning to be used in the way it was originally intended: a safe haven from the manipulation of legacy markets.
For more than a month, the global price of Bitcoin on BLX has been negatively correlating with the 10-year US Treasury rate in anticipation of the Federal Reserve rate cut this week.
As the Fed lowered its fund rate by 25 basis points to 2,25% on Wednesday, Bitcoin grew by ~ 10%. This price movement follows other safe haven assets, such as gold, the Japanese yen and the Swiss franc, which all received a blow to the announcement, although not as large. Although Bitcoin is far from perfect, it looks like the cleanest dirty shirt in the laundry room compared to many other markets.
Ponzi's inherited schemes and great wealth transfer
Central banks from Antipode to Brussels are quickly turning to the monetary policy of financial repression, reducing interest rates and bond rates to historical lows and even negative ones, which leads to the transfer of wealth from lenders (depositors) to debtors (borrowers). Ray Dalio believes that looking at who keeps debts and loans can give us an understanding of what he calls a paradigm shift.
“By looking at who has what assets and liabilities, asking yourself who the central bank should help the most, and finding out what they are likely to do, given the tools they have, you can get the most likely monetary policy . shifts that are the main drivers of paradigm shift. ”
The largest debtors are corporations.
As a percentage of GDP, US corporate debt is the highest in history, using the Fed data (chart above), representing 47% of GDP (according to the IMF, this figure is close to 75%). All over the world, debt with negative returns (corporate and state) is almost 13 trillions of US dollars, and the debt is much higher than zero.
AAA US corporate borrowing rates (blue line) are close to historic lows at 3,2%, while commercial credit card interest rates are at record highs near 17%.
Corporate debt, which attracted most of the repurchase of US stocks, is at a historic level due to low interest rates on loans. Meanwhile, consumer loans on credit cards have almost reached record levels, are growing steadily, and corporate rates continue to fall.
While the private sector has been reducing its debts in recent decades, the corporate sector has been raising money, and, most importantly, it has contributed to acquisitions and rising asset prices, as most of the public debt was purchased by the central bank through quantitative easing.
The Gini coefficient, the left axis, is an index that ranges from 0 (complete equality) to 1 (complete inequality).
The transfer of wealth to the United States caused by low interest rates can be seen in the widening gap of inequality. The Gini index is used to measure inequality in a country, and it has become strongly negatively correlated with the Fed rate since the 1980's. In other words, when the interest rate drops, it raises the prices of assets held by the rich and increases inequality.
Negative rates: open market manipulation
In Europe, more than 40% or 1,4 trillion. Corporate bonds currently have negative returns, and more than 50% of government bonds have negative returns; actually paid a loan.
These negative incomes are changing the nature of what communication is. Traditionally, a debt instrument whereby a government or corporation agrees to pay the holder annual positive income over the life of the bond (usually within 2, 5, 10, 20 or 30 years) and is worse than the issuer's credit rating. the higher its bond yield to offset risk, and vice versa.
But if safe sovereign bonds do not yield positive returns, and risky corporate returns are only slightly larger, they are no longer fixed income instruments. Instead, bonds have become accounting tools, which are money transfers between central banks, commercial banks, and corporations.
According to Japan, the first country to experiment with negative interest rates, negative yield bonds can exist in these markets for decades without any return of significant inflation and without a complete collapse of debt markets.
Manipulating the housing market
The primary housing markets in the USA, Canada, Ireland, Australia and New Zealand were deformed by record low interest rates and the influx of foreign money, which pushed property prices to record average income multipliers and were out of reach of the majority. young locals.
Despite a decade of warning signs, the governments of Australia, New Zealand and Canada have only recently introduced stricter AML regulations and foreign buyers to prevent speculators and money laundering from China, which has overheated real estate markets in their largest cities. However, these foreign flows provided most of the liquidity in these markets.
Volumes of overseas buyers in New Zealand real estate markets. Source: Digital Financial Analytics
Since legislation was passed in New Zealand last year according to which foreigners must apply for real estate, New Zealand statistics show that in the first three months of 2019, the number of foreign buyers fell by 81 percent compared to last year. Traditionally, many foreign buyers in Auckland have been from China, which is stepping up capital controls and AML monitoring.
Similarly, after the introduction of the “empty housing tax” to reflect sales volumes of homes of foreign speculators in Vancouver, in May fell by 90% compared to the previous month. Primary urban housing markets in New Zealand, Australia and Canada are some of the most expensive in the world, with 9 incomes that are more than average incomes.
Real Estate Market Propaganda
The Reserve Bank of New Zealand and the Reserve Bank of Australia were the first among OECD countries to cut interest rates this year. The banking industry is heavily influenced by the real estate market in both countries (in New Zealand it exceeds 60%), and large banks in both countries have the same parent companies (big four banks).
Mortgage debt and stress are increasing in Australia to ease debt servicing and stimulate increased borrowing. The RBNZ and RBA have resulted in rates at record low levels in both countries, 1% in New Zealand and 1,25% in Australia, which is below the level of emergency situations. during the global financial crisis and the possibility of further reductions this year.
Three emotional advertisements designed for buyers of a first home from the same bank at one bus station in downtown Auckland.
To support the real estate market, novice buyers are often encouraged to use 5 leverage: 1 on 160 000 dollars. On the housing market (the average price of a house in Auckland exceeds 800 thousand dollars), with which they have no experience, and the data on them are distorted. interested media, real estate agents, developers and managed interest rates, debt growth and offshore capital flows.
To prevent further closing of the price gap in the upper and lower parts of the market, commercial banks in New Zealand are conducting aggressive advertising campaigns to attract first-class home buyers to the market, to support sales and maintain market confidence. Using bait with record low interest rates, banks scramble to advertise and offer each other as credit growth in New Zealand slows.
Despite the fact that the New Zealand media widely cover crisis situations with a shortage of housing, especially in Auckland, the opposite is true: there is a record excess of housing stocks, and building permits have reached record levels. However, there is a shortage of affordable homes for novice buyers.
The S & P / Case-Shiller 20-Cities Composite Home Price Index for US home prices is now well above the low-price era.
In addition, US housing prices, which have led the country to the worst financial crisis since the Depression, are now well above previous historical highs of the subprime crisis.
A new kind of Irish property crisis
To see how this can play in New Zealand and Australia, we only need to look at Ireland before and after the construction boom of the Celtic Tiger (2000 – 07). The blast of the Celtic Tiger bubble left tens of thousands of unfinished houses and apartments across the country, but especially in Dublin. After the GFC and with record-low interest rates, venture capital and hedge funds raised distressed assets around the world, including many blocks of real estate in Dublin. For years they sat on unfinished projects, waited for prices and rents to return, and slowly pumped up stocks.
The total number of homeless people in Ireland has reached a record high of over 10. Source: Focus.ie
A decade after recovering from the shock of the housing boom and bust, Ireland is now facing a different kind of housing crisis - undersupply - especially in its capital, Dublin, which has pushed property and rent competition to new unaffordable levels and led to record homelessness. In 2018 alone, nearly 1000 families were left homeless in Dublin. In 2018 alone, the funds spent €1,1bn buying nearly 3000 residential properties in Ireland, representing almost 30% of total real estate investments that year.
Stock market manipulation
Just as central banks became the largest holders of government bonds in an era of zero interest, US corporations became the largest holders of stocks (mostly their own) in the stock market.
Much of the cheap credit QE injected into corporations has gone into buying back their shares, to the extent that companies have become the largest holders or "whales" in the stock markets. As recently as 1982, companies illegally repurchased their shares, but this was reversed during the Reagan era of deregulation. Share buybacks are explained by the growing inequality of wealth within countries.
Instead of corporate profits going towards productive goals, from 2007 to 2016, 461 share buybacks by companies listed on the S&P 500 amounted to $ 4 trillion, or 54% of total profits. Average annual executive compensation doubled over the same period. The buyback of a company distorts the health of the company as it increases earnings per share (EPS) even though corporate earnings may actually decline. Buyouts have been described as a legal form of market manipulation. Next, we'll look at volatility beyond simple deviation from the mean and how volatility and risk are masked in stock markets.
Volatility runs counter to stock market risk
The perceived risk in bitcoin and crypto assets is always due to their high volatility. Since the financial world bases risk on retrospective VAR (Value at Risk) indicators, which equate high volatility to high risk, crypto assets are out of sight of most fund managers. However, Bitcoin had a higher Sharpe ratio than any of the FANG shares after the Facebook IPO in 2012.
The Bitmex Historical Volatility Index (BVOL) in blue has jumped 48% YTD, while the S&P Implied Volatility Index (VIX) has fallen by almost the same value and just above historic lows.
Buying the VIX has been the most popular trade of the decade, with dedicated ETFs even catering to retail traders – it has artificially suppressed the VIX and is at 13,9 and more than two standard deviations below its long-term average of 18,3. However, this low volatility can lead to risk. Hyman Minsky’s economic instability hypothesis that “stability can be destabilizing” – or that prolonged periods of low volatility lead to increased debt and risk leading to a crisis – has recently been empirically supported by research from the London School of Economics:
“The level of volatility is not a good indicator of a crisis, but it is relatively high or low volatility. Low volatility increases the likelihood of a banking crisis, both high and low volatility matter for stock market crises, while volatility – in any form – does not seem to explain currency crises.”>
Crypto assets are undoubtedly a more volatile asset class than stocks (the thinner the market, the more volatile), but this does not emphasize the inevitable market capitulation, unlike global stock markets and even housing markets that are based on private debt, corporate debt, and share the ransoms.
The Sharpe Ratio is a metric that investors closely monitor to measure an asset's return per risk taken, and by this metric, Bitcoin has outperformed FANG stocks since 2012 - smoothing out the ups and downs in volatility over the years has resulted in a return per risk doubled compared to Facebook. This contradicts the main narrative that Bitcoin is too risky an asset that investors should be protected from.
Blockchain finance improves transparency
Worrying about “crypto whales” (many of which are the first users or developers to start the project from scratch) pushing the market around is justified. Of the 10 richest bitcoin wallets, 6 of these can be identified as belonging to global exchanges. Probably, in the top 20 more exchange and over-the-counter (OTC) dealers are currently unknown. These exchanges have become the largest BTC players, now akin to “blockchain banks,” and they require higher standards and control than they currently are.
Six of the 10 of the richest Bitcoin addresses are exchange wallets of the largest world exchanges, together they make up about 4% of the total number of coins in circulation.
The nature of open source blockchain financing is already an improvement in transparency in legacy markets with open APIs and block researchers, allowing you to publicly view all wallet transactions and assets. As Bitcoin becomes more and more “institutional”, the transparency standards that governments and financial institutions require to audit cryptocurrencies will increase, and we can even see that all transactions become fully identifiable (currently an alias in Bitcoin). Over the past year, we have already seen the transition to a higher KYC and verification on all reputable exchanges, even on Shapeshift, focused on confidentiality.
Investors (and traders) often rely on the main narrative that they manipulate bitcoins and other crypto-asset markets, or the Ponzi scheme, which can lead to zero. This is comparable to the housing market and corporate incomes, which depend on lending growth rates in countries that are growing faster than debt servicing indefinitely, and with this exponential GDP growth, so that new debt entering the system can pay off the outstanding debt.
Conclusion
For a millennium and younger, the next decade will be a defining era. We are at the center of what looks more like a globally interconnected Ponzi scheme, and we can either take part or resist and experiment with alternatives that have stocks and property at record highs in many OECD countries and bonds with negative yields, implied future yields in these assets in the medium term is negative.