Last week, the key stock indexes of the world's largest stock market, the U.S., showed a significant decline. The S&P 500 and Dow Jones fell to three-month lows, while the high-tech Nasdaq went down to a five-month "bottom." At the beginning of this week, however, there is a rebound. Does this mean that we have only seen a strong but technical correction, or has the first wave of the incipient global financial storm occurred?
JPMorgan about the Looming Crisis
The fact that the world is on the verge of crisis is a regular saying. This is evidenced by analysts from JPMorgan. In early September, the head of the organization’s quantitative analysis department, Marko Kolanovic, stated that we should expect a strong decline in the value of almost all investment assets, and salvation can be traditional, as this is another “quantitative easing” from the U.S. Federal Reserve, that is, an additional issuance of U.S. dollars. Will the regulator go for it? It is unlikely, since, according to economist Peter Schiff, in this case, the value of the U.S. dollar will begin to plummet. And the U.S. authorities have nowhere to run from the American currency, despite the fact that Bloomberg has already begun to publish publications about the tyranny of the American dollar without any restrictions.
In mid-September, other JPMorgan analysts clarified the date when most assets will be cheaper, and that is 2020. The stock markets of countries with developing economies (48 percent), oil prices (38 percent), and metals ( 29 percent) will be affected most. The U.S. stock market may shrink by one fifth in terms of capitalization, and at times fall more sharply, as in the crisis of 2007 and 2008, when the S&P 500 lost 48 percent. The reason is simple: Wall Street depends on the price of oil no less than the Russian budget on the cost of a barrel of “black gold.”
The “Treatment” of the Crisis of 2007/08 Will Reverberate with New Shocks
It is curious that the cause of the new crisis may be the “treatment” that was carried out to get the American economy out of depression ten years ago. The base interest rate lowered close to zero and the additional $20 trillion in cash issuance caused a “miracle:” the growth of the capitalization of the majority of companies on Wall Street. It draws attention to the artificial nature of this “holly,” which is further reinforced by the frequent practice of companies in the United States of buying their own shares, but not with the aim of reducing their number in circulation (“redemption”), but for creating artificial demand for them. Yes, formally, this practice is not welcomed by the SEC, but it exists when using offshore companies. As a result, instead of investing in development, the management of well known American companies have actively been using free liquidity for such operations over the last two years. Shareholders are satisfied, plus dividends are paid, but the business for the future is developing poorly.
Why Wall Street Envies Bitcoin
For comparison, the Bitcoin cryptocurrency market showed even greater growth without any tricks: every two years, the No. 1 cryptocurrency adds another zero to its price: in 2009, Bitcoin started almost from scratch, in 2011, it cost $10, in 2013, $100, in 2015, $1,000, and in 2017, $10,000 on average over the year. There is no reason not to believe that this trend will continue further, as well as the fact that any fiat has proved its inflationary nature. Anthony Pompliano gives an estimate of economist Saifedean Ammous, according to which “any currency unit existing in the world has lost at least 95 percent in purchasing power since 1971.”
To put it mildly, the success of Bitcoin cannot but cause a feeling of envy on Wall Street, so the arrival of capital from there is not only an attempt to stake out a place in the crypto market but also the desire to take revenge, to recoup, so it is not surprising that they are “pushing” Bitcoin to $3,000 or even lower. But even here they miscalculated, as the volatility of the cryptocurrency is now at its lowest level in 18 months. This allowed researchers from Poland to come to the conclusion that Bitcoin and other crypto coins that follow his path, being not just goods, but goods that possess the properties of money, can expel fiat.
The U.S. Fed Has Inflated a Bubble and Now Blows It Off: It’s Nervous and Unpleasant
The problem of Wall Street is that the capitalization of most companies and the valuation of securities are certainly overstated, as the U.S. Federal Reserve took care of this by delaying the process of getting out of the “cheap money” policy. Technically, the recession ended in June 2009, but until December 2015, the regulator continued to pump the U.S. economy and the world with dollars. In 2017, the U.S. Federal Reserve has begun “tightening the screws,” increasing the base rate three times. Trading with leverage has become increasingly expensive, but last year the market did not sink significantly. In the current year, fourfold increases have been scheduled. On September 26, the rate was raised for the eighth time, to 2.25 percent, and the effective rate (2.18 percent) is now at its maximum level since April 2008. And the market "creaked," as it did last week.
The U.S. government is obviously losing control of itself (there is nowhere to hide, as Tom Lee notes): Donald Trump announced that he was disappointed in his appointee, Jerome Powell, who replaced Janet Yellen as head of the U.S. Federal Reserve, and that the regulator represents the biggest threat. The U.S. Federal Reserve cannot refrain from raising the rate, however, as the U.S. currency can lose the trust of many users in the world due to the political actions of Trump himself, as well as the regulator itself. And then there's cryptocurrency with its nice alternative.
The Phenomenon of Cryptocurrency
Thus, all this overlaps not only on the monetary aspect of the inevitable and strong decline of the Wall Street indices but also on the emergence of the cryptocurrency phenomenon. Their role is significant. The total market capitalization is $200 billion. The Financial Stability Board under the G20 believes that it is very little to talk about the impact on the global financial system. It is easy to make a mistake here, however, as not only the price of Bitcoin is important, for example, but how many transactions with it are made when paying for goods and services, and it is not always possible to estimate the volume of such transactions, since they can be in cryptocurrencies, but also with rights to the addresses at which they are recorded.
In addition, Bitcoin looks like the most steadily growing asset in the world today, if we take the dynamics of the last several years. Gold cannot boast much, and that is why it is hardly worth retaining faith in this metal, as the famous Kim Dotcom suggests. But one can agree with his recommendation to buy cryptocurrencies.
Europe and China: Their Solutions to the Problems
If we talk about the crisis in the E.U., it arose as a result of the critical situation in the Italian banking sector. The Old World is unable to fully understand why capital adequacy in credit institutions is falling, as the ECB is “pumping” money into the economy no less than the U.S. Federal Reserve, and the regulator’s balance is now 41 percent of the eurozone GDP.
Great difficulties are expected in China, which is the economic leader in the region, and, as the pulse of the Russian economy affects the state of any country of the former USSR in one way or another, in the same way, the problems of the Middle Kingdom can cause a tsunami in southern Asia. The “trade war” with the United States clearly ends with China’s surrender, as it is difficult for the yuan to compete—the reserve currency, although included in the IMF’s basket—with the U.S. dollar. The Asian securities market went into a deep minus on October 11 after a domino effect, demonstrating its dependence on the situation in the U.S. stock market. The crisis has already swept the Middle Kingdom, as the fall in real estate prices, in some cases immediately by a third, leads to an increase in social tension in this country.
Bitcoin Shows Stability and This Is an Important Achievement
During the fall of the Wall Street indices on October 10, there was a lot of frustration in the crypto world about why investors did not run out of the “financial bubbles” into cryptocurrencies. DeCenter has already written about what it is worth doing if a cryptocurrency rally does not happen until the end of the year. There was no rally so far, although analyst Alex Kruger was waiting for it due to recent events on Wall Street. There was a “dress rehearsal” for the future global financial crisis, as it would have become obvious that it would affect all key securities markets when all country ETF values went negative this time, as compared to their maximum levels.
The fact that Bitcoin remained unshakable is also an important indication of what kind of asset will be a real “safe haven” in future financial turbulence, which first begins to affect the foreign exchange market, then the bond market, and then other securities. The flight from the obligations of the U.S. Treasury begins quickly and leads to a sharp increase in the yield of these securities, which is what we saw last week.
New Financial Technologies Make the Onset of a New Global Crisis Inevitable
The financial storm is inevitable, as the state of the debt situation of the United States and other countries of the G20 in the October report of the IMF is said to be an important factor in the coming crisis. Indeed, U.S. debt is growing and the U.S. budget deficit is growing as well, which jumped by 17 percent in fiscal 2018 to $779 billion compared with the previous period, despite Trump’s hopes to start reducing this figure. We see that such a debt situation can be controlled for a long time with the help of monetary policy tools, however, but that which cannot be controlled is deserted branches of banks and online user offices due to the fact that millions of people, primarily millennials and generation Z, will start operating in cryptocurrencies due to the complete transformation of financial market institutions, including the disappearance, at least in their current form, of banks, insurance companies, and investment funds. The technological wave is becoming the main reason for the restructuring of the global financial system, and cryptocurrencies are the most reliable way to invest in situations where absolutely all other assets will fall in price.