Too Long, Give me the short version
We have been in a recession all 2022 and economists are just now talking about it. Supply is extremely backed up, inflation is record high, car and housing markets are at record highs, markets are at record lows, bonds and commodities are getting hammered, we have a labor shortage in the U.S, and a looming geopolitical crisis thats affecting global supply chains. Sounds very recession-y if you ask me.
This recession started in Europe and has slowly been affecting the global economy. It will lead to food shortages in under-developed nations since Russia is a global supplier of fertilizer (almost 30% of global supply). Shortages in Oil will lead to prices remaining high until OPEC reaches a deal with U.S. and Saudi.
Avoiding a global recession depends on the ability of world leaders to reach a passive agreement in Europe and relieve some of the pressure on supply chains. If supply chains open back up then costs will reduce and stimulate the economy back to health.
The Federal Reserve has had a policy of 'money printing' (quantitative easing) & low interest rates (cheap money) since the Global Financial Crisis ('08). This introduction of cheap money into the economy has led to incredible growth in the global economy but has also led to an inflation crisis (prices going up& currency getting weaker).
A rise in prices makes it very hard for people with low/medium incomes to keep up. People living paycheck to paycheck are forced to find second streams of income or relocate to a cheaper area. If wages rise at the same rate as the goods/services then things are usually okay. Problems arise when the cost of goods and service gets too high but wages are the same.
The Federal reserve thinks that by reducing the amount of money flowing through the system that it will bring inflation down to a healthy level. Their plan is to increase the cost of borrowing money so that people spend less. Their Idea is that by spending less it will increase the supply of goods, which will cause retailers and manufacturers to bring their costs down.
They understand that the Trillions of dollars printed during the Pandemic crisis has made everyone feel richer and has led to a rise in prices. Slowing down the economy will have a negative affect on financial markets as we've seen since the beginning of 2022. The federal reserve is sacrificing the financial markets in order to save the real economy...a very risky bet since most big players in the economy are also invested in the markets.
This decision will have a direct impact on retirees, investors, workers, borrowers, lenders, and everyone in between. Markets will continue to crash until the Fed decides to shift their stance. The Fed will continue to tighten monetary policy until something breaks in the economy. This could be in the form of a serious recession, escalation of conflict in Europe, Inflation numbers coming back positive, Employment crisis, a consumer debt crisis, or a retirement crisis.
Once the Fed shifts their policy we will see a V-shape recovery in Equity, Crypto, and other important financial markets. Timing this is nearly impossible but it's important to understand that the lower markets go, the closer they get to a bottom. Averaging into the market makes sense in these conditions as long as you're getting into high quality, long-duration, & reliable assets.
The 2022 recession is a problem that’s been building for years. We almost entered a recession in 2019 because of failed monetary policy but the Fed corrected its course and saved the market. 2020 is when the global economy got shook and we’ve been dealing with the consequence of printing Trillions of Dollars into the economy.
The Federal reserve introduced almost $14 Trillion into the economy through their quantitative easing strategy. This is more than 40% of the total dollar supply outstanding in the economy. The result of the money creation is that it inflated the price of goods, services, and assets.
People who own assets usually benefit from inflation because the price of their home, investments, art, jewelry, and cars will appreciate in value. Asset owners become more wealthy in times of high inflation. Consumers on the other hand tend to get screwed in inflationary times because they don’t own assets and it becomes very difficult to buy them. The price of consumer goods also increases which can affect the standard of living for people as they pay more at the grocery store.
This recession will be led by a combination of geo-political pressures mixed with a Federal Reserve policy that is hindering economic growth. As traditional assets begin to decline in their returns, investors will look to move their money somewhere they can generate big profits, and we believe crypto is that asset class.
The Fed = The United States Federal Reserve.
"Money Printing" = When you see this mentioned, we are referring to Quantitative easing; the Federal reserves strategy to buy assets from the market in order to introduce cash.
Consumer Price Inflation = The rise in cost for goods and services in the consumer markets.
Currency inflation (Debasement) = debasement of a currency is the result of printing too much of the currency, causing the currency to lose value or 'debase'.
Wage Inflation = The amount of increase in wages over time.
Interest rate = There are may types of interest rates. Here we are referring to the Federal Funds Rates; the rate set by the FOMC (Federal Open Market Committee). This is the rate the federal reserve recommends to commercial banks for lending between each other.
HOW DID WE GET HERE?
The US economy has been operating in an environment of low interest rates since the global financial crisis. Since having low interest rates makes borrowing money cheap, this has stimulated the economy and allowed a lot of progress to be made but has also led to an inflation crisis. (See definition below).
The global economy was headed into a recession in 2019 following the federal reserve's decision to raise interest rates. Very similar to today, the Federal reserve feared that inflation was out of control and it was their role to slow down the economy. The Fed raised rates twice in 2018 leading to a severe crash in the equity markets. They were committed to normalizing rates but the economy was not reacting appropriately so they softened their stance in order to recover markets.
The 2020 pandemic was the straw that broke the camel's back. The real economy and financial markets crashed in a way that no one had ever seen before. Global Supply and demand went to 0, meaning there was no transaction and no flow in the economy. This exposed the severity of weakness in the economy and caused the fed to drop interest rates to 0. Collectively with the U.S treasury the Fed pumped close to 7 Trillion dollars into the economy.
Combined with looming geopolitical pleasures with China and Russia, the responsive action by the Fed led to the worst inflation crisis the world has ever seen. Supply chain issues are making goods more expensive to make which is also causing retailers to charge more.
KEY POINTS IN THIS DOWNTURN
"CASH IS TRASH, UNTIL THE MARKETS ABOUT TO CRASH" - ROY DUNIA 2022
Global investors are looking to get out of high risk assets until the storm settles.This is why we have seen a massive influx into the USD at the same time as Equity/Crypto/ Gold are selling off. Investors are getting out of high risk assets until the storm settles. After the transition these investors will look to enter long duration assets
DASH FOR CASH
The DXY is a composite index of multiple currencies, mostly the US Dollar (70%+). This index tracks the performance of the dollar relative to other currencies.
The DXY responded to the FED printing in 2020 by crashing from the highs at 102 down to the 90 level. Markets recovered when the Fed announced they were dropping rates to 0 as well as quantitative easing in March 2020. When the FED announced their rates hikes +quantitative tightening (summer 2021) the USD demand went up drastically and led to a global dollar shortage.
A strong dollar hurts U.S. trade with other nations sine the cost of goods is higher. The DXY broke the important 104 level and has maintained a bullish trajectory above the 100 zone. We will likely see a continued push in the Dollar until he Federal reserve changes their stance on monetary tightening. This will also be the bottom of asset markets.
M1 Money Supply = Total volume of currency held by the public.
Source: St. Louis Federal Reserve FRED https://fred.stlouisfed.org/graph/?g=PVOw
M1 Money Supply- Pre-pandemic the the total money supply held by the public is almost $4 Trillion. After the pandemic the total M1 money supply is at $21 Trillion. That's almost $17 Trillion of new money introduced into the economy..in under 2 years. This introduction of new money has led to the insane inflation numbers we've seen in 2022. This is why the Fed is trying to reduce the volume of money in the system.
Source: St. Louis Federal Reserve FRED https://fred.stlouisfed.org/graph/?g=PVOw
NAS100 Crash of 2022 = There has been a direct correlation of the NASDAQ100 index with the FED money printing. March 2020 (noted by that grey bar) has one of the fastest recoveries out of any previous economic crisis. Since the supply of money was growing, a lot of that flow ended up in U.S. tech stocks. We can see that since the Fed started tightening monetary policy the NAS index has been falling. The correlation on the NAS and Fed balance sheet is almost .9 (directly correlated).
BTC vs the FED
Bitcoin & Fed Money Printing = This chart shows a direct correlation to Bitcoin's market cap and the size of the Fed/ECB balance sheet. This indicates that the rise of Bitcoin's price was correlated with the increase in the balance sheet of the two largest central banks in the world.
Why would global investors be running into an asset that is losing (7%+) of its value (USD)? Why would they leave historically performing assets like stocks and crypto for cash? Global investors are getting out of risk assets early and preparing to buy the next dip.
(OPINION) Opportunity comes during times of transition. Global investors are looking to get out of high risk assets until the storm settles.This is why we have seen a massive influx into the USD at the same time as Equity/Crypto/ Gold are selling off. Investors are getting out of high risk assets until the storm settles. After the transition these investors will look to enter long duration assets, high potential startups, and … basically anything that can outperform inflation. As investors get out of historical favorites like gold, bonds, and cash.. they will move their money to assets that have higher returns.
This move out of traditional assets and into digital will bring in the next generation of economics. It will enable blockchain technology to flourish and usher in a new regulatory framework. 2020-2026 will be remembered as the new digital revolution where the legacy financial system adopts new technology, or gets competed away by it.
(Not financial advice please do your won research). We are holding cash and waiting for a sign of the bottom in equity and crypto markets. Meanwhile we are dollar cost averaging into high value name's that were always too expensive for us to get into. These names range from top 10 crypto's, high value tech stocks, NFT projects, traditional consumer staples, forward looking innovations (AI, Bio tech, etc..).
(EXTRA) The European Recession Story
Chart credits to ec.europa.eu/eurostat
European trade balance has been steadily declining since the end of the Cov-19 pandemic in early 2021. The trade balance was exceptionally flat following the euro zone debt crisis in 2012. Since the first negative rate was implemented in 2014 the Euro trade balance has been unstable. The ECB began its policy of QE (money printing) as a result of the 2008 financial crisis and has only recently rolled back its policy in March 2022.
The weakness in the European trade balance is an indication of a much larger problem. Europe accounts for approx. 14% of global trade (of goods) with its largest export being cars.
Europe is dealing with the supply chain issues that come with geopolitical tensions. The Russia situation has led to a rise in global goods and services and has made trading between European nations more complicated.
Russia controls a large portion of European/ Global energy supply so they have leverage in this situation. Russia also control a large portion of global fertilizer supply which is uses in agriculture. This will lead to a global food shortage that will have ripple affects through the economy.
Europe's ability to coordinate through this crisis will determine the survivability of the Euro. This may be the situation that ushers in the Digital Euro that the ECB has been hinting at in their CBDC documents.
May 29, 2022
Disclaimer: This article is the result of the analysis carried out by analysts associated with ChartAddicts. The article does not purport to represent the views or the official policy of ChartAddicts. This is not investment advice; please do your own research and consult a financial professional.