Central Bankers Have Put Cryptocurrencies Back in Play
As those who have been engaged in the cryptocurrency space for some time will no doubt have noted, 2018 would be a year best forgotten. In the thick of a particularly heavy flow of buzzword diarrhea, every and all manner of town caller and snake-oil salesman was calling for “revolutionary change” and “disruption” of the financial services industry.
Many of these same “experts” who were not too long ago foaming the milk for your venti decaf skim milk latte were now suddenly dispensing sagely wisdom as to how to obtain an “exclusive” initial coin offering (ICO) allocation.
And while the euphoria or “irrational exuberance” (to quote former Fed Chairman Alan Greenspan) of the early days of cryptocurrencies are well and truly behind us, monetary policy moves by central banks from Australia to America and everything in between mean that “riskier” assets are back in rotational play as seemingly limitless dollars continue to chase yield.
Let’s Raise Interest Rates, Or Maybe Not
In Australia, soon after U.S. President Donald Trump delivered his State of the Union address, the governor of the Reserve Bank of Australia, Philip Lowe, warned of an “accumulation of downside risks,” citing trade skirmishes between China and the U.S., rising populism and Brexit, indicating that the next move in Australian interest rates could be downwards, instead of upwards.
Australia has been somewhat of an economic miracle, having not had a single recession since the 1990s. Since then, interest rates set by the Australian central bank have fallen from a high of around 17% to 1.5% today. Coupled with the rise of China after the reforms of then-Chinese President Deng Xiao Ping, Australia, which has an abundance of natural resources such as coal and iron ore, has prospered along with the rise of the Chinese economy.
But the low interest rate environment, has also inflated a dangerous property bubble in the land Down Under. And recently, property prices in the two key cities of Sydney and Melbourne have tumbled 15% and 9% respectively, indicating that the property party is coming to an end mate!
Not to be outdone, the Reserve Bank of India, long under pressure from Indian Prime Minister Narendra Modi to ease monetary policy, also trimmed rates by 0.0025% a day after the State of the Union. On the same day, the Bank of England abandoned plans for multiple rate hikes, putting further downward pressure on an already battered pound.
To pin all of these monetary policy moves on the Trump administration would be to give it undue credit, but President Donald Trump would likely take that credit anyway.
President Trump has long credited the “unprecedented economic boom” in the U.S. to his leadership, but in reality, much of that boom can also be traced to the unprecedented and extended period of low interest rates, creating numerous asset bubbles from property to tech stocks.
And with signs that the U.S. economy had reached terminal velocity, Federal Reserve Chairman Jerome Powell had indicated last year that he would be gradually increasing rates, to prevent an overheated economy. The move sent shockwaves throughout a market by now addicted to loose and easy monetary policy.
Hit Me Baby One More Time
With stocks diving in the last quarter of 2018 and an increasingly interventionist White House, vocal in its criticism of the Fed, Powell took a significant policy turnaround, announcing towards the end of January this year that the Fed will be shelving any plans to lift rates any further, because of the possible risks to U.S. growth.
Since then, markets have rallied and analysts from New York to New Delhi are even touting emerging markets as the flavor of the month.
That central bankers are now behaving as if another recession is right round the corner is a jarring contrast to the euphoria this time last year. Similarly, this time last year, cryptocurrency titans were behaving as if they were unstoppable and Ethereum and Bitcoin were at all-time highs.
At a time when all asset prices were grossly overvalued thanks to excess liquidity, it’s no wonder that confidence was in oversupply.
At last year’s gathering of political and business leaders in Davos, Switzerland, optimism was in the air, with one survey of bosses putting confidence at its highest for six years. And the champagne wasn’t just flowing from the developed world either, the IMF hailed the broadest synchronized global upsurge since the start of the decade, with 120 economies enjoying a pick-up in growth.
Everyone’s Getting Rich!
From initial coin offerings (ICOs) to blockchain venture capital, opportunists, technologists and snake oil salesmen were raising billions of dollars as well for every and all manner of cryptocurrency or blockchain project, with little consideration about the viability or sustainability of said project.
To think that the cryptocurrency bubble could have existed without these macroeconomic forces at play is to live in a bubble of one’s own creation. Cryptocurrencies did not rise at the speed and rate that they did of their own merit, but were merely one of many bubbles created from excess liquidity.
But the global economic picture no longer seems as rosy, with the IMF just last month bemoaning the “backdrop of weakening financial market sentiment, trade policy uncertainty, and concerns about China’s outlook.”
According to the IMF, growth in developed world economies is expected to slow to 2% from an estimated 2.3% in 2018 and fall further to 1.7% in 2020. Global manufacturing activity on the other hand, is at its lowest in two-and-a-half years.
According to global financial services giant Allianz’s Chief Economist, Mohamed El-Erian, who had earlier predicted the survival of cryptocurrencies after their broad sell-off,
“You are getting a much more sober assessment of global growth.”
According to El-Erian, the change in sentiment, in particular among central bankers from across the globe, was a realization that policymakers had become overly bullish last year. The Fed, he says, in particular, had over-reached by signalling four interest rate increases for 2018, at a time when the global economy was still fragile.
Business as Usual
But since then, markets have rallied and confidence has returned, meaning that risk assets, in particular cryptocurrencies which many institutional investors and family offices had been quietly stocking up on are once again in rotational play.
For now at least. the U.S. economy has continued to put in robust performance. Whether or not one believes this is the work of U.S. President Donald Trump or not, the number of new jobs created in the U.S. economy in January came well ahead of Wall Street analyst expectations.
For a change, wage growth is also running comfortably above inflation, increasing the disposal income of middle and lower income households, which will be looking for vehicles to either invest this extra money or avenues to spend it.
For now at least, the Fed is not likely to raise rates anytime soon, allowing more asset bubbles to be inflated as money, once again, goes in search of yield.
Against this backdrop, cryptocurrencies, in particular those which have become bellwether cryptocurrencies such as Bitcoin and Ethereum may serve a dual role.
A recent study by Stephen King, an economic adviser to HSBC, found that of a group of 37 countries studied, only 8 have reduced their aggregate debt ratios compared to before the financial crisis. According to King, this means that central banks will “naturally be more cautious in raising rates.”
“If you thought the (financial) crisis was associated with debt, in some senses we are in a more vulnerable state now.”
And given that Bitcoin was created in direct response to global debt and a systemic failure of the financial system, there is a reasonable argument to be made for its role as a hedge for the next one.
Beyond the bubble that may be created in cryptocurrencies as more liquidity is pumped into the global economy, there are now serious warning signs of economic weakness in Europe as well.
Last Thursday, the European Commission slashed its growth forecast from 1.9% to 1.3% for this year, with Germany dragging down growth of the region and Italy predicting its weakest expansion in 5 years.
Part of this has of course to do with China, where demand for luxury goods and vehicles from Europe is starting to taper off.
But more significant is that the European Central Bank (ECB) has stopped expanding its €2.6 trillion quantitative easing program — a program where the ECB purchases bonds and other financial assets to spur economic growth.
With a chaotic Brexit looming (barely six weeks away with nary a plan), the political barriers for the ECB to restart the quantitative easing program, which is often associated with helping undeserving corporations and financial services firms, may be unpalatable to an already restive European population — a factor which could push for greater adoption of cryptocurrencies, in a region which has already been relatively open to them.
So with interest rates likely to be kept low for the foreseeable future and pullbacks in already over-inflated asset prices from property in Australia to technology stocks on the NASDAQ, excess liquidity will need to flow into other areas, which is why riskier assets such as emerging markets (which have taken a battering and are now approaching attractive valuations) as well as cryptocurrencies, which many pundits argue may have bottomed, out may come back into play.
Another roll of the dice perhaps?