Latest estimates are that the recent asset meltdown has whipped out more than $9 trillion of value year to date, much more than when the bubble bursted for the 2008 GFC or the 2000 Internet craze. This equal opportunity bear market had already caused the world’s 500 wealthiest persons to lose $1 trillion of their portfolios.
While it is comforting that everyone is also suffering one of the worst few months in recent history, had anyone seen it coming?? Bears have been shouting for more than 14 years since the massive easing by central banks to save the markets after the 2008 GFC. Is this it now or is this just another buy on dip strategy that has been so successfully played out over and over so many times? Are we heading to a recession or is the Powell put going to be activated again?
This is like a death by a thousand cuts situation where the frog in the pot is being boiled. While the slide in prices was over weeks, the dramatic drop still caught many by surprise. So many well know stocks are now less than a third of their highs now. Many others like Chinese stocks are only a tenth of their 2021 price. The savage bear had clobbered all asset classes and none were spared.
It was the turn of cryptos this week. They were supposed to be an inflation hedge but that did not work now. Even Gold prices are down. The trickle became a stampede when one of the stablecoin was threatened. Everyone decided to get out at the same time.
The main culprit? Luna token and Terra UST stablecoin. They are interlinked as the creators had devised an algorithmic mathematical process to ensure that the peg between them would automatically self adjust to maintain it. Until it didn’t work this week.
The value of Luna suddenly dropped off the cliff to become almost worthless in a matter of days as too much new supply was created by the algo and the selling exacerbated the price free fall. The suddenness of the action made it a shitcoin immediately. This in turn caused the Terra UST stablecoin to fall below its 1 to 1 peg to the USD to less than 30 cents. As UST was a stablecoin, it also affected USDT, one of the most popular stablecoins at the moment, threatened to bring down the whole crypto ecosystem.
All cryptos went into a sudden free fall which triggered more margin calls on leveraged positions, leading to more selling. BTC, XRP and ETH dropped like a brick as uncertainty within the market asked if the very foundation of the crypto markets was at risk. Crypto billionaires basically lost their shirts this week, losing from 60 to 99% of their wealth within days. And we are talking about big numbers here.
Let’s analyze the big picture now and try to make sense of where do we go from here. The 3 main macro themes at the moment are the Ukraine/Russia war, Oil price and China’s Covid response. By predicting what will happen to each of them, perhaps we can logically come to a better near term projection to help us adjust our investment strategy.
The Ukraine war has been going on for too long and Russia does not seem to be gaining ground. The US is openly mocking Putin by sending billions of new weapons to them. Every important American political person is lining up for flights to meet up with Zelensky every other day. Russia’s annual military budget is about US$ 66 billion and America is already promising at least $44 billion to Ukraine to date.
Russia’s tanks, ships and equipment are being decimated all over the cities of Ukraine with sniper missiles supplied by NATO, the US and other countries. Spring is coming and the roads become muddier for the Russian tanks to advance, even as they become sitting ducks for the shoot and forget anti-tank weapons.
The world has ganged up against Mother Russia. It is in a no-win situation while the war is costing them more than a few billion dollars per day. The forecasted short war has dragged on for too long. Latest rumours of a coup to get rid of Putin could eventually come true, besides talk that he is ill with cancer. I do not think Russia can keep this up any longer as they are running on empty soon. The nuclear option is scary for everyone and hopefully a rational solution prevails.
Oil prices have been struggling to go higher to stay above $110 per barrel. This level is too attractive for oil producing countries to ignore. Non-Russian producers will glading pump more to sell as it will also be seen as a pro-Ukraine stance besides earning more revenue. I sense that the US oil frackers will also be turning on their taps very soon as the price is above their breakeven cost of $55. Biden may be more sympathetic to them as it will also help to arrest inflation.
Oil had broken above $100 (high of 147) 3 times previously (2008, 2011, 2013) and dropped each time back to below this level quick quickly as suppliers rush to take advantage to lock in high prices for future delivery. Latest US inflation numbers last week surprisingly showed a slight drop. As long as the Fed is on track to raise interest rates by 50 bps twice in Jun and Jul, I think inflation will be well contained.
The past few weeks financial markets correction is actually a much needed pull back from all the asset bubbles that have been created during Covid. Newly created asset classes like SPACs and NFTs needed to come down to earth with their ridiculous pricing of “nothingness”.
Finally, we have China with its zero Covid strategy. There was a report that they are fearful of forecasts of 1.6 million additional deaths if they remove all Covid restrictions like the rest of the world. To be honest, the US has about 250,000 deaths related to the annual flu season every year for a population of 300+ million. China, with its bigger population, will therefore also have at least a million deaths from flu this every year anyway. The elderly do pass on annually regardless of Covid.
China has to weigh against being pragmatic versus being overly cautious to decide what is best for its people. Their supply chains have to be working to prevent citizen protests from getting out of control. They will have to let go of Covid restrictions eventually to rejoin the rest of the world.
In summary from the above 3 topics, I do see a return to normalcy for the financial markets soon. Perhaps it is a good time to selectively use up our cash reserve to buy on dips our favoured assets. I am still a crypto HODL and will aim to buy more of the top ones. I will need to do more research on stocks to carefully utilize my remaining free cash, given that my portfolio of Tech and China names had not been doing well recently.
Then again, as the markets have shown last week, sentiment may prevail over logic and we may again get another black swan. Like Terra Luna, the 6 Sigma probability event means that the machine ain’t suppose to be broken until it suddenly does.
The world had just bounced back from a once in a 100 years black swan Covid event. I have no doubt that it is resilient enough to weather this current bear market to come out stronger to face the brave new world.
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