Opinions Crypto Talk with TerenceA Comment -- General Comments From an ExpertA CommentaryCOMMENTJan 27, 2022
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Leverage and credit expansion
Leverage is often blamed for the 1987 stock market crash, about 38 years ago. Rising use of borrowed money, such as margin debt in equities or high loan-to-value ratios in real estate, amplifies gains during bull phases and magnifies losses afterward. Easy credit or relaxed lending standards frequently accompany bubbles. Currently, there is a lot of concern about margin debt. According to the U.S. Financial Industry Regulatory Authority (FINRA), margin debt is at about US$1.1 trillion. Sure, it is a big number, and is at a record. It represents two per cent of total S&P 500 market value, and is up 35 per cent in the past year. But again, it may not be as bad as it sounds. The S&P 500 is up about 15 per cent in the past year so some margin expansion is expected. Lower interest rates also help investors manage their debt exposure. And, two per cent of the S&P 500 does not sound like a lot, considering expected earnings growth forecasts in the 10 per cent or more range for next year. Still, margin debt is certainly something to watch, and may be a sign of future troubles.
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Watching for US Treasury announcements this week on quarterly refinancing needs. Appears requirements will be less than originally planned for. Upcoming US Fed meeting will also be indicative of US economy. If US Fed starts to issue more bonds than expected, not a good sign for markets (need to raise capital is bad). Widely expected that US Fed will keep rates flat, and appears rate cuts are on the horizon. Reduction of US Fed balance sheet will also be interesting to watch. Upcoming earnings from big tech companies will be defining on direction of markets (could break momentum of markets).
Best place to get growth in portfolio that is not tech oriented is ETF called PAVE. Offers investors an option to get infrastructure spending exposure. As globalization reduces, more spending will occur "at home" in North America. Bricks & mortal syple business' also provide traditional cash flows. Not a cheap valuation, but would recommend buying on share price weakness. PAVE ETF also pays a nice dividend yield for defensive investors.
Case for Owning Equities Over the Long Term:
This might make the prophets of doom quiver a bit. We ran a Bloomberg screen this week, using Jan. 9’s closing market prices, on every stock in North America. The market at that time had been open for a grand total of six trading days, yet we found 21 stocks that were up more than 20 per cent this year, ranging from a high of 106 per cent for Athena Bitcoin Global to 20.6 per cent for Structure Therapeutics Inc. Since we are on the topic of pie-in-the-sky news, how about annualizing those returns? Wow, that would be something.
For our screen, we only used companies with a market capitalization of more than $100 million. The two companies noted above are more than $1 billion each. If we take off our market cap restriction, we get even more early winners.
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Garner predicts a surprising but sharp uptick in grain prices though agriculture has been hated. Tech has made farmers more efficient. New production came online after the grain shortage following Russia's initial invasion of Ukraine. But demand from China has softened. However, the bears/pessimists have sold by now until we're now seeing a floor/bottom. Garner predicts corn rally to $5.50. Don't buy wheat now, only on dips. He expects wheat to rally with corn. Wheat's chart shows an inverse head-and-shoulders, so wheat is pointing up and could rebound to the neckline of $6.60; a breakout could touch $7.60. Soybeans could see short-term weakness, but a breakout past $13 could see the price reach $14, and can bottom at $11-11.80.
Historically it is a good sign that U.S. markets keep hitting record highs after 18 months of not making new highs. Also we are in an election year after a negative mid-term (presidential) market. This is good too, historically. There has been 5 new net term highs in January which predicts well for the rest of the year. A number of global markets have woken up after 15 years, including Japan after 30 years. There is a substantial improvement of the breadth of the market and in putting new money to work. Along these lines there could be a fair bit of money coming back into Canadian stocks. Also there are a lot of Canadian companies not just focused on the Canadian domestic economy, especially in industrials. Latin America and parts of Asia are interesting - not just the U.S. U.S. earnings are improving after a contraction - could be up 15% by the 4th quarter. There are corporations and individuals with high cash rates.
ANALYSIS ON INTEREST RATES
During the last 2 years, central banks have created massive money (quantitative easing) in order to make recovery plans and avoid the impacts of the economic crisis caused by the Covid.
This injected money ended up massively in the stock markets (stocks, futures, cryptos), which contributed to give a huge boost to the different assets and to pull them higher and higher. Nevertheless, logically, this huge money creation of several trillion dollars contributed to increase inflation.
To regulate this, central banks can generally play on 2 levers:
Stop quantitative easing.
Raise interest rates (today between 0% - 0.25%).
The FED has chosen to raise its key rates for the first time since 2018 (which should start in March 2022), concretely, this means that borrowing money costs more and at the same time, the currency (here the US dollar) that we hold yields more interest. If the currency earns more interest, it automatically appreciates and its value on the currency market increases (you would rather keep 1 million dollars with 1% interest on it than the equivalent in euros with 0%, so you sell your euro to buy dollars).
The equity market is becoming very risky, because with the end of quantitative easing, the liquidity tap will close. As far as the market we are interested in, the crypto-currency market, is concerned, it becomes extremely interesting, because if it is true that it is an extremely volatile market and that it has also benefited greatly from quantitative easing, it is also true that many investors consider certain assets, notably Bitcoin, as a safe haven in the same way as gold and consider using it to fight this inflation. In addition, with some DeFi protocols, it is possible to earn interest passively by staking or farming on blockchain (on stablecoin in particular).
The year 2022 will be very revealing for the blockchain ecosystem, as with the exponential adoption of blockchain projects by many large investors, let's hope that crypto currencies start to de-correlate from other markets, and from each other, in order to fulfill their full potential!