Crypto Market Commentary
30 March 2020
Doc's Daily Commentary
The 3/25 ReadySetLive with Doc and Mav is listed below.
A New Global Thesis Pt. 2
What am I expecting
There are a number of things I expect moving forwards:
Continued weakness in stocks –I think we have seen Act 1 scene 1. There are still a lot of dip buyers and headlines like that below that we ALL KNOW after weathering the crypto bear market, are NOT A BOTTOM SIGNAL! We are not out of the bear market…we just entered it.
I also do not believe we will see a ‘V-bottom’ formation in the stock market like we saw in 2008-09. In fact, the long drawn out painful bottom formation Bitcoin has tuned us into is more likely in my opinion.
Baby Boomers get Scared – The largest generation in history are starting to retire…at the exact wrong time. Pension funds are heavily invested in stocks and corporate debt, both of which are imploding. Many have not sold, not wanting to realise their paper loses, but likely will have to at even lower prices. My personal view is this is why we have further to go. It is a harsh reality but markets punish the maximum cross section of people. Retirees are net LONG and they will sell as soon as it becomes clear that Act 1 Scene 2 is playing out. Act 2 is then a race to the bottom, last one out the door loses the most. Add to that the lack of genuine buyers and it is a one way bet.
Stimulus of Gargantuan proportions – No government can afford to support all those people. They MUST print en mass to prop up the markets and provide the largest generation in history with an acceptable exit. Else pitchfork sales will moon. Stimulus is going to be the largest buyer of assets.
For me in my late 20’s, I am under no illusions that I will be footing this bill with currency devaluation and likely future taxes. Future generations will bail out current retirees. This is not a new reality (and is exactly why I am bullish gold and BTC).
Cash is King – Having dry powder is top priority during the sell off. I don’t think we have seen all margin calls and the next leg down is likely to be another flight to safety. All assets usually sell off during this time. The other reason to be cash dominant is that sweeping the actual bottom will present opportunities of a lifetime.
Stagflation? – For those not familiar, stagflation is where the economy and growth slows (stagnates) whilst at the same time inflation picks up significantly. In a world where the virus has the globe in stasis and money is printed in trillions to prop up the system, this seems to be the most likely outcome.
Add to this the reality that whilst commercial banks may borrow from the central bank at zero interest…but they still have risk in their market portfolio. I expect commercial banks will actually raise interest rates for consumers in an attempt to take risk out of the system in an attempt to avoid an ‘08 style implosion. We already see this in Australia where central rates are near zero and dropping but these are not being passed on to households. Last time we saw this was the 1970’s when the world officially released gold as the standard and the conditions are eerily similar.
The End game
There are four phases to my end game thesis.
Phase 1 – USD – I expect continued strength in the USD as equities fall. The USD is dry powder and is likely the strongest and most sane position to dominate a portfolio at the moment. This prepares you to take charge of the bull and invest at the bottom in everything trading at a discount. I personally have felt the effects of this having moved from the UK back to Australia at a time where the AUD had lost 18% of its purchasing power in a month….extreme reality check. Fortunately, we have access to USD facilities
Note – I believe we are currently somewhere between Phase 1 and 2 right now.
Phase 2 – Gold – We already see the smart money accumulating gold both at a central bank and institutional level. I personally am accumulating gold heavily at the moment and am very bullish on the current supply shock, a result of extreme demand. Gold is also the asset that boomers are likely to associate with safety when everything else sells off which adds another support level for demand.
The big argument against gold is it is a non-yielding asset. Well, in a world where stock returns are -30% and bonds yield negative interest, zero yield seems pretty attractive. For Australians amongst us, PMGOLD is the best I have found on the ASX. It is 1:1 gold backed by the Perth Mint and guaranteed by the WA government for extra assurance. You can even fly to Perth and trade shares for the physical gold.
A speculative play on gold would be to invest in stable gold miner equity. Now it is easy to lose your shirt speculating on gold miners so you must certainly do your own research. I personally invest in Australian miners based on a simple set of criteria: They must mine in Australia (stable jurisdiction), have a life of mine at least 5-10years with prospects of expansion and a stock price strongly correlated to XAU/USD price. This way, I can basically track the gold price and have a strong case for amplified returns on the miner stock. Factor in also that oil prices are now very low which brings down miner costs alongside increased profits from a bullish gold price.
Finally, my selection criteria is to calculate miner production minus the all-in-sustaining-costs (AISC) to determine the current profit rate. I can then compare profit per share under to give a fairly simple and robust comparison between each miner.
Phase 3 – Inflation starts to accelerate – The money printing machines will whirl to for years during this process and I see no rational base case where inflation in hard assets like gold, real estate and ideally BTC does not occur. We could even see prices of household items start to inflate also which will really stir up the emotions. This is where gold really hits its stride and potentially sees the next chess moves in the East dropping the USD reserve asset come into play.
During this whole process, the structural and likely irrecoverable past of the modern financial system falls apart under stagflation conditions. Central banks fail to control the situation as they only have one tool, the printer. When all you have is a hammer, the whole world looks like a nail.
We may see some very Orwellian measures deployed including digital cash, vaccine trackers and increased surveillance and an expansion of government ownership of companies and the means of production. All of these processes lean into the need for a hard currency separated from government control. Bitcoin and sound cryptocurrencies stand to benefit from this and as Raoul Pal says, these assets are a call option on a better financial system in the future.
This is where cryptocurrencies really shine. As digitally scarce, bearer assets, they solve many shortcomings of gold such as the ability to self-custody, easily transport and protect from censorship and inflation. I see crypto as a parallel system forming alongside a rapidly changing fiat system.
I’m not going to lie, I see Bitcoin as the only winner in crypto under these circumstances. I do not see altcoins as a sound play until we establish a sustained bullish market sentiment.
Phase 4 – Buy the generational dip – If you are like me, the stock market is completely out of reach and stupidly overpriced. I refuse to pay $1600 for a single share in Amazon. It is madness.
At the end of this whole disaster, assets will be repriced to a level that becomes attainable for a much wider cross section of society. At that stage, I hope for us all to have realised pleasing returns from holding USD, GOLD and BTC which can then be rolled into purchasing a diverse basket of assets that are will by then be trading at generational lows.
Those who have cash at the bottom of a bear market set the rules and I do believe there will be life changing opportunity as part of the end game for those that prepared for it. Participating in the rebuilding of strong sustainable companies and economies will be a life changing opportunity.
Plan to be prepared when this time comes.
There you have it, my current global thesis on what I think is going on and how I intent to play this very overwhelming market. I really think simplicity is key and the transition through USD, GOLD and BTC feels to me like the most sensible play. Holding all three is sensible and patience is the secret sauce.
Remember, we are all in this together, some of us are just better prepared than others. It will be a tough slog for many and the value of communicating with peers to navigate the information is invaluable. I for one value the RSC community immensely, you have all been my go to for testing theories and ideas in the lead up to this ‘event’. For that I must thank each of you, the journey wouldn’t be the same otherwise.
We generally saw this coming but to actually live through it is a whole different story. We have a kick-ass team here and that includes you. Keep the chatter up, test your theories and together we will navigate the chaos to greener pastures.
I will leave you with one of my favorite sayings that reminds me of what we have built here at RSC (although I cannot for the life of me remember who said it….)
In times of uncertainty, make sure to surround yourself with people you are certain about.
Stay safe, stay sane and keep the strategy simple.
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