2/27/2020

Written into the first block ever mined on the Bitcoin blockchain is the message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.

Index Action:

Last week, the major US indices pulled back 16% from the highs, more than Laissez Faire’s biggest drawdown ever, and more than the 5 year backtested drawdown as well. This move downwards is in the top four biggest weekly drawdowns since World War II with worldwide markets falling in tandem. The headlines blame the Coronavirus, and while it does have serious economic implications; the virus outbreak serves as a needle to a balloon of systemic issues. I believe there are several other hidden problems within the banking system, the federal reserve, and world economies in general – which I’ll illustrate below.

The Virus:

The virus itself is certainly economically disruptive. It already has destroyed many supply chains from China to nearly every country in the world. World economics are going to feel the waterfall effects of Chinese production disruption and supply shortages of certain things are very likely.

The Harvard Business Review explains that most of the effects will be seen mid-march to April.

https://hbr.org/2020/02/how-coronavirus-could-impact-the-global-supply-chain-by-mid-march

Laissez-Faire Unaffected: 

As you know, back in September I theorized that LF could outperform most assets, indexes, bonds, and commodities by the end of the next recession. Now more than ever I believe this to be a likely outcome. Not only did the algorithm outperform just about everything on the list this week, but Bitcoin also remained more or less unaffected Thursday and Friday while gold and the markets made historical plunges. I maintain the stance that economic collapse isn’t good for Bitcoin, but quantitative easing by the Fed and devaluation of the dollar certainly is. A good analogy for this theory is the price of gold going into and out of the 2008 financial crisis.

Update: As of 3/3, Bitcoin remains flat in the face of a huge 50bps emergency rate cut, albeit a quick spike up to 8950 and back. It will be very interesting to see how it behaves while traditional markets take hits.

Laissez-Faire and Bitcoin During a Global Recession

Gold down -7.66%

10 Year Note Interest Rates -19.26% 

Dow Jones Index -16.09%

Now, more likely than ever in the last 10 years, the markets stand most likely to enter a recession.

Chinese Collapse: 

China’s production has essentially halted, and the waves following their collapse will be seen in every country with a supply chain connected to them.

U.S. Federal Reserve:

In my opinion, the Fed is likely to lower rates as an “emergency action”. Although, I don’t believe a Fed rate cut is going to solve all the problems (in spite of Goldman’s prognostications)…it would just be putting a bandaid on a mountain of open wounds. The Fed’s two tools for managing the U.S. economy revolve around money circulation. The Fed funds rate is set at varying rates to provide economic stimulus, balance inflation, stimulate debt, and affect money circulation. Their other tool is simply to print money. By printing money, the Fed creates short term stimulus at the expense of devaluation of the dollar, thus creating the “hidden tax” of inflation. This is one of the reasons unbacked fiat currency is not sound money, something I’ll be writing about in the next article.

Update: As of 3/3/2020, Jerome Powell announced an emergency rate cut of 50bps, the highest in 11 years. It’s likely they cut rates another 50bps later this month. The next FOMC meeting is on March 18th.

The other worrisome economic metric is the overnight repurchase agreements. Repurchase agreements were non-existent leading into 2019 for 10 years, since the 2008 crash. Suddenly in September, the Fed was fronting cash overnight to keep some institution or group afloat. I’m certain this is another driver of the crash, as it’s most blatantly obvious that someone ran out of credit. Banks around the world are performing similar quantitative easing measures like dropping rates and printing money – the problem is that rates are already so low worldwide. As of March 3/3, the Fed is injecting 70B every night into the repo market to keep it afloat.

The greatest boon for Bitcoin will likely remain the loss of confidence in fiat currencies and fiat governments.

So let’s stay tuned.