Below is a write-up from the team at Delphi Digital, an independent research boutique providing institutional-grade research on the digital asset market. They share some of the key takeaways from most recent quarterly macro outlook, which you can read in its entirety here. Full disclosure: I currently sit on Delphi’s board of directors.
Trade wars. Slowing global growth. Weak inflation. $14 trillion of negative yielding debt. Unprecedented monetary policies. Late cycle fiscal stimulus. Potential peak corporate profits. Asset valuation concerns. Sub-2% U.S. Treasury bond yields. Explosion in covenant-lite loans. Multi-billion-dollar IPOs with multi-billion-dollar profit losses. It’s easy to see how people get lost in the mayhem of markets when these are just some of the notable trends investors face today. Amid the chaos, the second quarter of 2019 was marked by a few key narrative shifts with significant implications for both traditional markets and crypto going forward.
A key reason behind bitcoin’s outperformance in recent months is the strengthening narrative around its value proposition as “digital gold.” The macro backdrop that’s emerging is the perfect storm for bitcoin to thrive as it has the potential to benefit from both secular and cyclical trends in the coming years.
First, and arguably the most important, sentiment from global central banks took a drastic turn towards more dovish monetary policies. The Fed, ECB, BOJ, PBOC, and many others are now preparing market participants for more rate cuts and additional stimulus measures as they attempt to keep the current economic expansion going. Look no further than recent commentary from Jerome Powell, the leader of the U.S. central bank, who simply stated, “it’s very important that this expansion continue as long as possible.” The effects of such a sharp reversal in policy are already starting to show up across multiple asset classes. Public equities, especially those in the U.S., are breaking to new all-time highs as expectations for multiple Fed rate cuts by the end of 2019 surge. Central banks around the world are standing armed and ready.
Global economic growth has trended lower for decades as advanced economies face demographic headwinds like aging workforces and slowing population growth. Excessive debt levels also weigh on productivity and potential GDP for major countries like the United States, where estimates for future economic activity point lower over the next decade.
This global slowdown everyone has feared for some time has begun to show up in the economic data as well. Global PMIs, GDP growth forecasts, and inflation expectations are all trending lower, which helps support the case for looser monetary policy. Increased stimulus measures are likely to get more extreme this time around given the already low starting point for short-term interest rates. It wouldn’t be a huge surprise, for example, to see the European Central Bank follow in the footsteps of the Bank of Japan, revamping their corporate sector purchase program and potentially expanding their mandate to include equity index vehicles like ETFs.
The simultaneous decline in global growth forecasts has fueled a resurgence in the growth over value trade, a trend likely to continue unless the economic backdrop firms considerably. As a result, yields on government debt have plunged across the world, pushing many bond markets into shaky territory. Falling yields have also given a boost to gold prices in recent months as the opportunity cost of holding non-income producing assets declines. If yields continue to decline, it should serve as a tailwind for bitcoin as well.
This increasingly bleak backdrop does not mean markets are doomed, but growth assets (i.e. technology stocks, alternative investments, etc.) tend to outperform during periods of slowing economic activity. Longer-term, we are strong proponents of the “digital gold” narrative for bitcoin that continues to gain relevance amid extreme monetary policies and rising geopolitical tensions. However, the relative size of bitcoin’s market value compared to the investible gold market, for example, also makes it a tempting opportunity for investors starving for assets with above-average growth potential.
Unsurprisingly, bitcoin’s market value is often compared to the total size of the above-ground gold supply (~$8 trillion), though it may be more appropriate to use the total investible gold market as a more conservative proxy. Either way, the long-term total addressable market (TAM) for “digital gold” may be substantially higher. There are only a handful of assets that largely sit outside the purview of any single government, so the demand for such non-sovereign assets could be even greater in the decades to come depending on how the effects of unconventional monetary policy shake out.
Nothing operates in isolation. The crypto market is no different. The search for yield will likely push investors further and further out the risk curve, which could be a strong catalyst for BTC's next bull run. The opportunity cost of not holding at least a small allocation in bitcoin grows by the day, especially as the long-term outlook for conventional asset classes looks more and more bleak.
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Here are my tweets from yesterday:
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