Global monetary easing, record low interest rates, and the upcoming Bitcoin halving - will Bitcoin become a choice for safe-haven funds?

BlockVC believes that the logic driving the Bitcoin market is evolving from "halving" to global monetary easing.

Original Title: "Halving, Easing, and Bitcoin Bull Market | BlockVC Strategy"
Author: BlockVC

Living in a time where history is constantly being made can be both fortunate and unfortunate. True historical turning points often happen quietly, and by the time you realize it, the winds of change have already blown over you.

On March 3, 2020, we may have witnessed history once again, as the Federal Reserve unexpectedly announced a 50 basis points emergency rate cut, marking the 9th emergency rate cut event since 1994 in the history of the Federal Reserve. The last emergency rate cut was back in October 2008 during the economic crisis.

If you are unfamiliar with the historical significance of emergency rate cuts, take a look at the timing of past emergency rate cuts, including during the 2008 subprime crisis, economic recessions, the aftermath of the Lehman Brothers collapse, the 9/11 terrorist attacks in 2001, the burst of the tech bubble in 2001, the Russian financial crisis in 1998, and the collapse of Long-Term Capital Management. Each emergency rate cut reshuffles wealth significantly and leaves a mark in global economic history. Such a historical event has just unfolded, and it will undoubtedly be recorded in the annals of global economic history.

Data Source: Federal Reserve

This emergency rate cut by the Federal Reserve is a response to the rapid global spread of the COVID-19 outbreak, following the footsteps of the People's Bank of China. Over the past two years, we have imagined numerous possibilities of a US stock market crash and a global stock market disaster, whether it be from corporate leverage, ETF liquidity crisis, or a fundamental shift into recession. However, none of these scenarios were predicted, and instead, a global virus outbreak unfolded before our eyes.

Major US stock indices plummeted violently last week, experiencing the largest weekly sell-off in a decade. The Dow Jones Industrial Average dropped by 12.4%, the Nasdaq by 10.5%, and the S&P 500 by 11.5%. The fear index VIX soared to the 99th percentile level since July 2014. Affected by the rapid global spread of the epidemic and concerns about global supply chain disruptions, stock markets in hard-hit regions such as Japan, South Korea, and Italy led the decline in Asia-Pacific and European markets. Commodity markets also saw a bloodbath, with the oil market experiencing its largest weekly drop in a decade, even gold, a recognized safe-haven asset, was sold off by institutions to cover margin calls in the equity markets.

Given the record-setting drop in US stocks, the emergency rate cut by the Federal Reserve is crucial to extending the ten-year bull market. Just as real estate is crucial to Chinese household wealth, financial assets represented by stocks account for nearly 70% of US household total assets, and at this moment, US household financial net worth as a percentage of disposable income is at a historical high. The appreciation of these assets is solely driven by loose monetary policies and rising asset prices. Therefore, a severe adjustment in the US stock market will significantly impact household balance sheets and consumption, a scenario no American wants to see.

Following the Federal Reserve's emergency rate cut, central banks in Japan, Canada, Australia, and other countries swiftly followed suit, with the European Central Bank and the Bank of England's probability of rate cuts soaring. The G7 central banks and finance ministers stated in a joint declaration that they will "use all appropriate tools" to hedge downside risks, signaling the start of a global "easing competition."

Looking back over the past thirty years, most of the Federal Reserve's emergency rate cuts occurred during or just before a recession. Once rate cuts begin, they inevitably trigger a series of successive cuts (the market is pricing in a probability of over 77% for continued rate cuts within six months).

The most immediate impact of the Federal Reserve's rate cut is the depreciation of the US dollar, with US bonds rising and stocks experiencing short-term relief but increased volatility. Setting aside whether the devaluation of the US dollar and the decline in interest rates will lead to a massive capital outflow, looking at the performance of the Dow Jones and S&P indices after past rate cuts—emergency rate cuts seem to indicate that this is just the beginning. Coupled with a quarter of profit declines and the ongoing pressure on the US stock market, except for 1998, the US stock market has invariably experienced a downward trend following emergency rate cuts in the subsequent six months, hitting new lows. This has raised concerns among many investors about whether the Federal Reserve is signaling an impending recession.

Data Source: Bloomberg Internet

The global central bank "easing frenzy" is essentially similar to writing down the answer on the final math problem of an exam and copying a bunch of formulas. The main objectives of central banks are to maintain bond yield spreads, stabilize exchange rates, support the real economy, and stabilize financial markets.

The yield on the US 10-year Treasury bond has officially dropped below 1%, which has shattered the last 100 basis points for many bond traders. With Japan and Europe deeply entrenched in negative interest rates for a long time, the effectiveness of rate cuts has become very limited. The policy space for developed countries, including the US, is quickly diminishing, and considering that the dollar value of US bonds has less than 1% nominal returns, the value of investing in US bonds may be in question. A change in the pricing logic of US bonds could potentially affect the valuation logic of global asset classes.

Looking at the following chart of the US Federal Reserve's 10-year Treasury yield trend and the Dow Jones index, it is evident that over the past thirty years, the decline in interest rates has had a clear negative correlation with asset prices.

Data Source: Bloomberg

Traditionally, investors have been excited at the news of rate cuts, often equating easing with asset bubbles. While lowering interest rates can lower risk-free rates, leading to an increase in asset present value and asset prices.

However, with the failure of monetary policies in Europe and Japan, the Fed's interest rate adjustment policy is nearing its end. The impact of rate cuts on boosting asset prices has weakened, and its effect on asset prices is significantly discounted. Unlike previous financial crises, the current risk stems from the harm the virus poses to the real economy. Once the harm deepens, central banks around the world will have emptied their arsenals. Against the backdrop of high asset valuations and rising leverage, for many countries, the probability of instability triggered by rate cuts now exceeds the possibility of stimulating a new round of asset bubbles.

Image Source: Internet

Contrary to the ineffective monetary policies in Europe and Japan, China has continuously lowered interest rates and reserve requirements since 2019. While the yield on the 10-year Chinese government bond has dropped to a low point in 2016, there is still room for policy adjustments. The interest rate spread between China and the US has widened, and the Chinese yuan has appreciated significantly. Investors may have noticed this amidst the sharp decline in USDT. With China's manufacturing PMI falling to 35.7 in February, lower than the 38.8 during the November 2008 financial crisis, the Chinese central bank has continuously lowered rates, initiated a trillion-dollar "new infrastructure" stimulus, and the combination of "flexible monetary policy and active fiscal policy" has been unveiled. Under such conditions, the Chinese stock and bond markets have greater upward potential, which is also a key reason why foreign capital continues to flock to Chinese financial assets, leading to a bullish trend in both stocks and bonds.

Data Source: Bloomberg

The COVID-19 epidemic has evolved into a global public health crisis. The spread of the epidemic will deepen the downward trend in economic growth. The lasting impact and severity of the epidemic on overseas economies cannot be predicted at this time. The rate cut is just a response to the initial wave of the epidemic, and the impact of the epidemic on overseas economies will unleash a second wave of shocks. The subsequent results are still unpredictable.

However, the central bank's interest rate tools have already been exhausted in dealing with short-term financial market volatility. In such conditions, we may soon see nominal interest rates in countries, including the US, compressed to zero. However, rate cuts are just the appetizer; the real feast belongs to QE (quantitative easing) and fiscal deficit monetization. Governments worldwide will have to step in and stimulate overall demand through government spending—but with government debt already at significant levels, tight deficits, and interest expenses, governments will need to issue more government bonds to increase deficit rates. This will require central banks to cooperate by buying bonds with newly printed money, providing cheap refinancing for the government, stimulating overall demand, guiding the devaluation of the US dollar, pushing inflation upwards, reducing actual debt. This also means that actual interest rates will continue to decline, a direction that Europe and Japan have been following, and will likely be a convergence trend globally.

Following this path, the next stage of asset allocation will face three major challenges:

1) Economic low growth will set the ceiling for asset yields, while facing potential pressures of high inflation;

2) The long-term decline in real interest rates and abundant liquidity will inflate the valuation of major asset classes, suppressing risk premiums;

3) Influenced by the first two points, funds will strive to squeeze out all possible high returns, leading to highly crowded trading, potentially resulting in high price volatility—so the key to future investments is to choose assets that can counter the decline in actual interest rates, have potential risk premiums, and are currently severely under-allocated by institutions and individuals.

Gold is an excellent choice, as seen from the chart displaying the relationship between gold and the real interest rate of US 30-year Treasury bonds (switching positive and negative coordinates). Over the past thirty years, gold has had a perfect negative correlation with the real interest rate of the US, with gold prices rising continuously during periods of declining interest rates. It still holds broad investment potential in the future.

Data Source: Bloomberg

If there is a better choice than gold, it would be Bitcoin. Like gold, Bitcoin is an interest-free asset, which is more attractive to investors in the era of negative interest rates in major economies worldwide. Therefore, Bitcoin and gold both possess the property of resisting the decline in real interest rates. In an environment of low-cost long-term funds and abundant liquidity, savvy investors will leverage ultra-low interest rates to seek out high-risk premium assets like Bitcoin, especially as digital assets are currently significantly under-allocated in global asset portfolios. Recent news of India's Supreme Court overturning the cryptocurrency trading ban and the South Korean parliament passing a special financial law to greenlight cryptocurrency exchange licensing undoubtedly signal a new era for Bitcoin in the eyes of global investors.

Aside from the "black swan" events looming over investors such as the Middle East situation, global pandemics, and the US presidential election, the "grey rhino" in the room is slowly approaching the global economic and financial environment driven by interest rate cuts and debt since 1981. Major economies have been stuck in a long-term environment of negative or zero interest rates, encouraging debt behaviors by governments, businesses, and individuals, with global debt growing like a snowball. Currently, 94% of the US money supply is debt-driven, with annual GDP growth in the US equivalent to the interest payable that year. The four sectors of the national economy are firmly bound by towering debt, and they can only go further down the path of rate cuts. With interest rates now at their lowest and debt levels rising, the current Federal Reserve Chairman, Powell, is unable to withstand the pressure from the president and the market. Through quantitative easing and fiscal deficit monetization, providing cheap large-scale refinancing for government debt by printing money, controlling the yield curve of bonds is an inevitable last resort. Hence, rate cuts are just the appetizer; QE is the main course, and the global easing competition is just getting started.

The financial foundation of the contemporary world is facing unprecedented challenges. There used to be jokes in the industry that the four global bubbles were US stocks, Japanese bonds, Chinese real estate, and Deutsche Bank, but little did we know that Deutsche Bank is facing bankruptcy, US stocks are deeply mired in a crisis triggered by the epidemic, Chinese real estate is constrained by the "no speculation" policy, and Japanese bonds are under the pressure of a rising yen. Can investors still be as fortunate as they have been in the past twenty years and think that the "grey rhino" is far away? If a severe economic recession and debt crisis—a "grey rhino"—breaks out amidst the chaotic "black swan" events, will investors remember the "Safe Box" of the global financial monetary system, digital gold Bitcoin?

Looking at Bitcoin's performance in the secondary market, after a 45-day unilateral uptrend starting in January 2020, Bitcoin is currently consolidating. It is expected to complete the adjustment at least by mid to late March, and the market trend in March will be the most critical turning point for 2020-2021.

The following chart shows the logarithmic trend chart of Bitcoin's weekly and monthly lines. Both the weekly and monthly levels show Bitcoin moving towards the end of a consolidation triangle, with an expected breakout by the end of April, which could lead to a cross-year bull market lasting over a year.

Data Source: Tradingview BlockVC Strategy Research

In the short term, Bitcoin's price is approaching the central axis of a consolidation triangle. Since the $8,500 level has been a tested platform, offering considerable support, Bitcoin will undergo a short-term rebound around the $8,500 level, oscillating near the lower rail of $8,500 to build a base, and resume an upward trend in the near future. It may even break out as the halving approaches.

The upcoming global central bank QE wave is a new round of significant wealth transfer and redistribution. For funds with a higher risk appetite seeking high yields, Bitcoin is the best investment choice, and Bitcoin will truly usher in its era. In the current trend of consolidation at the end of the weekly and monthly lines, investors do not need to make judgments about whether the market will "go bullish" or "go bearish" with a $1,000 fluctuation. BlockVC Strategy Research believes that the driving logic of the market is evolving more clearly from the "halving bull" to the "QE bull" of global monetary easing. This is the fertile ground for Bitcoin growth, and an anticipated long-term bull market is on the horizon.

And at that time, you will recall Satoshi Nakamoto's words left in the genesis block of Bitcoin:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

This article is reprinted with permission from ChainNews. Source: ChainNews (ID: chainnewscom)

Additional Reading

• Fed Rate Cuts Fail to Drive Prices Up, Deeming Bitcoin as a Safe-Haven Asset Premature

• "Investigation": I Don't Understand Contract Trading, Is It Feasible to Play with "Leveraged Tokens"?

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