Back to the future

By Marius-Cristian Frunza
Weekly Briefs

2020 will be remembered beyond any doubt as a turning point in contemporary history. We present below ten themes that we believe marked financial markets throughout the year amid a global health and economic crisis.

Bitcoin found believers

2020 brought a fulminant start for Bitcoin. The leading cryptocurrency climbed above 25,000 USD. Many are those believing that we witness another 2017 pattern with prices reaching the maximum historical level. But  2020 was not 2017 for many reasons. The bitcoin market is more mature and better crystallised. The different liquidity segments are stable and there is a solid base of crypto-investors participating in the price discovery process. The new generation of investors includes more than simple coin holders and has the firm belief that Bitcoin.

The decline of the US dollar

At the beginning of the year, Chinese entities owned as of 2019 over 1.10 trillion USD of US debt, accounting for  26 % of the US debt held by foreign countries and representing more than 5% of the total US outstanding debt. Moreover, China’s trade deficit is 419 billion USD, accounting for 47% of the overall US deficit in goods. Thus, China is not only America's most prominent banker but also the leading supplier of goods. After the initial crisis in the first quarter, China recovered quickly, but the COVID crisis disrupted ineluctably US growth and the US dollar’s position.

V, W or Zigzag shaped Recovery?

The “V-shaped” recovery encompassing a gradual return to the economy’s previous state was the main scenario priced by the financial markets. During the fall, economists talked about a "W-shaped" recovery as the most probable optimistic scenario. The global economy seems to be hit harder by the pandemic than expected. The likelihood of an exit from the neverending series of lockdowns in the foreseeable future is low. Zigzag shaped recovery toward nowhere is the most probable scenario.

Negative assets prices

During the 2008 crisis, marked by Lehman's bankruptcy, we learned that money has no value. We discovered negative interest rates and learnt that you might need to pay debtors when you lend them money. With negative yields, central banks introduced a tax on liquidity, a fee that cash owners need to pay to hold their funds in a bank.

The current crisis brought a new paradigm shift: physical assets with negative prices. The primary U.S. oil contract closed at a negative price, plummeting to -37.63 USD for a barrel.  The sale of an asset that requires the owner to pay the acquirer, and not the opposite, reshapes the concept of ownership. The only item that requires its possessor to pay upon disposal is a penalty or a tax note.

Pandemic, false prophets and conspiracy theories

Covid-19, 5G, global experiment, vaccines with nano-chips, Bill Gates, reptilians, global government, end of freedom… Since March, media platforms were flooded with several underground conspiracy ideas that became almost mainstream in the context of the current lockdown. The real issue is that the spread of these theories is harmful. They make no distinction between imagination and reality, theory and fact, mysticism and science. Denying the pandemic or associating a matter of public health with new technology like the 5G has no real background. The only result was that they amplified the fear in the population and undermined the role of authorities.  Therefore, propagating these ideas in the name of freedom of speech is dangerous and was forbidden by most social media.

The end of Trumpism

Many business tycoons that supported Trump in 2016 swung towards Biden for a straightforward reason. Businesses needed first and foremost political stability and less scandal in the White House.  A strong US economy requires a President supported by his/her party and respected by his/her opponents.

Needless to say that the end of Trumpism will challenge the US position on the international scene. We are witnessing a paradigm shift, where the US steps back from its historical role of sole global super-power. Good or bad, loved or hated, the US were since the fall of the Soviet Union, a reliable guarantor of the geopolitical equilibrium.

Therefore, in a post-Trump era, we could observe an increasing turmoil in international relations, thereby leading to a regime of high volatility on the financial markets. High volatility is often synonym to an economic recession. Another consequence could be the de-dollarisation of the world's economy.

Universal basic income

In a post-pandemic world, capitalism, as we know it, may reach an end and may need to reinvent itself in order to cope with the new realities.  Moreover, social distancing may lead to significant mutations in the retail, entertainment, catering and tourism industries. Therefore, entire sectors could be wiped out, leading to a permanent loss in employment. The technology, banking and other service-oriented industries that can function in a social distancing society can continue operating and propose decent wages to their employees. But, most developed countries need to find solutions to massive structural unemployment. Universal basic income seems to be one if not the only solution. Capitalism may continue for a part of the society, highly-skilled, working in the corporate-dominated sectors proposing. But for the rest of the population, socially-oriented measures encompassing the universal basic income may be a necessity.

A new tech bubble

Tech stocks had a prosperous period throughout 2020. Some analysts qualify the recent tech rally as a bubble similar to the 2000 dot-com bubble. The social distancing and the working from home strategy implemented in most big firms amid the pandemic were the main catalysts of this trend.  NASDAQ, the leading index of technology stocks has reached an unprecedented climax. Its level is 2.4 times higher than its peak during the dot-com bubble. There are many similarities between the current trends in the tech sector and what occurred two decades ago. Enthusiasm for digitization is at an all-time high, but like in 2000, very few understand what digitization means. If in 2000, any company with a website had colossal valuation, currently any start-up claiming the use of AI is worth hundreds of millions of dollars. If soon, the US administration decides to put an end to QE, the stock market will collapse, and the tech sector may be irreversibly damaged.

Race for a vaccine

The pandemic split the world in two: those who have means to fight the bug and those who don’t. The more impoverished parts of the world and the lower strata of the society may face more challenging times. A vaccine was needed not only to solve the health crisis but to prevent a global impoverishment. Moderna and Pfizer’s alliance with BionTech promised and delivered vaccines. Governments jumped-in and started massive vaccinations in December. As a result, BionTech and Moderna shares experienced a strong rally since the beginning of the year.

Real Estate and exodus

The social distancing rule and lockdowns brought already significant changes in the catering and hostelry sectors. Most restaurants, bars and clubs which operated with a high volume-low margin model went bust. The massive increase in online commerce destroyed commercial real estate.  The remote work decreased pressure on the infrastructure and reduced the occupancy rates in offices. The pandemic reshaped the real estate market landscape brutally. Big metropoles experienced big dips in real estate prices due to massive exodus to rural and suburban areas.

Ten outrageous predictions for 2021

  1. The US dollar will dip by 30%
  2. The Yuan will double in value
  3. Bitcoin will rise to 50,000 USD
  4. Tech bubble will explode
  5. Trump will leave the US
  6. Tokyo Olympics will have a record low number of participants
  7. Central banks will stop the QE
  8. Kamala Harris will become the first woman President of the US
  9. COVID vaccine will become useless due to mutations
  10. The British pound exchange rate to Euro will rise above 1.3

Weekly Market Movements

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.