What is the probability of financial markets collapse in the US?Mikhail Karkhalev
In my previous article, I wrote that the global economic system – including the crypto market - moves in cycles. Any trough is followed by an expansion, which is in turn followed by a contraction and so on.
The cryptocurrency market is dominated by the so-called Kitchin cycles, which take 3 to 4 years to complete the full peak-recession-trough-recovery sequence, mostly due to the periodic character of Bitcoin halving and a certain similarity between BTC and gold.
In the traditional market, so-called Juglar cycles dominate, with a crisis every 7 to 11 years. This explains why crises are so predictable. In one of my future articles I'll show you how to forecast such events, so that you can see their predictability for yourself.
If you search for outlook analysis, predictions, and articles from 18 months to 2 years ago, you'll be surprised to see that even back in 2018 there was already talk of an upcoming recession. Back then, many analysts – including myself – believed that the new global recession would be triggered by the US-China trade conflict. However, the trouble eventually came from somewhere unexpected.
The current crisis is unique, because it was triggered not by economic or political circustances but rather by a pandemic and a lockdown that followed. The stock market crash in late February to mid-March 2020 was just the first wave of the recession, and a new crash is all but guaranteed. The logical question is, why? That's what we're going to talk about this time.
A bit of history
During the 1973 petrol crisis, the markets went through 4 slumps in 18 months. During the dotcom crisis of 2000, as well as the after the September 11th, there were 3 serious crashes in 2 years. During the 2007/2008 crisis, the markets went through 4 significant pullbacks in 18 months. Here I'm talking about the S&P 500 index, which reflects the overall stock price movement for the 500 largest US corporations.
It's reasonable to assume that the new crisis will also include not one, but at least 2 or 3 crashes, the first of which we have seen already. The reason is that the first crash triggers a chain of negative economic events that create new problems and exacerbate existing ones. As a result, every new crash is larger than the preceding ones.
The previous recessions were caused by economic and political problems whose impact could be mitigated using traditional anti-crisis measures and protocols. By contrast, the coronacrisis is unique. The challenges are growing exponentially, and even the most decisive measures have only a limited effect, because each new problem and its consequences are unpredictable. The only thing one can do in this situation is to limit the damage, holding off an immediate crash but allowing gradual downward movement.
The US Federal Reserve will pursue a policy of quantitative easing at least until 2022, as announced after the FOMC session on June 10. This means that interest rates will remain at 0-0.25% for another two to two and a half years, while the state will continue printing as much money is needed to prevent an economic collapse.
This intervention will result in high inflation – which, by the way, will drive gold prices up. Economists predict that the unemployment rate will reach 10% in 2020, while the global GDP will contract by 6% and that of the US, by 6.5%. Such figures haven't been seen since the Great Depression. For comparison: during the 2009 crisis, the global GDP fell by 2.85%, which was considered the worst slump since WWII and viewed almost as a disaster
The high rate of unemployment means a reduction in tax revenue. Industrial disruptions, decreasing trade volumes, falling exports and imports – all this will negatively impact not only the state budget but also the largest companies. Energy, manufacturing, finance, travel and retail will be among the hardest-hit industries. These businesses' stocks will begin to fall as early as Q3 2020. As in any crisis, we're likely to see a wave of bankruptcies.
These problems make previous recessions look like a child's game. So, is a new stock market crash probable? The answer should be obvious.
When will the next crash happen?
While the pandemic and the crisis it triggered began in Q1 2020, their true impact was revealed only in Q2. In the first quarter, macroeconomic data and companies' financial reports looked bad; but in the second, they will be awful.
The ubiquitous lockdowns paralyzed production, travel and retail across the globe, causing damage to the energy markets and finance. As a result, the price of WTI oil CFDs fell to zero, and the price of the May futures even collapsed to -$40.
For the Q2 data, together with the next crash, we'll have to wait until late July and early August. The crash can actually come even sooner, because large investors are fully aware of what is going to happen. As soon as they see a good exit point, they'll start offloading their stocks instead of waiting for new data and reports.
Bitcoin and the crypto industry
The traditional financial system is on its last legs. Back in 2008, the participants of the anti-crisis G20 summit discussed a potential reform of the financial system and a replacement of the Jamaica Accords.
In 2009, Bitcoin burst onto the scene. A decade later, it dictates its own terms to the world of finance, nudging the world towards a new digital economy era. In order not to sound overly enthusiastic, I will remind you that China has already launched – and is slowly implementing – its own Central Bank Digital Currency, or CBDC.
CBDC is not a cryptocurrency in the true sense of the word, even though it's based on blockchain and on-chain tech. Rather, it's a whole digital finance infrastructure, headed by the People's Bank of China and comprising all the largest banks and corporations in the country. Naturally, it is under the control of the government and there's no talk of decentralization. A number of other countries are also studying the possibility of creating their own digital currencies, including Germany, the UK, France, and the US.
Of course, the transition to a digital economy won't come quickly. It's a gradual process, but the ongoing crisis can serve as a catalyst. If the Fed and the US government fail to contain the 2020 crisis by the usual means, extraordinary measures may be taken. Why am I so sure? Because the US government didn't allow people to invest in crypto using Bitcoin futures and options on the CME and Bakkt just because investors asked for it; there were strategic objectives behind this decision.
It's silly to think that the authorities do anything by accident or out of sheer goodwill. However, it's still a positive development for the crypto market. If investors are pushed to save their capital from a sudden crash and the traditional financial system can't offer them any good options, they will look to alternative – yet very promising – assets, such as Bitcoin.
Who knows – we might be witnessing the emergence of a new reserve currency whose value is by no means inferior to that of gold and perhaps even exceeds it.
Let me summarize my conclusions. Yes, there will be a new market crash – probably more than one. We have to accept this sad fact. Each of the past crises was milder than the one before it, but even so, mitigating the consequences was hard, and that resulted in 3 or 4 crashes every time.
This time, the situation is radically different. However, even this dark tunnel has a light at the end: a faster switch to a digital economy and the adoption of the best features of the crypto industry. The work in this area is already ongoing, so we'll just have to wait.
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