Welcome to your April 2022 issue of the Global Intelligence Wire.
This is the monthly digest exclusively for Global Intelligence Lifetime Circle members, in which I cut through the media chatter and highlight five underreported news stories from recent weeks.
First up this month…the surprising resilience of crypto.
Crypto Could Outperform Stocks and Bonds in a Recession
The world is in a perilous moment…
Russia has upended the global economic order by launching its senseless invasion of Ukraine.
The resulting sanctions on Russian oil, gas, and other exports is exacerbating the global commodity super-cycle…a prolonged period of high prices for raw materials.
This, in turn, is pushing inflation ever higher. The March reading in the U.S. was 8.5%, the highest rate in over 40 years.
The Federal Reserve is trying to cool this inflation by raising interest rates, which it did by hiking them 0.25% in March. Now, the Fed Heads are reportedly eyeing a 0.5% increase at their next meeting in May.
But that’s like trying to put out a blazing inferno with a Super Soaker. I mean, what good is a 0.5% hike when inflation is over 8%?
As inflation soars, people will need to spend more and more of their income on necessities, collapsing demand for other goods.
This could easily produce a recession…and it’s causing many investors to ponder, for the first time, what would happen to crypto in a downturn.
Crypto has never really faced a recession before. Bitcoin, the world’s first crypto, was launched in 2009 amid the global financial crash, but it didn’t break through until long after that crisis had receded.
I’ve long held the opinion that crypto would do well in a downturn caused by high inflation. In a period when the purchasing power of the dollar and other major currencies are collapsing, I think that lots of people will want to hold some of their wealth in crypto…just as people like to hold some of their wealth in gold during times like these.
Given the speculative and highly volatile nature of crypto, that idea was once considered bizarre…maybe even delusional. Now, however, some of the world’s top banks are coming to the same conclusion.
Michael Hartnett, chief investment strategist at Bank of America, wrote this month that the inflation shocks are getting worse and a “recession shock” is coming. He also noted that cash, commodities, and cryptocurrencies could outperform bonds and stocks in this environment.
Hartnett’s not alone in this opinion. Mike McGlone, Bloomberg’s senior commodity strategist, also said that cryptocurrencies could come out ahead in this high inflation era.
This is why I recommend everyone owns some crypto (and gold) exposure in their portfolios.
Speaking of the crypto disruption…
Top Investor Warns That Crypto Could Make Traditional Banks Obsolete
Cathie Wood, the well-regarded head honcho of Ark Invest, said this month that banks are facing “big trouble” due to the emergence of decentralized finance.
DeFi, as it’s known, refers to all the traditional financial services we use today, from banking and saving to lending and insurance, but conducted using cryptocurrencies on the blockchain.
In recent years, traditional banks have been losing loans and savings business to DeFi companies.
The reasons for this are pretty obvious. These “crypto-banks” offer more than 10% annual interest on savings, compared to the measly 1% to 2% you can get on a one-year certificate of deposit at a traditional bank. (See your Profit From the DeFi Revolution report for details.) They also offer lower rates on loans and more flexible repayment schedules.
Wood noted that traditional banks are not only losing business to DeFi, they are losing talent, too. So, traditional banks have had to increase salaries to keep and attract workers.
This has only further widened the cost disadvantage they have against DeFi institutions, which are far cheaper to run.
I’ve been writing for some time that crypto-banks will replace traditional banks by the end of this decade. That’s why we own Aave, a giant of the DeFi world, in our Global Intelligence portfolio.
DeFi is the future. Traditional banks will fade into irrelevance. It’s just a matter of time.
Shifting direction for a moment…
China’s Failed COVID Strategy Will Worsen Global Inflation
While most of the world has started living with COVID, China is doggedly sticking to its zero-COVID approach.
Whenever an outbreak occurs, China locks down everything until it has passed.
As you’re probably aware, the city of Shanghai, with a population of 26 million, is currently under a complete lockdown. And it’s far from alone.
Since the start of March, full or partial lockdowns have been implemented in about 23 Chinese cities. The cities are home to roughly 13.6% of China’s population and they contribute $3.6 trillion worth of GDP, equal to about 22% of the country’s economy.
Locking down that many people and that much of the economy is starting to take its toll…
In response to the lockdowns, the World Bank slashed China’s 2022 growth forecast to 5% this year, down from last year’s 8.1%. And it’s likely to fall further as the lockdown extends.
It’s easy to dismiss this as a Chinese problem. But China is the world’s second-largest economy and what happens in China impacts everyone.
Countless major companies with manufacturing facilities in China have been forced to suspend operations amid the lockdowns. So too have key suppliers to companies like Apple, Tesla, and many other large Western firms. Meanwhile, the lockdowns have understandably impacted domestic demand in China across a vast swath of sectors, from automobiles to tourism.
So, China’s adherence to this zero-COVID strategy is going to worsen inflation in the West and impact year-end results for lots of Western businesses.
The question now is how long China can continue to pursue this strategy…
It’s clearly not working. The Omicron strain is simply too contagious. But don’t expect China’s authoritarian leaders to change course. Their priority is protecting the Communist Party, not China’s people or economy. And social unrest due to COVID deaths would pose a greater challenge to the party than high inflation and poor economic growth.
Speaking of ill-informed strategies by totalitarian regimes…
Russia Heads Toward a Massive Debt Default
According to credit ratings agency S&P, Russia has defaulted on its foreign debt because it offered holders of two dollar-denominated bonds payment in rubles rather than dollars.
S&P said it decided to call this a default because bond holders would not be able to convert the ruble payments back into dollars in the same amount that they were owed.
This is a “selective default” since Russia has defaulted on a specific debt, rather than on its debt as a whole. Russia has a month from April 4 to remedy the matter, but is unlikely to do so as it’s having trouble accessing dollars due to Western sanctions.
This marks Russia’s first debt default since 1917, when Lenin and the Bolsheviks failed to recognize the Tsar’s debt after assuming control of the country.
The announcement by S&P caused uproar in Moscow, which said it will pursue legal action if the West pushes it to default on its sovereign debt. Russia currently cannot access roughly $315 billion of its foreign currency reserves due to unprecedented Western sanctions.
This is likely the first phase of a slow-moving default of Russia debt.
The Russian government and Russian companies combined owe about $150 billion in foreign-currency debt. With its limited ability to access dollars and with the ruble’s status as currency non grata since the invasion of Ukraine, it seems unlikely Russia will be able to meet these obligations.
If the government defaults, expect companies to follow suit.
This will further drive investors out of the Russian economy, meaning businesses will find it very difficult to access capital…which will further slow growth…which will further impact the ruble…and so on.
Before launching the invasion of Ukraine, Putin thought he’d done a good job of shielding Russia’s economy from possible sanctions. But he underestimated the West’s resolve. Now, the Russian economy will be left in tatters…and Russian bond holders will be out of pocket.
We end this month with a final story on crypto…
Brazil Will Trial a Central Bank Digital Currency in 2022
Brazil plans to begin trials of its central bank digital currency this year, the country’s central bank president announced this month.
The South American country is the latest major economy to announce that it’s pushing ahead with developing a CBDC—a digital version of a sovereign currency based on the same tech as bitcoin. More than half of the world’s economies are now believed to be in the process of creating one of these digital currencies.
Regular readers will know that one of my bugbears is the glacial pace at which Uncle Sam is developing its own CBDC.
Part of this is undoubtedly U.S. arrogance at the dollar’s central place in the global economic order.
At the moment, most global trade is priced in U.S. dollars. This gives American consumers an advantage since we don’t have to factor in currency conversions, unlike most other countries.
However, in the near future, when countries roll out their CBDCs, they won’t need to use the dollar as an intermediary currency.
Brazil won’t need U.S. dollars to trade with China. It will be able to transform its e-reals into e-yuan directly…in the same way that it’s possible to change bitcoin into other cryptos without using an intermediary. Or, Brazilian buyers of Chinese goods can convert e-reals into another crypto and zip it across to the Chinese suppliers in seconds, not days.
This will fundamentally upend the global economic order.
There are justifiable concerns about CBDCs. They threaten to end financial privacy…giving the government full oversight of every transaction in the economy.
But we can’t fight the future. The best we can hope to do is implement these new technologies in a way that guarantees as much protection for the consumer as possible.
And that’s why the U.S. needs to get onboard…before it gets left behind.
And that brings us to the end of this month’s Wire. If you have any feedback or any topics you’d like me to address in a future issue, you can reach me through the contact form on the Global Intelligence website.
Thanks for reading and for being a Global Intelligence subscriber.
