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Animal Spirits

June 14, 2020 • 
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With some strange developments in the world in 2020, we take a look at which events could emerge in markets to provide the next tangible direction.

The Numbers

The VIX has skyrocketed higher this week, with little else to note on appreciation. Soft commodities and energy came off in a week that China released deflationary figures. Hard to trust given their record Q1 debt expansion but the markets reacted as expected if taken as true.

With room in the bullish run for retail leveraged positions to be shaken out of equities we are watching soft commodities and energy closely for signs of inflation in a global and strategic fiscal and monetary expenditure as/while fiat currency is sacrificed.

The United States fiscal response, likely on infrastructure, is probably a backup plan for a slump in markets and should be considered as potential.
Also, both the US Dollar and Yuan should be watched for these countries ability to manage their sovereign currency.

The Events

The US S&P500 traded lower last week, being pushed 5% lower overnight Thursday.

Last week we had been taking a look at the S&P500 as being overpriced and thought that there was a trade short above 3200, but questioned whether it could be a clean move (the move we are looking for makes a new low).

Although it seemed clear it was too high via several metrics (and it could even conceivably selloff 20% next week), we wondered then and wonder now if the Fed put will stop this from playing out in the short-term.

Part of the game theory is that in the case of a selloff we anticipate that there would be an announcement of the significant fiscal expenditure that has no doubt been planned, that would be used to temper hysteria (rationality) around markets.

More likely, we expect that this initial 5% move would stop-out leveraged retail traders and that the market meanders for some time, for weeks to a month.

Interesting events in markets include

The US Dollar sell-off. The global structural deficit of USD is supposed to mean it appreciates, however it has traded in the other direction. Is this a change in faith of the USD as money (with 0% or potentially negative rates it is no longer a store of value, and cannot underwrite the global financial system) or, does it mean that emerging market debt valued in USD is priced to default?

A recent forecast by Moody’s gave a figure of upto 13.7% of speculative grade bonds at risk of defaulting in the next year in emerging markets, a higher level than during the Global Financial Crises (0.8% last year). Of course, the figure presumes that Moody’s is giving a full account for potential but currently unrealised events.

Investors pulled a record-breaking $83.3 billion from emerging markets securities in March (during the global liquidity event) and it has been reported several times that 90 countries have asked the IMF for help – supposedly the lender of last resort.

With many countries already being downgraded, the global recession/depression event coincides with a decline in globalisation and likely the development of trading blocs between countries who share geo-political goals.

We would suggest that the United States foreign policy is not to engage in any broad globalisation type goals with the direction taken under President Trump. This means that South Korea, India, Australia, Japan and other countries who have likely given notice of their intention to join a new trading bloc will find solutions and politically unimportant countries or those whose fealty to the new plan cannot be expected will likely not.

If the ‘G8’ additions are anything to go by, this could even include Russia while marginalizing Europe and Canada.

In particular with these new disruptive events it looks like there could be a potential for tragedy in third world countries as the rest of the world figures its own issues out, especially in African nations the coming couple of years.

Other financial default-contagion scenario’s are also possible, and we think it would take something of this scale to make the markets properly bearish again, in the which case we see the equity market back through lows again.

The general view is taken in full acknowledgement that in some ways this could be considered a highly optimistic view, and on one level it seems wild to suggest anything other than markets having hit a high this last week and continuing to sell-off dramatically for the next month.

The US Election

Obviously the US Democrats have continued to fail at figuring out where the hard lines are in their social decline, being pulled all the way to the hard-left, while it being inconceivable that the Democrat nominee, Biden manages to make it to the election. The man is likely to go straight from presidential nominee selection to the dementia ward and it beggars belief with what his supporters think the role of President is.

The actual role of politicians, that they have consistently been unable to perform in more dramatic ways the last 2 decades is to be aware of the ideas, principles and values of the voter-base and to construct a narrative based on these things that satisfy the biases of that constituency.

Since George Bush destroyed most of the good faith in Nationalism and Obama/Hillary trashed classical liberal values with both discrediting the nation-state, there are simply very few viable narratives. The sanctity of the things that are used to create the narratives – service to the nation on the part of the military or police is significantly damaged, or perhaps the socialist ideas of liberals (now demonstrably extremist leftists after recent events) are discredited to anybody except extremists, but the lack of alternatives and the extremes demonstrating themselves publicly push individuals towards these polarising results.

Trump runs on the idea of the nation-state, which can only be realised if the people within it are convinced of its existence.

With very few actual options, there is a great opportunity for Bernie Sanders to come back in as a competitive candidate which would spice things up a lot in markets.

Animal Spirits

It is nothing short of deeply concerning that the Coronavirus is no longer a concern. If one paranoid hysteria can be replaced by another, it discredits both things, assuring us that the consistent element is extreme, self-manifested disasters. The Coronavirus response appeared to shun data, going as far as a spontaneous effort to discredit the treatment Donald Trump chose (hydroxychloroquine) – because it was chosen by Donald Trump!

Medical treatment became axiomatically incorrect because of political reasons.

Similarly, for the social justice scenario, it was not a review on which rights of the individual were written into the architecture of the republic as it was for Martin Luther King Jr. but has become a story about hard racial essentialism written into the fabric of reality. Some very concerning perspectives with terminal outcomes. Following the logic that has been accepted (i.e. not disendorsed), there would either be a racially subordinate and dominant group in the new utopia driven by judeo-christian morality in the spirit of bolshevism and because of collective guilt, or racial segregation.

In both cases it starts to look like the animal spirits breaking free from the safety of functioning narratives (which are discredited) and looking for new ways to manifest control over the environment.

In the case of coronavirus we saw this bizarre attempt to control the population. That if we put all the spots on the floor of where you could stand, if we all stood 1.5m apart from each other and obeyed the rules of this emerging, technocratically delivered but transcendent organising structure, that it would save us from this existential threat.

For social justice protests (in the case of the hard-left that Democrats have decided to share a house with), it is hard to find a better example of religious belief and architecture, where ‘moral’ rules can provide safety if followed fastidiously enough. Similarly, we are now out to create the perfect civilisation, where if the right scapegoats can be condemned strongly enough, if the right words are said often enough, if everybody agrees that the right symbols are good and right symbols are bad, that some kind of moment is possible of transcendence from ourselves, a moment of rapture. These politically inclined people believe in this deep in their soul, as being self-evident. The individuals are captured as agents of self-manifesting forces to realise this, where all means justify the end; it’s not different to Bolshevik Russia or Red Army China.

These political forces self-manifests this as an end-goal until and unless a counter-balancing force emerges. This is anticipated and is called fascism or Nazism in advance. It may naturally realise itself in this way.

This during a time of highly concentrated media, generations of degenerative pop-culture with its ever-shrinking (and ever more base) pool of available and connected cultural ideas and a reflexive social media mechanism that dramatically ratchets all imbalances to an extreme place in a short amount of time. The history of the ideas operating here as well as this environment and especially the lack of potential in ideas invites extreme views, as well as a trend towards greater extremism, until some point in the future where dichotomies such as a political left/right that create polarisation are overcome.

It’s not a matter of waiting for the time for the events to happen, these are the events happening.

Bitcoin

The week was bearish for Bitcoin, but potentially as significantly was that it was a short volatility week as Bitcoin hovered near swing highs for a long time.

It seems inevitable that Bitcoin must at least break-lower from all bullish patterns in a dramatic enough fashion before having another run at $10k.

The markets framing of the asset is something like this. The asset could move lower on equity weakness, especially with the recent memory of its crash during the global liquidity event in March.

If the market does sell-off, timing a bid could be very profitable in the short and medium term.

Bitcoin has many bullish factors going for it at the moment from the fundamental perspective.

Bitcoin / USD on the Daily Chart

However! The technical perspective of Bitcoin includes the sobering potential for something more like this inverse head and shoulders that develops over some months.

Bitcoin / USD on the Daily Chart

Volume

The weekly volume of Bitcoin was up, and above longer-term averages.

Volatility

BTC Volatility is down and has been trending down over time.

Sentiment

Sentiment is down recently to the lowest levels it has seen in a month.

Dipping to its previous low levels, sentiment is at a mid-range over time.

Bitcoin Dominance

Bitcoin dominance is interesting this week.

One of the guiding ideas in using Bitcoin dominance, is that there is a range of possibilities where the value of Bitcoin and its use as a store of value, if validated as real, means that the value-adding projects in digital assets must also be valuable.

Then, it is a matter of judging the range between where Bitcoin is valuable compared to the rest of the value-adding projects (with some inherently valuable in their own right).

So if the high and low could be mapped out with some rule of thumb, here at 50% and 72.5%, then Bitcoin should price itself somewhere in between.

With alt coins performing very well the last couple of weeks, it is possible that this chart breaks down lower, although until now we have been looking for a move higher in Bitcoin and in the space, as printed money floods the world and desperately searches for value, growth and yield.

Perhaps this more sombre tone is warranted for Bitcoin, or perhaps it is the invitation for a proper challenge to recent highs.

Money

Last week we thought that the money trade (selling fiat currencies and buying stores of value) might have run its course. The Dollar Index had continued to selloff, before setting itself up in a consolidation pattern late in the week. It will be interesting to see what it does in the next fortnight.

Gold

We found our previous trend-channel lines positive this week, as Gold first broker lower, and then retrace the move back into this range.

We think that this is very encouraging for the asset.

US Dollar Index (DXY)

Whether the US Dollar makes some kind of consolidation in black, or targets the support level in blue, it is of special interest in 2020 as we attempt to divine the trust in the dollar worldwide.

Given its month of selling, it is completely reasonable for it to retrace, and there is no reason to panic in it until the story develops in emerging markets, credit and debt markets.

Written By
Operations & Trading Manager
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