There has been a lot of talk recently over deflation vs inflation and which phenomenon is going to emerge.
The traditional path of inflation is that it first shows up in soft commodities then energy.
Indeed, the data for Q3 shows inflation, with soft commodities up from mid single digits all the way to 40% higher of the quarter (with the exception of Orange Juice and Oats which were marginally lower).
Although energy is yet to show signs of that inflation, with significant overcapacity in oil suppressing prices (especially with the lack of air travel with the coronavirus), natural gas is higher by almost 46% over the quarter – obviously a significant amount.
While this is a result of the initial response to coronavirus stimulus from March onwards, there is now a threat of deflation emerging – however further policy response is expected imminently.
With the US election underway we saw the first presidential debate recently. The event was slow with Joe Biden performing better than expected – by not being a disaster – and President Trumps strategy of freestyle, interruption and flow being handled well with superior tactics.
Those tactics include the promise of a return of technocratic stability to the governance of the country – an approach complementary to unofficial policy supporting the corporate funded, professionally organised riots of 2020.
There was a swing towards Biden in gambling books, with about an 8% improvement in odds given to a Democrat win.
If Democrats do win, we expect that the policy mechanism of the US Government will include the expansion of fiscal and monetary policy to include an infrastructure spend and a continuation of the trend in monetary policy
However if Republicans win, we expect that the policy mechanism of the US Government will include the expansion of fiscal and monetary policy to include an infrastructure spend and a continuation of the trend in monetary policy.
This delusion of choice in the United States creates an image similar to China with both countries now having essentially a centrally planned economy at the highest level, both developed a mass surveillance program, have media synchronised to political objectives controlling the window of discourse, and with heavy politically influence from what amounts to an aristocracy.
One major difference is that while China has been taking on debt at a record pace in 2020, the American fiscal stimulus has been held up in the democratic process. Between the fake trade-deal (China never having any intention of completing it), Coronavirus and political fandangaling in the US, China has stolen 2020 from the USA, giving some much needed time to develop strategy and tactical positioning before the Thucydides showdown emerges later down the track – in whatever form it does.
The broader battle of de-centralisation vs centralisation will be important in the competition between the two powers and something that digital assets, the ethos and philosophy behind the space will become more important in creating competitive advantages in macro-strategy of all kinds.
Now that we have seen Australian house prices down for 5 months in a row there are hints of a dead-cat bounce in the Australian property market. With restricted access to Chinese investors as well as poor sentiment in the conditions of the year the Australian government is expected to intervene in the property market in some way later this year or early next.
A federal budget is being delivered Tuesday the 6th October which has been described as a ‘jobs budget’. This budget is expected to have a $200 billion deficit with Australian national debt edging towards $1 trillion. $140 billion of stimulus is expected over the next four years with net migration negative for the first time since the 1940’s.
There is specific infrastructure and manufacturing expenditure as well as a continuation of JobSeeker payments in which the government is in a bind between encouraging re-entry to the workforce and providing a gentle landing for the unemployed adjusting to the boosted payments. Housing is likely to be one area where surprises would emerge, given Australia’s dependency on residential construction and broader housing prices.
Some specific areas of interest are $1.5 billion to manufacturing and $7.5 billion of spending in infrastructure projects covering all states and territories.
Whether this will be enough to avoid recession in a global slowdown remains to be seen. Recessions gather momentum slowly with employment decreasing only gradually before accelerated layoffs take hold.
Despite this outlook Australia is likely to remain a benefactor of global government policies where monetary policy has been taken as far as it can go in many places and fiscal policy is expected to replace it. There is upto $2.2 trillion of fiscal expenditure in the US expected, along with other fiscal expenditure that would improve the price of commodities. We have already seen this effect in China this year with their record increases in debt on the iron ore price.
In the third quarter of 2020 we saw Decentralised Finance projects stage a bubble of their own.
This gold-rush became so competitive at its peak that a project had been unnannounced, unreleased and in testing but was funded with $15mil of assets staked before it had a public name.
Now in the late stages of this phenomenon we are likely to see many lessons learnt, some impressive winning stories and some disastrous losses.
And the output of all of this chaos in defi includes projects that create a new aspect to the digital asset ecosystem as well as testing new products and game theory.
Leading projects include yearn.finance, Synthetix, Uniswap, Compound, Ren and Aave. Some notable game-theory has been developed to bolt onto the Ampleforth tokenomics in Yam and Based amongst others.
One of the key takeaways of the de-fi boom was the inability of Ethereum to handle transactions with costs per transaction skyrocketing. In addition to this there has been statements made by Vitalik to temper expectations in the full release of Ethereum 2.0. However the comments also include a clear direction for the asset, a focus on rollups, plasma and state channel with upto 4000 TPS (transactions per second)’ and upto 100,000 TPS in the full release of Ethereum 2.0.
Although it has traded higher over the time-frame, bitcoin has not done a great deal in Q3. With a major announcement from Microstrategy investing their entire treasury into Bitcoin ($425 million USD) and Grayscale Bitcoin Trust ($4.4 billion USD) holding about 2.2% of Bitcoins total market cap and reports from other institutional players such as OSL there is significant interest in the asset that is not translating smoothly into higher prices.
BTC/USD Chart: Daily
Volumes have been very low in the last quarter as designated in the red box.
With a slight bias towards fear, the market hints towards the ability to be bid
BTC Dominance has been trending lower since July, with a low potentially forming during September.
Gold, the U.S. dollar and bitcoin all traded sideways for most of Q3 as attention was on tech stocks and decentralised finance in digital assets.