Financial Markets Outlook – May 2020

Disclaimer: everything written in this article are of personal opinion, and should never be taken as financial advice.

Okay, so COVID-19 shut down the whole world and put a long, nasty pause on “normal life” as we know it. A looong list of establishments and businesses had to go under or be bailed out – restaurants, stadiums, concert halls, movie theatres, amusement parks, cruise ships, bars, nightclubs, co-working spaces, AirBnB’s, and the list goes on. Overleveraged landlords and commercial real estate got decimated, and so did a large portion of the retail/F&B/entertainment work force.

As US unemployment skyrockets from 5% to 15% over the past two months, which is historically very high for a developed nation, the US stock market is doing crazy things. It seems that on every new announcement of millions of jobless claims, the stock market goes up more. We now live in a simulation driven by frivolous Central Bank money printing, where labour/production and capital are no longer in correlation. Crazy times.

Dunning-Kruger Diagram: the majority of “retail investors” are typically around the “I know everything” stage

While many dip-buyers are celebrating what appears to be a beautiful “V” shaped correction from the March massacre, nasty surprises may be waiting. Historically, the market punishes retail traders, especially ones who flock en masse late to the party. This chart from Robinhood, the US-based retail stock trading app, paints a gloomy picture:

Robinhood chart overlaying the $SPY (S&P500 index ETF) performance (past 1 year) with number of users holding

As you can see, a huge number of retail users bought “the dip” on the $SPY from March onwards, to the tune of 40,000 users (doubling the total). Although most of these dip buyers are in profit – some more so than others, I personally believe that the worst is yet to come and they are in for a nasty surprise soon. Reasons being:

  • US unemployment keeps worsening to critical levels.
  • Q2 earnings numbers will be absolutely brutal.
  • Cascading bankruptcies led by the death of small businesses and commercial real estate – further cash crunch.
  • Overall sentiment appears to be approaching “complacency” – the Fed will create more stimulus to save the market.
  • Alternative assets (gold, bitcoin) continuing their strong bullish uptrend, showing that smart money is continuously moving more capital into these assets during these times of uncertainty.
  • Recession is already hitting other major economies (e.g. Japan) with crappier fiat currencies.

Furthermore, I am expecting the world to not fully open up until at least July. This will be coupled with horrific Q2 economic numbers, accompanied by a typically slow summer in the markets. Worldwide sentiment may start to return to normal by late summer or early fall, but I would not be surprised if we are overwhelmed with a second wave of COVID as the cold and dry winter flu season approaches in late fall. Any economic recovery we see in the fall (peak complacency) could potentially be decimated once again, should we see a second wave of the pandemic. As a result of this outlook, I am now shorting the $SPY with August/September put options.

Feels like we are somewhere close to “Complacency”

Of course, the Central Banks around the world are armed with a powerful weapon – money printing. They are printing massive amounts of money to stave off deflation and an inevitable economic crisis, but the question is how long will this hold. Note that the US Fed has already printed more money in March alone than during the entirety of the 2008 financial crisis! As I had explained in a previous post, the Cantillon Effect dictates that any new money created will always go into the hands of the elite, hence widening the gap and further destroying the Middle Class and overall long term financial prosperity of a nation.

March 2020 saw one of the biggest market crashes in history

At the meantime, alternative assets like gold and bitcoin have more than recovered from their respective March 2020 crashes, and are both showing strong bullish trends. Even traditional finance magnates such as Paul Tudor Jones has recently announced taking a position in bitcoin to guard against long term inflation.

In the short term, I am very bullish on gold and I am long (just bought July gold call options last week). In times of uncertainty like now, all the “old money” will reduce their allocation in “risk-on” assets and increase their allocation to a “risk-off” asset such as gold. And there is a shitload of old money around. Even Warren Buffett has been busy liquidating huge amounts of shares in banking, energy, and airlines.

In the medium to long term, I am extremely bullish on bitcoin, and of course, I have been for a while. In my opinion it is actually risky to not have any bitcoin in your portfolio, in this day and age of degenerate government monetary policies, capital controls, and inevitable hyperinflation. After the recent halving (new supply per block getting cut down from 12.5 BTC to 6.25 BTC), the inflation rate of bitcoin is at a similar level as gold (less than 2%), which makes it even more scarce, as we already expected based on the laws of its code. Since we now live in a completely digitized world where you practically cannot do anything without the internet, bitcoin is positioned to be the superior store of value and alternative asset, because you simply cannot carry a bar of gold with you everywhere you go. Also, due to its digital and censorship-resistant nature, bitcoin is intrinsically politically neutral and will not be directly influenced by trade wars or anti-*insert country* sentiments.

In conclusion, the above are the positions I am currently taking based on my current outlook, and I am eagerly awaiting to see what unfolds in the next 3-6 months.

Stay safe and be grateful everyone.

PS: Bitfinex is where I trade bitcoin and other cryptocurrencies, with a long history of accountability and supporting the bitcoin revolution, not to mention having one of the best UIs and trade engines. Sign up through my referral link for a little win-win situation.

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