Foreword: This paper mainly analyzes the possible relationship between US corporate bonds and bitcoin prices. The author believes that there is a certain risk in US corporate bonds, and once corporate credit is in crisis, funds will flow to safe asset types, such as gold, in order to avoid risks. The author believes that a very small percentage, for example around 2%, may flow to Bitcoin, thus affecting the price of Bitcoin. Of course, this article is only a logical prediction, mainly to explore the relationship between macroeconomics and Bitcoin, and cannot be used as investment advice. Investing in encrypted assets is extremely risky and requires decisions based on individual risk tolerance and market understanding.
The author, Yuriy Anosov, is translated by the "HQ" of the "Blue Fox Notes" community. The macro impact of negative impacts on global markets is often a catalyst for historical demand for safe-haven assets such as gold and silver. These dynamically evolving things remain relatively constant throughout modern investment, assuming that bitcoin is a substitute for gold and silver, and its demand characteristics as a safe-haven asset are similar to the demand characteristics of precious metals.
Looking back at some recent financial crises; the 1979 energy crisis was caused by the Iranian revolution, which caused global oil production to fall by 4%, and then oil prices doubled in the next year, leading to a global economic downturn. At the beginning of the 21st century, the Internet bubble triggered a recession, and the excessive speculation and high valuation of Internet companies spurred the dot-com bubble. Of course, the biggest financial crisis in the recent history since 2007 was caused by the collapse of the subprime market, when defaults and foreclosures led to a large-scale depreciation of housing-related securities.
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Today, let's analyze the corporate credit in the US and why I think this will be the reason for the next global financial crisis, which will have an impact on all major asset classes and will lead to capital inflows to safety assets (flight to safety) ), will ultimately benefit the price of Bitcoin.
Judging from the situation of the corporate credit market after the subprime mortgage crisis, American companies have been making full use of the low interest rate environment and consuming their own advantages at an increasing rate.
US non-financial corporate debt as a percentage of GDP
In the past few years, the ratio of corporate bonds to GDP has exceeded the peak during the subprime mortgage crisis. As the Fed entered a steady rate hike cycle from December 2015 to December 2018, this growth rate continued to slow down. However, as we saw at the December 2018 meeting, the Fed stopped raising interest rates. Be patient with further policy changes. In just six months, they hinted at a meeting in June 2019 that they might cut interest rates this year and beyond. This situation creates an environment in which companies are more likely to increase the size of borrowing for continued low-cost funds.
There are many reasons why the Fed has withdrawn its austerity plan. Although they may never admit this, I believe that one of the main reasons is that the policy's response to the price level of the US stock market is reversed. With the S&P 500 down 7% in May, the Fed quickly adjusted its tone and sent a signal to the market that the stock would be supported and led to a record high on the S&P 500 on Friday (July 5, 2019).
The second reason is political pressure; everyone knows the attitude of President Trump to the Fed. Every time the market falls, the president will soon blame the Fed and criticize their policies on Twitter, as well as in the financial media, and various The interview expressed his dissatisfaction and even tried to join the extreme doves to the Fed's board of directors, although these actions have not been successful so far. Although the Fed is a politically independent entity, I think most fund managers will think that this is not entirely correct, because political pressure in the past can indirectly affect the Fed, which happened before Trump became president.
Finally, differences with other global central banks, such as the European Central Bank (ECB) and the Bank of Japan (BOJ), which continue to provide loose monetary policy, have a net negative impact on the US, as divergent monetary policy tends to make the dollar stronger. This makes it difficult for US companies to compete on a global scale and has a significant impact on global supply chains around the world.
June 25, 2019, Bloomberg WIRP function screenshot
The Pengbo WIRP function screenshot shows that the implied probability of interest rate cuts in July is 100%. The WIRP function analyzes the possibility and scale of future interest rate changes. In particular, based on historical analysis of the bottom, market rates are expected to change at a rate that is short-lived. (Note: WIRP is the abbreviation of World Interest Rate Probability Function, Bloomberg's global interest rate probability function to track the probability of different interest rate channels, used to predict the probability and scale of future interest rate changes)
The last point about interest rates is that the prediction of their future movements is extremely complicated, as there are many drivers that change over time. The picture below is an article from the previous Wall Street Journal, showing 50 economists' forecasts of interest rate trends. Their average forecast at the end of June was 3.39% for 10-year US Treasury bonds. Note that no one's prediction is less than 2.5%.
What does all this mean for US corporate credit and its potential for collapse? I believe that since the company is essentially focusing on the equity incentive structure of executives in the short term, we will see that the interest rate cut will be directly translated into further use of the company's balance sheet for low interest rate borrowing, especially long-term borrowing, and Setting a lower investment threshold will align incentives for executives with this purpose, allowing executives to implement this strategy.
The table below shows that over the next four years, there will be $4.7 trillion in corporate debt maturity within the entire rating range. If the interest rate policy begins to decline as currently expected, then these maturity funds may be easily refinanced. However, if interest rates remain at current levels or rise, it will be difficult for companies to renew their debts. What we will see is that there will be a systemic cycle of corporate defaults and greater difficulty in maintaining operations in the future.
Another factor that can shorten the potential crash time is the current investment-grade debt situation. For those who are new to the company's debt rating, a simple starting point is that they are classified as “investment grade” (IG) and “high yield” (HY), and IG stands for bonds rated AAA to BBB. HY stands for bonds rated BB+ and below. The table below shows that BBB-rated bonds currently account for 50% of the total outstanding IG bonds.
In addition, you can also see that in the past 10 years or so, the concentration of bonds has reached the highest level since the subprime mortgage crisis, and it is still growing rapidly.
What does this mean for a crash to happen? The Fallen Angel effect is when an IG bond is downgraded to HY (from BBB- to BB+). Since most of these bonds are held by large mutual funds, according to their power of attorney, the fund only holds IG-level bonds. Once the bonds are downgraded to HY ratings, these funds become mandatory sellers of bonds, and market supply begins to flood. .
If enough bonds are sold at the beginning, the cycle will soon become a death spiral. If interest rates remain high, companies will have difficulty rolling their debts, downgrades will begin, and actively managed fund managers will begin to sell, while predicting which bonds will be downgraded in the next step, which will further exacerbate the death spiral effect.
Like the first article in this series (the article published in the Blue Fox Notes before the Eurozone Debt Crisis and Bitcoin), I want to do the same experiment on the results of a series of bitcoin prices. As a first step, we need to establish a few assumptions:
· $900 billion in corporate bonds will expire in 2020.
· Assuming that 5% of the debt will default in some way, the domino effect will result in the transfer of funds from corporate credit and bank loans to safe assets.
Under this assumption, if the debt is not renewed due to the tightening of the issuance standards or the decline in market demand, then the liquidity contraction will be considered a breach of contract and will have a negative impact on the company's operations.
· Total outstanding debt (excluding financial companies, but including bank loans) is approximately $15 trillion. (Data from Deloitte Research)
• Assuming that 10% of these funds will be automatically liquidated, these funds may be exchanged for gold, silver and other equivalent assets based on some of the dynamic factors explained earlier.
· Assume that 2% of the total funds that will be exchanged for gold and silver will enter Bitcoin.
· I did the same 2% assumption in the previous article on the potential euro debt crisis. I have received a lot of feedback about questioning the validity of this hypothesis. Although this assumption has not been accurately mathematically derived, I believe that as more and more institutional investors evaluate “value store” assets, bitcoin is gradually being accepted as another asset option. Now, I am not talking about a pension plan, or a large foundation that allocates 100% of the security asset/value reserve to Bitcoin, but I do believe that with the wider asset diversification, Bitcoin is definitely It is one of the choices and will be chosen more over time.
· The current market value of Bitcoin (July 7, 2019) is approximately $205 billion, or approximately 17.8 million bitcoins.
· Most importantly, the strict assumption of this price analysis is that the entry of corporate credit funds into Bitcoin is the only event that affects the price of Bitcoin, and the purpose of doing so is to influence many other factors that affect or will affect the price of Bitcoin. The factors are separated.
· Finally, I believe that what happens to the corporate credits I describe will only be the root cause of the beginning of a broader global crisis, which will affect a wide range of other categories of assets beyond credit, which will make more Cash flows from risky assets to general safe-haven assets. This will have a further positive impact on the price of Bitcoin.
As some of the above assumptions are difficult to predict accurately, the table below shows that I believe that if the basic price of Bitcoin remains at the current level (as of July 7, 2019, the price per bitcoin is $11,518), it can be expected. The price may be worth.
The basic situation shows that bitcoin prices will rise by 14.6%, assuming 2% of cash, and the company's total outstanding credit is about 15% of the 15 trillion asset management scale will flow to Bitcoin. The US government can intervene in a variety of ways to slow down the pace and further push the liquidation day of this debt-driven economy in almost every area.
One of the most convincing statistics I've come across recently is from an interview with one of my favorite bond managers, Jeffrey Gundlach. Gundlach said that national debt increased by 6%, while nominal GDP increased by 5%, indicating that GDP growth is debt-based.
If you look closely at the different parts of the economy, you will find many similarities, most of which are driven by the government's policy of supporting large-scale lending and over-leveraging. These dynamic factors have caused the US economy to undergo an adjustment that will go beyond the control of governments around the world (except for austerity measures that the government has avoided at all costs). US corporate credit is just the beginning of a falling domino.
In general, this is a good explanation for why decentralized bitcoin can eventually act as a macro stabilizer in future economic crises. Every time the economic crisis, currency control will continue to fade from the global central bank, and more controlled by the free market, in my opinion, there is no doubt that the free market will use decentralized technology to achieve this goal.