Pantera Capital CEO: The global economy is experiencing unprecedented recession, and Bitcoin will mature in this era

Written in front: The original author is Dan Morehead, the CEO and Chief Investment Officer of Pantera Capital, a well-known blockchain investment institution. It judges that the current global economic recession has never been experienced in history. All major economies in the world will Under the impact, in his opinion, Bitcoin born in the financial crisis will mature in this crisis era, and its price may reach a new high in the next 12 months, but this will not happen overnight.

(Photo: Dan Morehead, CEO of Pantera Capital)

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When I sat down to write (thinking of a way to express my concerns about the fragility of the supply chain and the economy as a whole), I thought of "The Free Choice" in Milton Friedman's classic economic book "Free Choice" Pencil story. "

In my opinion, this metaphor is more relevant than I originally thought. At this time, freedom of choice may be negative.

The book's Wikipedia entry has a sad summary:

"Freedom of choice: A personal statement that a free market is best for all members of society, provides examples of how free markets can promote prosperity, and insists that it can solve the problem of other methods failing."

Yet the world may be experiencing an exception to this rule. The free choice of everyone, every county, every state, and even every country may not be ideal. This fragmented choice can have serious consequences .

I am not an epidemiologist, so I leave this question to others.

It took me 35 years to work on global macro trading. This time, it is unique, and it will end the longest global expansion ever. Its impact on the global economy may be greater than any recession in recent memory.

Financial market

The S & P 500 hit its fastest bear market in history, and the COVID-19 pandemic dropped the stock market by 20% in just 15 trading days, which is twice the damage caused by the Great Depression of 1929.

After experiencing the longest and least volatile bull market in history, this could expose many of the bad risks hidden under a 10-year bull market.

In stark contrast to recent times. In 2017, the largest decline from crest to trough was only -2.8%, which was one of the lowest losses in the year in history. Standard & Poor's now executes every few minutes.

More than a month ago, the New York Times published a prescient review article that read:

"To combat the new coronavirus, medieval isolation and restrictions will now also come in handy."

The unfortunate result was that medieval GDP was low and stagnant.

economic recession

About two weeks ago, I intercepted a survey by Bloomberg economists in a report to my colleagues:

The conclusion is "This is crazy, the probability of a recession is 100.0%."

I now believe that a recession may be more severe than any recession after the war.

As many of you have already experienced in town, very few people are now doing business in the Bay Area, and my colleagues have reports like this in other cities. It seems that everyone in our community is hiking, walking in Manhattan, and in Central Park. Although this will bring Bhutan's national happiness index to its highest level, it will not increase GDP.

GDP is a flow indicator. If these hikers had previously produced goods and services, GDP would have plummeted.

Before 2009, the IMF defined the global economic recession as an annual real GDP growth rate of 3% or less , and the world has never experienced a period of negative growth. Emerging markets typically have higher growth rates, while recessions are usually within a country or region.

Now, Wall Street companies are predicting a real recession (negative growth) in the global economy.

Goldman Sachs: "Global real GDP will shrink by about 1% in 2020 … the United States will fall by 24%, which will be 2.5 times the post-war record."

JP Morgan Chase: "Expected 1.1% contraction for 2020" JPMorgan Chase made a very good US GDP infographic:

This time it wo n’t be “V-shaped”

Some people have already talked about the V-shaped decline.

There is too much uncertainty today, but one thing that seems obvious is that this recession will not be V-shaped.

The airline was shut down for three days after the 911 attack. After that, we were all very sad, but the business has restarted. This is a typical one-time shock, which allows V-type return. And what we just experienced will take a long time to resolve.

In the 2007-2009 recession, real GDP in the United States fell by $ 650 billion (4.3%), and it has not returned to the $ 15 trillion level before the recession in three years.

Record unemployment

Fiscal policy, for example, is difficult to help effectively and needs to be fast enough: cash held by small and medium-sized businesses can last about 27 days (with zero returns).

Goldman Sachs:

"Using three methods-the empirical relationship between GDP and unemployment, the experience of Hurricane Katrina, and a bottom-up analysis of possible unemployment by industry and occupation-we estimate U3 unemployment in the coming quarters The rate will rise by 5.5 percentage points to a peak of 9%. "

"… We estimate that 2.25 million Americans applied for unemployment benefits for the first time last week, a number three times higher than the previous record high and equivalent to 1.5% of the insured labor force. , In Canada, up to 2.5% of the workforce filed unemployment claims last week.) "

Interdependent supply chains and economies

When I was in elementary school, we watched a fascinating documentary about Ford in Dearborn. Iron ore, coal, sand and other basic raw materials come in one end, while cars come out at the other end.

And the world we live in is so different. The timely inventory management of thousands of suppliers in dozens of countries supports the supply chain, which will be difficult to restart.

In 1980, Milton Friedman presented his views on the free market economy in a 10-hour series called Free Choice by the American Public Broadcasting Corporation (PBS). Friedman refined his argument into a parable about an ordinary household object:

"Looking at this pencil, no one in the world can make this pencil. Extraordinary statement? Not at all. As far as I know, the wood from which it was made was a tree felled from Washington State. To cut that tree down You only need a saw. In order to make a saw, you need steel. In order to make steel, you need iron ore. And this black center, we call it lead, but it is actually graphite (compressed graphite). I do n’t Determine its source, but I think it comes from some mines in South America. This red top is an eraser, which contains the rubber component, it may be from Malaya, where the rubber tree is not even local! It is some merchants in Imported from South America with the help of the British government. This copper ferrule? I have no idea where it came from. Or yellow paint! Or black line paint. Or glue that glues it together. In fact, thousands of people have collaborated on this pencil. They speak different languages ​​and believe in different religions. If they meet, they may even hate each other! When you When the store to buy the pencil, you are actually using your time in exchange for a few thousands of people a few seconds. "

"What brought them together and prompted them to cooperate in making this pencil? No political commissar issued an order from a central office. The magic of the price system is that the non-personal manipulation of prices brings them together and allows They collaborate to make this pencil so you can buy it for very little money. " Ironically, the ordering economy may suffer much less virus damage.

Impact of the virus on the economy

If everyone in a country were to be quarantined for two weeks and tested, health officials would know who was infected and who did not. Citizens who are infected can get treatment, others can get back to work.

Two weeks divided by 52 equals a drag of 4% of GDP growth, which is the theoretically most optimistic situation.

The reality is not like that. Each country has adopted different measures. In the United States and many other countries, this impact is only the lowest estimate.

China, which was initially in trouble, is now expected to lead us out of its predicament. Its seasonally adjusted GDP growth rate in the first quarter may fall by 40%, which has not been the case for at least 50 years.

China has been slow to acknowledge the problem, and when China does resolve the situation, they will be able to control the virus. On January 23, China blocked Wuhan and restricted movement in most of its area, when only 17 people died in its territory.

China, South Korea, Singapore and others hope that through active efforts, they can defeat this infectious disease.

Possible policy response

Recessions are usually caused by insufficient income or access to credit. Fiscal and monetary authorities are used to coordinating policies to address this challenge.

Viruses are a physical limitation of economic activity (it is intangible), and it is very difficult to counteract with standard economic policy tools.

Countries like South Korea are proving that the most effective tools are science and localization technology.

Monetary Policy

Walter Bagehot stated:

"In order to avoid panic, central banks should provide loans to solvency companies as early and freely as possible, and provide good collateral at high interest rates."

In the era of zero interest rate policies, monetary policy has lost most of its effectiveness. Interest rates in most major economies have long been close to zero. Japan, which invented the Zero Interest Rate Policy (ZIRP), named the new reality the "lost decade." That was 25 years ago.

The economic and psychological impact of monetary policy on the pandemic is powerless.

"Hey dear, the Federal Reserve cut interest rates by 100 basis points today. Let's go to the movies."

With the Fed's interest rate cut last week, nearly 60% of the world's GDP is currently at the effective zero limit.

From the previous monetary response, during the 2008-9 global financial crisis, the United States cut interest rates by 438 basis points, while the global decline was 297 basis points.

This time, the United States has only 150 basis points of ammunition left. Globally, interest rates are expected to fall by only 55 basis points, lower than one-fifth of the policy support rate of the last crisis.

Many investors are asking questions about negative interest rates. In my opinion, most central banks now think that negative interest rates are actually not effective-zero is actually the lower bound. I don't know of any major central bank that thinks they can drastically reduce interest rates below zero. The Fed has now dropped to zero several times, each time setting its target at 0-25 basis points.

Fiscal policy

Currently, some form of fiscal stimulus is needed to support aggregate demand for the most vulnerable. Unfortunately, fiscal stimulus measures make it difficult to identify an invisible, physical opponent through surgery.

The United States is debating a $ 2 trillion fiscal stimulus package, accounting for almost 10% of GDP, which is much larger than any fiscal stimulus package since World War II. (The US Recovery and Reinvestment Act of 2009 was $ 850 billion, about 6% of GDP)

Compared to the Great Depression and World War II, the United States is likely to get out of the coming recession with more debt (as a percentage of GDP) .

Impact on cryptocurrencies

Bitcoin was born in the financial crisis and it will mature in this era.

When I was a bond trader, I realized that the term sounded upside down. The "best" period of bonds is the worst period for everyone. Recessions and depressions are "great" for bonds. Unfortunately, I believe this is what is happening in our (cryptocurrency) market.

As the government increases the number of banknotes, more banknotes are needed to buy a fixed number of items (such as stocks and real estate), and I think they will. As a result, they also inflate the prices of other things, such as gold, bitcoin, and other cryptocurrencies.

The United States has entered this crisis with an unprecedented structural deficit. The cost is 31% more than the investment. Before the emergence of the SARS-CoV-2 virus, the Congressional Budget Office expected a budget deficit of more than $ 1 trillion, and now it may be three times that number.

"Send $ 1 billion here, $ 1 billion there, and soon you'll talk about real money-US Senator Everett McKinley Dirksen."

Now that we have reached a trillion-dollar deficit, the deficit will only have a positive effect on the price of things that cannot be quantified (e.g. stocks, real estate, cryptocurrencies) . In other words, the BTC / USD exchange rate will rise.

Bitcoin's price could set a new record in the next 12 months, which will not happen overnight. My best guess is that institutional investors need 2-3 months to divert their current portfolio issues, and then 3-6 months to study new opportunities, and then, as they begin to allocate These markets will really start to rise .

I want to emphasize that nothing in this article is targeted at individuals or specific institutions. In difficult situations, everyone is doing their best. I'm glad I was not asked to make these choices. My only job is to manage your money in the cryptocurrency market. I strongly believe that these policies will eventually have a positive impact on cryptocurrencies.

Special action on cryptocurrencies

We believe that tokens will outperform venture capital (VC) in a few months. Tokens are immediately repriced, so they are more volatile, both up and down. And venture capital pricing is usually lagging, and the number of transactions will decrease rapidly. After many months, when both parties finally agree on the supply and demand curve, you will see the number of transactions pick up, but the price will fall.

We reduced the token risk by 15% in a week. We now believe that the short-term high correlation between cryptocurrencies and the general market has ended, and it will present an independent market .

We believe that in a period of time, Bitcoin's performance may surpass other tokens. This is a project that has been built, it has succeeded, and has an 11-year history. Many newer blockchain and smart contract projects are still under development and may emphasize raising funds to complete their development.

Often, people want to invest their money in the industry's safest asset. When the market is under pressure and people try to sell all crypto assets, Bitcoin is much more liquid than anything else. As a result, we have increased Bitcoin exposure and reduced the risk of other assets.

In the five major S & P downtrends since 2012, the correlation between Bitcoin and stocks rose sharply in the initial trend for 32 consecutive days, but gradually dropped to neutral within an average of 71 days.

Although during this period, assets such as gold rose by an average of 8.2%, historically, Bitcoin has experienced some of the largest fluctuations in history during these periods.

Since 2012, Bitcoin's relative market share in all digital assets (known as the "Bitcoin Dominance") has increased during the five major S & P downtrends. The historical rise in dominance lasted for about 4 months on average, with an average increase of 7.8%. We believe that this is likely to happen again. It has moved several percentage points.

(A graph of these correlations, dominances, and prices is in the appendix.)

Finally, these very volatile and panic-prone markets are perfect for algorithmic trading. In our algorithmic strategy, we have increased the share of the Digital Asset Fund to 30% of the fund.

I sincerely wish you and your family and the people in your community good health.

Dan Morehead, CEO and Chief Investment Officer, Pantera Capital

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