Dear friends
The U.S. economy added 372,000 jobs in June, and wages have risen 5.1% over the past 12 months. With the unemployment rate at 3.6%, there are still nearly two job openings for every job seeker. While this sounds like good news at first, it also means that companies’ production costs are rising, and with them the prices of their goods and services.
As a result, the latest annual inflation figures soared to 9.1% in the U.S., setting a new record in 40 years. No one really expected the numbers to be low, but the magnitude was a surprise.
In response, the Federal Reserve raised interest rates by another 0.75% at its July meeting, bringing them to 2.50% from near zero in March. Economists now expect smaller moves in September, as the Fed must be careful to lower inflation without plunging the economy into recession.
Interestingly, bond traders are already betting on three Fed rate cuts of 0.25% by mid-2024, according to Bloomberg, as 10-year Treasury yields are currently more than 0.25% below two-year bond yields. Market participants seem to assume that the Fed might raise rates a bit too much and then have to reverse them again to avoid a hard landing.
Such a yield curve reversal has preceded every U.S. recession in the last 50 years, but given the strength of the labor market and the state of corporate balance sheets, there is reason to believe that any recession could be rather short and shallow.
In the last week of July, U.S. stocks experienced a relief rally on strong quarterly results from Amazon and Apple, while Meta, Alphabet and Microsoft missed estimates.
Notably, Meta’s advertising business was hurt by Apple’s new iOS update, which makes it harder for advertisers to track users across multiple websites. Faced with lower ad revenue, developers have turned more to in-app purchases instead of subsidizing their apps with ads. This means more revenue for Apple, but less for Meta, whose shares have fallen over 50% since the beginning of the year.
At the end of the month Nasdaq closed at 12.3%, the S&P 500 9.1%, 20-year bonds 2.4%, gold ‑2.6% and bitcoin 18.0%.
Due to recent volatility our strategies were too cautiously invested to catch last week’s rebound and remained rather flat with Universal -0.3%, Progressive ‑0.7%, and CryptoMax 2.3%.
In my opinion, the most significant development last month, however, was a new law drafted by the European Commission to “bring order to the Wild West of crypto assets.”
The Markets in Crypto-Assets (MiCA) law will be the first comprehensive regulatory framework for the cryptocurrency industry in the EU, particularly for crypto exchanges and issuers of so-called stablecoins.
The European Securities and Markets Authority will be given the power to ban or restrict crypto platforms if they fail to adequately protect investors, threaten market integrity or financial stability.
MiCA will also address environmental issues related to cryptocurrencies and reduce anonymity in crypto transactions, requiring all transfers over €1,000 between exchanges and private wallets to be reported. Authorities are “deeply concerned” about the use of crypto assets to launder money or evade sanctions, particularly in the wake of the ongoing conflict between Russia and Ukraine.
While some of the stricter guidelines have unsettled crypto pioneers, several industry insiders see the move as a positive and believe Europe could become a vanguard in global crypto regulation.
Clearly harmonized regulations will be key to establishing larger crypto companies in Europe. For example, exchanges like Coinbase will be able to “passport” their services to all 27 EU countries at once under MiCA, instead of applying for a license in each country individually.
In my opinion, MiCA might significantly impact the crypto industry in two ways: On the one hand, we may likely see more consolidation with large international companies happy to comply with the new laws as they are able to absorb the increased regulatory complexity to gain more EU market share by acquiring smaller crypto companies that cannot afford the overhead.
On the other hand, I also expect to see even more “underground” innovation with fully decentralized, open-source, and community-driven projects that seek to increase anonymity to even further escape traditional government oversight and control.
Of course, most governments are not happy about independent cryptocurrencies (like Bitcoin or Ethereum), algorithmic stablecoins (like DAI or FRAX), or decentralized exchanges (like Uniswap) that are not backed by any commercial entity because there is no one to hold legally accountable and no technical means to stop or regulate them.
Authorities rightly fear that such completely anonymous decentralized financial systems, also known as DeFi, could literally defy government authority, threaten state currencies, and make it impossible to track funds, collect taxes, or freeze accounts.
But let’s do a little thought experiment on how things might play out so you can decide for yourself what this all could mean for you personally, for your community, or for your country.
Last year, China’s central bank successfully issued the e-CNY, a digital currency and legal tender equivalent to any other renminbi bill or coin, also known as the Chinese yuan (CNY). The digital yuan is designed to be used instantly in both domestic and international transactions. It is much better, cheaper and faster than any current financial system and even allows transactions between offline devices.
Isn’t this the perfect future technology to replace the slow and expensive current SWIFT network? Wouldn’t everyone be happy to have such an innovative new standard for smooth international trade at the speed of light?
Of course, as a small side effect, the yuan would replace the dollar and the euro in international trade, give the Chinese government total control over all global transactions, and allow them to block any account at any time if they suspect unlawful behavior. All for the good of the people, of course, similar to how the U.S.- and EU-controlled SWIFT system has been used to curb money laundering, fight corruption, stop terrorist financing, or prevent bad actors like Iran and Russia from financing wars.
From the perspective of Chinese policymakers, this would be a perfect world and their publicly stated goal. From a EU or U.S. perspective, this would be a serious economic threat and a national security concern.
So what might happen next? Well, the U.S. and EU are already preparing to issue their own central bank digital currencies as an alternative global standard to maintain their power.
While the US may well have a chance to compete, I’m a little less optimistic about the EU. I may be wrong, but I find it hard to imagine that more than two parallel global currencies and financial systems will be practical for international trade in the long run.
So, from the point of view of Switzerland, Japan, Morocco or any other country in the world, there will obviously be no chance to compete for such “world domination”. The remaining choice will be to be economically controlled by either the U.S. or China.
If any country should be uncomfortable with that (and I could certainly imagine some), the only alternative would be to actively support a fully decentralized digital currency and payment system that no one can control. If a country is facing the threat of losing sovereignty over its currency, trade, and money supply anyway, it might prefer to have no one in full control rather than being fully controlled by decision makers from a foreign state.
Over time, countries may come to realize that DeFi does not necessarily equate to Wild West-style anarchy, but rather to a grassroots democracy in which all market participants can vote on future developments and contribute ideas on how best to address issues such as financial inclusion, taxation, welfare, or budgets to curb global warming. DeFi has a promise to offer every individual, community, and country in the world an equal opportunity to contribute to the future of society. Assuming most people have good intentions, it will be very difficult for a totalitarian regime to continue to live on corruption, or for a single nation or ideology to dominate the world.
Current governments will, of course, not like such ideas in the short term, as they would lose their position of power both nationally and internationally. But as a global citizen, I prefer to trust the collective wisdom of 8 billion people for the well-being of our amazing blue planet, rather than a small group of American or Chinese elites who might put their own interests and agendas first.
Although objectively this would make a lot of sense to me, human history shows that logic does not always prevail, and if at all, it does not follow a straight path. So, in any case, it will be very interesting to watch how things will unfold…
Stay happy, healthy and wealthy!
Omar