July brought us the usual ups and downs: at the beginning of the month, equity markets rallied as renewed optimism emerged that the economy was recovering better than expected.
But soon new fears arose about the spread of the delta variant and Japan announced there would be no spectators at Olympic venues, so markets fell back again.
Meanwhile, Federal Reserve Chairman Jerome Powell addressed Congress and, as usual, said nothing new: he continued to dismiss inflation fears and reassured markets that the current stimulus measures of $120 billion per month would continue “until substantial further progress” toward peak employment and 2% inflation had been made.
The same song was heard from the European Central Bank meeting, where it was decided to “avoid premature tightening that would harm the economy” and to maintain record-low interest rates for as long as necessary.
As a result, the S&P 500 and the Nasdaq trended to new highs in another rally.
Then second-quarter earnings began with better-than-expected results from financial companies, but nevertheless their stocks mostly weakened. A similar picture was painted by mega-cap technology companies, which reported outstanding earnings but a weaker outlook, dragging the Nasdaq lower.
Given the combination of historic highs and lofty expectations, companies face a tough earnings season, as they struggle to show what might drive future earnings with most of the good news already priced in.
Despite ongoing tensions in Hong Kong and Taiwan and accusations of technology theft, the U.S. and China continue to ship goods to each other at a rapid pace. The semiconductor industry is benefiting from high demand for PCs, phones and game consoles. The surge in demand, however, far exceeded supply capacity, resulting in a global chip shortage affecting almost all industries. Semiconductor supply will probably remain tight for at least another year. Or more should the conflict between the U.S. and China further escalate…
Markets therefore continued to whipsaw at the end of the month as they juggled earnings season, the delta virus variant, central bank policy and supply chain challenges.
On the crypto side, Visa reported people using over $1 billion on crypto-cards this year, and PayPal increased its limit on crypto purchases to $100,000 per week.
More and more banks are enabling their clients to buy bitcoin, JPMorgan is offering all wealth management clients access to crypto funds, and a new Germany law allows institutional investors to hold crypto. German “Spezialfonds” can now invest up to 20% of their portfolios in cryptocurrencies, allowing (theoretically) up to EUR 350 billion to flow into the crypto space.
Against this backdrop, and overhyped rumors of Amazon accepting Bitcoin in the near future, cryptocurrencies suddenly surged over 20% at the end of the month, shortly after hitting a six-month low. And in a blink over a billion dollars in short positions were eaten up, who were betting on prices falling further…
All in all, we had another month of ups and downs, at the end of which everything was up: the S&P 500 +2.3%, the MSCI World Index +1.7%, 20-year bonds +3.7%, and gold +2.5%.
Our strategies also did quite well: Universal +2.6%, Progressive +5.6%, and CryptoMax, which held steady during the price declines but missed the last-minute crypto surge, ended at +0.1%.
A recent Goldman Sachs client survey on digital assets demonstrated a positive attitude toward the future of cryptocurrency investing. It found that over 60% of large family offices want to invest in cryptocurrencies for diversification and 40% have already done so.
A thought experiment to illustrate what this could mean:
- According to Credit Suisse figures, there are currently about 56 million millionaires in the world with a combined net worth of about $175 trillion.
- 60% of that would be $105 trillion, let’s round that down to $100 trillion.
- Assuming everyone wants to invest an average of 2% of their wealth into crypto, that would mean $2 trillion.
- There are currently 18.7 million bitcoins with a fixed maximum of 21 million in 2140.
- Currently, about 22% of them are in active trading, or about 4.1M Bitcoins.
- Bitcoin’s market share is about 40%.
- So the millionaires may compete to buy all the available 4.1M Bitcoins for about $800 billion.
- This would make 1 Bitcoin expected to be “worth” $195k
- Today, 1 bitcoin is worth about $40k
And we are only talking about millionaires. 13% of Americans bought crypto this year over Visa, PayPal and their favorite bank, up from 6% last year. If that demand continues to grow, the value may even climb higher over time, as the supply is fixed.
Of course, you wouldn’t want to hold the majority of your investments in crypto, but NOT having a small insurance policy for a potentially fundamentally different monetary future may also be a considerable risk.
Stay happy, healthy and wealthy!
Omar