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During our recent road trip to visit clients after a 20-month lockdown, we fielded many questions. In previous articles, we presented our views on inflation and the U.S. Fed’s response, as well as our outlook for the TSX and global growth. Here are two more popular and controversial topics that always come up.
Ah, crypto – today’s most hotly contested topic. Earlier this year, we wrote a report on the subject. Not much has changed since then. On the surface, many of the arguments for crypto are appealing and excitingly subversive, making people feel like they have taken the red pill and seen the truth. In fact, the crypto boom has tapped into many of our modern discontents – a mistrust of policymakers, disruptive technology, rising populism, and a deep concern over government largesse.
Crypto claims to solve all these issues, along with almost all of humanity’s other pressing concerns. And, the market is now worth more than $3 trillion (fun fact: Shiba Inu, the second most important dog-based cryptocurrency, has a similar market capitalization as gold major Barrick Gold Corp.).
This is a big topic (one client meeting ran 45 minutes longer due to a lively discussion). Where to start? First, the great irony is that while crypto has promised to be an independent, decentralized currency, it is steadily moving further away from that ideal. Crypto architects have spawned an entire ecosystem, including tokens, ETFs, listed securities, and exchanges to trade cryptocurrencies. This is looking more and more traditional and centralized by the day.
It is also becoming clear that crypto will be heavily regulated. If this author has learned anything after two decades in finance, it is this: Policymakers are control freaks. Eventually, they will demand their slice of the spoils (raising taxes) or regulate something (increasing costs for the private sector). All this matters because, if enacted, regulations add risks and potential costs for those who transact against the law. And, increased regulations would systematically remove the original benefits the cryptocurrencies claim to bring. Less anonymity, more intermediaries, and greater surveillance was not part of the plan. This signals that the state, not crypto, is winning in terms of control of the monetary system.
But our biggest problem with crypto is that it shares so many similarities with previous financial bubbles. The high temperature of the conversation gives away what’s behind it: Bubbles all feed on captivating stories, excess liquidity, and magical thinking. People are not buying crypto to use it as a currency. They are buying it in hopes that it will gain in price. Many will counter and say that Bitcoin is the new digital gold – an inflation hedge. Yet if Bitcoin correlates to anything, it is broadly to speculative appetite.
Of course, timing a crypto crash is difficult (even though there have been seven major declines in the last decade). Historically, an improving global economy with tighter monetary policy usually does the trick to prick financial bubbles.
This was the most divisive investment topic. Some would rather not touch the subject at all. But China is the second-largest economy in the world (soon to be the largest). A view on China is crucial to getting global investing right.
The reality is that the rest of the world remains tightly linked with China. The country will continue to be the fastest-growing market for nearly everything for the foreseeable future. China’s retail sales are larger than America’s, and China is the largest market for nearly all consumer goods, from autos to personal electronics and luxury goods. Foreign business will not abandon the Chinese market any time soon.
In fact, in an era that is increasingly defined by geopolitical competition and a push towards economic “decoupling,” Western business has never been closer to the Chinese economy. “There’s no point in talking about decoupling…we have no interest in a cold war with China. It’s too big of an economy – we want access to their economy, they want access to our economy,” US commerce secretary Gina Raimondo stated baldly.
Still, China’s heavy-handed policy interventions this year have decimated the local stock market. The economy has slowed substantially on austerity measures over the last year. Big Tech stocks are still down 50% from their highs earlier this year. The rout has also led to indiscriminate liquidation across all equity sectors (most of which are not in the crosshairs of China’s regulatory crackdown).
Yet we are now approaching a key inflection point. Regulators are adopting a far more constructive tone, aiming to restore confidence in domestic capital markets. A decisive turnaround in China’s fiscal and monetary policy is imminent. Historically, this has always been the time to start accumulating Chinese assets. In fact, the wider emerging market equity complex, having just hit a 20-year low versus U.S. stocks, is primed for a long period of outperformance. China’s policy will be one of the catalysts to spark a change in trend. (For a longer discussion on China, see our Special Report written from Beijing right before the pandemic hit. We will be back in the country again soon).
Anything is possible. Just don’t blame us when the power goes out.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. He specializes in global investment strategy and ETF trends. This article first appeared in Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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© 2021 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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