Macro Update

by Henrik Andersson

In February we wrote about how the Other Locations graph form the Johns Hopkins University dashboard is the most consequential graph in the world. Unfortunately it still is growing exponentially.

COVID-19 cases outside China.

COVID-19 cases outside China.

The consequence of the lockdowns following the spread of the virus has lead central banks around the world to take unprecedented action. The Federal Reserve on Sunday cut their policy rate to near zero in addition to other easing measures. Notably ECB already had -0.5% policy rate entering this crises and probably won’t cut any further. As the stock markets around the world have panicked, we have seen a run on liquid assets that have performed relatively well. This includes Gold and Bitcoin. We saw the same pattern in the ’08 financial crises when Gold initially sold off to meet margin calls before entering a multi-year bull market. That was just before Bitcoin was born. We believe Bitcoin and crypto is a hedge against a monetary policy with unlimited money supply. Remember, Bitcoin’s supply is cut come May — this is the exact opposite monetary policy of central banks!

One difference between crypto markets and other markets is the lack of circuit breakers and stops in crypto markets. Crypto markets operate 24/7 and even if they’re down (or up!) a very high percentage they continue to relentlessly operate. This is unlike traditional markets that halt trading during these kind of events. This likely means that a true market/clearing price is found more effectively in crypto markets as they are quicker react, always trade and never halt trading. There are no external actors manipulating crypto markets.

Last Friday, crypto markets saw a large drop, this seems to have been exacerbated by liquidations of leveraged traders particularly on one exchange, BitMEX. When the dust had settled it looks like around US$700M worth of positions had been liquidated on BitMEX alone. Crypto futures went from trading at contango to backwardation (futures trading below spot price). This is a good thread describing what happened on Friday. On the bright side, after Friday’s move, a lot of leveraged traders have been flushed out of the crypto market. In an encouraging sign of stabilisation, in the last 24 hours, Bitcoin is trading unchanged around the US$5,000 mark, while the US stock markets had its biggest fall since 1987, -12%.

The whole Decentralised Financed (DeFi) system on Ethereum came under stress last week. Bots fighting to move coins created a backlog on Ethereum which resulted in very high ‘gas prices’. In other words the Ethereum network had a hard time handling all the traffic. To us this shows how active the DeFi network really is. Yes it needs to be upgraded to handle higher traffic in situations like this. As things are calming down, it seems it mostly came out of it unscathed.

For investors looking for an equity portfolio hedge, we have a hard time to find other assets with upside potential outside of Gold and Crypto. Saying that, we do recognise that both Gold and Crypto have been terrible hedges so far in this environment but were are less than 1 month since the peak in what has the potential to become a multi-year event. The classic hedge, bonds, appears to us to have limited upside with interest rates at all time lows. To that point, we like to point out they are at a 3,000 year low, since interest rates were invented.

Our strategy during this time is to opportunistically take advantage of misallocations in the markets. As an example, right now it is possible, with less than 60 days to Bitcoin’s halvening and with Bitcoin at around US$5,000, to buy Bitcoin at a discount to spot prices through futures. We are taking advantage of such opportunities including selective short opportunities while remaining constructive about the market. Our cash position is healthy and even though the month of March looks like it will be a tough month for us performance-wise, we are excited about the future of crypto and our portfolio in this new macro environment.

We are big fans of the expert in tail risk, Nassim Nicholas Taleb. He famously says: “Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have — or don’t have — in their portfolio.”

While everyone’s financial circumstances are different, and this should certainly not be taken as financial advice, for the first time I have no stocks, only cash, gold and crypto in my portfolio.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Capital. Henrik actively manages both of the Apollo Capital investment funds; the Apollo Capital Fund and the Apollo Capital Opportunities Fund.