By Alejandro A. Tagliavini*
The main Wall Street indices fall sharply. So far this year, the Nasdaq 100 is down 26.91%; the S&P 500 fell 17.72% and the Dow Jones lost 13.34%. The Fed chairman said Tuesday that the US central bank will raise interest rates until there is «clear and convincing» evidence that inflation is on the decline. «Equities are taking a beating as inflation fears and weak earnings weigh on market sentiment,» according to Fiona Cincotta of City Index.
Few sectors like technology reflect the stock market corrections of 2022 with greater synchrony, in fact, the Nasdaq 100 is one of the most bearish indices of the year with a cut of almost 24% since the beginning of January. It is true that the last quarter of 2021 already brought with it a slowdown in North American technology companies, which took advantage of the quarantines and therefore encouraged them without any rationality, to start a rally in the markets as investors deposited their money as if it were a refuge value.
Thus, from the maximums recorded by the FAMANG companies (the old Facebook, Amazon, Microsoft, Apple, Netflix and the owner of Google) they lose an average of 46% in the markets:
Netflix takes the worst part, of course, locked up in their homes, subscribers grew a lot, but now, among other things, due to sanctions against Russia, they lost hundreds of thousands of customers. In addition, competition from content platforms has increased with the consolidation of the Disney+ business.
Meta, the old Facebook, peaked in July 2021 and has since plummeted 47%. Amazon loses more than 32% in the year and, since its maximum of 2021, 40.6% and at current levels it is trading below its historical average at USD 2,244. Both Microsoft and Alphabet (owner of Google) are around 22% of their highs. Apple, which is the one that best withstands the blow, yields 16% in the year, which is practically its fall from its maximum.
Thus, some analysts believe that, at current prices, a buying opportunity has opened up in the main North American technology companies. Personally, I would handle myself with caution and selectively, since the quarantines – irrational as they proved to be – should not return and, instead, the competition precisely due to technological progress is getting stronger.
One of the reasons that encourages the fall of Wall Street is the strength of the greenback. The dollar index, which measures the evolution of this currency against a basket of 500 world currencies, has climbed to the highest level in two decades and rises in 2022 by +8.5%. The rise in the dollar has taken the yen to its lowest level in two decades and has practically returned the euro to parity with the American currency, in fact, it has already exceeded the highs it reached in March 2020 against the euro and the yen:
And the reasons for this «strength» -relative to other currencies, let’s stress, since they all weaken due to excess issuance- are the tightening of the Fed’s monetary policy, initiating a new cycle of interest rate increases to «control the inflation” faster than in the rest of the developed countries and the fact that, in the face of global uncertainty, it is presented as the best refuge asset.
Also, the strength of the dollar, high commodity prices and interest rates are inextricably linked, as people need more dollars to pay for more expensive products. This is not likely to change until these prices reverse, signaling a spike in the CPI rise and then the Fed becoming less aggressive.
If we take a look at the FIAT currencies that have fallen the most against the dollar in the last 10 years, we have the following list:
1.- Venezuela -99.8%
2.- Sudan -99.4%
3.- Syria -97.7%
4.- Argentina -96%
5.- Turkey -88%
6.- North Korea -85%n
7- Suriname -84%
8.- Uzbekistan -83%
9.- Malawi -79%
10.- Angola -76%
Meanwhile in Argentina, the peso has fallen again in recent days against the blue – «the dollar rises» – but not only because of the relative strength of the dollar, but also because in April and so far in May the BCRA issued currency again to finance the Treasury, probably outstripping the demand for currency that was left in excess and devalued. By the way, as Roberto Cachanosky points out, the agreement with the IMF plans to cover 1% of GDP with monetary issue to finance the 2022 fiscal deficit, but until May 9 the Government had already issued the equivalent of 0.5% of the GDP, “and there is still a need to finance the spending party that continues to drive the ruling coalition”.
By the way, some are beginning to question whether there will be a ‘conspiracy’ by the world powers to weaken the dollar, as happened in the Reagan era, with the 1985 Plaza Agreement that took place in a context of growing inflation, a campaign of escalating increases rate from the Fed and a rising dollar. In other words, a scene that closely resembles the current one, a parallel that will not go unnoticed by the G-7 bureaucrats meeting this week:
Through this agreement signed at the Plaza Hotel in New York, the governments of France, Japan, the United Kingdom, the United States and Germany agreed to weaken the dollar. Of course, no one is predicting an imminent intervention since Washington’s support would be crucial for any effective agreement and that is unlikely in the short term, given that the strong dollar is making imports cheaper, something attractive in a time of strong rise in the CPI .
Now, if the euro falls below $0.90 vs. the current $1.05, that could set off alarm bells. There are certainly parallels between the strength of the US currency in 1985 and now: the dollar index has risen at a 14% annualized pace so far this year, faster than the 12% pace seen in the five years before the deal. And inflation in the US is higher than it was when Fed Chairman Paul Volcker raised rates to 20%, and the current chief has vowed to do whatever is necessary to curb rapid price growth.
Washington’s reluctance could change if the US economy contracts and a persistently strong ‘greenback’ hampers everything from exports to jobs and beyond. In fact, the probability of a recession in the next year stands at 30%, the highest since 2020, according to a survey by Bloomberg.
Although it could also happen that the dollar weakens on its own. Along these lines, Chris Iggo, AXA IM’s CIO Core, warns of a possible depreciation of the dollar in the coming months since, if growth slows and inflation falls, the rate cycle could undergo changes and, therefore, it is likely that the greenback weakens.
In short, seeing all this, it is not very well understood why there is so much bad press for bitcoin, after all, it follows the Nasdaq:
And it has always recovered. During the last decade, more than half of the time it was down more than 50%, with the biggest drops being the following:
Be that as it may, and leaving aside the particular case of BTC, that is, bitcoin or not, the digital world and the blockchain, although they are still incipient and therefore have many errors to be corrected, is unstoppable and puts in check the establishment associated with coercive governments.
Beyond the fact that “cryptocurrencies” could definitely be established as currencies or not -which will not be defined by any intellectual, much less by a coercive government, but only by the market-, among other things, DeFi -decentralized finance- are already strongly emerging and form a financial ecosystem built on blockchain technology. Its main characteristic is that it is the users themselves who exchange (supply and demand) assets and financial services directly among themselves, without intermediaries, to use as an investment or financing mechanism, for example.
Obviously, and therefore the great fear of the establishment, the Defi replace traditional banks -which today operate in an oligopoly with central banks- favoring people who interact directly without having to go through the banks and pay their commissions, but that the commissions are distributed completely among the individuals who interact in the market.
* Senior Advisor at The Cedar Portfolio and Member of the Advisory Council of the Center on Global Prosperity, de Oakland, California