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Volume 11, Edition 15 | May 9 – May 14, 2022

Nothing is Straightforward About Crypto

Doug Walters, CFA
The fragility of cryptocurrencies was on display this week. Investors need not overcomplicate their portfolios with assets that lack the tenets of a good investment.

Contributed by Doug Walters, Max Berkovich, David Lemire

Reality fired a warning shot at cryptocurrency participants this week as a bank run of sorts caused disruption across the space. The major headlines focused on, so-called, “stablecoins,” which broke their peg to the dollar. But the reverberations were felt across the crypto-space, with Bitcoin down as much as 30% on the week at one point Thursday. It is still early days for cryptocurrencies, and this will not be the last crisis of confidence. For now, these vehicles lack some core tenets of an investment.

It has been a rough patch for cryptocurrencies. The most famous of the cryptos, Bitcoin, was at one point this week down over 60% from its peak (the most infamous, Dogecoin, was off closer to 90%). On Wednesday, TerraUSD, a stablecoin, broke its peg to the dollar. Stablecoins are designed to track real currencies (like the US dollar) and provide some ballast to the broader crypto market by giving crypto traders a safe haven for their cash between trades.

TerraUSD is now virtually worthless. The stablecoin involves tokens called Lunas which can be swapped for Terra coin. They are backed by a central bank of sorts called The Luna Foundation Guard, which holds reserves in assets such as bitcoin. So a digital coin, swappable with a digital token, backed by another digital currency that has no real fundamental value other than scarcity. What could go wrong? Apparently a lot. More concerning for crypto-watchers were the shockwaves. Another, much more influential stablecoin known as Tether, also broke its peg. While it recovered, the episode revealed the “fragile nature of private stablecoins” according to ratings company Fitch.

In our recent whitepaper (Cryptocurrency 101 – A Primer), we highlight the risk of thinking about cryptocurrencies as investments. They just are not there yet. Too often, investors are lured into “exciting opportunities” that lack any real investment justification. At Strategic, one of our guiding principles is to maintain a straightforward approach. We believe that investors should always:

  • Understand what they own.
  • Know how much it is worth.
  • Be able to cash it in easily.

If your investments do not check off these boxes, you are probably overcomplicating your portfolio.

Headline of the Week

Stocks fell again this week. The S&P 500 is now down over 15% on the year. Cryptocurrencies have fallen much further and have been in the news this week for all the wrong reasons. The “will he / won’t he” drama between Elon Musk and Twitter continued, with Musk putting the proposed acquisition “on hold.” But it is inflation that makes our headline of the week.

Peak Inflation?

On Wednesday, the Consumer Price Index (a measure of inflation) was out, and there was fodder for both inflation bulls and bears.

  • For the bears, the headline measure (ex-food and energy) was higher than expected at 6.2%. Analysts had been expecting 6.0%.
  • For the bulls, 6.2% was down from the prior month of 6.5%, perhaps signaling peak inflation is behind us.

Inflation is stubborn, and The Fed now has it as its primary focus to bring it down through higher interest rates and reducing its balance sheet. According to The Chairman on Thursday, achieving its target inflation of 2% will cause “some pain.” Stock investors have already felt “some pain” this year.

A not-so-fun fact: Inflation pains are much greater elsewhere in the world. The highest rates of inflation are currently in Sudan (260%), Venezuela (222%), and Lebanon (208%). The highest inflation in Europe is in Turkey (70.0%). Those are sizeable numbers, but Venezuela’s inflation was close to 350,000% just a few years ago!

The Week Ahead

Another light week is ahead of us. However, inflation reports, consumer-focused earnings, economic reports, and events abroad, especially in China, should fuel market volatility.

China

Early in the week, Chinese Retail Sales, Unemployment, and Industrial Output reports lead into a Bank of China rate decision on Friday.

  • With the Zero-Covid policy causing lockdowns and restrictions, the world will be watching what kind of damage has been done to the economy.
  • Unemployment at over 5% in China is politically unpalatable. It was at 5.8% in the last report.
  • On Friday, the Central Bank will be looked upon to add stimulus to the economy.
  • The Peoples Bank of China (PBOC) will have to figure out how to stimulate the economy and support the weakening Yuan.

Storefront

Economic data and Earnings this week will have a very retail-focused tilt.

  • Reporting earnings will be home improvement and furnishing companies Home Depot, Inc. (HD), Lowe’s Companies, Inc. (LOW) and Williams-Sonoma, Inc. (WSM), big box stores Walmart, Inc. (WMT) and Target Corp. (TGT), and clothing retailers Kohl’s Corp. (KSS), TJX Companies (TJX) and Ross Stores, Inc. (ROST).
  • The U.S. Retail Sales report is expected to indicate the consumer is still strong, with a 0.7% increase in April.
  • The key things to focus on are the shift from goods to services and the impact of the declining wealth effect (as investment portfolios fall) and significantly higher oil prices.

What else?

Looking around for what could impact market sentiment next week points us to foreign lands.

  • Inflation reports in the form of the Consumer Price Index for the Eurozone, United Kingdom, Japan, and Canada could move the needle.
  • Gross Domestic Product (GDP) reports from European Union (EU), and Japan will be watched. Both are expected to have contracted from the previous quarter.
  • However, the EU is expected to have a 5% y/y increase, while Japan is expected to have contracted by 1.2% from a year ago period.
  • The European Central Bank meeting minutes is another notable release.
  • There are two titans in central banking with speaking engagements as both Federal Reserve Chairman Powell and ECB President Christine Lagarde are scheduled for appearances next week.
  • Lastly, European Foreign Ministers will be meeting next week to focus on a “Russian Oil Embargo.”

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.

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