In 2020, the world was uniformly “stress-tested”, providing a clear window in which to view and uncover global cause-and-effect relationships that would be otherwise difficult to uncover in more benign times. This was the year where lots of seemingly disparate pieces of knowledge over the years came together — leaving important lessons for millennials in 2021+.
Observation #1: Asset prices are set at the margin, supported by orderbook depth created by increasingly complex and heterogeneous investment rule sets
All assets have a price, which is set at the margins. Beneath the market clearing price (where the bids and asks meet) is an orderbook. The orderbook represents the depth of market participants willing to take liquidity (sell) and provide liquidity (buy). Successful investing (ie. two-way risk management to both the upside and downside) requires a deep understanding of the “dominant rulesets’’ which govern the orderbook of a particular asset. Long gone are the days of “buy low / sell high” value investment frameworks as the dominant ruleset.
Evidenced by the violent Mar 2020 draw-down and subsequent melt-up in markets…
If the build up and popping of the short volatility bubble was “Act 1” revealed by COVID, then “Act 2” is the story of secular imbalances resulting from decades of globalisation and a US-dollar based global financial “operating system”. As calls for de-globalisation, increased supply chain resilience, and re-shoring of production for national security become louder, an underappreciated knock-on effect will be the resultant change in power dynamics of the global financial system built on/around the US dollar. It is crucial for millennials saving for retirement to have a framework for navigating the possible outcomes ahead.
Well before COVID, there was an unspoken consensus that our global economy — powered by the US dollar — was likely not sustainable. It was never a question of if, but over what time period that the world would transition away from a USD-dominated system.
COVID has been the unlikely catalyst that has thrust this topic to the forefront today. …
Writing this article amidst COVID, it’s convenient to blame the virus for the everything that’s happening in the markets. While COVID is a significant catalyst, the seeds leading to this market drawdown were cast long before. It is important to recognize the volatility shock precipitated by COVID and the important lessons left behind for the next generation of investors: in particular, around changes to market structure and new paradigms for diversification.
Coming out of the 2008 Great Financial Crisis (GFC), Central Banks were tasked with bringing the global economy back from the brink through unprecedented monetary policy. For a while this worked, but like all market cycles, people eventually adapt to the new rules of the game. Excesses develop and unintended consequences emerged. Leading up to this latest market crash — the fastest decline in history — was a decade long bubble brewing in short volatility (vol) strategies.
Short vol bubbles eventually pop when there are bouts of higher volatility. Like a ticking time bomb, any number of market catalysts would…
Blockchain-based macro narratives don’t exist in a vacuum. Understanding the bigger picture of how crypto / digital assets fit into the global macro narrative requires a nuanced understanding of history. And in particular, an understanding of the mechanics of Modern Money and the roles of the 3 key types of bankers involved.
It is inevitable that those who become interested in crypto / digital assets, also become interested in the mechanics of the global modern monetary system. Just as there is a well-known “crypto rabbit hole”, there exists a parallel rabbit hole on discovering “what Modern Money is”.
Contrary to many people’s intuition, Modern Money is a more complex concept than most realize. Long gone are the days of money being backed by gold and a banking system that creates credit only through deposits and loans. Today, a global complex network of credit-based instruments function as Modern Money. …
Born from the depths of the 2008 Financial Crisis, Bitcoin tries to position itself as an alternative to existing currency and banking systems. Its presence has triggered global soul-searching — especially among younger people — to question what “money” actually is. While too early to judge Bitcoin’s long-term success, this post instead explores narratives driving people’s interest on the topic.
Since its inception after the Great Financial Crisis of 2008, Bitcoin has captured the hearts and minds of many around the world. Yet, 10 years in, many people still don’t have a common agreement on what Bitcoin really is.
No matter how many times it has been pronounced dead, it continues to exist. And like clockwork, the network of loosely bound participants comes together, every ~10 minutes, to update a global ledger of transactions. All of this driven by a deceivingly simple incentive laid out on a ~10 page document published just over ~10 years ago.
Tokenization of Energy: Crypto Mining, Proof of Work and the Reinvention of Energy Financial Markets
Blockchain-based innovations are as much about new technology as they are about new concepts of governance. In particular, the continued proliferation of Proof of Work (PoW) consensus has the potential to fundamentally change the structure and incentives of the energy markets. By translating physically trapped energy into global and digitally mobile value, the energy economics of production and distribution may change.
One of the most common misconceptions about the Blockchain and Digital Assets space is that we’re witnessing “a technology-driven” revolution. While the technology paradigm of distributed ledgers (“DLTs”) certainly brings incremental innovations to the table — mainly increased standardization and electronification — arguably, the bigger transformational innovation comes from new forms of distributed governance and incentive mechanisms.
“Open Finance “ — open-source financial services infrastructure built on public blockchains — may be the next major digitization narrative after Fintech. Driven by the transformation of analog liquidity (deposits in a bank account) to digital liquidity (tokens in digital wallets), the playing field can be leveled for offering financial services. As a result, new profit motives are introduced encouraging innovations not previously feasible.
Technology disrupting finance is a narrative that’s existed for a long time. The dream has always been for tech to digitize financial services, increase competition/access, reduce concentration risks, and improve customer experience. Many sales-pitches have tried to achieve this: from FinTechs, TechFins, API / Open Banking, to Permissioned Blockchains.
Investment managers may benefit from studying digital assets. This begins by understanding the difference between Crypto-currencies vs Crypto-assets, the role of the supply-side in setting the risk profiles for these assets, and how all these things combined introduces the concept of non-sovereign assets.
At their core, investment managers perform the important function of matching savings with investment opportunities. They either employ strategies to invest client cash into market tracking products (passive, index/ETFs) or into products which try to outperform (active, alpha-generating).
For most managers, the past 10 years since the crisis have presented a conundrum. Increasing central bank liquidity (Quantitative Easing), coupled with an increasing shift into passive strategies that do not consider fundamentals in their valuation, has led to a regime change in the global financial market structure. …
Since the introduction of Bitcoin, a lot of attention has gravitated towards the blockchain and cryptocurrency space. However, media headlines constantly focus on the price action of cryptocurrencies and miss the bigger picture. The more interesting story to tell centers around the convergence of many macro narratives which has led to blockchains and new digital economies.
Excitement around the potential of blockchains and digital assets, including cryptocurrencies, can be summed up by a deceptively simple idea:
“Blockchains allow us to create digital jurisdictions that are not defined by geographic borders.”
Blockchain-based digital jurisdictions are conceptually analogous to countries. Like countries that exist today, they have their own underlying markets, incentives, governing mechanisms and assets. Collectively, we refer to these ecosystems as “digital economies”.
Understanding how value is created and accrued within digital economies requires a different way of thinking. One that combines ideas across many disciplines: from computer science, behavioral economics, finance, psychology and political science.
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Scientific economies are globally distributed protocols for transacting in scientific goods and services, powered by the blockchain, and governed through the use of cryptocurrencies that incentivize positive emergent behaviors across the scientific community. A number of exciting projects are incubating on this theme that have the potential to change the landscape for scientific innovation and intellectual property.
A historical perspective of “The Science Stack”
Science, by all measures, is a public good or infrastructure that exists across borders. As a close friend recently noted: “cancer doesn’t care where you live”. Yet, the way that most science-focused funds are set up, implicitly evaluates investments in scientific technologies and marketplaces based on geographical (and sometimes political) boundaries. In fact, the scientific economy works best when there is frictionless collaboration across borders and fair attribution of contribution across the globe.
Historically, scientists have relied on a number of scientific platforms / intermediaries to facilitate collaboration and drive efficiencies. A number of venture investments were made to simplify…
Andrew W
Global Macro
