2020: Financial Markets in Retrospective

US Tech, Gold, and Bitcoin did very well, whilst the US Dollar and Crude Oil were the big losers of the year.

2020: Financial Markets in Retrospective

Key Takeaways


It is fair to assume that 2020 was a surprising year on the back of a Black Swan event that led us all to hyperventilate at the first sign of sickness, Rudy Giuliani style. To us, 2020 was like an Internet Explorer malware that was supposed to hit in 2012, and whilst it arrived customarily late, global democracies seemed to still rely on free McAfee anti-virus software that everyone constantly forgot to upgrade. Microsoft (read Bill Gates) did warn us about the risks of a malware attack (read pandemic), and some experts did warn us about how this was not just a flu, but we were all too busy trying to figure out if Carole Baskin did, in fact, kill her husband.

The number 21 has some mystic to it (blackjack, the number of spots in a standard die and the age in which US citizens have legal blessing to poison their liver), but before we look forward into next year, let’s have a quick look back at the most important things to remember about financial markets in 2020.

What happened in 2020


#1 – Fiscal spending has taken center stage, which may potentially break the 40-year long disinflationary trend for inflation.

Fiscal measures around the world have taken various forms, from a six-month cut in VAT rate (Germany) to support for innovation (France) to the purchase of corporate bonds or direct helicopter money. All are focused on giving households some cushion to withstand the economic damage created by COVID (or, for many, capital to go long TSLA call options) whilst the vaccine is being distributed. The Biden administration has also planned a $2 trillion investment plan in infrastructure and clean energy to be deployed in the first presidential term, which it expects to generate two million new jobs in the auto industry, construction, and energy sectors.

This level of fiscal spending is necessary to avoid economic contractions, but it comes at the expense of ballooning debt levels, as well as the risk of inflation in the mid-term. Whilst velocity of money (a measure that tracks how quickly money moves around the economy, which is frequently associated with economic growth and thus inflation) continues to be very low, fiscal measures such as direct transfers of money to households have the potential to be significantly more inflationary than the monetary stimulus of Quantitative Easing, with the key difference being how efficiently it reaches the real economy. Stimulus from Quantitative Easing has tended to get stuck on bank balance sheets (due to either the unwillingness of banks to make loans or reluctance of businesses to borrow), failing to reach the economy and generate inflation. With fiscal stimulus, money reaches the economy in a much more direct way – had you ever received a check from the government before? – which could potentially lead to a pick-up in Velocity of Money (how did you spend that government money?), and potentially a rebound in inflation expectation. In summary, whilst the pandemic was clearly a disinflationary shock, it could eventually become the catalyst that justifies the measures needed to finally generate inflation.

#2 – If fiscal stimulus really has the potential to change the inflation outlook, then we might be on the cusp of a commodity super-cycle as well as a generalized allocation move towards inflation-hedge assets like commodities and bitcoin.

Commodities (oil, copper, gold) are real assets that are generally associated with being inflation-hedges (their price rises when inflation accelerates) and should thus benefit from a reversal of the 40-year disinflationary trend. Commodities should also benefit from a lower US Dollar and the growth of the Chinese economy (the only major economy to post positive year on year economic growth in 2020 and the only major market where investors can still find positive real rates), which should help continue to fuel capital inflow. With the current underinvestment in the space (investors have, rightfully so, been focused on other sectors like Tech), and with low inventories keeping the supply side in check, commodities could start a multi-year outperformance. This has already started to happen into the end of the year.

Similarly, the case for bitcoin follows the same narrative as gold (store of value given it’s the most effective way to store value), but in the digital sphere. It is a scarce asset that is uncorrelated to other alternatives, but above all has three massive tailwinds: (1) it is just now being considered as a portfolio allocation candidate by fund managers (2) Wall Street brokers will likely aggressively enter the market given the potential revenue opportunity for them (3) the ecosystem is maturing, and it is now significantly easier to add or trim exposure to the space, both from an institutional perspective as well as a retail one. Bitcoin has some benefits against gold which we’ll explore in our January introduction to the space, but the main difference between both stores of value options is that the gold market is 20x the size of bitcoin, and as such a generalized level of adoption should have a disproportionate impact on bitcoin prices when compared to gold.

#3 – Government bonds do not hedge equity corrections anymore, and investors are now forced to find alternatives.

With bond yields so close to the 0% boundary, equity market corrections cannot be hedged with increases in bond prices. This fundamental change that has mainly occurred this year has great repercussions on asset allocation decisions, and as such we believe that some of the portfolio allocations that have historically been directed towards bonds might now find their way towards gold and gold miners, US Tech, green energy or other alternative assets that might provide investors a more suitable way to hedge their overall equity exposure.

Published in: Markets
Diego Tremiterra

Co-founder and Editor-in-Chief. Covers Markets, Business, and Thematic Oversight. Currently a hedge fund Jr. PM, ex-Goldman Sachs capital markets and startup COO.

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