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| By Juan Villaverde |
Last week, I dove into how the Japanese attempt to strengthen the yen against the U.S. dollar contributed to this latest round of selling.
And now we’ve come full circle. Because one of the unexpected benefits of this is the easing of pressure on other Asian currencies — which have also been rapidly depreciating against the greenback.
Fearing irreversible damage to the yuan, Beijing had been forced to pull back on its own monetary stimulus, despite the Chinese economy’s desperate need for support.
That’s because, in order to fight deflation sparked by the country’s “zero COVID” policies, the People’s Bank of China (PBoC) was among the most aggressive central banks in injecting liquidity into global markets.
This in turn wreaked havoc on the domestic economy — especially the real estate sector:
- Major Chinese real estate developers went bankrupt.
- Countless Chinese households have their savings tied up in unfinished real estate projects from defunct developers.
- While accurate data is hard to come by, estimates suggest that the Chinese real estate bubble could be as large as $50 trillion.
The overbuilding that followed the 2008 global financial crisis as part of Beijing’s economic stimulus efforts led instead to an economy teetering on the edge of massive price deflation.
Last month, a slew of economic data painted a truly dismal picture. From record-low foreign investment ... to freezes in bank lending … to a historic bond rally (signifying a flight to safety), the situation is worsening.
Initially, the Chinese Communist Party seemed content to ignore the crisis. But desperation is now setting in. To stop the bond rally, for example, Beijing is banning investors from buying government bonds.
Which brings us back to the recent rally in the Japanese yen. As the yen strengthened, so did the Chinese yuan.
And this gave the PBoC confidence to inject nearly $100 billion into global markets to stave off deflation in August alone!
As a result, global liquidity is now surging again. And that bodes well for crypto (and other markets) for the rest of 2024.
BTC’s High Correlation with Global Liquidity
Observe the near-perfect correlation between global liquidity and the price of Bitcoin (BTC, “A”). This makes perfect sense when you consider what Bitcoin represents — as a hedge against monetary inflation — and why liquidity is rising.
Bitcoin thrives as a safe haven in times of monetary debasement. And the recent surge in liquidity signals growing market fears of a global recession that could force central banks to devalue their currencies.
We’re already seeing this play out in China, and it’s likely that other nations will follow suit soon.
That’s why gold continues to climb despite predictions of a peak. And it is why Bitcoin is poised to end its six-month corrective phase very soon.
When that happens, we’ll be one step closer to the next bull market rally, which I expect will be a wild ride!
Savvy investors should take the current — relatively — quiet market to adjust their portfolios accordingly.
Best,
Juan Villaverde
