Trump/Reflation Trade Begins to Unwind – International equities delivered a solid quarter as growth in Europe and a resurgence of interest in Emerging Markets helped propel gains. European economies have been resilient in the face of disintegration risks, generating growth near 1.5% per annum and higher headline inflation. Meanwhile, Emerging Markets have benefitted from profit taking in the US and relative valuation advantages as well as a lower US dollar. In North America, the “Trump Trade” has nearly fully unwound with policies proving to be difficult to implement (i.e. Obamacare repeal and tax reform). Canadian markets were impacted by a sharp decline in oil prices with Brent Crude falling $10 per barrel during the quarter to $47.48.
Overall government bond yields were well supported for most of the quarter. Continued accommodative monetary policy, positive economic data and still subdued inflation provided the healthy backdrop.
The Cryptocurrency Craze – Prior to creating money to serve as a medium of exchange, humans traded goods by bartering for products of perceived similar value. Due to their utility, commodities including salt, tobacco and sugar became acceptable currencies followed by gold and silver coins. During the 18th century, the first form of paper currency was introduced by John Law in France. Most paper currencies from the 18th century until 1971 were backed by a physical commodity. However, the monetary system known as Bretton Woods collapsed and the prominence of fiat money rose.
Fiat currencies are a form of money that a government has declared to be legal tender, but is not backed by a physical commodity. Instead, its worth is determined by the faith and credit of the economy (i.e. supply and demand). Central banks control the money supply by purchasing financial assets or lending money to financial institutions. The acceptance of fiat currencies allowed for much larger variations in money supply and correspondingly inflation.
A cryptocurrency is an online version of money. The name is derived from the cryptography, which is used to encrypt transactions and control the production of the currency. It is a strictly monitored process, as it uses blockchain technology. Blockchain is basically an online ledger that keeps a secure record of each transaction all in one place.
Bitcoin was the first and is currently the largest cryptocurrency. The digital currency is traded against the US dollar, yen, euro and every other currency. The value, in theory, of Bitcoin was that the scarcity allows the currency to act as a store of value and the technology behind the blockchain is revolutionary. These two core beliefs aided Bitcoin’s accent from US$100 in 2013 to over US$3,000 today. This type of meteoric rise, known as a parabolic move, occurs from time to time, and usually does not end well. Valeant Pharmaceuticals’ 90% plunge in 2015-16 is a recent example, while the most well known historical craze occurred in 1637, known as the Dutch Tulip Bulb Mania.
The core properties that are essential to the investability of an asset as a store-of-value are scarcity, divisibility, portability and fungibility (interchangeable). Precious metals, such as gold and silver, share these characteristics and it has become more accepted that cryptocurrencies posses these traits as well. With only 21 million Bitcoins available, the digital currency initially passes the scarcity test. However, transaction speed has been slowing due to Bitcoin mining, the mechanism that releases more Bitcoins. Without getting technical, there is a movement to alter the coding for Bitcoin mining. However, by changing these mechanisms one cannot rule out the possibility of other “rules” being altered, such as the number of Bitcoins available. Therefore, the currency cannot irrefutably be deemed as a store of value.
The blockchain was established on the principles of decentralized transactions and an indisputable ledger. While Bitcoin enjoyed the first mover advantage, the technology is being improved or tweaked by other cryptocurrencies. The rise of Ethereum and Ripple are examples of this. Further, blockchain’s disruptive technology is motivating a wide range of industries to develop their own applications. In Financial Services, Visa recently launched its own blockchain for Business-to-Business transactions.
With more than 800 different cryptocurrencies being traded, and the absence of any central authority or regulation, digital currency valuation will continue to be turbulent. We anticipate that nature’s currency, gold, will benefit from the disorder.Download PDF Version