Investors have swung wildly between risk-on and risk-off postures, as Sino-U.S. trade tensions rise and fall. While crypto-volatility is still too strong for most investors to stomach, there could be a more reliable refuge for investor value.
At present, equities-averse money has very few places left to go.The Swiss National Bank recently intervened to dampen the price of the safe-haven Swiss Franc (CHF) and keep interest rates negative. The strength of the greenback is not supported by attractive returns and faces trade tension risk.
As central banks run out of levers after a ten-year period of expansion, a recession may mean no fiat currency is safe.
Bitcoin got caught up in the headwinds of recession fears, plunging over seven percent in twenty-four hours. However, stablecoins are not only free from crypto-volatility, they can also yield comparatively high interest. While fiat value dwindles, fiat-valued tokens might have better prospects.
Risk-on, Risk-off… Trump’s Trade War Poses Systemic Risk
Over the past ten years, the U.S. has enjoyed the longest ever modern streak of economic expansion. It hasn’t been characterized by frothy swings upward of GDP. According to the U.S. Bureau of Economic Analysis, annual growth has ranged between one and four percent since the 2008 financial crisis.
Courtesy U.S. Bureau of Economic Analysis, U.S. GDP over the past ten years
The economy has been propped up by cheap money, with historically low interest rates both in the U.S. and elsewhere lending a hand to an economy that was always considered to be at risk of contraction.
Ongoing tensions with China, along with concerns over a no-deal Brexit, sluggish global demand, and the gradual cooling of the Chinese domestic economy, have investors on high alert for falling growth and a stock sell-off.
Well-known Nomura analyst Masanari Takada has warned of a “Lehman-like” plunge in stocks, suggesting that current market conditions are not dissimilar to those that preceded the Lehman Brothers collapse. The analyst identified a genuine risk of “panic-selling by fundamentals-oriented investors and systematic selling by trend-following technical investors.”
Swiss National Bank Clamps Down on Flight to Franc
The CHF has always enjoyed safe-haven status during periods of economic turmoil, but Swiss regulators don’t seem to be warming to the idea of a strong Franc. The SNB’s governing board member, Andrea Maechler, told attendees at an economic conference on Wednesday not to expect a departure from Switzerland’s accommodative stance of negative interest rates:
“We think that the franc remains at a very high value, absolutely. That’s why… we need an expansionist monetary policy… but yes it’s clear there are risks.”– Swiss National Bank governing board member, Andrea Maechler
With downward pressure on already historically low interest rates, inverted bond yield curves, and a falling appetite for equities, there is a dwindling number of asset classes from which investors are confident of earning a return. Even bitcoin has caught on to recession fears, falling back below the psychologically significant $10,000 mark.
Courtesy Coinmarketcap, BTC falls over the past 24 hours
Stablecoins: An Interest-Bearing Option Amid Uncertainty
Crypto lending is a new and fast-growing market. A number of lenders have added stablecoins to their lineup of assets. BlockFi offers 8.6% annual returns on the Gemini Dollar (GUSD). Nexo pays out 8% on any USD-backed stablecoin.
Celsius offers “up to” 10% on GUSD, TUSD, PAX, USDC, and DAI, as well as non-pegged cryptocurrencies. This week, Binance launched 14-day fixed-term crypto lending products, paying 15% on deposits of BNB, 10% on USDT, and 7% on Ethereum Classic. They were fully subscribed within minutes.
For investors not yet convinced of bitcoin’s safe-haven credentials, stablecoin lending could be a viable recession-busting strategy, offering healthy returns in a loose monetary policy environment. There’s still the danger of ‘startup’ risk, insofar as it is a strategy betting on the success of those companies. Those generous rates are also like to erode over time, should borrower demand falter.
For some, the risks may be worth the rewards.
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