- Bitcoin recently surged above $8,000 to its highest level in almost a year.
- It’s no coincidence that this occurred as global investors worried about a recession, according to Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch.
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What doesbitcoin have to do with the next recession?
Michael Hartnett, the chief investment strategist atBank of America Merrill Lynch, sees at least one link that’s worth keeping in mind.
Its genesis is a trend that has dogged investors since the end of the 2008 financial crisis: the hunt for yield.
After the last financial crisis, policymakers around the world pumped stimulus into their economies, including massive central-bank purchases of government debt. Those purchases helped keep interest rates low enough to encourage borrowing, spending, and — ultimately — economic recovery.
The flipside of this stimulus for investors was that yields on bonds they bought for safe and steady returns gradually became unappealing. And by mid-2014, bond yields in some major countries were literally falling through the floor andturning negative.
Yields remain near historic lows, and the latest leg down is due to fears that the global economic cycle is about to worsen. Bond prices in the US have been in an uptrend (and yields have fallen) since the fourth quarter as recession concerns have grown.
The recent trade-war escalation and the acute slowdown in the Euro economy have only exacerbated these fears and suppressed yields further. Germany’s 10-year bund — the benchmark debt instrument for the region — stumbled back into negative territory in March for the first time since 2016. And in the US, the 10-year yield has fallen below the 3-year yield twice this year, triggering one of the market’s most reliablerecession signals.
Read more:‘The Ice Age will soon be upon us’: One market bear explains why the next recession will do the unthinkable to US markets
Amid lackluster yields from the safest assets in the world, investors have piled into a “greed trade” that includes $127 billion in corporate and emerging-market debt, Hartnett said in a recent note to clients, citing data compiled by Bank of America Merrill Lynch.
That’s where bitcoin comes into the picture. Hartnett doesn’t explicitly say bitcoin rose because of the so-called greed trade. But he finds it noteworthy that bitcoin’s latest rally occurred as the world’snegative-yielding assets crossed $12 trillion in value for the first time since 2016.
Bitcoin’s surge above $8,000 “confirms belief in world of negatively-yielding debt,” Hartnett said.
Bank of America Merrill Lynch
Make no mistake: This isn’t Hartnett’s way of outing himself as a bitcoin evangelist. In fact, he likened its jaw-dropping run in 2017 to history’s greatest bubbles, including the infamous tulip mania of the 17th century. Right before bitcoin crashed in 2018, a survey conducted by his team showed that large fund managers thoughtbetting on bitcoin was the most crowded trade in the world.
Despite his measured views on the cryptocurrency, Hartnett is not alone in suggesting that investors find bitcoin more attractive during periods of uncertainty. Bitcoin’s wild price swings and unique qualities make it uncorrelated to major asset classes. And broadly speaking, cryptocurrencies represent a loss of faith in central banks and established financial systems.
However, this doesn’t mean investors should go to the extreme of adopting bitcoin as a recession hedge.
“We have long been skeptical of cryptocurrencies’ value in most environments other than a dystopian one characterized by a loss of faith in all major reserve assets (dollar, euro, yen, gold) and in the payments system,” John Normand, JPMorgan’s head of cross-asset fundamental strategy, said in a research note earlier this year.
He continued: “Even in extreme scenarios such as a recession or financial crises, there are more liquid and less-complicated instruments for transacting, investing and hedging.”
But with yields on so many of these assets still historically low — reflecting recession fears — it’s not far fetched to note that bitcoin has benefited from the fear of missing out on higher returns. Or as Hartnett put it, the late-cycle “greed trade.”
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