“Requiem of Dreams” tells the story of four New Yorkers who entered the imaginary utopian world because of smoking *****, but as their drug addiction worsened, the utopian dream was finally shattered. Recently, this kind of monetary policy like the “Requiem of Dreams” version has become a reality. The *****-like stimulus effect of quantitative easing is gradually dissipating. At the same time, people’s dependence on loose monetary policy is being exposed in a subtle but potentially ugly way. The epidemic has further aggravated the interest rates of US and UK government bonds, and they may turn negative in the near future. Many companies are sensitively aware of the possible negative interest rates and the problems exposed, and have begun to find suitable alternative assets and potential stored-value instruments.
Risk buffer strategies are failing
Due to the failure of traditional risk buffering strategies to work well, there has been unusual selling recently in the market. There are many reasons for this situation, but the main reason is that the government and the central bank have adopted unconventional monetary policies (mainly quantitative easing). The central bank’s quantitative easing policy began in 2009 during the last financial crisis, when “bazooka policies” were needed to prevent a severe economic recession. Initially, these expansionary policies helped to re-adjust the company’s asset structure by enhancing the value of assets. In addition, the policy also mandates that money market funds waive commissions to reduce corporate expenditures, but at the same time, this also induces investment institutions and other companies to seek higher returns.
The hunt for higher returns has changed investors’ asset allocation
Since then, this pursuit of higher yields has been driving the demand for fixed income and other yield products, while also depressing the yields of such products. It has become popular like *****, and has recently reached its zenith, and the yield rate of fixed income products is becoming negative. According to Reuters, about 30% of European government bonds currently have negative yields. This has also led to an unprecedentedly high proportion of fixed income assets in investors’ portfolios. If bond prices fall sharply, it may bring huge risks to investment managers.
Data sources: Bloomberg, ICI, CoinShares, as of October 13, 2020
The epidemic has made negative interest rates worse
Negative interest rates are not good news for those who deposit funds. For most countries that have implemented a negative rate of return policy, the affected capital accounts are mainly held by the central bank, which in essence is equivalent to encouraging them to lend instead of retaining excessive funds. This has also led to the transmission of negative interest rates throughout the financial system, such as interbank deposits, corporate deposits and large personal deposits. The epidemic has exacerbated the government’s already very heavy debt burden, and this situation may get worse in the future. At the same time, the epidemic has also led to a significant reduction in the use of cash, and as we move further towards a cashless society, negative interest rates will more easily affect individuals.
Data sources: Bloomberg, IMF, Link, CoinShares, as of November 1, 2020
Challenges of corporate fund management
Traditionally, the corporate finance department is usually responsible for managing the organization’s liquidity risk, financial risk and working capital to support management and business departments. Corporate finance departments with sufficient funds often invest funds in the currency market to make short-term cash investments, rather than leaving them idle in capital accounts. For the European region, since March 2015, it has been very challenging to obtain income from short-term savings or cash investments with negative yields.
European corporate finance departments have to accept the negative interest rate, but for those companies with more international business, they make full use of the interest rate differential between the United States and Europe to reduce losses. At this time, the short-term loan interest rate in the United States is still positive, which is very helpful for these companies, especially when the consensus on the outlook for the dollar is still generally optimistic.
Disillusionment about U.S. monetary and fiscal policy
Since the epidemic began to spread in February, the United States has responded by formulating a stimulus plan that accounts for 13% of GDP, which is much larger than the European plan of 4.3% of GDP. As shown in the monthly chart of London Interbank Offered Rates below, the US stimulus plan has had a significant negative impact on short-term deposit rates.
Data source: Bloomberg, CoinShares, as of November 1, 2020
Since the beginning of this year, interest rates in the United States have fallen from 1.5% to now very close to zero, and the interest rate differential relative to Europe is also rapidly shrinking. The monetary expansion policy has aroused the concern of the corporate finance department: as the company’s income generation accelerates, its monetary purchasing power is declining. This monetary expansion also increased the public’s distrust of the US fiscal and monetary system, and fundamentally changed the outlook of investors and corporate finance departments on the dollar.
The corporate finance department began to look elsewhere
Due to the emergence of negative interest rates and people’s consensus on the poor prospects of the US dollar, corporate finance departments began to seek alternative stored-value assets. Through searching, it is found that few investment products can effectively play this role. Initially, US long-term Treasury bonds were very popular, but in recent months, the correlation between US Treasury bonds and US stocks has become very high, and other traditional safe havens (such as the yen) are also showing their lower defensive characteristics than history.
The result is that under the dollar-dominated situation, there are few stored value assets to choose from. Currently, there are mainly two viable, low-correlation liquid stored-value assets-gold and Bitcoin. Our research shows that Bitcoin is a better diversification tool than gold. In addition, as shown in the figure below, the close connection between Bitcoin and negative interest rate bonds is gradually emerging.
Data source: Bloomberg, CoinShares, as of November 1, 2020
We can see that more and more companies announce that they will allocate Bitcoin as a stored value asset.
Data sources: Bloomberg, Bitcointreasuries.org, CoinShares, as of November 6, 2020
Just like the ending of “Requiem of Dreams”, the corporate finance department gradually became aware of the reality of negative interest rates and began to look for viable alternative reserve assets. As Michael Saylor, CEO of MicroStrategy recently said, as companies begin to think about the world in different ways, every public claim of Bitcoin will be a catalyst for the public to further accept Bitcoin.
