Longhorn Investment Team Weekly Insight: NBA Finals Edition (6/3/2019)

We know, we’re a little late with this week’s edition, but so was the Raptor’s comeback last night so it’s fitting. The stock market hasn’t had a May this bad since 2010 – the last year Lebron James wasn’t in the finals. In this edition of the Weekly Insight, we’ll be discussing drivers of the recent slump in the markets.

DJIA: $24,815.04 (-1.41%)

S&P 500: $2,752.06 (-1.32%)

NASDAQ: $7,453.15 (-1.51%)

BITCOIN (BTC): $8,735.17 (+1.67%)

The Bitcoin Comeback

Throwback to 2017 when you were trading bitcoin and bumping Bodak Yellow all day long. What a time to be alive! Since Bitcoin’s peak at $19,783 in December of 2017, it crashed to as low as $3000 in December of 2018, and has rallied over 122% to $8,500 over the past three months. This begs the question: why did bitcoin bounce back harder than the Warriors in the 3rd quarter while the stock market has incurred 6 straight weeks of losses?

What sparked the rally?

  • An April Fool’s joke: On April 1st (the generally accepted date in April in which pranks are permitted), some jokester tweeted that BTC was approved by the Securities and Exchange Commission, which could have triggered bitcoin’s surge. I guess people are still running with the joke?
  • Bitcoin as a Haven Currency: Because bitcoin doesn’t correlate with the stock market or other foreign exchange rates, some speculate that bitcoin has rallied because the market has done so poorly. In other words, people are comparing a digital currency to a traditional “safe asset” like gold or silver. Regardless of whether or not this sort of investor sentiment is a driving force, bitcoin is not intrinsically similar to gold or silver because bitcoin has no intrinsic value and it doesn’t have significant recognition from major governments.

While some people use Bitcoin for actual transactions, merchant services only accounted for 1.3% of total bitcoin activity last year, meaning most people are just using it to trade speculatively or buy illegal stuff. Because bitcoin is so volatile, many analysts argue that bitcoin fundamentally does not serve as a reliable source of currency – it doesn’t offer a reliable store of value and it is hardly used to buy and sell things (that are legal anyway).

Why is Bitcoin so volatile?

  • Scarcity: Because there are only so many Bitcoins available, they’re very scarce, meaning higher demand can easily outpace supply. In other words, the less of something there is, the more people will pay for it – especially if they believe said “thing” has value all of a sudden.
  • Computers: Since a large percentage of bitcoin traders rely on algorithms with preset stops and limits, sometimes cascades of buy or sell algorithms are triggered at once when BTC hits a certain price, which ultimately means the market reacts faster to certain trading metrics.

As we were writing this, BTC fell over 5% in just one hour – that’s why nobody will use bitcoin for normal transactions. Imagine driving to the grocery store to buy groceries with your bitcoin, but by the time you’re checking out you can’t afford them!

Trade War Updates: Things go South

We decided to move trade war discussions to the bottom because they’re getting old, but we can’t talk about the recent downturn without mentioning worsening trade talks with China and the announcement of tariffs on Mexico. Let’s start with this whole Mexico situation, because that’s where we got the pun in our headline from.

Last Thursday, Donald DRUMPF President Trump announced a 5% tariff on all goods from Mexico. That tariff will rise by 5% every month (capping at 25%) until the country “substantially stops the illegal inflow of aliens coming through its territory.”

Big Losers

Detroit: Who else would it be? Almost every US car manufacturer depends on auto parts from Mexico, which is why if the new tariffs hit 25%, vehicles prices would increase by $1,300 on average and production could dip by as much as 18%. How inconvenient! Just as car manufacturers are trying to pivot to the next generation of electric and autonomous vehicles, they get slapped with billions in extra annual costs.

NAFTA’s replacement: Renewed border tensions came about just as congress was beginning to pass the new free trade agreement for North America: USCMA. Nothing derails a trade agreement like instigating a trade war.

Consumers: The FED Bank in New York estimates that total tariffs could cost the average American household over $800 this year.

Unsurprisingly, Mexican President, Andres Manuel Lopez Obrador, warned that if a deal isn’t reached within 10 days, they will retaliate with tariffs of their own.

China Drama Continues

Orange Man’s President Trump’s new wave of China tariffs went into effect last week, and Xi Jinping as retaliated with tariffs of his own. The Chinese government also announced that they would retaliate against the government’s Huawei shutout. The bleak picture for trade negotiations has prompted some hefty selloffs, although the S&P isn’t nearly as low as it was last Christmas.

Mark your calendars for June 8th and 9th, there won’t be any finals games, but the G-20 summit will be on like Donkey Kong (he’s a Nintendo monkey). At the G-20, Trump and Xi Jinping will meet for the first time since talks froze. A recent policy paper signaled that China would be willing to negotiate still as long as policy makers could reach “a fair deal,” so things are still up in the air.

Coming Soon:

We heard the news today; we’ll be giving our takes next week. Stay tuned for big tech’s great reckoning and whatever else happens this week.