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Investors’ worst nightmare is here

Date: 2022-07-25

We’re in for one of the most daunting weeks in many years, here’s why

A series of events happening in the last week of July could send the markets into absolute turmoil, possibly creating a doomsday event that could send the main markets, especially the main tech indexes and crypto, into a death spiral of unknown consequences.

Evenung sun

Photo by Kym MacKinnon on Unsplash

The destroyer of worlds

On the 6th and 9th of August, 1945, two American Boeing B-29 Superfortress, the Enola Gay, and the Bockscar, respectively, unleashed the two most devastating weapons the world had ever seen on Hiroshima and Nagasaki; the atomic bombs.

These bombs destroyed both cities, leaving Japan no option but to surrender on the 15th of that same month, putting an end to the second great war, World War II.

Years later, in 1965, J. Robert Oppenheimer, by many considered the father of the atomic bomb, recalled in a TV broadcast what he had thought to himself when, days before the Japanese detonations, the Manhattan project managed to test the first detonation of a nuclear weapon on July the 16th:

“Now I am become Death, the destroyer of worlds” — J. Robert Oppenheimer

In that sense, although nothing compares to the sheer destruction those bombs inflicted on humanity, these same words could have been said by the economy’s most daring enemy, inflation.

Inflation destroys economies, and destroyed economies destroy societies

There is no shortage of examples to help us understand how bad inflation — the overall increase of prices, or in other words the gradual decline of the value of a currency — is for society:

  • From the early stages of 1922 to November 1923, the German mark went from 160 marks for one dollar to 4,200,000,000,000 marks for that same dollar. Germans bought bread with shopping carts full of worthless marks. This period of hyperinflation fostered extreme poverty and discontent, a combination that fueled the surge of the Nazis. I think there is no need to explain what happened next.
  • Consumer prices in Venezuela grew at an astounding rate of more than 65,000% from 2017 to 2018. Venezuela, once one of the richest countries in South America, is now one of the poorest and most unsafe countries in the world
  • Zimbabwe’s currency’s hyperinflation period from March 2007 to Mid-November 2008 created extreme hunger and prices doubled every 24.7 hours (every day basically). Zimbabwe is also one of the poorest countries in the world right now.

I hope this gave you an idea of how bad inflation is.

Inflation has increased a lot during this past year

Inflation has increased a lot this past year, as a result of:

  • Huge money printing during the Covid-19 pandemic
  • Historically-low interest rates fueled irresponsible spending from society and especially venture capital markets
  • The aforementioned QE, that enabled governments and corporations to spend cash extremely irresponsibly

But the worst thing is that inflation is self-sustaining.

What this means is that when a company’s costs rise due to inflation, the prices of goods and services they offer also do. At the same time, wages also tend to grow with inflation, as many wage contracts rise according to it. So the cycle spirals as the two key components chase each other upward.

The death spiral continues, as inflation fears encourage money to keep moving. People don’t want to hold cash that is losing value; they want to buy assets before the price increases.

Hence, the rising demand for anything that might be valuable (houses, art, cryptos, etc.) keeps pushing prices higher as more people try to buy before prices get out of reach.

Sadly, inflation is, once again, a threat to the world

Understanding that inflation is a threat that must be dealt with immediately, central banks around the world have stepped in to, allegedly, save the day.

Consequently, in March 2022, markets and investors around the world hold their breath as they listened to Jerome Powell, chairman of the Fed, the United States of America Central Bank, deliver a speech announcing an interest rate hike of 0.25 percent.

At the same time, that same month, the Fed also finished tapering bond purchases. Before this, they, alongside other central banks, were essentially financing the world economy, injecting a lot of liquidity to sustain it, as well as the financial markets. This was known as Quantitative Easing (QE).

QE was an artificial way — in a sense that growth fueled by this method is not sustainable — of sustaining market growth during the dire economic times of the Covid-19 pandemic (although it had been done previously years before).

Markets hate these measures

The desperate measures put into place by central banks have caused that, since the beginning of 2022, markets have fallen off a cliff.

Although inflation, as explained before, hits really hard on a company’s margins and profits, the measures taken by central banks make the job a lot harder for them, as financing becomes more expensive, and also because a tighter monetary policy implied by higher interest rates discourages spending; if consumers don’t spend, company revenues also fall off a cliff.

Adding insult to injury, it must be noted that the Fed’s duty is not to protect the markets, but to ensure low inflation and maximum employment.

Therefore, they won’t hesitate to throw markets and the economy into recession, if that reduces inflation.

Why the last week of July could worsen everything

Now, this is where things get scary.

May I present you the ‘markets could be f**’ menu, brought to you by… — I couldn’t think of a witty name for a restaurant, sorry.

As an appetizer, the last week of July is plagued with earnings reports

The last week of July has a huge deal of milestone events that could define the future of the economy and the tech & crypto markets for the following months or years, as many huge technology companies are presenting their earnings reports.

A series of bad results could signal that we are really entering a dark economic territory for the following months… a territory of high inflation, continuously-increasing interest rates, and companies eroding their profits and margins.

For reference, some of the upcoming July earnings reports you should be looking at, include:

  • Visa, on the 26th of July
  • Google, on the 26th of July
  • Microsoft, on the 26th of July
  • Meta (Facebook), on the 27th of July
  • Amazon, on the 28th of July
  • Apple, on the 28th of July

This is especially relevant for the crypto industry, as crypto markets are very correlated to tech stocks. Bad earnings reports by tech companies are a huge ‘no bueno’ for crypto.

As the main dish, the US could be officially in a recession

Thursday the 28th marks the day that the Bureau of Economic Analysis, also known as the BEA, will announce its first US GDP estimate for Q2 2022. If it turns to be negative, we would be officially entering a recession, as we would be in the territory of what is known as ‘technical recession’.

If the US enters an official recession, and earnings reports, especially those of tech companies, are bad or worse than the analysts’ estimate, we could enter an extremely scary bearish atmosphere that could down spiral all markets into depression.

As a dessert, that same day the Fed could announce another interest rate hike

“Another one” — Jerome Powell, also known as the Dj Khaled of central bankers

If Amazon and Apple’s earnings reports are bad, the US enters a recession and the Fed announces another interest rate hike, all on the same day, the 28th of July could potentially be one of the worst days in the financial markets’ history.

The expectations are not positive. If we take into consideration what other central banks have done recently, we might expect an increase of 0.75% or more. For instance:

  • The expectation with the Bank of Canada was 0.75% and it turned out to be a 1.00% increase
  • The expectation with the European Central Bank was a 0.25% increase and it turned out to be 0.50%

Sit tight

As I always say, please only invest money you are capable of losing. In my opinion, we are in for many weeks of unprecedented uncertainty and, possibly, very high volatility across all markets.

Adding to this, during August many of the Mt. Gox Bitcoins will start to be repaid, which could generate even more volatility in the crypto markets.

In any case, my plan is to avoid investing over these following weeks, as I have no intention of selling anything, and I do feel that there are big chances that the markets will fall considerably over the upcoming months.

However, it must be said that I am not an expert, so I don’t have a clue what direction markets are going — pst, not even the most expert investors have a clue of this, nobody does.

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