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Trends Watch: August 16, 2018

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman
 
This week, Elana talks to Jeremy Boynton, Founder, Pure Crypto.

What is your outlook for crypto?

We are long-term bullish for the following reasons:

  1. Institutional money that is not invested yet, but will be because regulatory hurdles are coming down; qualified custodians are launching and regulated exchanges are launching.
  2. Retail money is still only lightly invested but this too will change with eventual ETF launch(es).
  3. Security tokens will displace Wall Street trading infrastructure to some extent.  Blockchain technology is going to be cheaper, more transparent (regulator friendly) and eventually faster than current settlement speeds of major exchanges.

Bottom line: Blockchain technology is a transformational technology.  But it is still in its infancy at less than $300 billion in total market cap.  (FYI, almost no opinion of short term price action/direction.)

What is your outlook for the economy?

We are in the late stages of the economic cycle currently; the second longest economic expansion in modern American history.  Debt levels are at extreme levels on government, business, and personal balance sheets.  Warren Buffet’s favorite stock market indicators (total stock market capitalization over Gross Domestic Product) is also at an historical high.  See the chart here.

I expect an economic recession and coincident market retrenchment of at least 33% of value broadly in the stock market at some point in the next two years.  That event could also be complicated with rising interest rates on government debt, which would create an unusual negative rate of return in the stock and bond markets at the same time.  Traditional asset allocation, namely hedging stock market exposure with bond market exposure and vice versa, may not work.

I do not expect the actual recession to be on par with the Great Recession or the Great Depression.  However, due to high debt levels --- the market’s price action may be as severe anyway.

Lastly, I believe that on the other side of this “reset,” the economy will exhibit the following characteristics:

  1. An ever-increasing role for the Federal Reserve to “manage” the economy.
  2. Systemically higher debt levels at the government, business, and personal levels.
  3. Accordingly, an even lower rate of growth for the next business expansion.
  4. Consequently, an even larger premium placed on “growth” stories in the stock market.  Higher prices, P/E ratios. 
  5. And an increasing migration toward socialism: large dominant brands that wield massive power economically, socially, and even politically perhaps even without being required to make a profit.  (Think Amazon.)

What keeps you up at night?

Figuring out how to reduce “systemic risk.”  The above narrative implies an ever-increasing correlation between asset classes that used to be less correlated.  Since virtually everything correlates to “1” in a recession/market correction and because that is the only time when true diversification is actually needed, I lose sleep thinking about how to find truly uncorrelated assets to stay diversified in a bad market, while also only holding assets with reasonable positive expectancy in rising markets.

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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