Insights – Are we headed for a Recession?

How will the financial and crypto markets be affected? How can you protect your wealth? What will the future look like? Analysts and investors believe a recession is more likely after the US Federal Reserve hiked rates by 75 basis points in mid-June 2022 – its biggest raise in nearly three decades – and committed to delivering more big moves to fight surging inflation. The Central Bank of The UAE has also decided to raise interest rates, following the Fed rate hike.

This was an interesting in-depth conversation moderated by Oliver von Wolff, Co-founder, Crypto Oasis with guest experts Himanshu Khandelwal, Managing Director, Asas Capital Ltd; Michael Mildenberger, Co-Founder, Yieldstar; Michael Mross, Broadcaster, former CNBC presenter.

Oliver von Wolff: In 2021, the US Fed and European Central Bank printed approximately 25% of the total money volume. What was in circulation until then, how has this increased and what has changed?

Himanshu Khandelwal: For the last 40 years we have been in a trend of declining inflation due to two factors. One is massive technological advancements, which has been increasing the productivity globally, and second is the decline of population growth across the Western world. These two megatrends allowed central banks to embark upon a massive quantitative easing plan. They were not fearful of inflation. But this trend (of low interest rates) has now broken, and we are watching it unfold into a new normal.

Germany and US were used to an almost negative interest rates trend and central banks kept printing a lot of money. Politicians did not have the political will to take the tough decisions of raising taxes; and central banks either printed money, took money out of supply or changed interest rates. They tried to keep rates zero and hoped that inflation would not be out of control. We are in the midst the time when financial assets and real assets are getting segregated. Central banks are so hopelessly behind the curve in terms of inflation, and they must raise rates so fast, which is going to lead to asset carnage across the world.

Oliver von Wolff: What are the main indicators showing that we are heading for a recession?

Michael Mross: What the Fed is doing is completely wrong, because if you know how money systems work, you cannot reduce the money supply or else you will get a deflationary shock. I predict that the consequences of the Fed decision will be felt acutely, and they will make a 180 degrees U-turn in the first quarter of next year.

Oliver von Wolff: What are the central banks and governments learning from the MMT Policy?

Himanshu Khandelwal: MMT is modern monetary theory. The central banks manage the yield curve and low interest rates. The Bank of Japan is now the only bank which continues to follow this, and why we see the yen continuously declining. The intention is to artificially keep the interest rates low and maintain the yield curve at an exceptionally low rate. Over the last 20 years, for every recession, the central banks did not have too many options but to print money and to lower interest rates. This has resulted in a situation where financial assets have artificially gone up. We will start seeing social upheavals because as financial assets go up, the income inequality dramatically goes up too. If you study the last ten years in terms real wages, there has hardly been any growth in the US since 1994, but the top 1% has quadrupled their wealth. Effectively the rich are benefiting, causing more socio-political issues. The US is heading into elections in the second half of the year, and we could expect a U-turn from Central Bank.

Oliver von Wolff:  How are the central banks managing the challenges?

Michael Mross: They have no choice. They must print money. When you look back two years ago when COVID began, the US and Europe printed money to manage political problems. In 2020, the ECB balance sheet had €5 billion and now we are at about €9 billion. The same thing happened in the United States – they doubled their balance sheet, which is doubling the money supply. Besides, the ECB and the Federal Reserve, the People’s Bank of China and the Japanese Central Bank did the same thing. So, during the last two years there has been a surplus of 50% plus money supply which has artificially raised the stock market and real estate market. But now the game is over.

You cannot, however, just stop printing and take substantial amounts of money out of the system suddenly. You must keep printing to keep the monetary system going. However, the recent yields are not sustainable, and we must start the downward manipulation of money now before it is too late. But there will be great difficulties, and the central banks are in a dilemma. We are heading towards a perfect storm.

Oliver von Wolff: Can you tell us about investing in the De-Fi space?

Michael Mildenberger: It is like investing in ETFs, meaning that you are not investing in a single asset or company, but in a full set of different assets. These are protocols in the De-Fi space, and it is possible to execute a market neutral strategy on these diversified portfolios. You can design a strategy that insulates you from the volatility of the market. It is algorithm driven, and the machine learns how to allocate liquidity in the best way possible. We are looking to create a financial product that could insulate against these market crashes and volatility, to a certain extent.

Oliver von Wolff:  How do you allocate your portfolio to better deal with volatility and future trends?

Himanshu Khandelwal: A diversified approach is always prudent money management in volatile times. However, these are strange times, with equities and bonds falling together in the last three months – this is rare. Precious metals could be one asset class that to plan against inflation. Keep the cash levels high, so that as soon as markets give you an opportunity, you are ready to get in again.

Oliver von Wolff: Which assets will do better in the long term – digital or traditional?

Himanshu Khandelwal: Personally, in my own portfolio, I have kept a sizable portion in digital assets. You can consider 5% of your assets in this space. I do not think bitcoin is going away, though it may fall a little more. However, the technology has been proven with trillions of dollars transactions in the last ten years. It is the scarcest asset class in the world, so it merits a small allocation.

Oliver von Wolff: Do you think we have reached the peak of inflation and recession, or have we just started?

Michael Mross: I would forecast lower inflation rates next year. The hardest recession is still to come. The big bet for the future is buying bonds. I predict that yields will go down heavily in the next year. We have US$300 trillion debt in the world. They will have to lower the interest rate. If you flood the system with money, people must look for other assets – not only real estate or stocks – but bonds. This is the reason bond prices are falling in Western countries.

Oliver von Wolff: How are we going to store value?

Michael Mildenberger: We are focused in the defi space where we have a market neutral strategy. Is this sustainable? We do not know yet because the tracker only shows for the last 11 months. It is an effective way to park your money until you see what the storm really brings. We are going through another wave of digital transformation, which will create new job and products which we have not even thought about yet. The digital space is becoming more relevant in all areas of our lives and all sectors, like mobility and energy. You can also invest in technology solutions across different industries, which will become the engine of the economy.

Michael Mross:  The Fed policy is a self-destructive path. We will see profound consequences by the end of the year. The stock market is falling about six months ahead of the real economy, and so there will be a worsening situation in the real economy and the central banks will have to rethink their strategy.

Audience: Can the US default? And what is your outlook for gold and silver? Gold is up 500% in the past 20 years.

Michael Mross: The US will never default because they can print as much money as they want. However, it has depreciated by 95% or more since it was established in 1971 and lost its gold peg. Regarding gold, it is always good to have some gold which was money for six thousand years and has proved to stay forever. My gold forecast for the next year is US$10,000 per ounce. I am also very bullish for silver.

Himanshu Khandelwal: The US will not default because it is the only country which has all its debt in its own currency. No other country can claim that. Therefore, it will never default. It will just print more dollars. Eventually there can be a challenger to the dollar – Euro or Yuan. Most countries do not trust China and it has not yet commanded the respect and transparency from its financial system. People do not know how much debt China has internally. Everything is speculation. You cannot become a reserve currency without transparency. Deutschmark was prominent for about 90 years, the pound collapsed in 1914 and since then, the dollar took over since 1971, but I think 99% of the value of dollar has been debased by now. But still 58% of the world’s central bank reserves, are in dollars. This is massive. More than half of all global reserves are in dollars. However, it is down in the last 20 years from 72%…so it’s slowly coming down. China is trying to bring their allies to start trading in their currency, such as African and many Asian countries which are dependent on Chinese debt.