Reality check

Bitcoin started the new year in a dwindling market. The political turmoil in Kazakhstan had an unforeseen impact on the leading cryptocurrency. The global sell-off in the stock market amplified the swing and propagated across the major altcoins. Could this temporary spike in volatilityGreat Britain passed the peak of the Omicron infections, anticipating the end of the fifth wave and maybe of the pandemic. The spring of 2022 could bring the return to normal, to a “new normal”.  COVID  will become endemic and cohabitate with other viruses for several years. Will post-pandemic trigger a reality check?  

The answer is positive.

New macro numbers

The first consequence will be to adjust the macroeconomic figures to the new reality. The way inflation, unemployment or GDP are measured should be changed to fit the new reality. For instance, leading economies delivered growth in 2021, but most of it was generated by under-estimated inflation.

Unemployment is another figure which is most likely underestimated. Many individuals not enrolled in the workforce do not appear in the unemployment statistics. The digital world created new opportunities not actually incorporated in official numbers.

Interest rates

The Federal Reserve should raise interest rates in March to deal with hyperinflation. While the attempt makes sense, it is not sure that it will be successful. The Fed may end in a situation with a high-interest rate, high inflation and low economic growth. Therefore, the concept of interest rate should be reviewed. What is the meaning of interest rates when the money supply is practically infinite?

Investing

The investing frenzy may end slowly. Living out of crypto trading and the stock market may not be viable long-term. Retail investors should realise that trading is not a hedge for inflation. Investing profits could shrink while prices increase.

Life is a series of natural and spontaneous changes. Don't resist them; that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like. Lao Tzu, Chinese philosopher

Market overview

The Dow Jones plunged below 36,000 for the first time this year, marking the second week of negative returns.  The US inflation climbed to 7% in December 2021, a fivefold increase since one year ago. While the inflation increase is slightly diminished, there is no sign that prices will stabilise.

Moreover, the official numbers do not take into account the price boom in real estate, high-end products, electronic or digital products. The actual increase in average prices on a broad range of products and assets should be at least double of the official inflation.

Forex:

GBP/EUR

The latest UK GDP data shows that the British economy recovered to pre Covid-19 pandemic levels. The British pound gained momentum to the Euro, climbing near 1.20, the highest level since the pandemic outbreak. The Omicron wave will have a negative impact on the British economic growth, thereby hindering the GBP. But, overall Britain seems to have moved over Brexit and has good perspectives for the next year.

Focus:

Electricite de France

We covered extensively the energy crisis that hit European countries in December, amid higher gas prices. France is without any doubt a paradox. With its enormous park of nuclear plants, France should be at least in  theory independent and self-sufficient with respect to its electricity consumption. Electricite de France (EDF) has the monopoly over the management of nuclear power supply. Facing low popularity, French President Macron French imposed pressure on the leading power supplier to sell cheaper nuclear power to its competitors to cap the devastating inflation of utilities bills that negatively impacts the purchasing power of the french population.

In a year marked by a presidential election, the French government sacrifices its leading utility to please the public. EDF’s share plunged as much as 25% after the announcement that the company will lose up to 8.4 billion euros in revenue.

Interest rates:

10 year Treasuries

The yield on 10-year Treasury notes soared to 1.758%, continuing its progression that started last autumn. The market expects that the Federal Reserve will raise rates in March in an ultimate attempt to control  inflation.

Moreover, the Fed aims to raise interest rates not once but three or four times a year. Therefore, the yield on 10-year Treasuries could climb as high as 2.25% in the foreseeable future.

Focus:

Netflix

Netflix soared 3.3% in the last trading session on news that the streaming company will inflate its prices for US and Canada based consumers. The sudden jump comes amid a slow decline that started in November 2021. Like all tech companies that boomed during the initial phase of the pandemic, Netflix faces the ceiling of its growth rate. The number of new subscribers is diminishing, and existing customers' capacity has reached saturation.

Moreover, Netflix's business model may lead to its own demise. Its ambition to take over Hollywood involves low-cost productions pushed through strong marketing. Netflix’s key advantage is its significant market share, but it is also its Achilles' heel. Many competitors are coming into the market, aiming to get slices of Netflix’s pie.

Market outlook

The Dow Jones Index continued declining, dipping below the 36,000 support level. The new Omicron variant and the anticipated tapering of bond repurchase can trigger at any moment the beginning of a structural market decline.

Bitcoin ended the week above USD 43,000, recovering from the previous week.

The Gold ounce ended the week into positive territory, closing near USD 1,820. The foreseeable market contraction and the inflationary context are good arguments for a rally in gold prices.