When the global financial crisis struck in 2008, enough funds were moved into US treasuries in order to give them the status of a safe asset. Should a similar market downturn occur today, which asset would assume the role of safe haven? Where will investors go when safety becomes more important than returns?
THE FOUNDATIONS OF US DOLLAR ARE NOT SO STRONG THIS TIME
The trust in US Treasuries lies on tradition, with foundations firm enough that distressed capital flooded into the US rather than out of it when the housing credit market caved in. Today, the US is facing a different economy and financial environment. The current US president’s actions do not effect the confidence in USD and US economy favourably. Disagreements with international institutions, dabbling in trade wars, government shutdowns, and the balance of power between the two political parties are the likely deterrents for investors as opposed to 2008. Of course, one cannot rule out the possibility that a knee-jerk reaction of portfolio managers would lead to the same scenario, but let us look at some possible alternatives.
EURO AND OTHER CURRENCIES AS ALTERNATIVE?
The Euro, the second most used currency of the world, is not without its own troubles. Germany as the core economy of the EU has recently foreseen a slow-down of growth in 2019 and a survey revealed the confidence of German investors at a four-year low. The Italian banking crisis is far from over, with the ECB ready to step in to prevent systemic crisis. The absence of a finalized Brexit deal exerts additional negative pressure on the future of Euro, and also rules out Great Britain as a safe haven for capital flight.
China comes to mind next as an economy with ample reserves and a substantial market for public debt. But with a history of capital controls and unpredictable measures of Chinese authorities, not to mention the suspicion that the country’s official economic statistics are not to be entirely trusted, investors show little inclination to move their funds into Chinese securities.
Japan may be more attractive than China, as it’s public debt market is second only to the US. The great deterrent here would most likely be the prohibitively high government debt, currently at 250% of the country’s GDP. The Australian dollar also makes an interesting case, as it is a high volume currency due to the substantial international trade of the country. It is historically more volatile than US dollar or Japanese yen and also more dependent on foreign markets, especially Asian economies with large demand for commodities. Investors sometimes refer to it as “commodity currency” to reflect its unsuitability for the role of safe haven as the demand for Australian exports is likely to shrink during a major global crisis.
THERE IS ALWAYS GOLD?
No discussion about safe havens can circumvent gold. We have already questioned the idea of gold as a store of value, but one can still easily agree that it should be present in diversified portfolios of retail investors as a hedge against corrections. Gold performs reasonably well over longer periods of time, but its volatility often requires one to wait for the price to recover. It seems that its function as a hedge is predicated on a weak US dollar and therefore of limited duration barring some major catastrophe. Moreover, owning physical gold has its own disadvantages, as it is either risky or costly and one has to sell it through a dealer to make it liquid, which again takes time and money.
The absence of a clear-cut safe haven might lead to an inconvenient situation where investors shift their assets at the slightest sign of troubles, thus contributing substantially to the overall volatility of markets.
NEW SOLUTIONS ON HORIZON
With the development of blockchain technologies and cryptocurrencies, attempts to tame volatility have found their expression in a host of stable coins. However, the great majority of them pursue 1:1 tokenization of a major currency, predominately the USD. These conditions subject the coin to the same market forces that are influencing the currency, and therefore do not bring any real novelty to the markets.
The X8 Project is committed to bringing forth a line of products addressing the issue of value preservation. These fintech solutions will be taking advantage of the price fluctuations of major currencies to provide unprecedented protection against value erosion. This unique approach will employ an operating AI that has been tested in a real financial environment and bring something qualitatively different to portfolio risk management.