TRAVERSING THROUGH THE INSTABILITY OF STABLECOINS - KALKINE MEDIA MAGAZINE June 2022
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KALKINE MEDIA MAGAZINE
June 2022
TRAVERSING THROUGH THE
INSTABILITY OF STABLECOINS
Copyright © 2022 Kalkine Media Pty Ltd. All Rights Reserved.
ABOUT KALKINE GROUP
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KUNAL SAWHNEY Founder & CEO Kunal Sawhney is the Founder & CEO at Kalkine Group and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian equities market. His knowledge, skillset and vision provided all the perfect ingredients required to start one of the fastest growing equity market research firms across Australia. This was further supported by the aim of channelising energy and enthusiasm towards the stock market into a leading media research firm. Copyright © 2022 Kalkine Media Pty Ltd. All Rights Reserved.
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Note From The
EDITOR
T he ride of crypto investors has
become increasingly bumpy in recent
the first time since World War II, the
capital markets are seeing such a
year of fluctuations and volatility. The
months. The recent crash brought correlation between crypto and stock
down the value of the whole asset markets reached its all-time high
class to US$2 trillion. There was a in 2022, affecting almost all asset
common notion in the market that classes.
stablecoins are the safe digital asset
The UK economy is certainly facing
that maintains a stable valuation.
tough times at present with fears
The May crash mainly due to Terra
of stagflation looming over the
stablecoin was an epic one as it
economy. The pessimism among
wiped out more than US$200 million.
households as well as businesses is
The Luna Terra lost around 100% of
rapidly growing. Our story, Economic
its value, making it almost worthless.
Stagnation, and Inflation: What’s
Our first story this edition, What’s
in store for the UK, talks about the
the future of Stablecoins post crypto
crisis and how the situation can be
collapse? talks about the volatility
tricky with soaring inflation.
in the crypto market and the future
of stablecoins. The cryptosphere is Stagflation occurred in the 1970s
reeling under immense pressure as as a result of monetary and fiscal
retail, institutional, and corporate policies and an oil embargo. The
investors are worried about the term was first coined in 1965 when
future. Bitcoin, which leads the race, British Conservative Party leader Iain
has lost around 55% after touching Macleod in a speech told the House of
its all-time high of US$69,000 in Commons: “We now have the worst
November 2021. of both worlds — not just inflation
on the one side or stagnation on the
At present, the crypto ecosystem
other, but both of them together.”
is complex due to several reasons.
The economic condition severely
The crash was triggered after the US
affects the stock prices and global
Federal Reserve raised the interest
stock markets. In our story, How
rates by half a percentage point in a
will stagflation affect your equity
bid to control spiralling inflation. For
Copyright © 2022 Kalkine Media Pty Ltd. All Rights Reserved.
portfolio, we take a deeper view by almost 1% between October
of the situation and how investors and December. The concern is
should plan their investments. that recovery is not expected so
soon, and Britons would be under
Our story, How Britons can prepare
pressure for some time as the
for a looming recession, talks
budgets will be tight. Hopefully, the
about how rising inflation and the
Boris Johnson government would
cost-of-living crisis can be more
offer support packages, just like the
troublesome in the coming months.
recent £15 billion package to help
A downturn is coming for sure.
the families deal with the soaring
The Bank of England has predicted
household energy bills.
that the UK economy could hit a
pothole later this year, contracting Happy Reading!
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CONTEN T S Copyright © 2022 Kalkine Media Pty Ltd. All Rights Reserved.
C ON T EN T S
01
What’s the future of
02Economic Stagnation and
Stablecoins post crypto Inflation: What’s in store for the
collapse? UK
Crypto markets were in freefall in May. The Economic growth in the UK has been weak
stablecoin market led by TerraUSD crashed lately and inflation levels have been hitting
due to the increased sell-off, eventually the roof, triggering the threat of stagflation.
losing its peg. Manu Shankar takes a close Please read Rishika Raina’s analysis.
look at the recent crash and stablecoins
comeback.
03
How will stagflation affect your
04How Britons can prepare for a
equity portfolio? looming recession
During stagflation, stock markets tend to The UK economy is facing a risk of recession
suffer as companies battle declining sales after the economy shrank in March.
and rising expenses. Abhishek Sharma Recessions are a critical phase for an
writes about the volatile situation and how to economy as they bring job losses, business
invest in such conditions. failures, downturns, and bankruptcies. Priya
Bhandari looks at the details.
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01
WHAT’S THE FUTURE
OF STABLECOINS POST
CRYPTO COLLAPSE?
By Manu Shankar
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Crypto markets were in freefall in May. highs of US$2.8 trillion in November last
Though if we look at the year 2022, year.
crypto and equity markets have been The losses have been so catastrophic
selling off since the beginning of this that it has ricocheted to other markets
year owing to various factors, such as as well, with Nasdaq and Dow feeling
soaring inflation, rising interest rates, the effect of the crypto crash. With the
and the Russia-Ukraine war. Last increasing correlation of the crypto
month, the crypto market registered markets with the stock market, it’s hard
multi-billion losses, reducing the crypto to imagine how the performance of one
market to just US$1.25 trillion from the market segment doesn’t affect the other.
What caused the crypto crash?
The crypto meltdown started with US The stablecoin market was witnessing a
Federal Reserve’s decision to increase highly volatile movement to make things
the interest rates by 50 basis points. The worse. The stablecoin market led by
growing inflation was one of the reasons TerraUSD crashed due to the increased
why the Federal Reserve raised the
sell-off, eventually losing its peg. This
interest rates, thereby heightening fears
that if the inflation rate doesn’t stop, it has a ripple effect on other cryptos, as
could prompt the Federal Reserve to take crypto markets lost billions resulting in a
more drastic steps. “crypto winter” like situation.
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Source: © shutterstock.com
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So, what caused this crypto crash this time around?
The crypto meltdown started with US The stablecoin market was witnessing a
Federal Reserve’s decision to increase highly volatile movement to make things
the interest rates by 50 basis points. The worse. The stablecoin market led by
growing inflation was one of the reasons TerraUSD crashed due to the increased
why the Federal Reserve raised the
sell-off, eventually losing its peg. This
interest rates, thereby heightening fears
that if the inflation rate doesn’t stop, it has a ripple effect on other cryptos, as
could prompt the Federal Reserve to take crypto markets lost billions resulting in a
more drastic steps. “crypto winter” like situation.
Source: © 2022 Kalkine Media®
Terra (LUNA), as it stands, has lost lost its peg briefly before regaining it in
almost 100% in value ever since it a short duration. A similar fate was felt
achieved its all-time high last month or by DEUS Finance’s DEI token, which also
so. It is a substantial change of scene
joined the stablecoin collapse, losing its
for the stablecoin industry, with several
stablecoins losing their peg during May. peg and prompting the investors to
In fact, leading stablecoin Tether had sell off.
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What does losing peg mean?
Stablecoins such as UST, Tether, and But Terra losing its peg prompted
USDC are like bank accounts for the investors to withdraw their funds from
crypto ecosystem whose value is pegged the Terra’s Anchor Protocol, which
to fiat currencies such as US Dollar (on resulted in the massive pullout. This
a 1:1 basis). Stablecoins are designed in created a mayhem-like situation in
a manner that they would hold a fixed the market, with both LUNA and UST
value so that their store value can be combined witnessing a loss of over
relied upon. US$60 billion.
Survival plans
Terra Luna’s founder Do Kwon released upon them, LUNC could provide them
its revival plan and in fact on 25 May with resistance against such incidents,
the Terra 2.0 proposal plan was passed which could also give them better control
by the Terra ecosystem with an aim to over their systems.
revitalise its ecosystem.
Besides, founder Do Kwon in a long blog
The Terra 2.0 revival plan believes stated that the Terra ecosystem will
in a complete rejig by discontinuing work tirelessly to win back the trust of
the stablecoin TerraUSD or UST and
the community and for this, he intends to
rebranding it as Terra Classic (LUNC).
work with the validators and will focus
The move can be considered an on resetting the network’s supply to one
important one as it will give Terra better billion tokens.
control of the system. Although forced
Source: © Inueng | Megapixl.com
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What’s the future of stablecoins?
With the collapse of TerraUSD, other issued by companies — to support
stablecoins are under a microscope. its token.
Tether, a fiat-pegged crypto, has always
been under the radar with many The USDT, in the last week of May,
detractors questioning its reserves. boasted of a market cap of US$82 billion
However, after a settlement with the (£66 billion). However, UDST briefly lost
New York attorney general, Tether had its peg after it had dipped to US$0.97,
revealed that it relied on a bouquet of and despite its recovery, has once again
assets — including commercial paper, fuelled this conversation on reserves
a form of short-term, unsecured debt and its stability.
Source: © Vladsseven | Megapixl.com
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Source: © shutterstock.com
Several experts believe that going their noose around stablecoins. Most
forward, considering the risks, of the regulators such as the FCA and
collateralised stablecoins could SEC are already closely studying the
well define the stablecoin market. A Terra collapse and they may add a few
collateralised stablecoin is backed by a stipulations while drafting the
set of collateral held in a reserve. This regulatory laws.
allows the user a better opportunity to
Also, one of the prominent hurdles
redeem them for any other assets or in
for increased crypto adoption was the
the form of US dollars. Therefore, the
increase in retail investments. The likes
likes of USD Coin (USDC), and DIA, did
of Tesla, Morgan Stanley, JP Morgan
prove to be more resilient during the
Chase, etc., all have invested heavily
Terra crash.
in Bitcoins. Even from the stablecoin
Besides, the Terra collapse could also perspective, the Terra protocol benefits
act as an eye-opener to many crypto largely from retail investors, such as
projects and the industry may see better Pantera Capital and Delphi Digital. But
products being launched in the future. post this stablecoin incident, it may not
be a surprise to see reduced or limited
This has also given food for thought to
participation.
regulators as well as they could tighten
Conclusion
The crypto crash will be an eye-opener of why one must do their market
for many for a long time. Investors and research before entering the market and
enthusiasts would realise that the value
study the trends to make sure that they
of a token can even go to zero if proper
checks and balances are not maintained. don’t make any investment decisions in
TerraUSD’s collapse is a classic example haste.
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02
ECONOMIC STAGNATION
AND INFLATION: WHAT’S
IN STORE FOR THE UK
By Rishika Raina
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The UK economy is certainly facing as it is marching towards being the
tough times at present with fears of advanced nations’ stagflation capital. The
stagflation looming over the economy. pessimism among households as well
Most countries are reeling from soaring
as businesses is rapidly growing. There
inflation and weak growth, but according
to economists and experts, the UK might is déjà vu all over that the stagflationary
experience something even worse situation faced in the 1970s may return.
What is stagflation?
The UK economy is certainly facing as it is marching towards being the
tough times at present with fears of advanced nations’ stagflation capital. The
stagflation looming over the economy. pessimism among households as well
Most countries are reeling from soaring
as businesses is rapidly growing. There
inflation and weak growth, but according
to economists and experts, the UK might is déjà vu all over that the stagflationary
experience something even worse situation faced in the 1970s may return.
Source: © 2022 Kalkine Media®
High inflation and low growth together due to another major economic shock
can be a deadly combination and this time, after the Covid-19 pandemic.
thus have a damaging impact on the The UK economy has been going through
overall economy. The UK experienced a stagnancy in growth while the prices of
stagflationary situation in the 1970s due food, fuel, and other commodities have
to a global oil crisis. Fears of stagflation been hitting the roof lately.
have emerged in the country yet again
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Economic growth in the UK has been economic growth becomes negative for a
weak lately and inflation levels have prolonged period.
been hitting the roof, triggering the
However, a recession would probably
threat of stagflation.
be less damaging than stagflation, as
In addition to the pandemic, Brexit stagflation combines the most damaging
as well as the recent escalation of effects of the recession with the soaring
the Russia-Ukraine war have also prices of staple commodities.
contributed to pushing the country on the
In a stagflationary situation, the disposal
path to stagflation.
income of households falls due to
The UK has been facing the fears of declining wages and lesser jobs.
a recession, which means that the
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Monetary policy tightening
According to the latest ONS data, the (February 2020), the monthly GDP
GDP growth of the country stood at growth increased by 1.2%. Meanwhile,
0.1% in March 2022, after not growing the Consumer Prices Index (CPI) went
at all in February 2022. The contracting up from 5.5% in 12 months to January
GDP growth has sparked the fears of 2022 to 6.2% in February. The CPI had hit
stagflation in the country. However, 7% in the 12 months to March and has
as compared to the pre-Covid levels now reached a 40-year high level of 9%
Copyright © 2022 Kalkine Media Pty Ltd. All Rights Reserved.19
Source: © 2022 Kalkine Media®
in April, as per ONS data released on 18 appears to be the only possible way out.
May 2022. The BoE has recently warned that the
In response to the skyrocketing inflation, inflation level may even cross the 10%
the Bank of England (BoE) has been mark by the end of this year and the UK
going for monetary tightening. Even with economy may potentially shrink in 2023.
the fears of stagflation looming over The UK has been facing the fears of
the economy, the BoE’s Monetary Policy
a recession, which means that the
Committee (MPC) has raised the interest
economic growth becomes negative for a
rate to a 13-year high of 1%. From the
prolonged period.
historic low of 0.1%, the interest rates
have been raised consecutively in MPC’s However, a recession would probably
last four meetings, to 0.25%, 0.5%, be less damaging than stagflation, as
0.75%, and finally 1%. stagflation combines the most damaging
Tightening of the monetary policy is effects of the recession with the
raising the risk of stagflation being faced soaring prices of staple commodities.
by the UK economy. But with the inflation In a stagflationary situation, the overall
levels heavily breaching the BoE’s set income of households falls due to
target of 2%, raising the interest rates declining wages and lesser jobs.
While the economy is contracting, the been declining, hitting its lowest level of
value of the pound is going down. In 1.2393 since the start of the pandemic.
early May, the value of the pound has
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Falling GDP and unemployment
After contracting by 9.4% in 2020 due to growth in 2022. The unemployment rate
the pandemic, the UK economy expanded in the country has fallen below the pre-
by 7.5% last year. According to the Office Covid levels, which is seen as a sign
for Budget Responsibility’s (OBR) latest of economic recovery. Currently, the
economic and fiscal outlook, the growth
unemployment rate in the country stands
of the UK economy is expected to go up
by 3.8% this year, but this is still way at 3.7%, which is the lowest level since
below the earlier expectation of 6% 1974.
However, the unemployment rate to increasing wage inflation, which is
typically has an inverse relationship happening in the UK right now. Wages
with the inflation level. Labour demand are on the rise amid the tightest labour
exceeds the supply during periods of market seen in the UK over decades,
low unemployment, and as the labour
and this has worsened the inflationary
market becomes tighter, employers
are forced to pay out greater wages for situation, nudging the country further
attracting employees. This in turn leads towards stagflation.
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The ultimate sufferers
As per OBR’s recent estimates, the real The ongoing cost-of-living crisis due to
incomes of UK households are set to rising inflation may lead to the greatest
decline by more than 2.2% over the decline in living standards since the
year, which is the highest such fall in 1950s, as per economists. If this
incomes since 1956. Amid the spiralling combination of weak economic growth
cost-of-living crisis, the UK households and ballooning inflation continues for
are facing the brunt of soaring food a sustained period, the UK economy
and fuel bills. According to the National might have to deal with a stagflationary
Institute of Economic and Social situation. The Boris Johnson government
Research (NIESR), around 1.5 million is thus being urged to take the necessary
UK households would face difficulties to steps to support the households
pay their energy and fuel bills over the in tackling the ongoing crisis and
next year amid rising tax payments and preventing them from falling into the
soaring prices. trap of debt and destitution.
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03
HOW WILL STAGFLATION
AFFECT YOUR EQUITY
PORTFOLIO?
By Abhishek Sharma
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Fears of stagflation are growing as and diesel. People are forced to reduce
millions of UK households are facing the expenses as they now have to shell out
biggest squeeze in their pockets as they more money for things than they did
struggle to pay their food and energy a year ago. Necessities like groceries
bills. The demand has outstripped and electricity now cost significantly
supplies, causing prices to rise - from more than ever, leading to what is being
goods in the supermarket to petrol termed the cost-of-living crisis.
Source: © 2022 Kalkine Media®
Stagflation vs Inflation
An economy in trouble would be the get costlier. Usually, it is triggered by
simplest definition of stagflation. a shock and the present situation of
Basically, it is a toxic amalgamation of stagflation can be attributed to the re-
high levels of inflation and stagnant emerging COVID-19 variants, combined
or little economic growth. During
with Russia’s invasion of Ukraine, which
stagflation, business costs rise, job
losses grow, and consumers have have put immense pressure on the
less money to spend even as things global economy.
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In the UK, consumer prices rose by estimates published by the Office for
9% in the 12 months to April, which is National Statistics in May showed that
the highest in 40 years. On a monthly the gross domestic product (GDP) fell
basis, the rise was 2.5% in April 2022,
by 0.1% in March after no growth in
compared with an increase of 0.6% in
April 2021. Meanwhile, the monthly February.
How does it impact the stock markets?
In such situations, stock markets tend considered safe havens for investments.
to suffer as companies battle declining This, however, doesn’t imply that all
sales and rising expenses at the same sectors in equity markets must suffer.
time, eventually leading to shrinking Some stocks have defensive properties
profit margins. The UK is already or a positive connection with inflation,
struggling to recover from the impacts making them more shielded than others.
of the pandemic and Brexit. Aggravating For example, healthcare, utilities,
things, the Russia-Ukraine conflict has consumer staples, etc. tend to be at
sent shockwaves across global markets. an advantage during high inflation
Investors have pulled out money amid and their stocks are likely to hold up
concerns over the impact of the war and comparatively better than others during
uncertainty over how things will unfold economic slowdowns.
in near future. This is because people may hold off
During stagflation, traditional inflation buying a new car or a new house until
hedging assets like commodities and the prices come down, but they will have
gold see a rise in price as they are to buy the essentials in any situation.
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Generally, the best performance during IT, financials, etc. are among the worst-
an economic slowdown is witnessed performing cyclical sectors.
by defensive sectors such as utilities,
In statistical terms, the shielded or
consumer staples, etc. Commodities and
defensive sectors have a market beta
energy stocks tend to perform better as
below 1.0, which means they are less
they are the sources of input costs for
volatile and tend to outperform when
companies and a crucial component of
the market index falls. In contrast, the
inflation indices.
market beta of cyclical sectors is more
On the other hand, cyclical sectors, than 1, meaning they are more volatile,
meaning those which mirror the state and their performance also dips when
of the economy, face difficulties in the index falls.
challenging environments. Industrials,
Source: © 2022 Kalkine Media®
What does this mean for equity investors?
If the Bank of England’s prediction is may be paying more than they would
to go by, inflation may reach 10% by have otherwise.
the fourth quarter of this year. This
means that the situation will continue to Nevertheless, carefully considering
deteriorate in the coming months and the portfolio positions and tactically
investors should be prepared for it. adjusting them may shield the portfolio
during stagflation.
While there are stocks that might
be considered a stagflation hedge, it Diversifying the investments across
is also crucial to know that some of different sectors and companies might
those stocks may have a risk premium be even better. However, it is always
attached to them, meaning that investors a good idea to conduct due diligence
before investing.
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04
HOW BRITONS CAN
PREPARE FOR A
LOOMING RECESSION
By Priya Bhandari
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A recession is when a country between January and March 2022 but
experiences an economic decline. dipped by 0.1% due to the cost-of-living
Recessions are a critical phase for crisis, according to the Office of National
an economy as they bring job losses, Statistics (ONS).
business failures, downturns, and
bankruptcies, which bring a lot of misery Dealing with the Covid-19 pandemic
to individuals, and companies from along with the impact of Brexit, the
expanding and hiring people. The UK situation was already tough for the UK
inflation levels had been surging for the due to supply chain disruptions, labour
past few months. The situation worsened shortage, rise in material costs, and
after Russia invaded Ukraine, further so on.
pushing the increase in prices of energy,
The recent impact of the Ukraine war
food, and commodities.
has led to additional troubles for the UK
The UK economy is facing a risk of economy, and households are the worst
recession after the economy shrank sufferers, facing the rising energy and
in March. The economy grew by 0.8% food bills.
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Inflation can be defined as the depleting The Bank of England has warned that
purchasing power of money, basically the UK economy could plunge into
showing how the prices of goods and recession. The inflation rose to a 40-year
services are increasing in the country. high of 9% in April from 7% in March as
The Bank of England (BoE) has raised the the food and energy prices soared and
interest rates from 0.75% to 1% to tackle the consumer confidence plunged amid
spiraling inflation, which was further fears of recession.
affected by the Russia-Ukraine war.
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Why has inflation risen so much?
Since last year, prices in the UK have During the Covid lockdown, inflation was
risen sharply as the economy started low as people couldn’t go out and spend
recovering from the pandemic slump. their money. But with the easing of
Covid restrictions, the economy started
The lockdown in China and the Ukraine
to reopen, the demand for goods and
war are further increasing the global services started to rise and the shortage
supply chain issues. of basic items made the situation worse.
Oil prices and inflation
At present, fuel costs are the biggest after the Russia-Ukraine war there
contributor to inflation. The Boris was a rapid increase in energy prices.
Johnson government introduced the Following this, the energy cap was
energy price cap in 2019 in a bid to save revised on 1 April. As of now, the average
the consumers from high wholesale energy bills for 18 million households
costs. The scenario was tweaked stand at £1,971 after the rate revision.
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From October, the energy prices could with inflation. Data from the Office for
double, creating more troubles for the National Statistics shows that pay in
struggling Britons. With the sharply the UK increased by 3.8% between
rising cost of living, the average pay November and January, which is far
increase in the UK isn’t keeping pace behind the inflation rate.
What happens in a recession?
While inflation is the increase in the activities due to negative growth. In
prices of goods and services, including economic terms, if there is a drop in the
food, fuel, gas, and other stuff, recession, Gross Domestic Product for two back-
on the other hand, can be defined as to-back quarters, it can be termed a
the period of slowdown in economic recession.
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With the recession, most businesses jobs. In 2008, during the recession,
try to cut costs to save money and unemployment levels peaked at 10%.
there is a risk that people can lose their
Recession, markets, and investors
Recession matters to investors as investors with the hints of a dipping
most spend their money on essentials market might pull out their money, a
and the task of saving for the future few find this as a perfect opportunity
takes a backseat. During the recession to invest in fundamentally strong
period as the markets are volatile, stocks with better prospects for the
stock prices can fluctuate. While some long term.
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Source: © 2022 Kalkine Media®
The market is cyclical, and one should The only silver lining in a recession
not panic and take decisions that could period is as rates escalate and inflation
hurt them in the future. Any decision comes down, prices of goods and
taken in haste can result in harm that services, and our personal savings
cannot be fixed in later stages. boost.
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