Tuesday, February 16, 2021

It's all about reflation now

Just about the entire world economy is in the grips of reflation. What's reflation? My definition of reflation is when economic activity and prices are all moving higher. Economic growth is returning to almost every country in the world, and almost all commodity prices are rising. Reported inflation is still "tame," but inflation expectations are rising. The Fed has determined that they want inflation to be higher, and they are getting their wish.

This now poses an excruciating dilemma for most investors: while it is certainly nice for prices and economic growth to be increasing, this creates significant risks for fixed income investors, since eventually interest rates will have to rise as well. 10-yr Treasury yields have already risen from a low of 0.5% to now just over 1.3%, but they will have to go much higher still to be competitive with inflation, which will soon be running at a solid 2% per year, on the way to perhaps 3-4%. But as interest rates rise commensurate with the return of inflation, that will subtract significant support from equity prices. And once the Fed decides that inflation has moved up by "enough," whatever this is, then short-term interest rates are almost surely going to rise, and significantly. That's otherwise know as "tight" money, which has traditionally been anathema to the equity market, and eventually to the economy.

The Fed's current monetary policy stance, in short, is not sustainable. Sooner or later they will be yanking the punchbowl. Many observers realize this, but no one knows how long the current situation can last. The Fed has convinced the bond market that short-term interest rates are going to be pegged at extraordinarily low levels for the next two years. I sincerely doubt the Fed will be able to stick to this promise.

And then there is the issue of fiscal policy, which seems almost like a runaway train under the leadership of  President Biden (with an assist from not-so-conservative Republicans). Our national debt is now 100% of GDP and likely to rise further if Biden gets his wish. That sounds outrageous, but it's not really a problem—for now, at least—because the cost of servicing that debt is very low, a mere 2.3% of GDP, thanks to extremely low interest rates (courtesy of the Fed).

The thing to worry about is the direction of fiscal policy, which will almost certainly bring us higher taxes, increased regulatory burdens, and more expensive energy. 

To be fair, higher inflation combined with today's very low interest rates will lighten Treasury's debt burden significantly over time. Treasury reaps a bonanza with every bond it sells, since interest costs are less than inflation across almost the entire yield curve, while inflation lifts income and revenue streams which in turn increase tax revenues. A good deal of today's debt can be paid off with cheaper dollars tomorrow. Of course, that also means that those holding Treasury debt are losing money every year—in the form of lost purchasing power. Bond investors don't like that, but most institutional fixed-income investors don't have the ability to dump bonds in favor of higher-yielding equities. So it's like watching a train wreck in slow motion. 

Unfortunately, it's never a good idea for the public sector to "steal" money from the private sector via an inflation tax. Argentina has been doing that for generations now, and the economy and its people are a wreck. People catch on: capital leaves for safer locations, money is poured into inflation hedges, and long-term investment projects face higher hurdles because of greater uncertainty. The poor and the ignorant among us suffer the most. Already we see commodity prices, real estate values and equity markets levitating. 

Potential disaster is not imminent, but it is certainly on the horizon. No one with foresight is sleeping easy these days.

Some charts to round out the story:

Chart #1

For the past three decades there has been an impressive correlation between 10-yr Treasury yields (the benchmark for nearly all global bond yields) and the ratio of copper to gold prices, as shown in Chart #1. Copper prices rise as global economic activity picks up, and although you might expect gold to rise with inflation expectations, that is not always the case. In fact, it could be argued that gold prices rose some years ago in anticipation of the rising inflation that we are seeing today. Moreover, stirrings of economic life and higher interest rates pose challenges to holding gold, since it pays no interest or dividends and must be stored. This chart suggests that interest rates are only just beginning to turn higher. Copper and nearly every other commodity are up quite strongly since last March; crude oil prices have nearly tripled over the same period. 

Chart #2

As Chart #2 shows, for the past 15 years gold prices have been highly correlated with the price of 5-yr TIPS (the chart uses the inverse of their real yield as a proxy for their price). It also suggests that gold tends to lead TIPS prices. Gold prices started to decline last year, and recently we have seen signs that TIPS prices are beginning to decline (i.e., real yields are starting to rise after hitting the extremely low level of almost -2%). Real yields also tend to rise as economic activity picks up. It all ties together.

Chart #3

Chart #3 shows two measures of corporate credit spreads, which are a good barometer of the outlook for corporate profits. A growing economy and rising prices are good news for most businesses, and the outlook for corporate profits is robust; that's why spreads are quite narrow.

Chart #4

Chart #4 compares the nominal and real yields of 5-yr Treasuries; the difference between the two is the market's expectation for what the CPI is going to average over the next 5 years. Here we see that inflation expectations have soared since last March, and now exceed 2.3%. For reference, the CPI ex-energy has risen about 2% per year for the past decade. 

Chart #5

On the pessimistic side of the ledger we have a big and fairly recent decline in small business confidence, as shown in Chart #5. Confidence soared following the election of Trump in late 2016, and it has almost completely reversed thanks to Biden's promise of higher taxes and more regulations. The economy is is likely to continue growing, but it's not going to be growing at a gangbuster level. I discussed this in my previous post, and I continue to think that 2% annual growth is the best we're going to see for the next several years.

Chart #6

Chart #6 shows how much the current level of air travel has dropped from the same period a year ago (i.e., pre-Covid). Air travel has not improved very well in recent months and is still almost 60% below the levels of a year ago. This speaks to the lack of confidence on the part of consumers and individuals in general. It's reasonable to expect things to improve for the rest of the year, but it will likely take a long time to get back to what used to be "normal" levels.

Chart #7

Chart #7 shows the number of daily new Covid cases in the US as of yesterday. Things are really improving! And not just in the US: most countries around the world are seeing similar improvement, and this can only get better as vaccinations spread. My friend Brian Wesbury has a nice collection of Covid-related charts and factoids here, one of which shows that more than 40% of the US population has most likely already acquired Covid-19 immunity. In the US, daily new cases are down 65% in the past month, and in California, daily new cases are down a whopping 80% over the same period. Why aren't we hearing more about this? This is fantastic news, so why is Biden still preaching doom and why are so many teachers still afraid to go back to school?

Chart #8

Chart #8 shows why Fed tightening has invariably led to recessions. Fed tightening happens when real yields rise (blue line) and the yield curve flattens (red line). Note that every recession on this chart has been preceded by a big increase in real yields and a big flattening or inversion of the yield curve. It should also be clear that these two critical predictors of recession are nowhere close to the point at which we should become worried. As I said before, disaster is not imminent, but it is on the horizon.

Chart #9

Chart #9 shows that the current burden of federal debt is historically low, despite the fact that federal debt equals 100% of GDP, a level not seen since the days of WW II. It's all about today's very, very low interest rates. A cynic might argue that the Fed is keeping interest rates extremely low in order to bail out Treasury and support politicians' urge to pass "stimulus" bills which threaten to add yet more trillions to our national debt. (But do remember that fiscal "stimulus" of the sort that hands out money and subsidies and tax breaks to favored groups and industries does almost nothing to create real stimulus. Real stimulus requires policies which create incentives for people to work and invest more. Sadly, no one is even thinking about genuine stimulus these days. Old-fashioned "stimulus" such as Congress is currently considering will only sap the economy's strength over time.) 

Chart #10

Finally, Chart #10 shows the current state of the equity market. Fear is still out there, but not excessively so, and so prices continue to drift higher. 

Once again I'd like to recommend subscribing to my friend Steve Moore's excellent (and free) newsletter, which you can sign up for here.


Roy said...

“My definition of reflation is when economic activity and prices are all moving higher. Economic growth is returning to almost every country in the world, and almost all commodity prices are rising.”

I think this definition is key to the discussion: country A can have economic growth due to providing massive supply-side growth, which is dependent on the demand-side growth of country B. This is one of the main reason we won't see inflation in the USA rising as fast as expected.

"And once the Fed decides that inflation has moved up by "enough," whatever this is, then short-term interest rates are almost surely going to rise"

They had a chance to take away the punchbowl years ago but they didn't. Isn't it reasonable to assume they will be late this time as well?

"And then there is the issue of fiscal policy, which seems almost like a runaway train under the leadership of President Biden"

It's great to see you waited a whole month before starting to blame everything on Biden (before even any stimulus package pass), compared to other ""conservatives"" who waited only two days to a week.

"Unfortunately, it's never a good idea for the public sector to "steal" money from the private sector via an inflation tax"

Wouldn't it more correct to say, that inflation transfers wealth from asset holders to debt holders? In most countries, that would move wealth from households to companies.

"My friend Brian Wesbury has a nice collection of Covid-related charts and factoids here, and one of which shows that more than 40% of the US population has most likely already acquired Covid-19 immunity."

1. The 40% is percentage with antibodies which does not necessarily mean immunity.
2. The 40% includes a significant percentage due to having received vaccination (including just the first shot).

I'm very optimistic myself, thanks to the vaccines however there's still reason to be vigil: mutations. There are recent news that the south-African mutation has reinfected people who had Covid before, i.e. their antibodies were not sufficient to protect against this new mutation.

New mutations, such as the British one, seem to have greater infection rates with kids, compared to the first mutations.

So far, it seems that some of the vaccines are still good against these mutations.

steve said...

The immunity from having Covid only lasts maybe 90 days. At that point, someone who has had Covid can become reinfected so we'll need a lot of people vaccinated to reach herd immunity-probably about 75%. But it is fantastic news that cases are dropping rapidly. Of course, if you fall into the idiot Trumpster camp this has been nothing but a vast WORLDWIDE conspiracy so it's no wonder cases are dropping.

Fred said...

You don't have to be a Trumpster to acknowledge that lockdowns and mask laws did no translate into better outcomes on Covid metrics. Just do an overlay of New York, California and Florida to see that without harsh lockdowns or mask mandates, Florida did better on per capita death rates and much better on its economy. Most of the current drop in cases is per Farr's law on epidemics. Hopefully the vaccines will stop another large wave of cases.

Scott Grannis said...

Roy, re "Wouldn't it more correct to say, that inflation transfers wealth from asset holders to debt holders?"

That's correct, but in a limited sense. From a macro perspective, the public sector controls the level of inflation and the public sector is the largest single debtor. Inflation works directly to the public sector's benefit by eroding the value of debt and the value of money, both of which are liabilities of the public sector. Only the public sector faces a win-win proposition, while some people in the private sector lose (those who hold money and bonds) and some win (those who hold real estate and equities). Smart actors in the private sector (such as leveraged holders of real estate) win, while the rubes (such as those who don't seek out inflation hedges, preferring to hold cash) lose.

Inflation wreaks a lot of havoc in any economy. Only the public sector comes out a net winner.

As for blaming Biden, I do so only because he has a strong preference for fiscal policies which are anti-growth. Trump's policies (with the notable exception of tariffs) were generally pro-growth, and I cheered them. I have said for a long time that a return to anti-growth policies would be bad for the economy. I'm actually going out on a limb here, because right now the economy is definitely improving, and probably growing at a faster-than 2% rate, which I think is only temporary.

As for the Fed, they started to take away the punchbowl in 2018, but by the end of the year it became evident that they were doing so prematurely (the economy almost slipped into a recession around the end of the year) and so they had to reverse. They misread the signals (eg, inflation expectations were not problematic). The Fed has made many mistakes in the past.

Scott Grannis said...

steve, re Covid. Some speculate that Covid immunity is only short-lived, but no one knows for sure. While I favored Trump's policies, and I speculated that the Dems and the press sought an electoral advantage by overstating the number and severity of Covid cases, there is, as you say, no basis for anyone to argue that the worldwide decline in new cases has anything to do with Trump's departure. Only a nutty conspiracist would think so.

Fred is correct to note that those states with aggressive lockdowns and restrictions (most of which were Democrat-controlled) fared no better than those states (mostly Republican) that remained generally open. As I noted long ago, shutdowns were catastrophically bad without question (the economic and mental health damage that resulted was far larger than any benefits they might bring). If we have learned anything from Covid it is that there is no reason to adopt drastic measures in a futile attempt to stop a virulent virus. One of the worst and most under appreciated results of shutdowns and mask mandates is that we have ceded way too much power over our daily lives (and businesses) to politicians and bureaucrats. This has resulted in deep and lasting damage to our liberties and our economy.

JC from MN said...

Thanks. Great insight. Won't the presumed bear market in bonds going forward still make equities (of the two) the preferred investment choice?

steve said...

Well people let me tell you, I am a Naples, FL resident visiting three of our kids in Seattle, WA as I write this and I can tell you that in Naples they are WAY more vigilant about mask protocol than here in Seattle-which BTW I am giving my kids a rath of s&^t over.

Rob said...

Scott what do you think about the "permanent portfolio" as written about by Harry Browne in his book Failsafe Investing? It consists of 25% each in bonds, gold, cash and equities, and seems to have a very good track record in terms of stability and resilience through very varied economic times. Some people say it's no good now that cash and bonds have been so debased but that doesn't seem to have impacted it's performance yet. Thanks.

wkevinw said...

On lockdowns, masks and other contagion mitigation.

1. first response to lock down and understand the details was the right decision ~2 weeks.
2. After details learned, e.g. protect vulnerable, which generally does NOT include children (different from most of these viruses), opening up with mitigations should have occurred, with some mitigations- distancing, masks, etc. But no 100$ lockdowns.
3. Before vaccines, these mitigations just flattened the curve and saved some of the vulnerable. The virus will run its course- with most of us being infected, if this goes like historically similar events. Locking down will not prevent infections in the long run.

My favorite quote is that the "virus is waiting outside your door when you finish with the lockdown."

That's about as sensible as it can get. Sorry if it goes against the politicized misuse of the word "science" from any side of the argument.

Benjamin Cole said...

Great wrap-up.

I dunno about inflation. I won't say how many decades ago I first began earnestly studying about the threats of inflation, but I have been worried ever since. There was a President named after a car, if that is a clue.

Instead, inflation and interest rates just went lower and lower. Even more so in Japan. Europe too.

Rarely mentioned: Yes, higher rates of inflation and interest rates would hurt bondholders. Call it "theft" if you wish.

Just as bondholders have been rewarded with lower rates of inflation in the last 40 years. Was that "theft" too, or is it a one-way street?

Add on: OK, let us say we get up to 5% inflation for the next 14 years. The national debt would be cut in half (ceteris paribus) and a lot of "theft" from bondholders along the way.

Of course, that would favor income-tax payers, who would have to pay less in taxes, to honor debts.

Well, these are the same people. Wealthy people own bonds and wealthy people pay most of the US income taxes (not payroll taxes).

Then we have the situation of the Fed buying bonds, paying off bondholders, and no inflation either. I suspect a large chunk of the national debt can be monetized without result. See Japan.

If you want to shoot a silver bullet at inflation, try getting rid of property zoning. And decriminalize street vending.

Switching to a system of property taxes, and not wage taxes, might help in the long run also.

Frozen in the North said...

Wow that was fast:

"And then there is the issue of fiscal policy, which seems almost like a runaway train under the leadership of President Biden (with an assist from not-so-conservative Republicans)."

Biden has been in the white house for nearly 30 days -- and it's already "his fiscal policy" thank god you included the "not-so-conservative Republicans".

Scott Grannis said...

steve: re kids wearing masks. All should read this:


" ... forcing a child to wear a mask is a form of child abuse."

The larger issue is that masks and lockdowns make little difference to Covid outcomes. But they are harmful in so many other ways, especially to kids.

Scott Grannis said...

JC from MN: "Won't the presumed bear market in bonds going forward still make equities (of the two) the preferred investment choice?"

It seems the market is suddenly worrying about just what I worried about in this post. Higher bond yields and a tighter-than-expected Fed are bad news for equities. But in the end, interest rates must go higher if the economy is improving and inflation is rising, and the Fed must tighten policy. I've always thought if the Fed does the right thing (i.e., tighten to avoid higher inflation) then that can't be bad for the economy or for equities. It's when the Fed makes mistakes that things go bad for equities. So far it's not clear that the Fed has made a fatal mistake, which is why I've said in the post that while disaster is on the horizon, it's not imminent.

I don't think we are in the early stages of a Fed-mistake episode. I think the market is in the process of sending the Fed a message (the Fed generally follows the market, after all) that keeping short rates near zero for the next two years is not a good idea. The market had traded up a lot, and what we're seeing now is a correction, a return to focusing on the risks that are out there.

In the long run, equities are highly likely to outperform bonds, especially now that bond yields are so low.

HDX said...
This comment has been removed by the author.
steve said...

I'm not going to reopen a discussion on the efficacy of masks but to argue that masks "don't work" is so lacking in cogency as to be completely ignored. An airborne virus has to spread somehow and for it to have infected tens on millions of Americans and probably hundreds of millions worldwide OBVIOUSLY implies that is has spread largely via BREATHING and masks will help in the prevention of infection. No one serious would argue against such simple ratiocination AND no one serious has.

I completely agree that children under age 16 or so are practically impervious to the deleterious affects of Covid but they still could spread it. There is an interesting piece in the WSJ today about herd immunity by end April. Much is not known about Covid and I am skeptical about reaching any conclusions from the significant drop off in cases since vaccinations have started but we're def headed in the right direction.

JC from MN said...

In the past you have noted the demand for money which accounts for the high excess reserves in our banking system. You have surmised that the reason for these high reserves is due to risk averse attitudes among the private holders of these accounts. Recently, and in light of what appears to be a generous impending fiscal policy and improving economy, there have been articles duly noting that these reserves are a storehouse of demand and thus a sure trigger for widespread price inflation. But doesn’t it matter who holds or more precisely owns these reserves? If these reserves are owned primarily by the upper 10% of the wealthy among us and the propensity to consume among this group is inherently low, isn’t the fear of consumer price inflation still a bit overblown?

Frozen in the North said...

I think your Air travel stats are for the US only.

Europe stats are far below at around 30%, Asia Pacific, North America are around 59% for domestic and around 20% for international.

Scott Grannis said...

Frozen: the stats are from TSA, so they reflect passenger traffic at US airports. Some portion of that traffic is going to international locations. I haven't seen those numbers broken down however, but it would be interesting.

Scott Grannis said...

JC from MN: the vast majority of the increase in M2 represents bank savings deposits which pay little or no interest. I doubt that the very rich hold a significant fraction of their wealth in the form of savings deposit, or that they control a significant fraction of those deposits. Moreover, M2 does not include institutional holdings such as large money market funds. In any event, the propensity to consume of the owners of bank savings deposits is not what would drive or influence the rate of inflation. What matters is their willingness to continue to hold a significant fraction of their annual income in the form of savings deposits. If a significant fraction of the owners decide to reduce their holdings, the money they take out of the bank will have to find its way, eventually, into other types of assets (consumer goods, real estate, equities, gold, other currencies ...). And that would serve to raise the level of prices generally throughout the economy.

Rob said...

Scott, I see you have responded to other peoples comments but not mine. It might be more considerate just to tell me that you apparently don't have a view on my question rather than simply ignoring it. As a long time reader of this blog I had hoped for more, although I do notice that whenever I have asked questions relating to your views on investing strategies you usually give me the same cold shoulder
it seems a bit odd. After all this blog is about investing as much as anything. Thanks.

Scott Grannis said...

Rob, re “what do you think about the "permanent portfolio" as written about by Harry Browne in his book Failsafe Investing? It consists of 25% each in bonds, gold, cash and equities.”

Sorry for the slight, but it was unintentional. I’ve probably answered this question in one way or another over the years, but not directly. I think I’ve been clear that cash is a losing investment right now. Bonds are a close second. Gold is far too volatile to be a store of value, and I’ve never discovered any rule for determining its underlying value except for comparing its current price to an average of its long-term, inflation-adjusted average value (which I think is currently about $500-600/oz); by that standard, gold is still very expensive. Equities are the undisputed king of long-term performance, and that’s where I like to spend my time because I am very patient.

Harry Browne’s portfolio is most likely “safer” from a volatility perspective (i.e., less volatile and thus safer, according to portfolio theory), than pure equities, but volatility doesn’t bother me. Bonds and cash look good from an historical perspective (they reduce risk while not subtracting huge from returns because they are had a low correlation to equities), but not looking ahead, since they have such incredibly low yields right now, and thus give an investor hardly any cushion against downside risk.

I am invariably drawn to stocks which are considered to be “very risky” since they exhibit more volatility than the S&P 500. But I think that a strict adherence to low correlation, low risk portfolios can overlook opportunities (e.g., Apple, MSFT, Amazon, Qualcomm) that really pay off in the long run. A smart investor should be able to take less overall risk by buying very risky assets, in other words. I love to find stocks that seem very cheap and unloved if I think they have a chance to outperform in the long run. Good recent example: XOM which was beaten down to incredibly low levels yet paid an >8% dividend because the market thought there was no future for oil consumption.

So to answer your question directly, I don’t find the “permanent portfolio” to be attractive at all. But that’s just because of the way I like to invest, which to many would seem incredibly risky. A great friend, colleague and mentor (thanks, SKL) once told me that I’m a “high conviction” investor, and that is indeed the case. When I believe in something, I buy it when it drops and hold it as long as I think it still has a great future. I”ve suffered gigantic ups and downs along the way, but in the end it’s been worth it.

Rob said...

Scott this answer has "redeemed" all my perceived sleights previously :)
It is a fascinating insight into your investing approach which I will have to mull over for a while because there's a lot to think about! We all have very different abilities to ride out stockmarket storms. You must have a tremendous ability not to lose your nerve when the going gets tough and it has obviously paid off handsomely. Many thanks again for responding.

randy said...

A nuance to Scott's excellent commentary is that an investor needs to also consider their age and when they need to access the assets. Many retirees were devastated in 2008 being fully invested in stocks, and having no choice but to sell at 40% off. If an investor can afford to keep a few years of living expenses in cash / short term fixed income, they have a much better position to be fully allocated to equity with the rest. Very sadly there is not any good options for retirees that cannot afford to do that.

Rob said...

Ps. Sorry if you've answered this before but given that Bitcoin etc are hitting new highs (Bitcoin now has a market cap of one trillion plus) and a lot of people see it as a new, improved version of gold, do you have any interest in it as am investment or a store of value?

Scott Grannis said...

re bitcoin. I have no ability or insights into how to value crypto currencies, so I'm on the sidelines just watching. I think I understand the appeal and utility of blockchain technology, but I have difficulty understanding how an asset that is so incredibly volatile with respect to just about everything could ever be a store of value (i.e., a viable option to cash).

Rob said...

Thanks. I think the volatility problem is being viewed as "normal" growing pains until Bitcoin gets to an appropriate size, at which point it will end up no more volatile than any other currency, or indeed less so. I note some crypto enthusiasts already saying that it's volatility has dropped significantly, or rather it's downside volatility. But I certainly don't have the stomach to do more than dabble at the moment.

steve said...

Completely agree with Scott re Permanent Portfolio and Bitcoin. PP has always struck me as dopey especially the 25% cash and bitcoin is just a head scratcher.

Re bonds; there ARE ways to make $ trading bonds. I was up 33% last year but it requires constant vigilance and an edge. Right now, the only place to be in the bond space are mortgages and who knows for how long. There was an interesting piece in the WSJ asking if 2021 could be the worst year in the bond market ever. Of course, when people say "bond market" they mean GOVERNMENT bonds which I would never touch.

Teton said...

Scott. Amazing post. Given the likelihood of reflation / higher rates, how are you positioning? Banks? Miners? Ag?

HDX said...

If the US dollar becomes worthless -- which is the alleged reasoning behind bitcoin and other crypto-currencies -- the US government would be impotent (if not collapse) because "follow the money". I am not predicting this or anything else, just trying to understand the thinking behind this alleged store of value.

So under such a scenario: society is a mess, communications systems may or may not work, and the US electrical grid will be even less reliable than it is now... so bitcoin is worthless. I know, some guy in France has a shared ledger that proves that I own a bajillion bitcoin. But with shaky electricity and intermittent internet -- who cares? And why would a shop keeper want to exchange a real good for something that only matters when and if the electricity and communications systems happen to work?

I've spent enough time in third world countries to know "promises" that the electrical grid will always work is nonsense. Same with the phones. Even if you have a generator, that doesn't mean all the people along the communication line do. It doesn't mean the shop keeper has it either.

A barter system or outright black market tends to spring up and dominate -- and no one staying off the books is going to trust a shared ledger system accessed via government communications networks.

It seems like the very scenario that bitcoin is meant to address is the scenario in which the stuff is worthless.

What am I missing?

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Frozen in the North said...

HDX What am I missing Re Bitcoins

You are missing that crypto requires the rule of law in any jurisdiction and the ability to transform Bitcoins into "money" for which you can spend it. The fallacy of Bitcoin is to think that the "US system will collapse and Bitcoin will survive" It will not, without a set of laws that respect property, Bitcoin like fiat currency is worthless.

Having a medium of exchange in a lawless environment is equally useless!

HDX said...

Frozen: you seem to be saying that bitcoin is worthless in the very scenario it is supposed to protect?

If the USD becomes like a 3rd world peso / drachma / etc, the US government won't be able to enforce the rule of law... same as all those 3rd world countries where the law is merely a suggestion. In all the emerging market countries I have visited (and my job takes me to a lot of them), people want a stable medium (not something who's price is 40k, no wait 20k, no wait 50k, no wait...). They want something that is difficult to trace (no shared ledgers that can be seized by the "tax man" from the opposition party). They want something that can be exchanged anywhere, not just on a government controlled communication network.

In short, you are telling me that bitcoin won't be there if the USD isn't there.

Gold might work, but its heavy to transport. Dehydrated ramen noodles might work (they are used in prisons). Cigarettes might work. Ramen noodles and cigarettes require expensive soldiers (who might be bought off) to go to each person and seize the items one by one.

Bitcoin is easily halted (any government can block IP addresses at will). if bitcoin interferes with the government collecting "inflation income" (devaluing currency), it will be crushed. Its easy to send soldiers to a DNS root server. Its easy to send soldiers to internet trunk lines.

Bitcoin will never challenge the government's currency monopoly.

Johnny Bee Dawg said...

Bitcoin is currently a great exchange for criminal enterprises, and money laundering.
Money cleaners routinely give up a quarter of their funds thru “fees” and middlemen, so the volatility does not bother them.
In fact, they could actually enhance their returns if it goes the right direction.
Other than that, it’s hard for me to see what “problem” Bitcoin solves. US monetary policy isn’t all that much worse than the rest of the world.
People need currencies to function. They aren’t all going away anytime soon.

Despite all that, it’s definitely a good investment because so many people DO think it solves a problem, and won’t be dissuaded.
Welcome to supply & demand and price discovery. Super strong charts.
And soon the coin “mining” will stop and supplies will stop increasing.
Users and blockchain aren’t immune to government scrutiny. NSA is smarter than they think.

Johnny Bee Dawg said...

Reflation continues, and the “re-open” trade is getting even stronger...

Large Cap is continuing to get spanked by Small.
OEF (Large) up 4% in 2021, IJR (Small) up 18.5%

Value has been crushing Growth since summer. Trend continues.
S&P Value (RPV) up 17.5% in 2021, S&P Growth (RPG) up 4%

Another huge year for investment returns is underway with a bang.

High Beta is getting stronger while Low Vol is getting worse
SPHB is up 22.5% in 2021 while SPLV is DOWN 1%

Apple, Amazon, Facebook all negative this year. (That won’t last)
Free Speech crusher, Twitter, is up 33% in 2021. Duh.

As states re-open and activity increases, all forms of energy stocks are rising.
Especially since President Asterisk JoeBama tries to limit US supply and subsidize the Green.

Out of the 197 Industry Groups IBD ranks by current market relative strength, SEVEN out of the Top 20 are energy related.
2 are alt & solar, 4 are Oil drilling, service & exploration, and one is COAL.
Coal, of all things! Don’t tell Camilla. People making money in Coal stocks will trigger Chief Commander Val Jarrett.

Like Mark Twain said: The report of Fossil Fuels’ death is an exaggeration.
Nat Gas equity fund (FCG) was up 4.75% today to the highest level since Sept 2019.

I just filled up my redneck truck’s 36 gallon tank for the first time since the Coronation at Gunpoint.
Gasoline price is up over 25%. I miss Donald, and US energy independence.
Oh well, Commies gotta eat, too.

Frozen in the North said...


No I am saying that Bitcoin shares the same problems as a fiat currency! So if you invest in Bitcoins in case the "US implodes" you have no more protection -- the fact that property rights are enforced by the government, without governments there is nothing but anarchy...

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FDR Liberal said...

Scott, The graph as to mask or no mask is too simplistic.

A better comparison might be the below link, it extrapolates per capita, Covid tests and positivity results.

In the below link California, Texas and Florida are measured equally.

The upshot is if you don’t est you can’t measure.


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