The old joke goes ‘when you are in a hole stop digging.’ This is not a luxury for the US or Europe when it comes to piling up national debts or printing money. It isn’t an option for the world economy either.
There might be light at the end of the Covid tunnel but that twinkle of hope is still a long way a way by the time thatspec of light turns into an exit to the sunlight, the hole in the finances of the global economy will be so large most at still unprepared to yet think about the consequences.
The bond market, which used to be considered a vigilante when it came to monetary policy, is stirring to the prospect of inflation, but under the new mechanism of monetary policy it will ‘no doubt’ be bludgeoned back into its coma with sacks of new cash.
The bludgeon is simple and effective. The bond market wants more interest for its risk of inflation or its indigestion from too much supply, interest rates or specifically yields on bonds rise. The Cenral bank simply buys bonds from the market driving up their price, which is as good as a dividend as far as ther holders are concerned. This drives down interest rates in general and boost the value of the bonds. What the central bank buys bonds with might not be straight cash, but whatever it uses that instrument is heading toward cash creation so its little different from the straight printing of $20 bills.
That cash travels and thank goodness because if it didn’t the financial fiscal and monetary hole being dug by governments would not exist and we would instead be sat in a different smoking crater of a collapsed global economy. Global economic collapses do not end well and surely no one wants landscape painters leading us in an existential fight to the death once again. War is often the outcome of financial collapse so anyone moaning about their current lot should temper their sadness with that thought.
So rather than a rerun of the 1930s or 1790s a deep pit of debt and a flush of currency debasement is much more palatable. Taking the US as an example, it has roughly a 130% debt to GDP ratio right now. You can split hairs but its best to think in scale rather than points. 80%-100% is considered fine, more not so much. The US debt level is heading to 150%, which may be a high estimate or perhaps a low one if things don’t go swimmingly.
At this point predicting the future of what comes next comes down to setting the level where a government and economy can be comfortable with a debt load. That level was 100% and now various economists suggest it can be way higher that that and and as a matter of fact Japan’s is 230%+ (though it has mitigating circumstances in so much as the money is not lent to it by the world unlike the US but instead by its own meek citizens.)
So if the equilibrium point for debt is the old 100% of GDP, then the value of those debts must be either inflated away or real GDP growth must do the rebalancing. At an optimistic 3% growth that would take too long to happen, so it seems inflation must do the job instead, especially as emboldened politicians will be addicted to handouts to the populous during the recovery. Did I say handouts? Sorry I meant stimulus. You could be forgiven in predicting that if 150% debt to GDP was sustainable then politicians will only push that envelope harder still so that the outcome is set as being inflation as it has been for much of the world over the last century.
So squishing all these variables around it seems conservative to imagine 30% inflation in the next 5 years. 6% a year can be fudged down to look less with all those glorious tech baubles getting more powerful and cheaper by the month to average down the embarrassing effect on the price of food and other un-fungible necessities. Assets on the other hand wont be fobbed off and will simply rise by the real rate and perhaps rise further to compensate for the risk of yet more debasement to come.
I think this 5-7% inflation idea is a good benchmark for the next few years but I would be surprised if this little inflation can be gotten away with. 50-100% is my guess with 200% if things go awry again with the skies the limit a small but real possibility if the goal of normality by the mid of 2022 is not substantially reached.
Without doubt Bitcoin has levitated in large part because of this inflation fear, at least $20,000 of the rise can be laid at that door. In my mind that is indicative of a 100-200% inflation prediction.
You do have to believe in the calcuating power of a market to think that, but if you believe markets are good at pricing and you roll in factors like the halvening, it makes sense you conject Bitcoin is calling a strong surge of inflation in the next few years.
That pricing is in, so unless there is a new stimulus plan to top the latest one, inflation should already be priced in. The Crypto market is now worth about $2tr. That is a heavy lump to levitate, so I’m not bullish in the short term. Long term is another matter, over the next 4-5 years I’m bullish for Bitcoin and Crypto, in general, just not at the moment.
But what about Gold?
Gold is in the dumps because jewellery demand is way down and anyone wanting to run for a haven asset that is not technologically challenged is going to plump for the easy access, storage and thin spreads of Bitcoin over the clunkiness and costly transaction issues of precious metals.
However that setup could change quickly.
Gold jewellery demand will come back with the journey back to normality and that will produce a tail wind. If we get a heavy correction in Crypto, and I believe that is inevitable, it will cause a cascade of Gold buying as the herd dashes for the exit of Crypto and looks to find a new hedge..
So the play to me is to watch Bitcoin and buy Gold if it crashes. If it heavily crashes it will of course be time to start acquiring Bitcoin for the long term, but for the short and middle term Gold is the cheap inflation hedge asset as I write. It will depend on your choice of weapons. Some will like the physical metal, some stocks, some ETFs, others Options and some like myself will fancy Crypto Gold trackers like PAXG which I have a stash of.
For those who like a kicker, the precious metal of choice is Platinum. They don’t make much and its going to be core to the hydrogen economy which is the next phase of the global zero-emission economy drive. Even if the deflationists are right, Platinum is going to do well because the world is set on a course for powering itself with renewables and the best way to store energy for when the wind doesn’t blow or the sun isn’t shining is to split water into oxygen and hydrogen and turn it all back into water to generate electricity with the help of platinum catalysts.