Bitcoin!
US producer prices rose 9.7% year over year in 2021. The increase was expected to be 9.1%. Here is the chart below:
This type of inflation shows up in raw material costs. It is not part of CPI (consumer price index). However, since (OER) owners equivalent rent, is not included in CPI it is much lower than PPI from the above chart. CPI is 7.5% Which is half what real inflation is considering OEM, food, Gas, energy, and services. In more expensive parts of the US, CPI is less than half of real inflation. This will get much worse. We explain why the rest of this blog.
For those readers who know or follow Charlie Munger and Warren Buffet, here is the latest Charlie Munger quote, he called Bitcoin rat poisen in 2018, click here to view on twitter.
When the pandemic started in 2020. The Fed had stimulus, perpetual QE, and they were buying treasury bonds at alarming rates. The result now, in the US, is a $15 trillion overvaluation of all treasury and mortgage bonds. See the chart below from Dan Moorehead of Pantera Capital:
Due to said overvaluation, the bond bubble will crash soon and when it does, rates would theortically skyrocket:
Here is a quote from Pantera Capital:
“You can see that about a year ago, the Fed completely pushed that up, really crazy. I think the Fed's actions are a complete policy mistake and they are basically about to stop. The Fed is going to have to stop doing what they're doing, and then there's going to be this big air gap in bonds. So, if you have yet to sell your bonds to the Federal Reserve, you should do it. By next month, the last buyer (and only buyer) of bonds will be gone. And that will drive a lot of people to come into alternative asset classes like crypto.”
We still think the Fed will chicken out and raise rates 25 bps. Inflation will get much worse in this case. If they do raise rates substantially, stocks and real estate will take the hit. Since the late 90’s the Fed has held up asset prices and inflated them. A lot of the government corruption has been derived from this. Therefore, a continuation of this corruption and a loss of buying power to ordinary Americans is more likely. Of course, it could go either way. Either way is bad, unless you own Bitcoin. Here are two more charts from Dan Moorehead of Pantera Capital:
With $30 trillion in government debt, debt to GDP at 130%, zero fed funds rate is unimaginable. The Fed will either cram massive rate hikes onto the market, which we seriously doubt they will do. The other direction is a 25 bps rate hike the next 1 or 2 quarters and watch what happens to inflation. CPI should be double digits by sometime in the 3rd quarter 2022! Let’s wait and see what direction unfolds here.
Pensions and Endowments are getting hammered. Raoul Pal talks about this a lot, $200 trillion AUM in Pensions and Endowments. Can they take real yields like this?:
No, they have to move out the risk curve, which means risk on investments like Bitcoin. In layman’s terms they take more risk to make a real return that takes CPI into account. If we are wrong about that, the other scenario also leads back to Bitcoin. Here is how that works. Rates go up much faster than anticipated. Borrowing money gets much, much more expensive. Capex budgets in all industries get slashed. Liquidity dries up as quantitative tightening begins and gets worse over time. This crashes stocks and real estate quickly. A recession or depression unfolds. Since Bitcoin is an inflation hedge it generally does better when the dollar is weak. If rates climb the dollar gets stronger. So Bitcoin would suffer short term but eventually, money would flow into Bitcoin as stocks and real estate returns dry up. Much like pensions and endowments going out the risk curve. It would likely take a little longer. Investors would need the higher returns of Bitcoin despite the volatility, they would go out the risk curve to get these returns. That is Bitcoin. Not to mention the decentralization and censorship resistance. So which way will the Fed go?
St. Louis Fed President James Bullard:
“We don’t want to be disruptive or surprising markets,” Mr. Bullard said. He said he would change his view “if the data went against us here.”
All things considered we see the fact that the US is a debtor nation, not a creditor nation, leading to the Fed decision to raise rates very slowly if at all, inflation increases! Not to mention all of the corruption opportunities that come out of asset inflation. Case in point, Gary Gensler the SEC chairman, click here to view on twitter.
He was also part of keeping any spot Bitcion ETF’s from getting approved yet, in the US. It comes out he was CFO of Clinton’s campaign and oversaw the payments for collusion and treason against a political adversary both while on campaign, and after she lost the 2016 election. Surely more will come out about this. But to think there is no corruption in the SEC, is ignoring glaring facts. So remember the decentralization, censorship and seizure resistance Bitcoin brings to investors.
Institutional investors from Wall Street are likely why Bitcoin is well below the 11 year trend, and is now undervalued:
Bitcoin has only spent 12.7% of its 13 year history, as far under trend as it is now. This next chart shows it looking at this halving cycle compared to previous cycles. Once Institutional investors can no longer get access to the supply of Bitcoin, to trade it, and hold the price down, on the future’s market. That is when the price action will turn parabolic. It could still take several weeks or months. Here is the chart below:
Compared to the 2017 bull market Bitcoin has been less decisive this time and has had two mini bear markets, inside this bull market. Volume has been a missing ingredient and it takes a lot of volume to move the market now vs 2017. So it may not get as high as 2017, in % growth terms. Yet, it will still be great to watch if this does unfold this year. Here is the chart:
In Bitcoin, it is a marathon not a sprint. We have to enjoy the process and the ride even when it takes much longer. Based on history, selling Bitcoin now would not be a wise move. Check out the cup and handle Bitcoin has been printing for over 4 years!:
Bitcoin will make that turn! It will happen at some point. We just don’t know when exactly. We are not advisors and this is not financial advise. We see Bitcoin strengthening now. This consolidation Bitcoin has been in, goes back a long way. Don’t get left behind now, buy Bitcoin!
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