beautifully written! I'd put a higher percentage on Bitcoin, but that's a matter of taste.
But: I think you can hold bitcoin (or gold) even if you don't believe in their future monetary role. Just another risk asset in your basket, increasingly popular among even large institutions for its unique return profile.
this is why i don't believe gold or silver will carry our future. people see nothing as more valuable than something. so really bitcoin fits the narrative. people really don't think... https://www.youtube.com/watch?v=bYhTFz_SGw0
Why would central banks and governments allow a currency they have little control over? Maybe it's like gold in the US in the 1930 depression. That didn't go well for the private citizen
Yes, gold was allowed. In fact it was mandatory. People didn't WANT to use gold currency just because. Kings (who already had most of the gold/silver in the first place) demanded that people bring taxes to them in the form of precious metals and then used some of theirs to pay their armies. This created circulation and caused goods to be denominated in PM coins (and gave them military power of course, which was the point really).
I would make the argument that it's a bit of prisoner's dilemma. Yes, governments would much rather issue currency that they can control, but the worst outcome scenario is to be forced into a monetary regime that a rival government controls. The non 0% probability comes from bitcoin being that neutral ground (like gold was without the problems outlined above).
Very succinct. A monetary reset = Deflationary event, right? Not done voluntarily by the gov/fed. so hence it requires an external, fairly catastrophic event. WWII was the last one we had. It would have to be global, so that all agree to a reset. Gov/fed could simply cancel out public debt, but that would not change anything. Hence, we need to define what we actually mean by 'reset'. First principle thinking. Higher nominal rates would be a secondary effect only, so is inflation. The first principle would be a redistribution of wealth. A reset in asset prices so that the population at large can again participate in the acquisition of wealth. And this with a declining working population. Easier said than done. Short of such a catastrophic external event, Japanification looks very attractive. Especially if the gov steps up social programs, education, healthcare, and other social transfers to keep social order. The US will find itself in a more and more aggressive competition with China. That has not yet sunk in.
To not sound too sarcastic about digital, I also see war as the most likely cause of any global reset. However I don't see a severe enough war without the possibility of one (or both) of two things, either of which I would see as threatening digital assets: a) EMPs and/or b) computer fuckery on a huge scale, something I envision as the new superweapon, since presumably one could use it without the repercussion of seeing one's cities vaporized in response. Okay, your wallet is offline. But your wallet is also worthless until it goes back online, right? There has to be an "online state", and it has to be uncompromised.
I use 'reset' here as in the clearing, largely by default, of global debts. As to what might happen to cash, it would very much, I think, depend on what cash. Generally in a depression however, cash is a good thing to have. Prices go down to once in a lifetime levels, and people with cash can buy them. Most people don't have cash however, because they are leveraged (have debt) going in.
So when a reset happen cash will be king? I always wondered why Buffet hold $150 Billion in cash .. Why Alf in the article says own real estate with no mortgage?
External shock or better if we choose a new system and transition to it. By the introduction of a new global currency system, one not circulatory, something different than Game A of trade for profit. Something like what I'm writing a book on now: intro at www.Common-Planet.org.
100% agree... Lacy Hunt in his recent interview with Demartino Booth basically gave away that he is for sound money. Gold will eventually take its place back as the only true collateral.
Warren Buffet has gold... You're thinking of Berkshire Hathaway's balance sheet. There is no gold there. See Warren Buffet's quote on gold, then compare it to what his father said about gold.
"It gets dug out in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - Warren Buffet
"I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it, unless you are willing to surrender your children and your country to galloping inflation, war and slavery then this cause demands your support. for if human liberty is to survive in America, we must win the battle to restore honest money. There is no more important challenge facing us than this issue -- the restoration of your freedom to secure gold in exchange for the fruits of your labors." - Howard Buffet - Warren Buffet's father.
In my opinion, the average retail investor preparing a conservative portfolio towards retirement faces two main problems: find a reliable store of value to combat inflation that ALSO provides some yield so our capital works for us. Unfortunately with yields so low and valuations so high, it has become almost impossible to find a decent yield without going to the extreme end of the risk spectrum.
Hi Alf, thanks for your response! The question I have is why has there been declining productivity decline since the 80’s? Has technology not been hugely accretive to productivity growth, just the gains now not filtering down to the workers, but being accrued by the companies and shareholders (being a big driver in inequality)? There is that famous graph that shows productivity growth vs. wages, which went up in tandem until the 70’s but then diverged enormously, however, it depicts continuously growing productivity hence why I don’t fully understand the productivity decline narrative? Any good literature to read on the subject? Thank you!
Thanks Alfonso, really enjoyed this article. all someone has to do in look back in history and look a the empires\countries that held the status of reserve currency and see how it ends. History just repeating over and over. go back and look at the Dutch and British empires. US is near the end of it's Debt Cycle. I like that you brought up Demographics as an aging population is the cause for less output in the economy and also a push on Inflation. Thank again Davin
Great read! I wonder how all this ends, as I 100% agree that politicians are not capable/motivated to take the responsibility and revert the policy. Hence, this should be some "black swan" event. BTC/ETH definitely have >0% probability to take a store of value role, but the problem is that crypto space is way too small (yet) and has been heavily inflated over recent years. So need some correction first.
A great article Alf! One question, however, is are the low bond yields purely as a result of limited growth going forward, largely due to demographics, or are there other embedded reasons? For example, what about the prospect of productivity improving due to the advent - or at least progression - of AI and robotics this decade? If there is marked improvement here and we still have ageing demographics we could see higher growth which could manifest itself in higher bond yields in the future, or am I missing something?
The productivity boost though should encompass the broader economy, so this will probably take decades. And also, it should be big enough to more than offset the demographics headwinds.
It's going to be a tough political sell to have negative Fed Funds rate in the US. Given that constraint, negative 10y US yields would imply a deeply negative inflation and term premium. It might happen, but the probability is not that high.
The ''mean'' of the distribution for 10y US yields over the next 10 years is probably somewhere <1.50%, with a slightly fat left tail.
Who in their right state of mind would want to own a bond of the sovereign with 35 Trillion in debt? Suddenly, at some not too distant point in future it becomes clear pension funds can not meet their future (first) and current (later) obligations
Another great post. I'd be interested in better understanding how planning for this long-term issue overlaps with planning for other long-term risks, like a PRC invasion of Taiwan.
beautifully written! I'd put a higher percentage on Bitcoin, but that's a matter of taste.
But: I think you can hold bitcoin (or gold) even if you don't believe in their future monetary role. Just another risk asset in your basket, increasingly popular among even large institutions for its unique return profile.
Absolutely yes. It's basically a high-beta risk asset with a very low probability but high potential role in a monetary reset.
this is why i don't believe gold or silver will carry our future. people see nothing as more valuable than something. so really bitcoin fits the narrative. people really don't think... https://www.youtube.com/watch?v=bYhTFz_SGw0
Why would central banks and governments allow a currency they have little control over? Maybe it's like gold in the US in the 1930 depression. That didn't go well for the private citizen
Was gold ever "allowed"? Money can emerge because people use it - if it is sufficiently resilient.
Sounds weird but the more time you spend studying it, the more unavoidable the trajectory appears to you.
Yes, gold was allowed. In fact it was mandatory. People didn't WANT to use gold currency just because. Kings (who already had most of the gold/silver in the first place) demanded that people bring taxes to them in the form of precious metals and then used some of theirs to pay their armies. This created circulation and caused goods to be denominated in PM coins (and gave them military power of course, which was the point really).
I would make the argument that it's a bit of prisoner's dilemma. Yes, governments would much rather issue currency that they can control, but the worst outcome scenario is to be forced into a monetary regime that a rival government controls. The non 0% probability comes from bitcoin being that neutral ground (like gold was without the problems outlined above).
Very succinct. A monetary reset = Deflationary event, right? Not done voluntarily by the gov/fed. so hence it requires an external, fairly catastrophic event. WWII was the last one we had. It would have to be global, so that all agree to a reset. Gov/fed could simply cancel out public debt, but that would not change anything. Hence, we need to define what we actually mean by 'reset'. First principle thinking. Higher nominal rates would be a secondary effect only, so is inflation. The first principle would be a redistribution of wealth. A reset in asset prices so that the population at large can again participate in the acquisition of wealth. And this with a declining working population. Easier said than done. Short of such a catastrophic external event, Japanification looks very attractive. Especially if the gov steps up social programs, education, healthcare, and other social transfers to keep social order. The US will find itself in a more and more aggressive competition with China. That has not yet sunk in.
Yes, an external shock is definitely the most likely catalyst. Or a war.
Could you expound on the value of a digital asset if the marginal chance of multiple EMP events was also >0%?
To not sound too sarcastic about digital, I also see war as the most likely cause of any global reset. However I don't see a severe enough war without the possibility of one (or both) of two things, either of which I would see as threatening digital assets: a) EMPs and/or b) computer fuckery on a huge scale, something I envision as the new superweapon, since presumably one could use it without the repercussion of seeing one's cities vaporized in response. Okay, your wallet is offline. But your wallet is also worthless until it goes back online, right? There has to be an "online state", and it has to be uncompromised.
What a reset mean? What happen to holders of current cash in a reset?
I use 'reset' here as in the clearing, largely by default, of global debts. As to what might happen to cash, it would very much, I think, depend on what cash. Generally in a depression however, cash is a good thing to have. Prices go down to once in a lifetime levels, and people with cash can buy them. Most people don't have cash however, because they are leveraged (have debt) going in.
So when a reset happen cash will be king? I always wondered why Buffet hold $150 Billion in cash .. Why Alf in the article says own real estate with no mortgage?
Nice concise article.
External shock or better if we choose a new system and transition to it. By the introduction of a new global currency system, one not circulatory, something different than Game A of trade for profit. Something like what I'm writing a book on now: intro at www.Common-Planet.org.
Unfortunately, it's beginning to look like the later at the moment. And people thought covid was scarey. War when the participants have nukes!!!!
100% agree... Lacy Hunt in his recent interview with Demartino Booth basically gave away that he is for sound money. Gold will eventually take its place back as the only true collateral.
Why Buffet the greatest investor of all time do not own gold then?
Warren Buffet has gold... You're thinking of Berkshire Hathaway's balance sheet. There is no gold there. See Warren Buffet's quote on gold, then compare it to what his father said about gold.
"It gets dug out in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - Warren Buffet
"I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it, unless you are willing to surrender your children and your country to galloping inflation, war and slavery then this cause demands your support. for if human liberty is to survive in America, we must win the battle to restore honest money. There is no more important challenge facing us than this issue -- the restoration of your freedom to secure gold in exchange for the fruits of your labors." - Howard Buffet - Warren Buffet's father.
Clear thinking at its best.
Thank you!
Thank you for the article Alf.
In my opinion, the average retail investor preparing a conservative portfolio towards retirement faces two main problems: find a reliable store of value to combat inflation that ALSO provides some yield so our capital works for us. Unfortunately with yields so low and valuations so high, it has become almost impossible to find a decent yield without going to the extreme end of the risk spectrum.
Indeed
Oil and gas pipeline trusts. check them out.
Love your writing style, no fluff, very clear.
Thank you!
Hi Alf, thanks for your response! The question I have is why has there been declining productivity decline since the 80’s? Has technology not been hugely accretive to productivity growth, just the gains now not filtering down to the workers, but being accrued by the companies and shareholders (being a big driver in inequality)? There is that famous graph that shows productivity growth vs. wages, which went up in tandem until the 70’s but then diverged enormously, however, it depicts continuously growing productivity hence why I don’t fully understand the productivity decline narrative? Any good literature to read on the subject? Thank you!
Thanks Alfonso, really enjoyed this article. all someone has to do in look back in history and look a the empires\countries that held the status of reserve currency and see how it ends. History just repeating over and over. go back and look at the Dutch and British empires. US is near the end of it's Debt Cycle. I like that you brought up Demographics as an aging population is the cause for less output in the economy and also a push on Inflation. Thank again Davin
Great read! I wonder how all this ends, as I 100% agree that politicians are not capable/motivated to take the responsibility and revert the policy. Hence, this should be some "black swan" event. BTC/ETH definitely have >0% probability to take a store of value role, but the problem is that crypto space is way too small (yet) and has been heavily inflated over recent years. So need some correction first.
Indeed. And it might be only a marginal role, who knows. I find it hard to believe 0% is the right asset allocation there.
Absolutely love these 'mini podcasts' you're doing alongside the articles!
Glad you like those!
a must read!
Thank you!
A great article Alf! One question, however, is are the low bond yields purely as a result of limited growth going forward, largely due to demographics, or are there other embedded reasons? For example, what about the prospect of productivity improving due to the advent - or at least progression - of AI and robotics this decade? If there is marked improvement here and we still have ageing demographics we could see higher growth which could manifest itself in higher bond yields in the future, or am I missing something?
Hi Jason, thanks! You didn't miss anything :)
The productivity boost though should encompass the broader economy, so this will probably take decades. And also, it should be big enough to more than offset the demographics headwinds.
"Japan leads the way in this experiment, with the EU lagging by 8 years and the US by 15 years approximately."
I have been saying this for 5-7 years - which begs the question - will the US 10 yr bond yield go negative ?? It isn't a zero likelihood, right ??
But NOBODY has it on their bingo card right now. I'd guess there is a 20% chance it happens by 2025.
It's going to be a tough political sell to have negative Fed Funds rate in the US. Given that constraint, negative 10y US yields would imply a deeply negative inflation and term premium. It might happen, but the probability is not that high.
The ''mean'' of the distribution for 10y US yields over the next 10 years is probably somewhere <1.50%, with a slightly fat left tail.
Who in their right state of mind would want to own a bond of the sovereign with 35 Trillion in debt? Suddenly, at some not too distant point in future it becomes clear pension funds can not meet their future (first) and current (later) obligations
no doubt - of course - would anyone have predicted a negative rate 7 years ago - other than Albert Edwards ??!! ;-)
Another great post. I'd be interested in better understanding how planning for this long-term issue overlaps with planning for other long-term risks, like a PRC invasion of Taiwan.
Sad, but true.
Great macro insights
Thanks!
wonderful and quality macro research for free!
Too kind!