Fiscal Domination Nation

Friday April 12th, 2024 - Issue # 68

(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

Happy Friday!

Among other things I wish I was better at, I wish my memory across the last cycles which were preceded by Bitcoin halvings, was better. If I were able to remember how everything went down I would be a better investor and a better writer because as the saying goes, history doesn’t repeat itself, but it often rhymes. I’ll cut myself some slack though, because bitcoin years are like dog years. Also, this time seems very different (famous last words) — Bitcoin has been institutionalized in the form of ETFs, it broke previous all time highs before the halving which hasn’t happened before, the marginal impact on the rewards being cut from 6.25 to 3.125 is the least impactful to supply/demand factors, and it might just be me but this seems to be the quietest lead up to the halving that I’ve experienced.

Okay, before I kick off, I need to show some love to all my gold bugs…

Very impressive move, and well deserved. While I firmly believe the digital version will continue to eat gold’s breakfast, lunch, and dinner, I’m rooting for much higher gold prices so that you guys have more money to buy BTC. Also, the larger gold’s market cap the better, as it gives “digital gold” more room to catch up.

If you were surprised about the chart above, take this thing in…

In recent months, we've witnessed a striking divergence between spot gold prices and the 10-year, deviating from their historically tight correlation over the past 17 years. This shift is particularly noteworthy against the backdrop of current economic conditions. Real rates—essentially the yields on Treasuries adjusted for inflation—offer a clear indicator of the true return investors can expect after inflation. These rates are crucial for making informed investment decisions, especially in an environment where inflation concerns are prevalent.

As gold prices climb, indicating a rush towards this traditional safe haven amid fears of rising inflation, real rates have been declining, suggesting that nominal interest rates aren’t keeping pace with inflation expectations. This scenario points to a growing investor caution, likely spurred by uncertainties around global economic stability and geopolitical tensions. Additionally, with all eyes on the Fed’s next moves, these rates are even more critical. The Fed’s handling of interest rates and monetary policy can dramatically influence real rates, affecting everything from bond yields to the attractiveness of gold as an investment.

This divergence reflects a broader trend of investor behaviour adjusting to a complex economic landscape, where traditional relationships between assets are shifting. For anyone keeping a close watch on economic indicators, understanding the movement in real rates is key to navigating these turbulent times.

With the stock market at record highs and low unemployment, alongside a Consumer Price Index (CPI) inflation rate stubbornly above the Federal Reserve’s 2% target at 3.5% this week, it would appear counterintuitive—and extremely weak—for the Fed to consider cutting interest rates. Typically, such economic strength would warrant an increase in rates to manage inflation and prevent the economy from overheating. Reducing rates in this environment might signal a lack of confidence in the economy's ability to handle current financial conditions without support, potentially undermining the Fed’s credibility in controlling inflation. Moreover, a rate cut could fuel further inflationary pressures, exacerbating the already high cost of living. Therefore, despite projections that the Fed might lower rates, such a move could be seen as an overly cautious approach that prioritizes short-term market stability over long-term economic health and price stability.

Or…the Fed, who is supposed to be independent from the US government, is watching the USG unravel and probably can’t believe their eyes. Take this in…

Just over a month ago, the Congressional Budget Office (CBO) forecasted a $1.5 trillion deficit for the entire year; now, astonishingly, projections have ballooned to a $2.2 trillion deficit, a staggering 47% overshoot and an amount even surpassing the anticipated deficit for 2031. This means the US government has no financial controls. They have no idea what they're spending or earning. Act accordingly Buy Bitcoin.

The current economic situation is very strange and confusing. Despite the Fed's discussions around potential rate cuts this year, bond markets are acting as if rate hikes are on the horizon, possibly reflecting skepticism about inflation being under control or doubts about the Fed’s commitment to cutting rates. On the other hand, gold prices are ripping, suggesting that investors are positioning for rate cuts, viewing gold as an inflation hedge. The stock market is near all-time highs, indicating investor optimism and confidence in robust corporate earnings, continued economic growth, and possible rate cuts and increasing liquidity in the system by the Fed tapering QT efforts. Oil prices are interesting — they’re rising but it’s hard to tell whether it’s because the markets are optimistic that the economy will avoid a recession, or because of tensions in the middle east — or both. Meanwhile, housing prices continue to climb steadily, driven by persistent demand and ongoing supply shortages, behaving as if interest rates are lower than they actually are. These mixed signals across different asset classes underscore the market's complex navigation through diverse expectations about economic conditions and Federal Reserve policies.

All of the above is made even more interesting as we’re in what is likely to be the most polarizing election year in recent history.

This week Biden told the world that there will be a rate cut this year…lol man, what is going on.

I highly recommend you guys listen to or watch pt. 1 & 2 below which digs into all of the above. Lyn and Luke have been on top of all this stuff for a long time now and lay it all out across these two podcasts.

Well, I guess I didn’t come back to the halving after all. I’ll leave you with this though, how freakin’ cool is it that without anyone doing anything, this ~$1.5T asset class is just going to programmatically cut it’s inflation in half next week 🤯…wild.

Here’s TD, one of the least friendly Canadian banks talking about it in their new commercial:

Have a nice weekend and stay bullish my friends.