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Saturday June 3, 2023 - Issue # 45
(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.)
We’re a couple of weeks away from Summer ‘23 and I couldn’t be more excited for our turn of sun and warmth for the next few months.
There’s clearly lots to discuss since my last note, but the macro has to take center stage again now that the US is in fact, not going to default on their debt…surprise surprise.
^ this is a problem.
Over the last few weeks, investors and other onlookers sat on the edges of their seat waiting to see if the US would default on its debt obligations. As many expected, things got intense kinda/sorta up to the last minute. However, “America always pays its debts,” and as history repeats itself, last night, they passed a bill to raise the debt ceiling for the next two years. The legislation is now on Biden’s desk waiting to be signed into action, presumably today if he’s not too banged up from his fall at the Air Force graduation ceremony yesterday.
So now that the US has side-stepped a default, we have to look at what is next — what’s next ain’t pretty. Essentially, the US Treasury has emptied its coffers and now needs to replenish its Treasury General Account with more bond issuances. It’s important to understand the dynamic between the Treasury and the Fed — the US Treasury funds the government, and the Federal Reserve prints money and holds assets on its balance sheet. As the Fed has pushed forward on its historic tightening cycle, the Treasury has actually been offsetting a lot of the Fed’s tightening by emptying its cash account into the financial system. When the Treasury was no longer able to issue new debt (because of the debt ceiling), they drew down their cash account. Their target is to have $500bn in their cash account at all times and that account has been dwindling down faster than my chequing account after this seemingly never-ending wedding season.
So now that the Treasury’s cash account needs to be refilled and the Fed is still tightening (decreasing their balance sheet, hiking rates), we no longer have that yin and yang that has benefited the markets so far this year. I want to explain what this pending liquidity dilemma could look like but it’s a tad too far outside of my wheelhouse. Click the tweet below to dive in with Lyn Alden.
Let’s move on to Bitcoin and how it might interact with the given macro environment over the course of the rest of ‘23. Personally, I am so bullish. Besides the macro and geopolitical uncertainty holding big money back from Bitcoin until we get a little more clarity, the fundamentals are crazy. On top of the fact that Bitcoin is no longer taken lightly by the most sophisticated investors and as of this week, even its biggest skeptics…
…Bitcoin has also worked its way into the highest level of politics and is now on a new world stage. While currencies, even as strong as the USD are being questioned, high-ranking presidential candidates like Robert F Kennedy Jr., and Ron DeSantis believe Bitcoin is so important to their campaigns that they have gone out of their way to show support to attract a meaningful category of single-issue voters. It’s unbelievable, really.
In times like today, where you can just smell the engine of the money printer warming up to combat whatever precarious position the world finds itself in in the near future after a brutal tightening cycle while debt levels are extraordinary — you may want to adjust your portfolio to include assets that do well when masses run for the exit. Gold and now Bitcoin can be viewed as this sort of metaphorical life raft for when (not if) things get ugly. Comparing the two, Bitcoin has fallen from ~$70k to ~$27k, while gold is barely off its highs. Bitcoin’s market cap is $0.5tn vs. gold at $12tn (24x greater than BTC). The allocation to either of these assets would be found in the alternative bucket of a well-diversified portfolio. As macro investor Hugh Hendry explains in the clip below (skip to 20:30 to jump to gold and then BTC), the alternative asset bucket is $100tn, and there’s no reason why Bitcoin can’t grow to 2% which would be a 4x from today’s levels. There isn’t another asset class that could do the same, so on a risk-adjusted basis Hugh, and other sophisticated investors like BTC over gold for this reason alone.
The richest guy in the world might know a thing or two:
This is really a must read:
Have a nice weekend!