Cash, crypto and gold
EVERYBODY has got very excited this last few days, because Bitcoin gained about 5% on the back of the 50 basis point drop in the FED rate.
The world and his wife have been shouting that that is the starting gun for the next stage of the bull market. And, of course, it could be. Certainly at Token 2049, the consensus was September needed to be finished before anything good happened. There are a lot of projects coming to market from mid-October on, and anything but a better feeling on the exchanges isn’t going to cut the mustard.
What of the Fed? Will they go for another 50 basis point cut, or only a 25 pointer? Myself I’d like to see a bit of caution (25 basis points, for example) as if they do 50 it might mean things are as bad as some commentators think.
As I keep saying, inflation is not beaten. And I don’t believe Powell has the cojones to emulate Paul Volcker, quite apart from the problem he has with the US Presidential election in November. In the past, the FED didn’t play around in the six-to-nine months before the election.
Things have got faster and less stable as time has gone on, so I’d pretty much bet there will be another cut in November and potentially more in the New Year. But beware – every time the FED has cut by 50 basis points in the last 30 years, a recession has followed. What may alter the course is the immense amount of liquidity sloshing about the system. It might dampen the effects but it won’t alter the course.
What of the UK? Andrew Bailey and his cohorts are (once again) behind the curve. Whilst the FED and Europe are reducing rates, (and now China) it’s beginning to look as if the good old Lady of Threadneedle Street dare not follow suit. Why? Because our new masters have already blown things with their pay awards to non-productive workers.
And by saying that, I don’t in any way denigrate what junior doctors, train drivers etc do. But they don’t actually produce a profit. They are a cost. And the cost has gone up dramatically since the July election, which will almost certainly feed through into higher inflation.
I regret to say it looks as if the UK economy has already stuttered to a halt, and if the stories of the October budget are true, there will be further headwinds for it to navigate.
In all this, might crypto not be the antidote? It could be – but if we really are staring recession in the face, then hard assets are going to be the place to be, not risk-on ones.
In general terms, crypto doesn’t suffer from inflation (as every currency worldwide does and I’ll come back to this) and in fact Bitcoin is currently undergoing inflation of about 1.7%. That, of course, is a lot less than most fiat currencies.
We have been brainwashed by the numbers that get pumped out every month – but what actually is inflation? Think of it this way... If the US treasury prints $1 trillion every 100 days (which it is doing just now) that represents an inflationary rate of 3% plus. Similarly, Bitcoin is only adding about 1.5%. Gold is about 1.5% pa too (3,000 tonnes mined pa versus 190,000 already mined). Oh and in case you missed it, Gold is up about 20% in the last year.
On the face of it, Bitcoin ought to be the best bet as a hedge. But don’t forget the Fed is also doing what is called Reverse Repo. That means the US treasury is offering to buy back money from people it has sold to at a higher price than it sold at. In other words if it sold at say 4.75-5.25%, it is buying back at 5-5.5%.
What does that do? Affects the inflation rate and continues to tighten the monetary aggregates. Remember, Bitcoin pays no interest (neither does gold) but as long as the Fed is keeping the inflation rate up (and you can interpret that any way you like) Bitcoin will continue to struggle.
It has correlated more and more to the real world (sorry, crypto) business cycle. Now, the business cycle appears to be shortening and if that is so, then Bitcoin’s previous cycles are nul and void.
As I always say, crypto has the capacity to surprise. In that case, let’s hope that the next one is a good one.
