Two opposite ends of the same bubble

The unorthodox times in which we live in monetary policy issues force us to take a closer look at two terms that are obviously related, but with completely opposite dynamics: “traditional inflation” and “reflation of financial assets”.

“Traditional inflation” is associated with an increase in the prices of real goods, for example, coffee, while “reflation of financial assets” is strictly correlated with an increase in the prices of goods with intrinsic value, such as stocks, commodities, real estate or cryptocurrencies.

Interesting things are happening in the world today: a collapse that does not exist, a bubble that does not burst, and the only culprit in all the troubles is liquidity.

Actually, this is something more than reflation, what we see today smells like a global hyperinflation of financial assets of bible proportions, deliberately generated by monetary emission in the hands of the Federal Reserve System. There is no doubt that since 2008, the Fed’s goal has been to stimulate the whole world with false stock indices showing returns that easily exceed 500%.

The dollar has sharply depreciated, but not in relation to traditional currencies, but in relation to financial assets with intrinsic value, including cryptocurrency. And this move was deliberately put forward by the Federal Reserve as the ultimate proponent of the price level.

The biggest bubble ever created by man is when the Fed cuts rates and the party goes on.

For a dollar today, you can buy about the same amount of euros as in 2008, but much less Nasdaq (US technology index) than at the same time. We can say that the dollar has greatly depreciated in relation to assets with intrinsic value.

Consequently, hyperinflationary dilution of the dollar in principle works if a person stays out of the stock market, which in itself indicates a very perverse dynamics in the market.

The Fed is “forcing” to take risks, as it is trying to “kill” the bond market as an alternative to savings, given the brutal drop in rates that we have been seeing not since last year, but since the real estate crisis of 2007.

Conclusion: the market is much higher than optimal, from the point of view of risk acceptance, and, although it retains, it is “anti-liquidation”, and highly “delusional”. This is the world of “zero rate” and four rounds of “quantitative easing” created by the Fed after the collapse of Lehman in 2008.

Of course, the conclusion is also delusional: the Fed destroys certain liquidity markets,

Hyperinflation and Crypto

Maybe Bitcoin, ETH and all cryptocurrencies, which today according to Coinmarketrate.com there are more than 12 thousand who have come to change the world. Some are becoming payment systems, others have brought smart contracts with them, and others are becoming bridges between blockchains. And this is great, as they are the sources of many innovations! But, they can both multiply their current value, and after some time, they can become equal to zero.

Let’s face it: the fact is that this is not an asset class in the traditional sense, but a lottery fee added to the portfolio. It is impossible to maintain a large position, given the monstrous volatility and unpredictability of the driving forces. The truth is that cryptocurrencies wouldn’t be worth what they are worth today if the Fed hadn’t plastered the entire planet with dollars.

It is impossible to play a big chip in the portfolio not only because of its volatility, but also because of the huge uncertainty about the driving forces of these huge price fluctuations, which occur more often than your wife cooks borscht for you.

The truth is, as they like to say today, cryptocurrencies are here to stay. Well, we have yet to see if all of them will survive, or if they will all die overnight to give birth to others. The positive aspect of all this is that the main states of the world, instead of ignoring the crypto phenomenon, are beginning to define the foundations that contribute to some type of reasonable regulation that regulates the basic parameters of behavior. And if this trend continued, cryptocurrencies would really become a panacea.

Time will tell whether central banks will want to maintain an exclusive monopoly on the currency. We will have to wait to see if their own digital currencies (CBDC) will not absorb the original cryptocurrencies in a direct and very Darwinian competition in order to preserve the opportunity to spread total control not only over the financial side of human life. The fight is in full swing, and the decisive battle is ahead.

Remember: from December 2019 to the end of the first half of 2021, BTC fell by 370%, and ETH increased by 1566%.

Regardless of the technological transformation generated by the cryptocurrency world, behind such a rally are all the rallies in risky assets that have been growing since March 2020, when the Fed decided to flood the world with dollars in its historic QE4 (Quantitative Easing 4, or asset purchases due to a huge issue of dollars), and at the same time almost everything was growing uncontrollably. Do you think this is a rash step?

SEC Warns Crypto Investors: “Many People Are Likely to Get Hurt”

It’s true that cryptocurrencies have a particular frenzy and relatively greater sensitivity to the S&P, but what’s important is that cryptocurrencies are part of the global financial asset hyperinflation bubble that started with the S&P lows in March 2020, with the Covid-19 crisis.

Crypto assets at the moment are the most striking example of the current bubble, but not the only one.

Nowadays, when the world of zero rates and mega-quantitative easing reigns everywhere, everything has turned into a nominal bubble that cannot burst in any way. Probably, the Fed’s plan is not to absorb all the issued funds, and that this mega-issue will be liquefied from generation to generation, with some inflation and some annual growth.

A nominal rate of 4% per year for 25 years will lead to the liquefaction of 62% of 2020 emissions. Moreover, in this “zero-rate” world in the United States, even now, allowing for higher levels of inflation, we must get used to an economy in a permanent state of steroids, with short real rates in negative territory. And this applies to the whole world.

In other words, if the short nominal rate is zero, and at the top we have inflation in the US at 4%, it is clear that we will live in a period of megasteroids with a negative rate that strongly supports consumption.

The United States is in a very aggressive process of negative real rates, which is highly distorted in the long run, but in the short term they are “buying” a strong jump in consumption, which is the key to restoring the decline in activity caused by the coronavirus.

The Disappointing Side of the Global Bubble: The Eternal Legend of Gold

From December 2019, that is, two months before the start of the COVID crisis, and until June 2021, GLD (an ETF that copies gold) showed a disappointing accumulated yield of 15%. And this is despite all the forecasts that said that this time gold will outperform stocks, in this unrestrained race against the dilution of the dollar.

This time, as during the previous crisis (2008), gold again lost terribly to the stock market in this schizophrenic race against the dilution of the dollar. Compared to stocks, gold has lost almost everything. Even EEM (an ETF that reproduces emerging capital), which has not had a good period, demonstrates a yield of 24%, easily defeating gold. And all this at the end of the June semester of 2021 to standardize and eliminate short-term noise.

The same disappointment occurred in the previous crisis (2008).

It is quite obvious that gold failed neither in this nor in the previous crisis to effectively hedge (protect) assets from hyperinflation deliberately created by the Fed.

But with Bitcoin, it was the opposite. Having first experienced the “Black Swan” effect, BTC quickly recovered and became a real hedging tool. Investors gradually got used to the idea that Bitcoin is a digital analogue of gold, which surpasses the real one.

Conclusion

Gold always loses in the race against asset reflation. Question: What will be the final destination of BTC, ETH and all cryptocurrencies? Will governments allow them to exist and develop as an engine of innovation, or will they eventually put into action their plan for aggressive protection of the currency monopoly – CBDC, which is trumpeted by all defenders of cryptocurrencies.

Yes, if this happens, then we will witness the destruction of the largest financial bubble in the history of mankind. But it would be better if this did not happen, since the consequences will be mega-destructive.