A Sleeping Giant Awakes — What is Going on in Financial Markets?

Something big is happening. More than just one thing, in fact. But before I get to them, keep this in mind today (this week, this month, this year): whatever you think is happening is probably happening a lot faster than you expect.

Try to connect the dots. Use your reason. Follow events through to their logical conclusion. And then realise everything is going to happen a lot faster than you imagined.

This is true for exponential change. From a distance, it comes at you pretty slow. The closer it gets, the faster you realise it’s coming. And by the time your senses perceive that it’s on you, it’s blown right past you. If you’re wondering what that looks and feels like, look at the price action in bitcoin in the last 30 days.

On 11 December 2020, it took you US$17,650 to buy one bitcoin. By the end of Friday, 8 January, it took US$41,528. That’s a gain of 135% in in 26 days (and also a faceplant by the US dollar, in BTC terms). Year-to-date, which amounts to six trading days so far, bitcoin is up 42% in US dollar terms. What’s going on?

I’ll come back to that in a moment. But what is going on in the wider world and the world of financial markets? What a loaded question! The answer: everything! Let me give you one example.

While the US Capitol building was under siege on Wednesday, Tesla’s Elon Musk was in the process of becoming the world’s richest man. His net worth — derived largely from his Tesla stock, which soared past $800 per share and a market capitalisation of $830 billion — surpassed Amazon’s Jeff Bezos at $190 billion. Tesla’s market cap is now greater than the entire GDP of Saudi Arabia.

Tesla and bitcoin are two sides of the same coin. They are competing for the job of ‘poster boy’ for this crack-up boom phase of the market. They are not alone, of course. The Dow Jones Industrials are over 31,000. The S&P made a new all-time high last week as well. A rising liquidity tide — and a fear of inflation — is lifting all the stock market boats.

But now I need to remind you of what Japanese Admiral Isoroku Yamamoto said after the Empire of Japan bombed the US naval base at Pearl Harbor on 7 December, 1941. He reportedly said, ‘I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve’. The American aircraft carriers were at sea during the bombing and thus survived it. That would come back to haunt Japan at the Battle of Midway.

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Inflation may be the Biggest Threat in 2021

Did the sleeping giant of the American bond market finally wake up last week? And are the ‘bond vigilantes’ who operate in it now filled with a terrible resolve to push interest rates higher? And might rising US rates — the yield on the 10-year note has doubled from July of last year to Friday’s close — be the pin that pricks the bubble in everything?

Those are a lot of unanswered questions. But the price action in the bond market last week was telling. Real 10-year yields, adjusted for inflation, are still negative. But nominal yields are on the rise. And inflation expectations are on the rise too. This is what I call a ‘pre-incident indicator’ that inflation may be the biggest threat in financial markets in 2021.

This is something me, Vern Gowdie, and Bill Bonner discussed last year while I was locked away on the 25th floor of a Melbourne high rise. We surmised that the fiscal and monetary response to COVID-19 would unleash a wall of money on financial markets. It would be inflationary. Were we right?

In 2020, the inflation was almost entirely confined to financial markets. And it made sense in a way. Certain digital businesses like Amazon actually did MORE business during worldwide lockdowns. The move to work from home, learn from home, eat at home, exercise at home and trade stocks at home was wildly bullish for a handful of firms in the position to profit. And now?

US President-elect Joe Biden is all set to immediately spend trillions more (in money the Americans don’t have) trying to undo the damage to small businesses and the economy from lockdown policies. That’s on top of the $27 trillion the US government already owes. And it doesn’t include a new batch of $2,000 stimulus cheques Washington wants to send out posthaste, to keep the barbarians outside the Capitol gates.

The upshot of all this is that inflation is set to move out of financial markets and into the real economy. When you start sending stimulus cheques once a quarter, why not once a month? Or once a week? Why not do it via a central bank digital currency, delivered via an app on your phone (as the Communists in China have been trialling for the last six months)?

Students of economics will recognise this for what it is: a mashup of helicopter money and voodoo economics. It’s money printing and deficit spending, completely untethered from any monetary anchor keeping the currency sound. It’s no wonder bitcoin is on a tear. Which brings me back to the point I made at the beginning of today’s letter.

Bitcoin, like stocks to a lesser degree, is a lifeboat. It appears to be a way out of the legacy financial system. More importantly, it appears to be the best of a new kind of digital asset class. As money, it’s not controlled by a committee or a government. Its supply can’t increase beyond its programmed limits. And it’s now being more widely adopted by more traditional financial institutions and investors, which explains the massive squeeze up so far in 2021.

Has bitcoin replaced gold as the soundest form of money? This is a question Bill Bonner and I discussed last week in Bill’s quarterly ‘State of the World’ address. Readers of The Bonner-Denning Letter can expect to see that later this week. The short answer, meanwhile, is ‘maybe’.

Gold’s been around for a long time. It has a long track record as a store of value AND a medium of exchange. Bitcoin is the kid on the block, 21st century money for a 21st century world. But how it holds its value in a crisis has yet to be seen. It’s too early to say.

We may find out soon enough. The ‘crisis’ is hard to define now. But there’s no doubt it’s upon us. Negative real interest rates have driven up financial asset prices to unfathomable heights. It’s enough to give a bear vertigo and an impending sense of doom.

But there’s also a crisis at the very heart of the US’ political institutions. The Democrat-controlled Congress looks set to commence impeachment proceedings against outgoing President Donald Trump. The goal, it appears, is to disqualify Trump from running for office again in 2024. But the process threatens to inflame political tensions which are already running high.

Which is the sleeping giant then? Is it the bond market? Or is it Trump himself? Will he go gently into that goodnight at noon on 21 January? It’s only 11 days away. But a lot can happen in 11 hours, much less 11 days. Buckle up.

And remember, whatever you think is going to happen will probably happen a lot faster than you think. Financially speaking, don’t forget to get rich in this bull market, even if it IS a massive bubble. That is, make sure you have a strategy for taking profits or cutting losses if the price action starts moving the other way. When it does, it will be swift and terrible.

In the meantime, here’s one other thing I try to remember at times like this: you control nothing but your own actions and reactions. Everything else — government policy, the opinions of others, the climate, the sun, the stars and the moon — they are beyond your control. Don’t worry about them.

Worry about what you CAN do. And then make sure you do it. It’s the best way to look after yourself and your family when so many other things seem to be flying apart at the seams. And it’s the only thing you can control anyway.


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Dan Denning,
Editor, The Rum Rebellion

PS: Gold has done well with the decline in real rates. When real rates are negative, there is no comparative disadvantage to holding gold (and paying to store it) over government bonds. But Friday’s move up in the 10-year note coincided with a big move down in gold and silver. What’s next? Stay tuned…

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

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