Let’s begin the week with two observations about money. First, it’s no good if you can’t spend it. Second, if you want to preserve purchasing power, sometimes you have to invest your money in an asset that may not be terribly liquid right now. Later, when you need to sell it for whatever passes for money, you’ll be able to.
These two imperatives — preserving value but being able to sell quickly and easily (liquidity) — can be at odds. But where you put your money also depends on what you’re trying to do. Are you trying to make more money? Or are you trying to store value, preferably in asset that doesn’t lose ground to inflation over time?
Enough with the theory. I’m talking about bitcoin and commodities. Bitcoin, as you can’t help knowing if you have any friends who own it, is on a tear. Last I checked, it was nearly US$57,000. That says more about the decrease in value of the US dollar than anything. But it also says that a larger number of institutional investors now believe it’s prudent to hold some of their wealth in a digital asset — one not controlled by a government.
But you wouldn’t spend it, would you? Bitcoin is too volatile at the moment to be used as money. It’s perfect if you’re using it as a vehicle to speculate (undoubtedly some buyers are trying to get rich quickly…but rich in US dollar terms, not BTC terms). However, if you’re a long-term HODLer, you’re banking a change in our financial system — from centralised, government-controlled money, to decentralised, marketplace driven money.
Real assets versus stocks
Meanwhile, take a look at the chart above. It’s the ratio between the S&P GSCI Commodity Index and the S&P 500. Or, to break it down in simple terms, the ratio between stocks as an asset class and real assets like oil, gas, coal, wheat, corn, lumber, coffee, cocoa, sugar and gold. What is this chart telling you about money?
Well first you can see how cheap commodities were relative to stocks in 1999. This was one year before China entered the World Trade Organisation. A huge surge in demand was just over the horizon. This would trigger the three phases of Australia’s commodities boom over the next decade. First, a surge in prices based on demand, second a surge in investment to meet the higher demand and third, a surge in production based off the previous investment.
The 2008 GFC dealt a hammer blow to ALL equities. But the strong performance of commodities lasted until around August of 2011. That’s when the gold price peaked. Then, in October of 2014, the oil price collapsed. From there, it was curtains for commodities.
Until now. The global shutdown in response to the pandemic almost one year ago coincided with a cyclical low in commodities relative to the S&P 500. Since then, you’ve seen breakouts in individual commodities like lumber and copper. Copper futures, for example, went over $4/pound for the first time in nine years on Friday (since September of 2011, to be precise).
So what? So what if this is a cyclical change in financial markets away from overvalued equities and toward undervalued commodities? The chart says a reversal is due. And trillions in pandemic stimulus and spending may finally starting to be show up in assets other than stocks.
It MAY be showing up in the real economy, as pent-up consumer spending increases. And it MAY final show up in state-sponsored infrastructure investment/spending. The weather-related blackouts in Texas last week could be the catalyst for several trillion dollars in new spending by Uncle Sam.
And then there is the mysterious drop off in COVID-19 cases, hospitalisations, and deaths in the US. In the US, COVID-19 hospitalisations are down 56% from their peak on 6 January. New cases per day are down 73% from their peak on 11 January and are at their lowest level since late October of 2020. And thankfully, deaths attributed to COVID-19 are down 43% from their peak on 26 January (at 3,449) per day.
It’s a Biden miracle! The dramatic fall in cases may have something to do with revised guidance on PCR testing issued by the World Health Organisation on 20 January (the day of Joe Biden’s inauguration). The science isn’t settled. But it’s possible the high number of cycles in PCR tests was generating a high number of false positive test results, thus overstating the number of infectious COVID-19 cases.
Or, it could be that natural immunity is higher than testing would indicate. That’s the view of Dr Marty Makary from the Johns Hopkins School of Medicine and Bloomberg School of Public Health. Dr Makary reckons the US could have herd immunity by April. His article published this weekend in the Wall Street Journal is sure to raise hopes (and eyebrows).
What if the end of the pandemic is nearer than we thought? What if a combination of natural immunity, plus the vaccination of the most vulnerable, plus the success of vaccines against variants from the UK, South Africa, and Brazil, means COVID-19 numbers are on the decline across the board?
It would be good news to everyone except power-drunk public officials and politicians. COVID-19 has been a godsend to would authoritarians the world over. If it quickly recedes as a public health risk, you’ll see how desperately they hang on to the emergency powers they granted themselves.
What about financial markets? Rising bond yields and commodity prices are ‘pre-incident indicators’ of inflation. Central banks assure us that they have things under control. But don’t be so sure. And remember, inflation may, for a time, look like a bull market in the form of rising asset prices.
But monetary endgames inevitable destroy a lot of wealth. In The Bonner-Denning Letter, Bill and I have argued that wealth preservation from these levels is more important than making more speculative gains. It’s a hard emotional position to maintain. Don’t give up now.
Editor, The Rum Rebellion
PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.