Takeaways:
- Of traditional assets, gold has been the best performing asset class of the three in each of the 1-, 3-, and 5-year periods following years which had negative returns for both stocks and bonds. These periods have historically been associated with significant monetary debasement and/or fiscal spending.
- Both stocks and gold have outperformed their historical average annual returns during these periods; gold significantly so.
- Bonds have outperformed their historical average on 1- and 3-year periods (performance bounceback?), but have underperformed in the 5-year period.
- Bitcoin has outperformed all other assets with 61.7% annualized returns in the 5-year period spanning 2018-2023. However, as a novel monetary asset in the process of monetizing from zero, bitcoin has significant other factors at play, and it might be more instructive to look at the performance of gold during historical periods of monetary debasement for clues to the performance of bitcoin in any future such periods.
Intuitively, this all makes sense.
While all assets show positive nominal returns, gold, as the alternative monetary asset, catches a bid as investors look to escape their debasing currency.
Perhaps the bigger takeaway, though, is that in a highly leveraged financial system, the value of the collateral underpinning all the leverage simply cannot be allowed to fall in nominal terms, or else the whole system collapses in a deleveraging.
As such, when the value of the collateral (stocks and bonds) falls, the Treasury and Fed have historically resorted to currency debasement to prop nominal asset prices back up.
We are currently in one such period.
So far, in the period since 2022 the Fed has been in a restrictive monetary policy regime, characterized by raising interest rates and reducing the size of their balance sheet. Indeed, the stock and bond market routes of 2022 can be seen to have been caused by these restrictive policy measures.
Only time will tell how the rest of the period will play out.
History suggests more monetary debasement on the horizon.
Podcasts of the Week
The Last Trade E036: Beyond the Fiscal Facade with Gary Brode
The latest episode of The Last Trade provides a deep dive into the current state of the economy and financial markets, featuring an insightful discussion with Gary Brode, founder of Deep Knowledge Investing. We tackle the contrasting narratives in the market, explore the implications of recent economic data, and investigate the potential for a re-emerging banking crisis. Additionally, we discuss the role of bitcoin in today’s financial landscape and the impact of ETF approvals on its accessibility.
Scarce Assets E003: Macro Masterclass with Lyn Alden
In the third episode of Scarce Assets, co-hosts Andy Edstrom and Jesse Myers welcome macro analyst and investor Lyn Alden to discuss the fundamental economic drivers of scarcity and the role of bitcoin as the scarcest asset. Lyn, known for her entrepreneurial spirit and deep understanding of global monetary systems, shares insights from her book “Broken Money” and discusses various topics including money creation, inflation, and the future of bitcoin.
Closing Note
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Until next week,
Zack Morris
