Bitcoin is going mainstream

Bitcoin rose above $28,000 today. It seems to be gaining wider acceptance in the traditional finance community. If it is to become an accepted asset class, it has only just started the journey and hence its price is likely to see continued gains. Unfortunately, Darwinex no longer supports cryptocurrency so I cannot add to my Darwins. Indeed, with the falling dollar, I would also like to add copper to my portfolio of positions but this also is not available. I have added oil but I am concerned about a sudden growth shock which I see as more likely to impact oil than copper. Copper also has the added benefit of long term demand whereas oil more unpopular when considering ESG positioning.

The performance of the Darwins has been disappointing over the second half of 2020. This has mostly come from my indecision around the outlook for equities. I have been negative based on weakening global demand from the pandemic and the expanding debt levels. However, my view now is that Powell will continue to take us down this path to inflation until he succeeds or is replaced. Since the Biden victory, fiscal policy is now much more likely to see significant use.

The outlook is positive for companies with pricing power. Indeed, since the central bank is standing by to purchase bonds under QE as needed, rates will continue to be held down and all assets will likely see continued gains.

Turning point

What then will be next turning point. As we move into 2021, inflation is still muted and certainly too low to concern Powell. I expect cash handouts will continue as we see expended unemployment and business failures.  Businesses which remain will see input price pressure from rising commodities and labour costs due to governments handing out cash as an alternative to finding a job. With less competition and supply from businesses which could not survive, those which remain will be able to raise prices.

If this coincides with vaccine success against the virus, there could be a large imbalance between demand and supply and very strong upward pressure on prices. The government will be torn between slamming on the brakes with the consequences of a very severe recession given the debt levels and a moderate tightening and risk of inflation gaining too strong a hold.

A short word on central bank forecasting

We should not be surprised that central bankers, just like economists, are so bad at forecasting the future. Asset managers are few in number who have this skill so why should we expect central bankers to be amongst their number. And so, what benefit is it that the central bank serves in controlling monetary policy? I believe they have a role to play in regulation but have had very bad consequences for the economy in running monetary policy.

As long as more debt is their answer to a slowing economy we will all suffer the consequences of their poor judgement.

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