- A considerable rise in inflation may cause equities & bonds to fall together
- Defensive assets like volatility, gold and now Bitcoin must be considered to diversify portfolios
Part 1: The Macro
The rise of Bitcoin from a misunderstood asset on the fringe of finance to a Global Macro Asset that has earned a role on corporate balance sheets and investor portfolios was one of the top stories in 2020.
This has forced investors and wealth managers to understand how Bitcoin works and establish what role it should play as an allocation moving forward. As part of this process, it’s important to take a step back and consider why Bitcoin has evolved as a macro asset and why it’s being included as an allocation in the modern portfolio.
For the past 40 years, we’ve experienced the greatest bull market in financial history. Stocks, bonds, and real estate have enjoyed unprecedented performance as a direct result of central bankers aggressively cutting rates from 19% in 1981 to 0% by the end of the financial crisis.
Since March 2009, we’ve witnessed the longest bull market in history with stock prices, valuations and corporate debt to GDP levels all at record highs. Bonds have had nearly an uninterrupted run thanks to easy money central bank policy and QE.
Bailouts and an explosion of the supply of the monetary base at a rate of over 22% a year, caused cattle prodding investors to over allocate to risk assets like stocks, bonds, and real estate. As a direct result, our interpretation of a Modern Portfolio has lulled into treating this as the norm.
In an environment where monetary and fiscal policy is anything BUT the norm, we need to begin thinking differently. As financial advisors, our job is to provide comprehensive investment management and financial planning to clients by considering all of the information available. This includes helping clients construct portfolios that include assets that will perform well when stocks and bonds don’t.
We are in an environment where central bankers are intentionally trying to create inflation through the debasement of our currency and politicians are trying to stimulate the economy through debt funded stimulus to create growth.
The overall increased risk exposure to stocks and chasing yield creates a systemic form of risk that also puts one’s savings and investments at risk. Historically speaking, portfolios built primarily around stocks and bonds struggle in periods where interest rates are close to zero (1930s U.S., post 1990 Japan, Europe today) as well as when inflation is rapidly rising (the U.S. in the 1970s). In these scenarios, bonds can become correlated to risk assets like stocks and real estate causing them to all decline at the same time.
Any meaningful uptick in inflation and growth will result in a backup in treasury yields that will have a knock on effect in all risk assets. Defensive assets like volatility, gold and now Bitcoin must be considered to diversify portfolios, smooth out returns and provide dry powder in periods of volatility.
The rise of Bitcoin as a legitimate macro asset over the past 12 years is no coincidence. Launched on Jan 3, 2009 as a direct response and solution to central banks bailing out Wall Street, it’s evolution from magic internet money to a non-sovereign, hard capped fixed supply, decentralized form of money gives it the potential to compete and capture a share of some of the largest markets in the world (Store of Value – Gold, Global Bonds, Real Estate and Broad Money).
It is improving the efficiency and accessibility of our global financial system. Not only does it solve real world problems but its ability to preserve wealth and take power from the state benefits individuals in the process.
In part 2 of this series publishing on Monday, we will quantitatively discuss the right allocation to bitcoin for a portfolio.
For the other articles in this series please see: