Bitcoin versus Tesla

Monday, 11 January 2021
Wollongong, Australia
By Greg Canavan

[4 min read]

And we’re back…

Happy New Year!

That break went a little too quick. It wasn’t helped by the ordinary weather either. It didn’t feel like Summer. But now, right on cue, the skies have cleared and this week is looking glorious.

I should be in Adelaide visiting family too. But because Wollongong had one or two cases of the Wuhan Flu, premiers lost their minds and shut their borders to residents of ‘Greater Sydney’, of which Wollongong, apparently, is part of. For reference, we’re 80km away. 

Thanks for keeping us safe!

Anyway, it’s good to see some things haven’t changed as we head into 2021. Ongoing political madness…ongoing financial market madness…

I’ll leave the politics aside for today and focus on the financial. There is plenty to talk about.

Probably the ‘maddest’ chart in the world right now is this neck and neck battle between bitcoin and Tesla.

When you adjust for the different price scales though, Tesla is well ahead. Since the March low, its stock price is up 1,129% versus bitcoin’s 715%.


Source: Optuma

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As a result, Elon Musk is now the wealthiest person in the world.

And there are many bitcoiners who are a lot wealthier at the start of 2021 than they were 12 months prior too.

I had my bitcoin epiphany late in the year. I wasn’t smart enough to jump on the about to run away train. But I began to see what others saw. That is, bitcoin is a decentralised form of money in competition with the US dollar and all other forms of ‘centralised’ fiat currencies.

I know. I’m slow. But better late than never.

The monetary system that houses/denominates your wealth is irretrievably broken. That’s why you’re seeing fiscal stimulus in the multitrillions of dollars.

It’s not just about the virus related shutdowns. Even before it hit, the global economy couldn’t stand on its own two feet. Ever since the 2008 bust, it’s needed some form of fiscal or monetary stimulus.

Asset markets love all this, of course. A structurally weak economy means lower inflation/lower bond yields and lower discount rates to value asset prices. The lower the discount rate for a given quantity of cash flow, the higher the asset price.

As long as earnings hold up, lower discount rates work their magic on asset prices.

But, wait, what’s this?

Everyone is talking about inflation! It’s coming, they say.

The evidence is the fact the US 10-year bond yields are now back above 1%. They’re 1.12% as I type.

But this time last year the yield was 1.82% and I don’t recall everyone screaming about the coming inflation.

What about back in October 2018? That’s when the 10-year Treasury yield hit 3.2%. If yields get anywhere near there this year I’ll be very surprised.

But markets are full of surprises. I get that. However, a much healthier economy couldn’t handle 3% bond yields back then, so it’s not going to handle it now.

That doesn’t mean inflation isn’t coming. I just don’t think it’s going to come as fast as many expect.

A good proxy for future inflation is the 10-year breakeven inflation rate. As you can see in the chart below, inflation expectations have climbed sharply this year. At just over 2%, they’re now back near where they were in 2018.


Source: FRED

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As far as financial markets are concerned, this is a bit of an inflation sweet spot. A move higher might start to pressure asset prices (via a higher discount rate resulting in lower valuations), while a move lower would suggest an economy that is slowing again.

While I think you should be prepared for any scenario, I think there is a higher probability of inflation expectations turning down again this year as this stimulus washes through the system, leaving the economy even weaker and more vulnerable.

As I said, I think inflation is coming. But not before another deflationary scare justifies the lunatics running our centralised monetary systems to press the start button on things like Modern Monetary Theory and central bank digital currencies.

When that happens, bet on inflation.

But also keep in mind that the natural trend for a broken monetary system and economy is deflationary. It will respond to bouts of stimulus by ‘reflating’ for a period of time, but not ‘inflating’ permanently. For that, you’ll need to change the monetary system.

This fear of huge fiscal deficits and coming MMT is likely behind the melt-up in bitcoin over the past few months. No doubt the return of the political ‘establishment’ in the US, in the form of Joe Biden and his handlers, has accelerated this trend. People want ‘out’.

But beware the parabolic rise. No matter how much sense something makes, there comes a time when it’s all priced in.

Especially beware the parabolic rise that doesn’t make sense. Tesla, with a market value of $834 billion, trades on a P/E ratio of nearly 300 times FY21 earnings forecasts.

It’s insane.

And as much as I get bitcoin and think it is a great antidote to the world’s current monetary issues, it’s largely in the price. For now, anyway.

I’m keeping it pretty simple this year. I think the things that will work best in 2021 are the ones that didn’t work too well in 2020. Energy, banks, old economy stocks…and bitcoin for old people — gold.

That’s where the value is.

Let’s see how it works out!

I’ll have more on this theme for you next time…

Continue below to Murray Dawes’ ‘Week Ahead’ update. Today, Murray looks at the large moves in US bonds, gold and oil caused by the confirmation that US Democrats will take control of both houses of congress.

Cheers,
Greg


[WATCH] US Bonds, Oil and Gold

By Murray Dawes

 

With confirmation that the Democrats will take control of both houses in the US, investors are placing their bets about the possible ramifications.

The most important shift has been the sharp sell-off in US bonds with the 10-year bond yield finally busting out above 1% last week.

That has seen pressure on gold with prices falling more than 3% last Friday. But other commodities are picking up steam to the upside with expectations that the US and China will be competing for scarce resources with printed money.

Oil prices have broken out after the production cut by Saudi Arabia last week, and the long-term chart is pointing to possibly much further upside.

Click on the picture above to see my analysis of all three markets and where I think they are heading next.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader