I am not convinced! I am not convinced we will see the sort of inflation augurs are expecting. The mainstream media is full of inflation fears; the alternative channels are full of inflation fears; if you are, like I am currently, arguing against it, you get rather lonely. I am used to «getting lonely on a lonesome trail.»
Why?
I personally do not believe in comparing historical events. One may draw conclusions from the past, but I believe life is (maybe, unfortunately) not that simple. Just to project such conclusions into the present or future, stimulate investors‘ confirmation bias, drawing big conclusions to me is not good enough.
Where is the correlation?
Since the 1960s, there has been no statistical correlation between inflation and broad money growth. As I have pointed out in previous weeklies, today the velocity of money circulation remains extremely low, and therefore the enormous money supply growth of recent years does not lead to inflation, except, Ladies and Gentlemen, in asset prices.
Asset Price Inflation
Ladies and Gentlemen, we see an asset price inflation, higher equity prices, higher real estate prices, higher prices for second-hand watches, etc. and we also see signs of inflation due to product shipping issues, higher energy prices and maybe raw material cost, but these, I believe, are onetime effects.
Antifragility
As an investor, you want to stay antifragile as much as possible. Talib taught us to be flexible. If one is structuring an investment strategy only for one event, inflation, one is, in fact, everything but antifragile. Betting on one event is a perilous strategy. Why would one do that? The opportunity cost is enormous.
Conclusion
Even Russel Napier, a critical mind, stated in a recent interview in the Swiss financial newspaper «Finanz und Wirtschaft» that solid companies‘ equities offer some inflation protection, and I am adding furthermore they offer cash returns in the form of dividends. To me, Ladies and Gentlemen, there is absolutely no way around a mixed portfolio. The mix should be customised to the investor’s very personal taste and needs.
Please let me know your views!
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
I received a lot of feedback to my last weekly. I would like to come back to that feedback next week, for this week I have a „special“ by my friend Anton to share with you. Please enjoy the read:
„Rational Hope
There is a certain amount of consolation, or relief, in looking at the past, no matter how distant and turbulent it was, and concluding that tomorrow will, at least to some extent, look like yesterday. This line of thinking is a form of rational hope: the human world is somewhat cyclical, but this circular quality is in direct opposition with another aspect of our existence: entropy (which means change).
Investors are required to understand if and how things changed. This means assessing what parts of our world will resemble the past and not going to do so. This is not an easy task, and maybe it can never be done with absolute accuracy; however, it is a necessary endeavour to successfully (i.e. profitably) invest.
The backbone of all investment analysis is data. We often look at charts and tables to understand how various parts of the economy and financial markets have changed and how they may do so going forward. It is on this subtle but inevitable step of judgment – between the data that captures the past and our mental extrapolation into the future – that our discussion will focus.
Inflation Expectation
At the moment, inflation is at the forefront of investors‘ conversations. There is widespread expectation that, due to what the central banks and governments across the world have done in response to the COVID-19 pandemic, consumer price inflation is, more or less, „inevitable“.
Why has this consensus formed? One answer can be found in the words of Joseph Gagnon, a senior fellow at the Peterson Institute of International Economics: „The stimulus is five times bigger than any conceivable need. […] We have never done this since World War II, and there was massive inflation. They put on price controls, but there was still inflation.“
In other words, previous events were extrapolated into the future. Gagnon is not alone, of course. As seen in the above chart, the majority of market participants expect these actions to lead to inflation because the past says so.
However, today was not yesterday, and tomorrow is not today. Here is how the world looked during the time of Gagnon’s example.
In the aftermath of WWII, the world economy was different: the US was the world’s major economic force, having won the war. Manufacturing was still a dominant sector in the economy for many countries. The monetary system was anchored in the Bretton Woods agreement, signed in 1944. The demographic makeup was very different, too, with only 2.5 billion people in 1950. The first hedge fund was established in 1949 by Alfred W. Jones, and there were no ESG products and no internet. The structure of money markets was different, with the first money market fund launched in 1971. Not to mention that societal values were different back then, and global trade was less interconnected.
Massive Changes
Today, all of these dynamics (and many more) have changed: developed economies are more service-orientated, with manufacturing representing a smaller contributor to their GDP (see two examples below). The dominant economic force is no longer the US alone but also China and the European Union. The monetary system is fiat with a tilt towards credit money. We have many more types of assets to invest in, and more people are playing in the markets. The world’s population grew from 2.5 billion to 7.8 billion in 2020. The hedge fund industry is now around $3.1 trillion. The structure of money markets is fundamentally different: the Federal Reserve (and other central banks) have shaped the channels of liquidity supply multiple times, more prominent following the GFC of 2008 and again during the COVID-19 pandemic in March 2020. With all of these changes, the mechanisms for transmitting monetary and fiscal policies have also changed. The past succumbed to entropy.
For successful investing, looking at data alone is not enough. If we make decisions based only on data, they will likely be wrong. Why? Because data are the traces of socio-economic activity. In other words, the numbers and their by-products (charts, tables and so on) are outputs of a broader environment, which is an open system with an „n“ number of factors that collide to provide a single data point.
Sure, 50% in 1950 meant the same thing as now. And so did a correlation of 0.8, for example. Nevertheless, these statistical figures need context. Often, however, we like to isolate certain factors and attribute them weight in the cause-effect dynamic to justify our judgment. For example, let us say that CPI inflation has reached 2.2%. We can view 2.2% as a weighted-average, where we divide each factor by its weight (importance) in deciding the direction of CPI inflation. We can make a mistake to attribute higher weights to factors that confirm how we see the world.
Money Supply
In the context of inflation, this can be money supply aggregates. We see the spike in M2 or M3 and link that growth in money supply to higher inflation. It is almost an automated mental process: because of A, then B must happen. This induction is further strengthened by comparing historical events without understanding that because it happened back then it may not happen now, for all the reasons we discussed above.
The argument that an increase in M2 or M3 leads to inflation is based on Fisher’s „butter argument„: if the total of goods produced in the economy is the surface of the bread when we put more butter (money) on the bread, we will have an increase in butter relative to the surface of the bread, i.e. inflation, unless the surface of the bread also expands so that it can absorb more butter.
Here is just one reason why the above chart may not lead to higher CPI inflation. As Ray Dalio explained, if you put money back into the economy by roughly the same amount that it was taken out / cancelled, then consumer inflation will not pop up. The equation is: – X (money destroyed by crisis) + X (money printed to replace them) = 0 CPI. Assuming this money gets directly in consumers‘ hands and they spend it on CPI-related goods, not on stocks etc.
The Past will not come back
Some things are indeed repetitive or cyclical: human nature. Our needs have remained the same as 100, 1000 and 10.000 years ago: shelter, food, rest and so on. Although our nature may offer some element of stable cyclicality, the changes in our environment and how we have adapted to them can make comparisons with past situations less relevant. Sometimes, we have to accept that the world around us is new, that the past is not coming back, and the future is simply uncertain.“
Thank you very much, Anton, for sharing your thoughts! Please, Ladies and Gentlemen, let Anton and myself know your views!
… but please do not forget (instead of hitting the reply button) to send your messages tosmk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
I am not convinced! I am not convinced we will see the sort of inflation augurs are expecting. The mainstream media is full of inflation fears; the alternative channels are full of inflation fears; if you are, like I am currently, arguing against it, you get rather lonely. I am used to «getting lonely on a lonesome trail.»
Why?
I personally do not believe in comparing historical events. One may draw conclusions from the past, but I believe life is (maybe, unfortunately) not that simple. Just to project such conclusions into the present or future, stimulate investors‘ confirmation bias, drawing big conclusions to me is not good enough.
Where is the correlation?
Since the 1960s, there has been no statistical correlation between inflation and broad money growth. As I have pointed out in previous weeklies, today the velocity of money circulation remains extremely low, and therefore the enormous money supply growth of recent years does not lead to inflation, except, Ladies and Gentlemen, in asset prices.
Asset Price Inflation
Ladies and Gentlemen, we see an asset price inflation, higher equity prices, higher real estate prices, higher prices for second-hand watches, etc. and we also see signs of inflation due to product shipping issues, higher energy prices and maybe raw material cost, but these, I believe, are onetime effects.
Antifragility
As an investor, you want to stay antifragile as much as possible. Talib taught us to be flexible. If one is structuring an investment strategy only for one event, inflation, one is, in fact, everything but antifragile. Betting on one event is a perilous strategy. Why would one do that? The opportunity cost is enormous.
Conclusion
Even Russel Napier, a critical mind, stated in a recent interview in the Swiss financial newspaper «Finanz und Wirtschaft» that solid companies‘ equities offer some inflation protection, and I am adding furthermore they offer cash returns in the form of dividends. To me, Ladies and Gentlemen, there is absolutely no way around a mixed portfolio. The mix should be customised to the investor’s very personal taste and needs.
Please let me know your views!
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
In July 2020, I did write a weekly on crude oil. My conclusion at the time was the following: «I believe we will see higher crude oil prices in 12 – 24 months from now, as inventory levels will decrease drastically in H2 ».
Massive Price Increase
In the meantime, crude oil prices have increased massively. For me, all of this happened almost too quickly. The interesting question is why the crude oil price did go up?
I think there are a few reasons for this. One one side, we hade a reduction of inventory as suggested in my weekly by then. Furthermore, OPEC+ was very disciplined in not increasing oil production by too much, unlike in the past. Then the weather phenomena «la Nina» led to a cold winter and increased energy consumption. Also, President Biden’s call for green energy and restrictions for U.S. fossil energy production probably sparked speculation on crude oil shortage and added to the momentum. Increasing economic activity indeed was a sentiment moving factor, too.
What comes next?
Now, the question is, what comes next? Well, Ladies and Gentlemen, as disappointing as it may seem, I do not know.
However, I think we will see some consolidation; I would not be surprised to see OPEC+ acting less disciplined in the months to come, trying to sell as many barrels as possible on these relatively high levels. Currently, there seems to be a lot of positive sentiment reflected in the price of crude oil and this usually calls for lower prices, at least to some extent.
Please let me know your views!
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Wow, my last weekly mail triggered quite some feedback and also led to questions. Many thanks, Ladies and Gentlemen!
The Fed’s Mandate
Now, most of the feedback and questions hovered around the Fed’s mandate. Some readers feel uneasy with the mandate’s expansion to «maximum employment». I see the point, and one could easily argue that maximum employment should be a political much more than a central bank task.
Facts
Fact is, maximum employment is part of the Fed’s mandate, and thus it is compulsory for the Fed to reach that goal as part of their mandate and, I assume the Federal Reserve will do whatever is necessary and possible from their side to fulfil their mandate to the best of their knowledge.
Fact is, too, that all of those actions impact the economy and financial markets. Now, the partners of Incrementum AG are active in a business where monetary expansion has led to prosperity. Even if I am never a fan of increasing government debt, I must admit that without the «help» of government rescue packages and stimuli from central banks, financial markets, precious metals, and crypto-assets (a term I have not yet gotten used to entirely, «crypto» and «asset» to me does not go together very well) would most probably not have benefitted to the extent they have ever since the great financial crisis. Is this good, or is this bad? To me, it is a question of perspective and highly philosophical.
A reader’s comment
I want to share a comment by John, one of my readers, out of an email conversation we had over the weekend: „As I have gotten older, I realized that balancing paradoxical forces is the name of the game. Being a good investor means being conservative when market valuation/greed is high and aggressive when market valuation/fear permeates many investors‘ psyche. It is easy always to be conservative (by avoiding the market crashes but also avoiding market swing ups). Being a permanent bull investor means one can be susceptible to mania valuations. Managing deflation and inflation in a balanced way is key to having a healthy economy. It is too easy to abuse the powers of printing money (MMT) or adhere strictly to Austrian economics do not have monetary expansion. Fiat currency does lead to more rapid economic marvels as it supplies readily available capital to enterprising ventures. Hard currency like gold may lead to more robust economies, but it may not grow as fast.“
Biases
Unfortunately, human beings (and with your permittance, I will count the partners of Incrementum AG to this cohort) are vulnerable to availability bias, worse, and besides, we are susceptible to confirmation bias. This fact sometimes makes it challenging to see beyond what we can and want to see. For this reason, we read a lot of research, books, listen to podcasts, attend conferences, speak to investors, analysts, maintain contact with open-minded readers through our many publications, of which this weekly mail is one. We try very hard to beat those and many other biases, but we are not always successful.
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Many thanks for the feedback to my last weekly. Rising interest rates seem on everyone’s mind. But are the recent bond yield increases really sustainable, and are they even showing a new trend?
Jerome Powell
Yesterday, Federal Reserve Chairman, Jerome Powell, was interviewed during the „The Wall Street Journal (WSJ) Jobs Summit“. I have included the link to the interview video towards the end of this weekly for your convenience. I think Mr Powell did a fair job explaining the Fed’s mandate and the tools to achieve the mandate’s goals. I had the impression he was well elaborating while being asked by the interviewer on potentially rising interest rates. The interviewer asked more or less the same question from different angles, yet Mr Powell’s answers seemed consistent.
What about inflation
I know there are many, many « prophets » out there, almost longing for higher inflation. For them, Mr Powell’s answers in the interview must have been a blow. As he mentioned, while he would see temporary inflation due to a post-pandemic increase in economic activity and higher energy prices, the Fed’s chairman believes all of this looks more like a one time effect from today’s point of view.
Ladies and Gentlemen, the Federal Reserve is not just a one-person show. It is an institution with thousands of employees, data scientists, economists, mathematicians from the best universities on this planet with access to data, not many can imagine. And yet, and of course, not even the Fed can foresee the future.
However
One of Mr Powell’s statements was very clear. He stated that it is not the Fed’s intention to surprise the market, and I do not see why I should not believe him. However, I understand that forecasts are somewhat tricky to make, even for the Fed.
Bondquake?
Quite frankly, I did not think so before the interview and certainly do not think so now. At least not for the time being. To see interest rates moving up significantly and continuously, we would need to see ongoing consumer price inflation over a more extended period.
Arrogance hitting the Fed – a short comment on the side
Please allow me one last comment. I sometimes seem to sense a certain arrogance from analysts and the (social) media regarding that institution’s work. I can not think much of that. I am convinced the Fed’s employees are trying to fulfil their mandate’s goals as much as they can.
Link to Interview with Fed Chairman Jerome Powell:
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Concerns about monetary tightening in the wake of rising inflation pushed the interest rate on ten-year U.S. government bonds above 1.5 per cent yesterday.
Rise in Yields
A significant rise in yields on the U.S. bond market led to the highest level in the U.S. government bond market yields since February 2020. The prospect of further rising interest rates in the USA makes investments in U.S. dollars more attractive while at the same time, higher interest rates weigh on equity and precious metals investments.
Risk-Off
Any steep increase in government bond yields usually leads to risk-off behaviour. This is precisely what we saw yesterday.
Why Do Inflation Fears Impact Stock Markets?
Why do inflation fears impact stock markets, and why does the stock market react to rising yields with a nervous movement? The reason why inflation fears weigh on the stock market and impact stock markets mostly negatively lies in the fact that any rise in yields usually leads to a lower discounted value of future profits. However, if inflation rises, the effect may be offset at least to some extent on the corporate level by higher future sales and profits but only if such rising inflation can be passed on to customers, and only as long and up to the point where consumers are willing and able to pay the higher prices.
Strong Balance Sheets
Stock markets react to rising yields in varying degrees because some economic sectors are negatively impacted, while others benefit from rising yields. «Losers» may be found, for example, in the real estate and utility sector and quite in general in stocks of companies operating with a high proportion of debt capital that will become more expensive in the future. Usually, growth stocks are also likely to face headwinds, as we have seen over the last few weeks, depending, of course, on their business model. In the case of growth stocks, a more substantial differentiation between companies with strong balance sheets versus cash-burning companies has already started.
Bye, Bye, Equities?
I do not think that the U.S. government yields will rise and rise and rise. This would be a significant blow to the U.S. economy and most probably lead to a yield curve control by the U.S. Federal Reserve System. Therefore, I do not think that we have to say goodby to equities just yet. However, the shift from growth to value may continue and take some of the steam out of stock markets which may be nothing more than a healthy corrective reaction to recent exuberant increases.
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Concerns about monetary tightening in the wake of rising inflation pushed the interest rate on ten-year U.S. government bonds above 1.5 per cent yesterday.
Rise in Yields
A significant rise in yields on the U.S. bond market led to the highest level in the U.S. government bond market yields since February 2020. The prospect of further rising interest rates in the USA makes investments in U.S. dollars more attractive while at the same time, higher interest rates weigh on equity and precious metals investments.
Risk-Off
Any steep increase in government bond yields usually leads to risk-off behaviour. This is precisely what we saw yesterday.
Why Do Inflation Fears Impact Stock Markets?
Why do inflation fears impact stock markets, and why does the stock market react to rising yields with a nervous movement? The reason why inflation fears weigh on the stock market and impact stock markets mostly negatively lies in the fact that any rise in yields usually leads to a lower discounted value of future profits. However, if inflation rises, the effect may be offset at least to some extent on the corporate level by higher future sales and profits but only if such rising inflation can be passed on to customers, and only as long and up to the point where consumers are willing and able to pay the higher prices.
Strong Balance Sheets
Stock markets react to rising yields in varying degrees because some economic sectors are negatively impacted, while others benefit from rising yields. «Losers» may be found, for example, in the real estate and utility sector and quite in general in stocks of companies operating with a high proportion of debt capital that will become more expensive in the future. Usually, growth stocks are also likely to face headwinds, as we have seen over the last few weeks, depending, of course, on their business model. In the case of growth stocks, a more substantial differentiation between companies with strong balance sheets versus cash-burning companies has already started.
Bye, Bye, Equities?
I do not think that the U.S. government yields will rise and rise and rise. This would be a significant blow to the U.S. economy and most probably lead to a yield curve control by the U.S. Federal Reserve System. Therefore, I do not think that we have to say goodby to equities just yet. However, the shift from growth to value may continue and take some of the steam out of stock markets which may be nothing more than a healthy corrective reaction to recent exuberant increases.
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
My partner Mark J. Valek coined the term volatility harvesting, and after my last weekly on cryptocurrencies, I would like to offer to you, Mark’s view on how to take advantage of a highly volatile asset class and explain what is behind «volatility harvesting». Mark is head of digital assets at Incrementum AG.
Volatility
In finance, the term volatility is commonly used synonymously for the risk of an investment. The website of Investopedia describes the widely used concept as followed: „Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.“ Needless to say, a crucial dimension of successful portfolio management is how gravely the investment returns fluctuate over the years. However, when it comes to individual positions within a portfolio, there is no need to fear volatility. Leaving regulatory aspects aside for a second, a single investment conceptionally cannot be too volatile to be added to any given portfolio what is crucial though is the correct position size. A minimal allocation of a highly volatile asset can reduce the portfolio’s overall volatility due to diversification effects. This fact is well established since Professor Harry Markowitz was awarded the Nobel prize for his Modern Portfolio Theory, which explains this.
Volatility Harvesting
However, highly volatile assets may be able to offer more than ‚just‘ diversification effects. Their volatility can be your portfolio managers ally to increase the portfolio’s returns. This can be the case if one applies a disciplined investment strategy. We call this strategy #VolHarvesting.
Step One: Rebalancing Bonus
There are two steps regarding the implementation of our #VolHarvesting strategy. The first step is via a disciplined, rebalancing approach. During the portfolio manager’s rebalancing, the portfolio manager reduces assets that have increased in portfolio size due to their outperformance versus underperforming assets. With the proceeds, he increases the positions of the underweighted assets. This process ensures that he buys low and sells high. If this approach is applied in a disciplined manner, the investor profits from the so called ‚rebalancing bonus‘. This strategy works exceptionally well if the assets that are being rebalanced exhibit high volatility and do not correlate positively.
Step Two: Selling Options
The second step of our #VolHarvesting strategy is somewhat more sophisticated. It involves the implementation of options. In the options market, one can go long and short options. Going short options is usually associated with many risks, as one sells insurance to one’s counterpart. By selling a call option, one takes on the obligation to sell an underlying asset at a specific price at a specific time in the future, regardless of what the spot price may be at that time. However, if an investor holds the underlying of the option as part of his or her portfolio, this risk is minimal, as one can sell the underlying if the call option is exercised. This strategy is called covered call writing.
Combining the two
Now let us combine the first step of our #Volharvesting strategy with the second step. If our portfolio is overweight, some assets and a rebalancing will make sense, we can sell some covered call options basically with no risk, as we are planning to reduce our asset anyway. As a seller of an option, we receive a premium. Moreover, this premium is very rich if the underlying asset is highly volatile.
We have been applying the #VolHarvesting in a fund that invests partly in cryptocurrencies and can add double-digit returns due to disciplined harvesting of the volatility. The fund was up over 80% in 2020 and so far this year is up another 15%.
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
As many of you will know, my partners and I live the privilege of reading books, research, articles, newspapers, and magazines to build up our knowledge base continuously as part of our job.
We receive much research for free, but we also buy research from external sources and one product we buy comes from a German house and frankly speaking, I am very fond of it. These guys just published an article on Bitcoin, and today I would like to share with you one or the other of their paragraphs with some of my comments. Please be aware that this is neither a recommendation to buy cryptocurrencies nor a recommendation to sell cryptocurrencies. It is merely an informative piece of text about a possible price development of Bitcoin and other cryptocurrencies in my weekly email format, which I hope you may appreciate. Please enjoy the read:
USD 100’000
If Bitcoin reaches the USD 100’000 mark soon, then the Bitcoin law of measuring through the power of 10 would have been enforced once again within a few months. As you may know, Bitcoin was trading below USD 10’000 at the end of July 2020 and is currently trading close to USD 50’000. The runs from USD 1 to USD 10, USD 10 to USD 100, USD 100 to USD 1’000 and USD 1’000 to USD 10’000 all took place within weeks or months. Between those runs, there was a break every time. The last two breaks lasted roughly three years each. If this rule (of 10) continues, the target does not have to be USD 100’000 exactly. The price may over-or undershoot slightly and yet, looking at past price patterns, one can detect some regularity.
The exciting part of the research article on Bitcoin I am partially quoting here is what may happen over the months and years to come if Bitcoin or other cryptocurrencies continue to shoot through the roof. The analyst who produced the article has an interesting take on it.
The Role of the Central Banks
If Bitcoin and other cryptocurrencies continue to perform well, we could eventually find ourselves in a situation of a significant «crash». The main reason behind such a crash could be explained by central banks‘ increasing perception of cryptocurrencies as serious competition for their own currencies. Central banks could be afraid of losing control over their monetary system. Such concerns may be fuelled even more by Tesla’s recent bitcoin purchase. The higher Bitcoin and the cryptocurrencies rise, the more likely they become victims of their success. It seems only natural that the more cryptocurrencies rise, the more central banks will want to regulate them.
Christine Lagarde
Last month Christine Lagarde expressed her views concisely regarding the regulation of cryptocurrencies. In her opinion, the regulation would have to take place within the global cooperation framework (at the G7 level, extended to the G20). The FATF (fatf-gafi.org) is an international institution against money laundering and could play a role in this. However, the fight against dubious business and money laundering connected with cryptocurrencies would probably do little to harm Bitcoin and co. Another remedy could be to ban Bitcoin mining. But I think it is difficult to imagine to get governments of lesser regulated nations to cut off the electricity of mining farms belonging at least partially to their own government members. It is straightforward, as long as there is a business to be made, there will be.
Restrictions
A sharper sword would be payment bans, capital export controls, exchange and trading restrictions. The Fed and ECB could ban Bitcoin and other cryptos as a payment method in the USD and EUR area. This could, for example, happen after having introduced their own digital money; Central Bank Digital Currency (CBDC). Central banks could also eliminate the store of value factor by setting upper limits for transfers. For example, only EUR/USD 10’000 per year and person would be transferable from crypto exchange accounts to current bank accounts. Restrictions could also be imposed on crypto exchanges. The mere build-up of a threat by G7 countries and major central banks (Fed, ECB, BoJ, POBC) alone could already hurt cryptocurrencies significantly. Cryptocurrency prices would fall because private investors could become more cautious. Why should average investors take the risk of violating money-laundering laws? Eventually, the processes described could be set in motion. Possibly initially only with increased verbal warnings by central banks and governments. Investors have been warned previously and on several occasions by central banks that their cryptocurrency investments could fall to zero.
Feasible Scenario
To me, this seems much like a bouquet of options for a feasible scenario, and to you?
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.
Many thanks, indeed!
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
