The only hedge against inflation is quality

What happened in November and December?

The Turkish lira crashed:

And so did Bitcoin:

This was not supposed to happen. The narrative for the past year was that Bitcoin is supposed to be a hedge against uncertainty, hyperinflation, or that foreigners would buy bitcoin to preserve value against their crumbling currencies. Indeed, the currencies are crumbling, but so is Bitcoin.

Yet again another narrative torpedoed. This happens over and over again, whether about Covid vaccine effectiveness or crypto being an inflation hedge.

The financial singularity means that all capital is being funneled to a shrinking number of assets, those being the highest quality of assets. This means the only hedge against inflation and uncertainty is investing in the the biggest and highest quality of companies, countries, assets.

No one is going to buy digital pixie dust when Microsoft is making billions a year in free cash flows and can raise their prices accordingly due to inflation.

Think about it: during periods of high inflation and geopolitical uncertainty, such as Covid, understandably people are concerned about wealth preservation. They don’t want to gamble or risk too much volatility, but instead want to preserve wealth. Hence the flight from crypto and into safer assets such as index funds, the US dollar, treasury bonds, large technology and retail companies, and expensive Bay Area real estate.

Outside of the US, hyperinflation and plunging currencies makes the citizens of such countries poorer, whereas Americans are getting richer (because the US dollar is the official ‘unit’ of wealth), which means Americans, by far, are the biggest buyers of gold and Bitcoin, yet by the same token Americans need such inflation hedges the least. The very people who need inflation hedges the most, are the least able to afford them and have the least amount of money overall. Turks, Venezuelans, Brazilians, etc. are much poorer than Americans, they are not going to be buying much Bitcoin or gold, or at least not enough to have any effect on the price. This is why all those stupid narratives about hyperinflation being good for Bitcoin, were so wrong.

Despite endless headlines about inflation, supply chains, shortages, etc. gold did nothing for all 2021:

On an inflation-adjusted basis, gold’s returns are negative 20% since 2010.

The S&P 500, Nasdaq up over 20% for 2021.

Lumber crashed. Then the Euro. The Turkish lira. Growth stocks [1]. Now Bitcoin. What will be next?

I don’t think people fully understand the paradigm shift at play here. Unless you invest in top quality, the likelihood is high that your investment will eventually be worthless when it falls out of favor. This market is unforgiving and has no tolerance or second-rate stuff.

[1] I don’t believe in growth stocks and I avoid them, and this is why ARK Innovation faltered so badly in 2021. I prefer infrastructure stocks, the idea being investing in companies that are indispensable and are laying the digital and physical infrastructures and groundwork of the country and world now and long into the future. Infrastructure is much more impervious to the whims of the market, or of macro factors. Instead of “I want to invest in a company that will change the world,” it’s more like “what if Amazon, Tesla, Meta, and Google become the world.”

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