Market Lab Report - On Yield Curve Inversions - It's a race to zero for both fiat and interest rates while bitcoin coils like a spring

The Race to Zero

No, not debt. That's certainly a long way from zero and would make for a great April Fool's joke.

As long standing members know, I have been saying it's a race to zero between the dollar, the pound, and the euro in recorded interviews on various television, radio, and print platforms since the early part of this decade. The same applies to interest rates of which more than $15 trillion now hold negative yields. When the dollar rises, gold typically falls. The dollar rallied sharply during July yet failed to dent the gold bull run which underscores the strength in the gold breakout move we've seen due primarily to currencies which remain in a perpetual state of free fall due to record levels of money printing. Exchange rate stability is an illusion. Bitcoin, gold, and hard assets have been and will continue to be the answers to protecting the value of one's savings.

Inversion

On Aug 13, the yield on the 10-year Treasury note fell below the 2-year yield for the first time since Dec-2005. A recession occurs on average 22 months following such an inversion. This has been true over the past half century. The inversion shows investors are harboring elevated worries about the global economy. The trade war against China and a hard Brexit are increasingly worrisome since the world is more connected than before. Chinese presence and control in Hong Kong may accelerate as a consequence of the current crisis between the two countries. Should such occur, perceived risk of doing business in Hong Kong will jump, and eventually, businesses may relocate into countries such as Switzerland and Singapore as safer alternatives. Capital is therefore moving into assets that are perceived to be safer. Earlier this year, the three-month yield moved above the 10-year yield.

That said, just because a yield curve inversion signaled a recession in the past, does NOT mean it will happen in the current environment due to the impact of Fed money printing debt monetization. So even though the yield curve has inverted, investors must keep things in perspective by not taking any single indicator too seriously. What worked in the past has often failed since 2009 in this Age of QE.

Chorus of Top Guns Agree

But as I've written, QE has its limits so it's a question of whether Trump's pro-business policies together with exponentially growing technologies, or ExpoTech, can energize growth in the U.S. to where the Federal Reserve will not be forced to lower rates all the way down to 0%, but instead pay down debt via faster growth. Renowned investor Stanley Druckenmiller has doubts and has gone on record predicting rates will have no choice but to hit 0% in the U.S. Ray Dalio of Bridgewater has said a major devaluation across fiat currencies is coming. Former Fed Chairperson Alan Greenspan has said, "This will not end well." The legendary Jim Rogers continues to put his bets on an unavoidable day of reckoning.

Central Banks Slam Yield

CME Fed Fund Futures now expect 3 rate cuts over the next 3 Fed meetings - September 18, October 30, and December 22. Other central banks are following suit. Beijing has already indicated easier money on the way. European Central Banker Olli Rehn recently flagged the need for a significant easing package in September. Mexico became the latest country to surprise with a cut in rates, the first in five years. Canada's yield curve inverted by the most in nearly two decades, piling pressure on the Bank of Canada to act. Markets are primed on reduced discount rates and a resumption of bond buying across the board. German 10-year bund yields hit a record low of ‑0.71%. Italian, Spanish and Portuguese bonds sharply rallied on the news. This substantial stimulus would send the U.S. dollar even higher.


Bitcoin above $60,000 by end of 2020

The race to zero on interest rates if they have not already reached zero or below zero as well as with fiat currencies continues to unfold. Bitcoin, gold, and various hard assets are the beneficiaries. Projected values of bitcoin show it should reach at least $60,000 by the end of 2020. This projection is based on the inverse of its inflation rate as the number of bitcoins released into its ecosystem halves roughly once every 4 years after 210,000 blocks are mined with a maximum of 21 million bitcoin created according to its code. This projection could be conservative as it does not factor in the number of tailwinds at hand as I have discussed in prior reports such as the 3 billion unbanked or partially banked that will be utilizing bitcoin to exchange value via cheap mobile phones or that the usage rate of bitcoin doubles every 12 months. Further, millenials who tend to favor bitcoin over gold will inherit $30 trillion from the baby boomer generation in the coming years. Bakkt also goes live in late September enabling institutions to get more involved in bitcoin in various capacities. And dont forget the various forms of macroeconomic upheaval which can send capital rushing into alternate currencies such as bitcoin and gold.

Indeed, at a price of $60,000 a bitcoin, its market value will have well surpassed $1 trillion. This capital is likely to come from fiat currencies whose purchasing power has eroded or from those who view bitcoin as a higher alpha version of gold or from negative-yielding debt which continues to grow as QE shows no signs of slowing. Negative-yielding global debt recently topped $15T.

In any event, never invest money you cant afford to lose. Bitcoin is volatile so don't be surprised if it undergoes steep corrections, typically between -28% to -42%, along the way to higher prices. It corrects in this range during its bull markets. But once the bubble blows which it has on a number of occasions since its creation in 2009, it can correct as much as -94%. And always remember, no investment is ever guaranteed.