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January 7, 2021

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”

- Ben Graham, The Intelligent Investor

(from our Read and Grow Rich reading list)

Hi Everyone,

Investors around the world are celebrating today as the 10-year U.S. Treasury yield surges above 1% for the first time since the coronavirus outbreak. Who knew you could earn that much by lending your money to the government?

This may not seem like such a big deal, but in a world where central banks have been artificially suppressing interest rates for more than a decade, in some cases pushing them below zero, it's incredible that this 1% is even available.

Many analysts will point to the yield curve's current incline as a sign of economic fertility. Yet, they fail to point out that more important than the slope of the curve are the percentage returns, which for the longer-dated bonds are currently abysmal by historic standards.

Here we can see the current U.S. Treasury Yield Curve. On the one hand, it's great that the 30-year is paying so much more than the shorter-term bonds, but all the numbers on our Y axis just seem super small.

"C'mon Mati, bitcoin is testing 40k, stocks are reaching record highs, and the drama in Washington is still fresh on our minds, why are you really talking about bond yields right now?"

-You, probably.

And yes, those are some good points. But we do need to understand where this drive is coming from, a lack of alternatives to store wealth.

The perception that the economy might someday recover, that inflation might eventually return, and that the Federal Reserve might one day again be in a position to raise interest rates off the floor, is once again manifesting in the markets.

For reasons that remain unclear, especially in light of yesterday's events, investors tend to see U.S. Treasury bonds as a risk-free asset. So yeah, it's nice to see exponential returns off this new bitcoin thing. We still don't know when it might turn around and lose 60%.

This characteristic volatility places bitcoin on the extreme opposite end of the risk spectrum compared to bonds. Again, we are not saying that's how it should be, but that's how it is.

What does this mean?

The rising yields are here to tell us that the reflation trade is coming. It really started once the Georgia election results became clear, that President-elect Joe Biden will have full control over both houses of Congress.

Even though the majority is thin, he should be able to pump in additional stimulus measures. More stimulus means more bonds in the market. More bonds means lower price per bond and higher yields.

In short, this is the market's way of anticipating the greater support provided by the Fed in the future. As we know, what happens at the low end of the spectrum has a way of reverberating throughout the system and amplifying many times over by the time it gets to the high-risk side, as we can see playing out with bitcoin.

A bit of volatility entered the market over the last few hours, just after bitcoin reached another unbelievable milestone, surpassing $40,000.

Just after hitting it, we saw another one of those classic 10% dips and an almost instantaneous rebound back to the highs. This quick retracement pattern has been showing up increasingly in the price action as we continue to build momentum and forge ever higher.

Monster volumes

We may never be able to say without absolute certainty exactly how much of the current demand for bitcoin is coming from institutions and how much is from the retail market, but what we can say is that volumes are enormous right now.

This chart from Messari shows the weekly real volume across exchanges last week have doubled their previous all-time highest levels.

Volumes on the bitcoin blockchain have also been building up steadily over the last few months and are now much higher than they were during the 2017 and 2019 rallies.

The number of transactions on the blockchain, however, has not seen any significant pickup, a fact that, when compiled with the previous fact, tells us quite clearly that the average value per transaction is increasing rather rapidly as bitcoin adoption proliferates among the wealthy.

Therefore, even though the price is zooming, we don't really see any fear of overflooding the network. The mempool is clean, blocks are timely and the fees are still relatively low. These are beautiful curves indeed.

Wishing you a wonderful evening.

Mati Greenspan

Analysis, Advisory, Money Management